Exhibit 13

 

A Letter from the President and CEO

 

 

To the shareholders of United Bancorp, Inc….

 

It is with great pleasure that I report to you, our valued shareholders, on the strong earnings and solid operational performance that United Bancorp, Inc. (UBCP) achieved in 2019. This past year, UBCP reported diluted earnings per share of $1.19 and net income of $6,810,000. These levels were $0.37 per share (or, 45%) and $2,528,000 (or, 59%) greater than the respective levels for each of these earnings metrics reported the previous year. And, yes… at these levels, our Company has produced record earnings, once again, for the third consecutive year! These record levels of earnings were achieved even though 2019 proved to be a somewhat more challenging year for our industry. In 2019, our industry (as a whole) saw a year-over-year decline in the net interest income that it realized for the first time since 2013. Even with this phenomena and the emerging headwinds that developed for our industry this past year, our Company greatly benefited from the positive execution of its strategic plan, which calls for growing by acquiring other like-minded community banking organizations; building new banking centers in key and complementary markets; capitalizing on prudent, yet profitable, organic growth opportunities; and, wisely investing in its operational, service and delivery platforms and infrastructure to ensure its relevancy for many years to come. Over the course of this past year, we had success in these key areas on which we keenly focus, which allowed us to achieve a higher level of performance than that of our overall industry. For this, we are genuinely grateful and truly proud!

 

 

A Sudden, and Unexpected, Change in the Direction of Monetary Policy: As mentioned, this past year proved to be a somewhat challenging one for our industry. At the beginning of 2019, our industry was poised for another good year with few anticipated challenges. Overall, the monetary policy of the Federal Open Market Committee (FOMC) was tightening in recognition of a fundamentally sound and growing economy. In 2018, the FOMC had implemented four twenty-five basis point (0.25%) increases in the target for the Federal Funds Rate over the entirety of the year--- with the final increase occurring in December, 2018. Most economists projected and financial companies forecasted this trend would continue into 2019 (even the FOMC’s forward guidance indicated upwards of three more twenty-five basis point (0.25%) increases during the course of the year). How quickly things can change! During the course of the first quarter of 2019, the Treasury Yield Curve started flattening and, actually, inverting toward the end of the first quarter for the first time since 2007. As we all well know through our experience with what is now called the Great Recession--- an inverted yield curve many times is a precursor to a downward turn in economic activity or a recession. In the first quarter of 2019, many factors contributed to the flattening and inverting of the yield curve… but, overall, our domestic economy continued to grow; albeit, at a slower pace than the previous year. United Bancorp, Inc. (UBCP) responded to this change by continuing to grow its balance sheet and focusing on becoming more liability sensitive during the course of the second quarter and throughout the remainder of the year.

 

Even with these economic headwinds and the sudden change in monetary policy that United Bancorp, Inc. (UBCP) faced during the course of 2019, our Company continued its recent trend of producing record growth and earnings.

 

Continuing a Strong Trend of Growth this Past Year: Regarding growth, United Bancorp, Inc. (UBCP) continued to pursue its intermediate term goal of growing its asset base to a level of $1.0 billion, or greater, in order to achieve greater efficiencies and produce higher levels of earnings. During the course of the first quarter of 2019, UBCP crossed the $600 million asset threshold for the first time in its history. By year end, our Company was pushing on the $700 million threshold--- having total assets of $686 million. For the year, higher-yielding earning assets grew by $96.5 million or eighteen percent (18%). This growth in earning assets was nicely divided between steady growth in our Company’s loan portfolio, with gross loans increasing by $31.9 million, or 7.8%, and very solid growth in our investment portfolio, with securities increasing by $64.8 million or 52.3%. With our Company’s increased level of higher-yielding earning assets, our level of interest income increased year-over-year by $5.7 million or twenty-seven percent (27%).

 

 

A Letter from the President and CEO - Continued

 

In order for United Bancorp, Inc. (UBCP) to fund the strong growth that it experienced in 2019--- while improving its overall level of profitability--- it needed to effectively attract new funding while controlling all-around funding costs. Considering the sudden change in monetary policy that our Company experienced this past year, this was a new challenge for us since, as previously mentioned, we began the year being properly positioned for the rising rate environment in which we had operated since 2015. With our quick-changing, strategic decision to become more liability-sensitive during the second quarter, we allowed some of the retail-based funding that had fueled our growth the previous couple of years to runoff and be replaced with more price-sensitive, overnight wholesale funding alternatives. Accordingly, we lowered the rates that we paid on all of our retail deposit products and shortened the terms of our certificate of deposit offerings. As a result, retail deposits grew at a somewhat slower pace in 2019 ($22.6 million or 4.31%) than we had been experiencing prior thereto; while, overnight advances from the Federal Home Loan Bank increased by $39.7 million year-over-year.

 

Even with the aforementioned action relating to the pricing strategy taken by United Bancorp, Inc. (UBCP) in 2019, our Company did see slight compression in its net interest margin. Year-over-year, the net interest margin of UBCP dropped by seventeen basis points (17 bps), going from 3.84% to 3.67%. In spite of this reduction, our Company’s overall net interest margin still compared extremely favorably to our peer… in addition, we firmly believe that the actions that we took earlier in the year to become more liability-sensitive will benefit us in 2020. Also, with the increasing volume of earning assets added to our Company’s balance sheet during the course of this past year off-setting the decline in our net interest margin, UBCP experienced a very solid increase in the net interest income that it realized in 2019. For the year, net interest income increased by $2.77 million or 15.3%. As previously mentioned, this level of improvement compares very favorably to our peer within the financial services industry!

 

Outside of the net interest margin, United Bancorp, Inc. (UBCP) kept a close focus on its net non-interest margin by maintaining its overall level of non-interest income, which increased in 2019 by $228,000 or 6.2%. In addition, non-interest expense only increased by $59,000, or 0.36%, year-over-year, which takes into consideration the merger-related expenses that it incurred the previous year with the acquisition of Powhatan Point Community Bancshares (PPCB) in October, 2018.

 

Lastly, UBCP’s credit quality-related metrics continued to be very solid in 2019 and helped contribute to its strong financial performance during the year. From a qualitative perspective, UBCP successfully maintained overall strength and stability within its loan portfolio. As of December 31, 2019, our Company had non-accrual loans and loans past due thirty (30) plus days of $2.7 million or 0.60% of total loans. Further, net loans charged off (excluding overdrafts) was $601,000 in 2019, which was higher than the $259,000 charged off the previous year. Net loan charge offs to average loans for the year was 0.14% versus 0.07% for the same period in 2018. Year-over-year, this number was slightly higher due to a loan-related charge-off realized in the fourth quarter in the amount of $428,000, which we fully covered with an offsetting provision to our loan loss reserve. Management firmly believes that this situation was an isolated (or, one-off) incident related to a character issue with an individual borrower and not a systemic or core issue within the overall loan portfolio. On the basis of current trends related to credit quality, we anticipate our overall credit quality to remain very solid in the near term.

 

All of this led to the record year of earnings performance that United Bancorp, Inc. (UBCP) achieved in 2019! As previously mentioned, this past year UBCP reported net income of $6,810,000 and diluted earnings per share of $1.19. With our record earnings in 2019, our Company had a Return on Assets (ROA) of 1.07% and a Return on Equity (ROE) of 12.5%. Each of these return metrics compare very favorably to our peer!

 

Achieving Solid Operational Performance in 2019--- Building for Our Future: United Bancorp, Inc. (UBCP) had solid operational performance this past year and as we continued to focus on building our infrastructure (or foundation) in order to maintain relevancy within our industry. The following items were either initiated or achieved during the course of 2019:

 

·

In January, UBCP completed the “operational” merger with Powhatan Point Community Bancshares. This operational merger (which followed the financial merger that occurred in October 2018) went extremely well… as evidenced by no overall shrinkage in the depository base that was acquired. By effecting this operational merger, the customer base of our newly acquired banking center was fully integrated onto our systems and into our products and services.

 

 

·

Early in the second quarter of 2019, our Company established a new line of business by hiring an experienced industry executive to create a bona-fide Treasury Management function. This new organizational function allows us to provide higher-level cash management, payment and depository services to our largest lending segment--- small business and commercial customers. Offering these services will enable us to both attract and develop additional relationships with this valued, relationship-oriented customer segment. In addition, it will add value by creating new revenue opportunities for our Company.

 

·

In the mid-second quarter, UBCP announced that it had acquired a parcel of land in Moundsville, West Virginia on which it planned to build a new full-service banking center. Beginning in the early fourth quarter, construction of this new banking center commenced in this very vibrant community in the heart of the proposed ethane cracker region. This new banking center will be our Company’s first full-service banking center in the State of West Virginia and will further enhance our footprint in the Upper Ohio Valley Region--- which is our “traditional” market. In addition, this new banking center will nicely complement our recent expansion into Powhatan Point, Ohio, which is across the Ohio River from this new and exciting market. This new service area has extremely high growth potential for our Company.

 

·

In the late second quarter, our Company took a major step forward in ensuring that we will achieve our lofty growth goal. Specifically, we successfully raised $20.0 million of capital without diluting our shareholders through the issuance of subordinated debt at very favorable terms to our Company! Although, this “leverage capital” is only measured at the bank-level; it will allow United Bancorp, Inc. to effectively grow toward its goal of attaining an asset-level of $1.0 billion, or greater, in a truly cost-effective manner.

 

·

During the course of this past year, UBCP developed a more dedicated Sales Function by hiring an experienced individual to help build our sales platform. This hiring allowed our Company to better identify ways to more effectively on-board and expand customer relationships on the consumer-side of our operation. In addition, this function has quickly evolved into strongly focusing on the overall “customer experience,” to ensure the retention of consumer relationships for the long haul--- thus, generating longer-term revenue streams for UBCP.

 

·

This past year, we also took a major step forward enhancing our Marketing Function by hiring an executive who truly understands how to help us better build our brand identity. With our “Unified Bank” brand being unique within our industry, we are now more optimally positioned to effectively build our brand through traditional and non-traditional channels. Our enhanced capabilities in this area should help us reach more potential customers and entice them to start doing business with our Company through in-person and digital interaction… once again, helping to ensure our relevancy for many years to come.

 

·

In the fourth quarter, UBCP focused on further enhancing the customer experience by developing the “Unified Care Center.” Being a community-style bank, it is very important that we have a “high-touch” service culture. Through our Unified Care Center, we now offer our prized customer base extended customer service hours to help them with their many needs--- most importantly--- on their individual schedules. Our Company now provides “live” personal, customer-centric service to our valued customer base six days a week, Monday through Saturday, at hours as late as 10:00 p.m.

 

·

Lastly, we began the process of completely updating our online and mobile banking platforms in order to serve our customers at a higher level and create a better customer experience! We anticipate that these new systems--- and their enhanced functionality--- will be fully functional by the end of the current year. Our investment in these new technology platforms will enable us to serve our customers without ever having to set foot into any one of our banking centers. In addition, our customers will be able to walk out of any banking center with the ability to immediately utilize any service that we offer--- including instant issue debit cards, mobile and online banking, person-to-person payments, bill pay and full fraud protection… among other services.

 

 

A Letter from the President and CEO - Continued

 

As evidenced by the aforementioned accomplishments achieved this past year, United Bancorp, Inc. (UBCP) is firmly committed to continually enhancing and building its infrastructure (or, foundation) to support further growth, while achieving greater efficiencies. We maintain (and, will continue to maintain) a strong focus on remaining relevant within our industry by investing in our technology, support, origination and service platforms to ensure that we serve our valued customers at the highest possible level by enhancing the overall customer experience. We look forward to further expanding our footprint and bringing “The Unified Way” to many new markets, as we continue to pursue profitable growth. Ultimately, our vision is to be a leader amongst all community banks in digital transformation--- having complete channel integration and offering mobility to our customers--- thereby, serving them on their terms and through their preferred channels. Such commitment should ensure UBCP’s relevancy and high level performance for many years to come!

 

At United Bancorp, Inc. (UBCP), none of our accomplishments would be possible without the genuine and steadfast support of you, our valued shareholders. Our primary focus continues to be rewarding you by paying a very solid cash dividend and increasing your shareholder value in our Company. During the course of 2019, we increased our cash dividend payout by $0.0025 each quarter. In the fourth quarter, we increased our quarterly cash dividend to $0.14… our fourth increase for the year! On a forward basis, our current cash dividend produces a yield of 3.912%, based on our year end closing price. Regarding our present market valuation, the market rewarded our solid performance this past year by pushing our market value to a higher level. Our Company’s stock finished the year trading at $14.30, which was an increase of 25% year-over-year. Giving consideration to all of the positive achievements that were realized by UBCP during the past year, we are extremely hopeful that the increasing earnings that we project in the current year (along with the positive operational enhancements that we have made to our banking model) will drive our market valuation to even higher levels than the current twelve times (12x’s) at which we were trading at year-end. On this basis, we are very optimistic about our future prospects!

 

As you can see, United Bancorp, Inc. (UBCP) had one of its most historic years in terms of performance in 2019. But… as always… your management team will never be satisfied resting on past performance and laurels. We are strongly focused on moving forward and achieving our goal of becoming a $1.0 billion community banking organization in the not too distant future. To reach this goal, we will maintain our commitment to and standard of producing stellar, above peer, performance and growth related results as we confidently move forward as one of the premier community-banking competitors within our industry. UBCP is truly blessed to have a “United and Unified” team, management, board of directors and shareholder group. As a successful financial service company, we truly appreciate everyone’s continued support… together, we will accomplish more!

 

 

Scott A. Everson

President and Chief Executive Officer

ceo@unitedbancorp.com

February 18, 2020

 

Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, changes in the financial and securities markets, including changes with respect to the market value of our financial assets, and the availability of and costs associated with sources of liquidity. The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

DIVIDEND AND STOCK HISTORY

 

								Distribution Date of
		Cash Dividends				Special Cash Dividends		Dividends and
		Declared (1)				and Stock Dividends		Exchanges
1983		$	0.05			-		-
1984		$	0.06			4 for 1 Exchange(2)		January 2, 1984
1985		$	0.07			-		-
1986		$	0.09			-		-
1987		$	0.09			50% Stock Dividend		October 2, 1987
1988		$	0.10			-		-
1989		$	0.10			-		-
1990		$	0.11			-		-
1991		$	0.12			-		-
1992		$	0.12			100% Stock Dividend		September 10, 1992
1993		$	0.12			100% Stock Dividend		November 30, 1993
1994		$	0.13			10% Stock Dividend		September 9, 1994
1995		$	0.19			-		-
1996		$	0.20			10% Stock Dividend		June 20, 1996
1997		$	0.23			10% Stock Dividend		September 19, 1997
1998		$	0.26			5% Stock Dividend		December 18, 1998
1999		$	0.30			5% Stock Dividend		December 20, 1999
2000		$	0.31			5% Stock Dividend		December 20, 2000
2001		$	0.32			5% Stock Dividend		December 20, 2001
2002		$	0.33			5% Stock Dividend		December 20, 2002
2003		$	0.35			10% Stock Dividend		December 19, 2003
2004		$	0.39			10% Stock Dividend		December 20, 2004
2005		$	0.43			10% Stock Dividend		December 20, 2005
2006		$	0.48			10% Stock Dividend		December 20, 2006
2007		$	0.52			–		–
2008		$	0.54			–		–
2009		$	0.56			–		–
2010		$	0.56			–		–
2011		$	0.56			–		–
2012		$	0.42			–		–
2013		$	0.29			–		–
2014		$	0.33			–		–
2015		$	0.37			5¢ Per Share Special Dividend		December 29, 2015
2016		$	0.42			5¢ Per Share Special Dividend		December 29, 2016
2017		$	0.46			5¢ Per Share Special Dividend		December 29, 2017
2018		$	0.52			5¢ Per Share Special Dividend		December 28, 2018
2019		$	0.545			–		–

 

2020 ANTICIPATED DIVIDEND PAYABLE DATES

 

t	First Quarter
	March 20, 2020
t	Second Quarter*
	June 19, 2020
t	Third Quarter*
	September 18, 2020
t	Fourth Quarter*
	December 18, 2020

 

*Subject to action by Board of Directors

 

(1)

Adjusted for stock dividends and exchanges.

 

(2)

Formation of United Bancorp, Inc. (UBCP). Unified Bank (formerly The Citizen's Saving Bank) shareholders received 4 shares of UBCP stock in exchange for 1 share of bank stock.

 

TOTAL RETURN PERFORMANCE

 

 

Index		12/31/14				12/31/15				12/31/16				12/31/17				12/31/18				12/31/19
United Bancorp, Inc.			100.00				124.71				183.32				187.62				169.23				221.79
NASDAQ Composite			100.00				106.96				116.45				150.96				146.67				200.49
SNL Bank Index			100.00				101.71				128.51				151.75				126.12				170.79
SNL Bank $250M-$500M			100.00				114.41				143.56				175.44				149.89				171.84
SNL Midwest Bank			100.00				101.52				135.64				145.76				124.47				161.94
Dow Jones			100.00				100.21				116.74				149.56				144.35				180.94

 

 

Directors

 

 

1 = United Bancorp, Inc.		2 = Unified Bank
3 = Chairman - United Bancorp Inc.		4 = Chairman - Unified Bank

 

 

Directors and Officers

 

DIRECTORS OF UNITED BANCORP, INC.

 

Scott A. Everson1	President & Chief Executive Officer, United Bancorp, Inc. Chairman, President & Chief Executive Officer, Unified Bank, Martins Ferry, Ohio
Gary W. Glessner2	CPA & CGMA, Managing Member, Glessner & Associates, PLLC; Glessner Wharton Andrews Insurance, LLC; Tiffany’s, LLC; GWA Realty, LLC, GW Rentals, LLC; Trustee, Windmill Truckers Center, Inc.
John M. Hoopingarner1,2,3,4	Executive Director & Secretary, Muskingum Watershed Conservancy District, New Philadelphia, Ohio
Carl A. Novak, DDS	Novak Dental Clinic, Clarington, Ohio
Richard L. Riesbeck1,2,3,4	Chairman, United Bancorp, Inc.; President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio
James W. Everson	Chairman Emeritus 1969 - 2015

 

OFFICERS OF UNITED BANCORP, INC.

 

Scott A. Everson	President & Chief Executive Officer
Matthew F. Branstetter	Senior Vice President, Chief Operating Officer
Randall M. Greenwood	Senior Vice President, Chief Financial Officer & Treasurer
Lisa A. Basinger	Corporate Secretary

 

DIRECTORS OF UNIFIED BANK

 

Jonathan C. Clark, Esq	Attorney at Law, Lancaster, Ohio
Scott A. Everson1	President & Chief Executive Officer, United Bancorp, Inc.
	Chairman, President & Chief Executive Officer, Unified Bank, Martins Ferry, Ohio
Gary W. Glessner2	CPA & CGMA, Managing Member, Glessner & Associates, PLLC; Glessner Wharton Andrews Insurance, LLC; Tiffany’s, LLC; GWA Realty, LLC, GW Rentals, LLC; Trustee, Windmill Truckers Center, Inc.
John R. Herzig	President, Toland-Herzig Funeral Homes & Crematory, Strasburg, Ohio
John M. Hoopingarner1,2	Executive Director & Secretary, Muskingum Watershed Conservancy District, New Philadelphia, Ohio
Carl A. Novak, DDS	Novak Dental Clinic, Clarington, Ohio
Richard L. Riesbeck1,2,ª	Chairman, United Bancorp, Inc.; President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio
James W. Everson	Chairman Emeritus 1969 - 2015

 

1 = Executive Committee 2 = Audit Committee 3 = Compensation Committee

4 = Nominating and Governance Committee   ª = Lead Director

 

 

Bank Past Presidents & Directors

 

The journey to becoming the institution we are today began in Martins Ferry, Ohio in 1902. Originally founded as The German Savings Bank and renamed to The Citizens Savings Bank in 1918, the last 115 years have seen growth and change that would have been unimaginable at its’ founding. The bank has grown through sound management, the addition of new offices and the acquisition of others. With the name change from The Citizens Savings Bank to Unified Bank in 2017, it has and will continue to move forward.

 

The growth and success of the bank has been attributed to the association of many dedicated individuals.

 

PAST PRESIDENTS

Edward E. McCombs, 1902-1936

John E. Reynolds, 1936 – 1940

Harold H. Riethmiller, 1940 – 1973

James W. Everson, 1973 – 2002

 

Past Board of Directors

 

Edward E. McCombs, 1902-1936*	Dr. Charles D. Messerly, 1957-1987
John E. Reynolds, 1902-1940	James M. Blackford, 1962-1968
Dr. Joseph W. Darrah, 1902-1937	John H. Morgan, 1967-1976
J.A. Crossley, 1902-1903	Emil F. Snyder, 1968-1975
William M. Lupton, 1902-1902	James H. Cook, 1976-1986
F.K. Dixon, 1902-1909	Paul Ochsenbein, 1978-1991
Dr. R.H. Wilson, 1902-1905	David W. Totterdale, 1981-1995
Chris A. Heil, 1903-1909	Albert W. Lash, 1975-1996
David Coss, 1904-1938	Premo R. Funari, 1976-1997
L.L. Scheele, 1905-1917	Donald A. Davison, 1963-1997*
A.T. Selby, 1906-1954	Harold W. Price, 1999-1999
H.H. Rothermund, 1907-1912	John H. Clark, Jr., 1976-2001
Dr. J.G. Parr, 1912-1930	Dwain R. Hicks, 1999-2002
T.E. Pugh, 1920-1953	Michael A. Ley, 1999-2002
J.J. Weiskircher, 1925-1942	Michael J. Arciello 1992 - 2009
David H. James, 1925-1963	Leon F. Favede, O.D., 1981-2012
Dr. C.B. Messerly, 1931-1957	Herman E. Borkoski, 1987-2012
H.H. Riethmiller, 1936-1980*	James W. Everson, 1969-2014*
E.M. Nickles, 1938-1968	Robin L. Rhodes, 2007-2015
L.A. Darrah, 1939-1962	Andrew C. Phillips, 2007-2015
R.L. Heslop, 1941-1983	Errol C. Sambuco, 1996-2015
Joseph E. Weiskircher, 1943-1975	Samuel J. Jones, 2007-2015
Edward M. Selby, 1953-1976	Matthew C. Thomas, 1988-2016
David W. Thompson, 1954-1966	Terry A. McGhee, 2001-2017

 

* Past Chairman

 

 

Shareholder Information

 

United Bancorp, Inc.’s (the Company) common stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol UBCP, CUSIP #909911109. At year-end 2019, there were 5,951,351 shares issued, held among approximately 3,300 shareholders of record and in street name. The following table sets forth the quarterly high and low closing prices of the Company’s common stock from January 1, 2019 to December 31, 2019 compared to the same periods in 2018 as reported by the NASDAQ.

 

		2019																2018
		31-Mar				30-Jun				30-Sep				31-Dec				31-Mar				30-Jun				30-Sep				31-Dec
Market Price Range
High ($)		$	11.75				11.84				11.85				15.30			$	13.79				14.00				13.70				13.25
Low ($)		$	10.25				10.57				11.01				10.87			$	11.81				12.35				13.03				10.44
Cash Dividends
Quarter ($)		$	0.1325				0.1350				0.1375				0.1400			$	0.13				0.15				0.13				0.13
Cumulative ($)		$	0.1325				0.2675				0.4050				0.5450			$	0.13				0.26				0.39				0.52
Special Cash Dividends		$	-				-				-				-			$	-				-				-				0.05

 

Investor Relations:

 

A copy of the Company’s Annual Report on form 10-K as filed with the SEC, will be furnished free of charge upon written or E-mail request to:

 

Randall M. Greenwood, CFO

United Bancorp, Inc.

201 South 4th Street

PO Box 10

Martins Ferry, OH 43935

or

cfo@unitedbancorp.com

 

Dividend Reinvestment and Stock Purchase Plan:

 

Shareholders may elect to reinvest their dividends in additional shares of United Bancorp, Inc.’s common stock- through the Company’s Dividend Reinvestment Plan. Shareholders may also invest optional cash payments of up to $5,000 per month in our common stock at market price. To arrange automatic purchase of shares with quarterly dividend proceeds, please contact:

 

American Stock Transfer

and Trust Company

Attn: Dividend Reinvestment

6201 15th Avenue, 3rd Floor

Brooklyn, NY 11219

1-800-278-4353

 

Annual Meeting:

 

The Annual Meeting of Shareholders will be held at 2:00 p.m., April 22, 2020 at the Corporate Offices in Martins Ferry, Ohio.

 

Internet:

 

Please look us up at http//:www.unitedbancorp.com

 

Independent Auditors:

 

BKD LLP

312 Walnut Street, Suite 3000

Cincinnati, Ohio 45202

(513) 621-8300

 

Corporate Offices:

 

Unified Bank Building

201 South 4th Street, Martins Ferry, Ohio 43935

Lisa A. Basinger

Corporate Secretary

(888) 275-5566 (EXT 6113)

(740) 633-0445 (EXT 6113)

(740) 633-1448 (FAX)

 

Transfer Agent and Registrar:

 

For transfers and general correspondence, please contact:

American Stock Transfer and Trust Company

6201 15th Avenue, 3rd Floor

Brooklyn, NY 11219

1-800-937-5449

 

Stock Trading:

 

Raymond James 

222 South Riverside Plaza

7th Floor

Chicago, Illinois 60606

Anthony LanFranco

800-800-4693

 

Stifel, Nicolaus &  Company Inc.

655 Metro Place South

Dublin, Ohio 43017

Steven Jefferis

877-875-9352

 

Tom Thurston

Piper Sandler Companies

1251 Avenue of the Americas,

New York, NY 10020

212-466-8027

 

 

Management’s Discussion and Analysis

 

In the following pages, management presents an analysis of United Bancorp, Inc.’s financial condition and results of operations as of and for the year ended December 31, 2019 as compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the Consolidated Financial Statements and related footnotes and the selected financial data included elsewhere in this report.

 

When used in this discussion or future filings by the Company with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

 

The Company is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on its liquidity, capital resources or operations except as discussed herein. The Company is not aware of any current recommendations by regulatory authorities that would have such effect if implemented.

 

The Company does not undertake, and specifically disclaims, any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

 

Financial Condition

 

Overview

 

United Bancorp, Inc. reported diluted earnings per share of $1.19 and net income of $6,810,000 for the twelve months ended December 31, 2019, as compared to $0.82 and $4,282,000, respectively, for the corresponding twelve-month period in 2018. The Company’s diluted earnings per share for the three months ended December 31, 2019 was $0.31 as compared to $0.11 for the same period in the previous year. Last year’s fourth quarter performance was impacted by the Company’s acquisition of Powhatan Point Community Bancshares. These year-over-year improvements in UBCP’s earnings are directly related to the Company executing its strategic vision of achieving profitable growth by both growing organically and acquiring other like-minded community banking organizations.

 

For the most recently-ended quarter, UBCP had an increase in net income of $1,178,000. For the twelve-month period ending December 31, 2019, the Company saw its net income increase by $2,528,000, or 59%, to a level of $6,810,000, which is a new earnings record for our Company. This increase in earnings is highly correlated to the strong organic and acquisition-related growth that our Company experienced during the past year. Even with the issuance of common shares to facilitate our most recent acquisition completed in the fourth quarter of 2018, our diluted

 

 

earnings per share was $1.19 versus $0.82 in 2018, an increase of 45%. The combination of the acquisition-related and strong organic growth that we achieved this past year facilitated the increase in the level of the Company’s higher-yielding earning assets (loans and investment portfolio), which grew by $96.5 million, or 18%, on a year-over-year basis. This growth in earning assets was divided between steady growth in our Company’s loan portfolio, which increased by $31.9 million, or 7.8%, and solid growth in our investment portfolio, with securities and other restricted stock increasing by $64.6 million, or 50.4%. With our increased level of higher-yielding earning assets, our Company saw a year-over-year increase in the level of interest income that it generated in 2019 of $5.7 million or 27%.

 

 

In order to fund this strong growth in our earning assets while improving overall levels of profitability, the Company needed to effectively attract new funding while controlling its overall cost of funding. Considering that the Federal Open Market Committee (FOMC) was postured to increase its target rate for the overnight borrowing rate (known as the Fed Funds Rate) at year-end 2018, we were positioned for a rising rate environment. With the sudden turn in monetary policy by the FOMC during the course of this past year, our Company made a strategic decision to become more liability-sensitive by the late second quarter of this past year and allowed some of the retail funding that we had on our balance sheet to runoff and be replaced with more price-sensitive, overnight wholesale funding. Accordingly, total deposits grew at a somewhat slower pace than we had been experiencing prior thereto; while overnight advances from the Federal Home Loan Bank increased by $39.7 million, year-over-year. By adopting this position, we are hopeful that our Company will mitigate further compression of our net interest margin in the coming year. As of year-end 2019, our Company’s net interest margin was 3.67%, which compares very favorably with our peers. Also, by reasonably controlling our overall cost of funding, our Company experienced a very solid increase in net interest income in 2019 of $2,769,000, or 15.3%, which also compares very favorably to our competitors within our industry.

 

From a qualitative perspective, United Bancorp, Inc. has successfully maintained overall strength and stability within its loan portfolio. Year-over-year, the Company continues to have very solid credit quality-related metrics supported by a relatively low level of nonaccrual loans and loans past due 30 plus days, which were $2.7 million, or 0.60% of total loans, at December 31, 2019. Further, net loans charged off, excluding overdrafts, was $601,000 in 2019, which was higher than the $259,000 charged off the previous year. Net loan charge offs to average loans for the year was 0.14% versus 0.07% for the same period in 2018. Year-over-year, this number was slightly higher due to a loan-related charge-off realized in the fourth quarter in the amount of $428,000, which we fully covered with an offsetting provision to our loan loss reserve. This was an isolated incident resulting from an individual borrower having legal issues. With the borrower facing upcoming incarceration, the borrower’s loans became non-performing. With this matter being highly correlated to a character issue with the borrower and an isolated incident, we firmly believe that our credit quality remains very sound and are very satisfied with the overall stable performance of our loan portfolio from a credit quality perspective.

 

 

United Bancorp, Inc. greatly benefited from the positive execution of its strategic plan, which calls for growth through acquiring other like-minded community banking organizations, building new banking centers in key and complementary markets and capitalizing on prudent, yet profitable, organic opportunities. Over the course of the past year, we had success in these key areas on which we keenly focus. With the double-digit growth in assets that we have experienced during this time frame, our Company has produced record earnings. In addition, we are well on our way to achieving our strategic vision of growing our assets to a level of $1.0 billion, or greater, which should also help our Company gain even greater efficiencies and higher levels of earnings. As previously announced, in the late second quarter of this past year, our Company issued $20.0 million in subordinated debt at very favorable terms. Although this does not contribute to our Tier I Capital at the corporate-level, it does add to our Tier I Capital at our bank-level. Having this new leverageable (or growth) capital at our affiliate bank-level will greatly aid in helping us attain our lofty goal for growth and driving our earnings in a positive fashion in future periods.

 

By continuing to utilize its “playbook” to achieve profitable growth, Management is very optimistic about the Company’s future prospects. In addition, we will continue focusing on building our infrastructure (or, foundation) to support further growth while achieving greater efficiencies. We are strongly committed to remaining relevant within our industry by investing in our technology and support/ origination/service platforms. Ultimately, our vision is to be a leader amongst community banks in digital transformation--- having complete channel integration and offering mobility to our customers; thereby, serving them on their terms and through their preferred channels. We have started this initiative and believe that, for a community-minded bank, we will have a complete digital solution that will be highly appealing to our target clientele. Coupling this investment in technology with continued investment in growing our Company through acquisition and new branch

 

 

 

construction in key complementary markets, we firmly believe that we can continue to grow at acceptable levels while remaining very profitable.

 

The Company purchased land in Moundsville, West Virginia, and has started the construction of a new banking center in this very vibrant community in the heart of the proposed ethane cracker region. This will be the Company’s first full service office in the State of West Virginia and this new location will further enhance our developing footprint in the Upper Ohio Valley Region (which is our traditional market). In addition, this new banking center will nicely complement our expansion into Powhatan Point, Ohio, which is across the Ohio River from this new and exciting market. We anticipate that our new Moundsville Banking Center will be open for business early in the second quarter of this year. Even with the high level of growth that we experienced over the course of the past several quarters, we continued to maintain our overall profitability. With our record earnings in 2019, our Company had a return on equity (ROE) of 12.5% and a return on assets (ROA) of 1.07%. For many quarters, we have stated that our pursuit of growth must be accomplished in a satisfactorily profitable fashion. We are extremely delighted that we are presently achieving this and strongly anticipate this trend will carry into 2020.

 

Earning Assets – Loans

 

The Company’s gross loans totaled $441.5 million at December 31, 2019, representing a 7.8% increase over the $409.7 million at December 31, 2018. Average loans totaled $420.5 million for 2019, representing an 10.1% increase compared to average loans of $382.0 million for 2018.

 

The increase in gross loans from December 31, 2018 to December 31, 2019 was primarily an increase in commercial and commercial real estate loans by $37.5 million.

 

The Company's commercial and commercial real estate loan portfolio represents 80.3% of the total portfolio at December 31, 2019, compared to 77.4% at December 31, 2018. During this past year, we found many new customers within our lending areas and our focus continues on our small business customers that operate in our defined market area. We utilize all the SBA, Ohio Department of Development and State of Ohio loan programs as well as local revolving loan funds to best fit the needs of our customers.

 

The Company’s installment lending portfolio represented 2.2% of the total portfolio at December 31, 2019, compared to 3.4% at December 31, 2018. Competition for installment loans principally comes from the captive finance companies offering low to zero percent financing for extended terms.

 

The Company's residential real estate portfolio represents 17.5% of the total portfolio at December 31, 2019, compared to 19.2% at December 31, 2018. Residential real estate loans are comprised of 1, 3, and 5-year adjustable-rate mortgages and 15-year fixed rate loans used to finance 1-4 family units. The Company also offers fixed-rate real estate loans through our Secondary Market Real Estate Mortgage Program. Once these fixed rate loans are originated and immediately sold without recourse in what is referred to as the secondary market, the Company does not assume credit risk or interest rate risk in this portfolio. This arrangement is quite common in banks and saves our customers from looking elsewhere for their home financing needs.

 

The Company did recognize a gain on the sale of secondary market loans of $54,000 in 2019 and a gain of $66,000 in 2018.

 

The allowance for loan losses represents the amount which management and the Board of Directors estimates is adequate to provide for probable incurred losses in the loan portfolio. Accounting for the allowance and the related provision for loan losses is viewed by management as a critical accounting policy. The allowance balance and the annual provision charged to expense are reviewed by management and the Board of Directors on a monthly basis. The allowance calculation is determined by utilizing a risk grading model that considers borrowers’ past due experience, coverage ratio to industry averages, economic conditions and various other circumstances that are subject to change over time. In general, the loan loss policy for installment loans requires a charge-off if the loan reaches 120-day delinquent status or if notice of bankruptcy liquidation is received. The Company follows lending policies, with established criteria for determining the

 

 

repayment capacity of borrowers, requirements for down payments and current market appraisals or other valuations of collateral when loans are originated. Installment lending also utilizes credit scoring to help in the determination of credit quality and pricing.

 

The Company generally recognizes interest income on the accrual basis, except for certain loans which are placed on non-accrual status, when in the opinion of management; doubt exists as to collection on the loan. The Company’s policy is to generally place loans greater than 90 days past due on non-accrual status unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, interest income may be recognized on a cash basis as payment is received if the loan is well secured. If the loan is not deemed well secured, payments are credited to principal.

 

Management and the Board of Directors believe the current balance of the allowance for loan losses is sufficient to cover probable incurred losses. Refer to the Provision for Loan Losses section for further discussion on the Company’s credit quality.

 

Earning Assets – Securities and Federal Funds Sold

 

The securities portfolio is comprised of U.S. Government agency-backed securities, tax-exempt obligations of state and political subdivisions and certain other investments. Securities available for sale at December 31, 2019 increased approximately $64.8 million from December 31, 2018 totals. The increase in the balances of securities available for sale is part of the Company’s strategy to maintain a highly liquid base of earning assets that are readily available to fund new loan growth, as needed.

 

Sources of Funds – Deposits

 

The Company’s primary source of funds is retail core deposits from individuals and business customers. These core deposits include all categories of time deposits,

 

 

excluding certificates of deposit greater than $250,000. Total deposits increased $22.6 million or 4.3% from $525.4 million at December 31, 2018 to $548.1 million at December 31, 2019. Overall total deposit growth was mainly focused on interest bearing money market accounts and certificate of deposit accounts.

 

The Company has a strong deposit base from public agencies, including local school districts, city and township municipalities, public works facilities and others, which may tend to be more seasonal in nature resulting from the receipt and disbursement of state and federal grants. These entities have maintained relatively stable balances with the Company due to various funding and disbursement timeframes.

 

Certificates of deposit greater than $250,000 are not considered part of core deposits and as such are used to balance rate sensitivity as a tool of funds management. At December 31, 2019, certificates of deposit greater than $250,000 decreased $2.0 million, from December 31, 2018 totals.

 

Alternative financial products are continuously being introduced by our competition whether through traditional banks or brokerage services companies. As a result of this competition, the Company does offer full service brokerage services through LPL Financial^®.

 

Sources of Funds – Securities Sold Under Agreements to Repurchase and Other Borrowed Funds

 

Other interest-bearing liabilities include securities sold under agreements to repurchase, and Federal Home Loan Bank (“FHLB”) advances. Securities sold under agreements to repurchase decreased approximately $1.1 million from December 31, 2018 to December 31, 2019.

 

Advances from the Federal Home Loan Bank (FHLB) increased $39.6 million from December 31, 2018 to December 31, 2019.

 

On May 14, 2019 the Company issued $20,000,000 of junior subordinated debentures in denominations of not less than $250,000. The debentures bear interest at a fixed rate of 6.0% until May 2024, which then becomes a floating interest rate equal to the three-month LIBOR (or an equivalent index) plus 3.625%, resetting quarterly. Interest on the subordinated notes will be payable semiannually through May 2024 and quarterly thereafter through the maturity date of May 2029. Principal is due upon maturity. The debentures are unsecured and payable to various investors. For purposes of computing regulatory capital, the

 

 

debentures are included in Tier 2 Capital. The subordinated notes may not be repaid in whole or in part prior to the fifth anniversary of the issue date (May 2019).

 

Performance Overview 2019 to 2018

 

Net Income

 

The Company reported basic and diluted earnings per share of $1.19 and net income of $6,810,000 for the year ended December 31, 2019, an increase of $2.5 million, or 59.0%, over net income of $4,282,000 for the year ended December 31, 2018.

 

Net Interest Income

 

Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Comparing the year ended December 31, 2019 to 2018, the Company’s net interest margin was 3.67% compared to 3.84%, a decrease of 17 basis points.

 

Average interest-earning assets increased $117.3 million in 2019 as compared to 2018 while the associated weighted-average yield on these interest-earning assets increased from 4.50% in 2018 to 4.69% for 2019. Average interest-bearing liabilities increased $85.0 million in 2019 as compared to 2018, while the associated weighted-average costs on these interest-bearing liabilities increased from 0.83% in 2018 to 1.31% in 2019.

 

Refer to the sections on Asset and Liability Management and Sensitivity to Market Risks and Average Balances, Net Interest Income and Yields Earned and Rates Paid elsewhere herein for further information.

 

Provision For Loan Losses

 

The provision for loan losses is a charge to expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate by Management and the Board of Directors to cover probable incurred losses in the portfolio.

 

Gross loans were up $31.9 million year-over-year to a level of $441.5 million as of December 31, 2019. During this same period, the Company’s non-accrual loans increased $207,000, or 16.6%, to a level of $1.5 million and net loans charged off were up by $342,000, or 132.4%, to a level of $601,000 (exclusive of overdraft charge off). With the strong growth in loans and the increase in non-accrual loans, the Company increased the provision for loan losses which was $908,000 for the year ended December 31, 2019 compared to $297,000 for the year ended December 31, 2018, an increase of $611,000 year-over-year. Total allowance for loan losses to total loans was 0.51% and the total allowance for loan losses to nonperforming loans was 153.6% at year end 2019, compared to 0.50% and 164.04% at year end 2018.

 

Noninterest Income

 

Total noninterest income is made up of bank-related fees and service charges, as well as other income producing services , sales of loans in the secondary market, ATM income, early redemption penalties for certificates of deposit, safe deposit rental income, internet bank service fees, earnings on bank-owned life insurance and other miscellaneous items.

 

Noninterest income for the year ended December 31, 2019 was $3.9 million, an increase of $228,000, or 6.2%, compared to $3.7 million for the year ended December 31, 2018. The majority of this increase is related to a $235,000 increase in service charges on deposit accounts.

 

Noninterest Expense

 

In 2019, our Company saw its overall noninterest expense levels increase as we continue to build for the future and support our overall mission for growth. Most of the increase in our noninterest expense levels occurred in the following areas: hiring additional credit personnel to support the loan platform, we hired a Treasury Management Specialist, added to the depth of our Marketing Department, brought in an individual to lead our front line team to enhance the overall customer experience; and we enhanced our Information Technology function to better manage risk and serve our valued customers. Overall noninterest expense for 2019 increased $59,000, as compared to 2018.

 

Salaries and employee benefits increased $812,000, or

 

 

 

10.2%, from 2018 to 2019. As described above, additional personnel were added to support our growing Company and we had an increased level of personnel from the 2018 acquisition of Powhatan Point Community Bancshares, Inc.

 

Professional fees decreased $881,000, or 40.5% for 2019 as compared to 2018. This decrease is the 2018 merger expenses of approximately $1.3 million for the Powhatan Point Community Bancshares (Powhatan Point) merger.

 

Marketing expense decreased $110,000, or 22.3%, for 2019 as compared to 2018.

 

Other expenses increased $273,000, or 11.4%. Items contributing to this increase were ATM expense of $58,000 as we issue and grow our debit card usage. Internet bank expense increased $39,000, which is also related to the growth in the number of depository accounts and increased usage.

 

Income tax expense for 2019 was $599,000 compared to $800,000 in 2018, a decrease of $201,000. The Company’s effective income tax rate was 8.1% in 2019 and 15.7% in 2018. Refer to note Note 9 Income Taxes for a reconciliation of the effective tax rate for the Company.

 

Asset/Liability Management and Sensitivity to Market Risks

 

In the environment of changing business cycles, interest rate fluctuations and growing competition, it has become increasingly difficult for banks to produce adequate earnings on a consistent basis. Although management can anticipate changes in interest rates, it is not possible to reliably predict the magnitude of interest rate changes. As a result, the Company must establish a sound asset/liability management policy, which will minimize exposure to interest rate risk while maintaining an acceptable interest rate spread and insuring adequate liquidity.

 

The principal goal of asset/liability management – earnings management – can be accomplished by establishing decision processes and control procedures for all bank assets and liabilities. Thus, the full scope of asset/liability management encompasses the entire balance sheet of the Company. The broader principal components of asset/ liability management include, but are not limited to liquidity planning, capital planning, gap management and spread management.

 

By definition, liquidity is measured by the Company’s ability to raise cash at a reasonable cost or with a minimum amount of loss. Liquidity planning is necessary so the Company will be capable of funding all obligations to its customers at all times, from meeting their immediate cash withdrawal requirements to fulfilling their short-term credit needs.

 

Capital planning is an essential portion of asset/liability management, as capital is a limited Bank resource, which, due to minimum capital requirements, can place possible restraints on Bank growth. Capital planning refers to maintaining capital standards through effective growth management, dividend policies and asset/liability strategies.

 

(In thousands)		2019				2018
Noninterest income
Customer service fees		$	2,843			$	2,608
Gains on sales of loans			54				66
Other income			991				986
Total noninterest income		$	3,888			$	3,660
Noninterest expense
Salaries and employee benefits		$	8,776			$	7,964
Occupancy and equipment			2,263				2,140
Provision for losses on foreclosed real estate			-				71
Professional services			1,292				2,173
Insurance			468				433
Deposit insurance premiums			75				190
Franchise and other taxes			408				364
Marketing expense			383				493
Printing and office supplies			136				165
Other expenses			2,681				2,430
Total noninterest expense		$	16,482			$	16,423

 

 

Gap is defined as the dollar difference between rate sensitive assets and rate sensitive liabilities with respect to a specified time frame. A gap has three components – the asset component, the liability component, and the time component. Gap management involves the management of all three components.

 

Gap management is defined as those actions taken to measure and match rate-sensitive assets to rate-sensitive liabilities. A rate-sensitive asset is any interest-earning asset, which can be repriced to a market rate in a given time frame. Similarly, a rate-sensitive liability is any interest-bearing liability, which can have its interest rate changed to a market rate during the specified time period. Caps, collars and prepayment penalties may prevent certain loans and securities from adjusting to the market rate.

 

A negative gap is created when rate-sensitive liabilities exceed rate-sensitive assets and conversely a positive gap occurs when rate-sensitive assets exceed rate-sensitive liabilities. Generally, a negative gap position will cause profits to decline in a rising interest rate environment and cause profits to increase in a falling interest rate environment. Conversely, a positive gap will cause profits to decline in a falling interest rate environment and increase is a rising interest rate environment. The Company’s goal is to have acceptable profits under any interest rate environment. To avoid volatile profits as a result of interest rate fluctuations, the Company attempts to match interest rate sensitivities. The Company achieves this by pricing both the asset and liability components to yield a sufficient interest rate spread, so that profits will remain relatively consistent across interest rate cycles.

 

Management of the income statement is called spread management and is defined as managing investments, loans, and liabilities to achieve an acceptable spread between the Company’s return on its earning assets and its cost of funds. Gap management without consideration of interest spread can cause unacceptably low profit margins. Spread management without consideration of gap positions can cause acceptable profits in some interest rate environments and unacceptable profits in others. A sound asset/liability management program combines gap and spread management into a single cohesive system.

 

Management measures the Company’s interest rate risk by computing estimated changes in net interest income and the Net Portfolio Value (“NPV”) of its cash flows from assets, liabilities and off-balance-sheet items in the event of a range of assumed changes in market interest rates. The Bank’s senior management and the Executive Committee of the Board of Directors, comprising the Asset/Liability Committee (“ALCO”), review the exposure to interest rates monthly. Exposure to interest rate risk is measured with the use of an interest rate sensitivity analysis to determine the change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the assets and liabilities.

 

NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance-sheet items.

 

Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. The NPV calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by surveys performed during each quarterly period, with adjustments made to reflect the shift in the Treasury yield curve between the survey date and quarter-end date. Certain shortcomings are inherent in this method of analysis presented in the computation of estimated NPV. Certain assets such as adjustable-rate loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the portion of adjustable-rate loans in the Company’s portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the case of an increase in interest rates.

 

The following tables present an analysis of the potential sensitivity of the Company’s net present value of its financial instruments to sudden and sustained changes in the prevailing interest rates.

 

The projected volatility of the net present value at both December 31, 2019 and 2018 fall within the general guidelines established by the Board of Directors. The 2019 NPV table shows that in a falling interest rate environment, in the event of a 100 basis point change, the NPV would decrease 7%, and with a 200 basis point change, the NPV

 

 

would decrease 18%. This decrease is the result of fixed-rate certificates of deposit not repricing in lock step with an immediate downward rate adjustment of 100 and 200 basis points. The other consideration is that once rates decrease 100 or 200 basis points from current levels, we tend to reach a floor on how low depository rates can adjust downward.

 

In an upward change in interest rates, the Company’s NPV would increase basically 0% with a 100 basis point interest rate increase. In a 200 basis point rate increase, the Company’s NPV would decrease 1%. This decrease is attributable to a portion of the Company’s deposit pricing tied to the overnight borrowing rate.

 

(Dollars in Thousands)

Net Portfolio Value - December 31, 2019

 

Change in Rates		$ Amount				$ Change				% Change
+200			128,125				(1,628	)			-1	%
+100			129,388				(365	)			0	%
Base			129,752
-100			120,886				(8,866	)			-7	%
-200			105,871				(23,882	)			-18	%

 

(Dollars in Thousands)
Net Portfolio Value - December 31, 2018
Change in Rates		$ Amount				$ Change				% Change
+200			134,438				8,102				6	%
+100			134,450				5,114				4	%
Base			129,336
-100			117,270				(12,066	)			-9	%
-200			98,346				(30,990	)			-24	%

 

 

The following table is a summary of selected quarterly results of operations for the years ended December 31, 2019 and 2018.

 

		Three Months Ended
		March 31				June 30				September 30				December 31
		(In thousands, except per share data)
		2019
Total interest income		$	6,315			$	6,648			$	6,921			$	7,150
Total interest expense			1,207				1,469				1,726				1,721
Net interest income			5,108				5,179				5,195				5,429
Provision for losses on loans			90				120				120				578
Other income			945				947				1,003				993
General, administrative and other expense			4,162				4,172				4,162				3,986
Income before income taxes			1,801				1,835				1,916				1,858
Federal income taxes			187				188				135				89
Net income			1,614				1,646				1,781				1,769
Earnings per share
Basic			0.28				0.29				0.31				0.31
Diluted			0.28				0.29				0.31				0.31

 

		Three Months Ended
		March 31				June 30				September 30				December 31
		(In thousands, except per share data)
		2018
Total interest income		$	4,625			$	5,107			$	5,523			$	6,065
Total interest expense			523				707				893				1,055
Net interest income			4,102				4,400				4,630				5,010
Provision for losses on loans			57				72				72				96
Other income			880				888				897				995
General, administrative and other expense			3,579				3,754				3,855				5,235
Income before income taxes			1,346				1,462				1,600				674
Federal income taxes			198				250				269				83
Net income			1,148				1,212				1,331				591
Earnings per share
Basic			0.23				0.23				0.25				0.11
Diluted			0.23				0.23				0.25				0.11

 

 

Average Balances, Net Interest Income and Yields Earned and Rates Paid

 

The following table provides average balance sheet information and reflects the taxable equivalent average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2019 and 2018. The yields and costs are calculated by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities.

 

The average balance of available-for-sale securities is computed using the carrying value of securities while the yield for available for sale securities has been computed using the average amortized cost. Average balances are derived from average month-end balances, which include nonaccruing loans in the loan portfolio, net of the allowance for loan losses. Interest income has been adjusted to tax-equivalent basis.

 

		2019													2018
(Dollars In thousands)						Interest													Interest
		Average				Income/				Yield/					Average				Income/				Yield/
		Balance				Expense				Rate					Balance				Expense				Rate
Assets
Interest-earning assets
Loans (1)		$	420,487				21,803				5.19	%			$	382,164				18,885				4.94	%
Taxable securities - AFS			48,911				996				2.04					45,250				765				1.69
Tax-exempt securities - AFS (1)			106,528				4,687				4.40					35,424				1,493				4.21
Federal funds sold			17,285				333				1.93					12,958				197				1.59
FHLB stock and other			4,049				211				5.21					4,179				249				5.91
Total interest-earning assets			597,260				28,030				4.69					479,975				21,589				4.50
Noninterest-earning assets
Cash and due from banks			5,405													2,000
Premises and equipment (net)			12,232													11,838
Other nonearning assets			22,787													20,274
Less: allowance for loan losses			(2,127	)												(2,085	)
Total noninterest-earning assets			38,297													32,027
Total assets			635,557													512,002
Liabilities & stockholders’ equity
Interest-bearing liabilities
Demand deposits		$	209,810				2,381				1.13	%			$	183,754				1,433				0.78	%
Savings deposits			109,806				188				0.17					88,900				54				0.06
Time deposits			112,211				2,258				2.01					77,558				1,104				1.42
FHLB advances			27				1				3.70					14,393				299				2.08
Federal funds purchased			8,933				185				2.07					162				9				5.56
Subordinated debentures			16,276				975				5.99					4,124				143				3.47
Repurchase agreements			9,699				136				1.40					12,874				136				1.06
Total interest-bearing liabilities			466,762				6,124				1.31					381,756				3,178				0.83
Noninterest-bearing liabilities
Demand deposits			109,349													80,243
Other liabilities			5,054													3,102
Total noninterest-bearing liabilities			114,403													83,345
Total liabilities
Total stockholders’ equity			54,392													46,904
Total liabilities & stockholders’ equity		$	635,557												$	512,002
Net interest income						$	21,906												$	18,411
Net interest spread											3.38	%												3.67	%
Net yield on interest-earning assets											3.67	%												3.84	%

 

                     • For purposes of this schedule, nonaccrual loans are included in loans.

                     • Fees collected on loans are included in interest on loans.

                     (1) Shown on a tax equivalent basis.

 

 

Rate/Volume Analysis

 

The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected interest income and expense during 2019. For purposes of this table, changes in interest due to volume and rate were determined using the following methods:

 

•

Volume variance results when the change in volume is multiplied by the previous year’s rate.

 

•

Rate variance results when the change in rate is multiplied by the previous year’s volume.

 

•

Rate/volume variance results when the change in volume is multiplied by the change in rate.

 

NOTE: The rate/volume variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Nonaccrual loans are ignored for purposes of the calculations due to the nominal amount of the loans.

 

 

Capital Resources

 

Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Bank. The Company’s stockholders’ equity was $59.9 million and $50.6 million at December 31, 2019 and 2018, respectively. Total stockholders’ equity in relation to total assets was 8.74% at December 31, 2019 and 8.54% at December 31, 2018. Please refer to the Consolidated

 

		2019 Compared to 2018
		Increase/(Decrease)
(In thousands)						Change				Change
		Total				Due To				Due To
		Change				Volume				Rate
Interest and dividend income
Loans		$	2,918				1,956				962
Taxable securities available for sale			231				65				166
Tax-exempt securities available for sale			3,194				3,126				68
Federal funds sold			136				76				60
FHLB stock and other			(38	)			(8	)			(30	)
Total interest and dividend income			6,441				5,215				1,226
Interest expense
Demand deposits			948				225				723
Savings deposits			134				15				119
Time deposits			1,154				599				555
FHLB advances			(298	)			(429	)			131
Federal funds purchased			176				185				(9	)
Subordinated debentures			832				-				832
Repurchase agreements			-				(38	)			38
Total interest expense			2,946				557				2,389
Net interest income		$	3,495				4,658				(1,163	)

 

 

Statements of Stockholders’ Equity for a detailed roll forward of stockholders’ equity from 2018 to 2019.

 

The Company has established a Dividend Reinvestment Plan (“The Plan”) for stockholders under which the Company’s common stock will be purchased by The Plan for participants with automatically reinvested dividends. The Plan does not represent a change in the dividend policy or a guarantee of future dividends. Stockholders who do not wish to participate in The Plan continue to receive cash dividends, as declared in the usual and customary manner.

 

The Company’s Articles of Incorporation permits the creation of a class of preferred shares with 2,000,000 authorized shares. If utilized, this will enable the Company, at the option of the Board of Directors, to issue series of preferred shares in a manner calculated to take advantage of financing techniques which may provide a lower effective cost of capital to the Company. The class of preferred shares provides greater flexibility to the Board of Directors in structuring the terms of equity securities that may be issued by the Company. As of December 31, 2019 the Company has not issued any preferred shares.

 

On May 14, 2019 the Company issued $20,000,000 of junior subordinated debentures in denominations of not less than $250,000. The debentures bear interest at a fixed rate of 6.0% until May 2024, which then becomes a floating interest rate equal to the three-month LIBOR (or an equivalent index) plus 3.625%, resetting quarterly. Interest on the subordinated notes will be payable semiannually through May 2024 and quarterly thereafter through the maturity date of May 2029. Principal is due upon maturity. The debentures are unsecured and payable to various investors. For purposes of computing regulatory capital, the debentures are included in Tier 2 Capital. The subordinated notes may not be repaid in whole or in part prior to the fifth anniversary of the issue date (May 2019).

 

In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I (“Trust I” or the

 

 

 

Trust”), issued $4.1 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.1 million of the Company’s subordinated debentures. The Company’s subordinated debentures are the sole asset of Trust I. The Company’s investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.1 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company’s Tier 1 Capital. The interest rate is a variable rate per annum, reset quarterly, equal to three-month LIBOR plus 1.35% and is payable quarterly.

 

The $4.1 million of net proceeds received by the Company was primarily utilized to fund a $3.4 million note receivable from an Employee Stock Option Plan (ESOP). The ESOP in turn utilized the note proceeds to purchase $3.4 million of the Company’s treasury stock.

 

Liquidity

 

Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold and securities available-for-sale. These assets are commonly referred to as liquid assets. Liquid assets were $203.8 million at December 31, 2019, compared to $149.2 million at December 31, 2018. Management recognizes securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 2019, $188.8 million of the securities portfolio was classified as available for sale. The Company’s residential real estate portfolio can and has been readily used to collateralize borrowings as an additional source of liquidity. Management believes its current liquidity level is sufficient to meet cash requirements.

 

The Cash Flow Statements for the periods presented provide an indication of the Company’s sources and uses of

 

 

cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2019 and 2018 follows.

 

Net cash provided by operating activities totaled $8.5 million and $5.8 million for the years ended December 31, 2019 and 2018, respectively. The adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and intangibles, gain on sales of loans, securities and other assets, the provision for loan losses, Federal Home Loan Bank stock dividends, net amortization of securities and net changes in other assets and liabilities.

 

Net cash used in investing activities totaled $95.8 million for the year ended December 31, 2019. For year ended December 31, 2018 net cash used by investing activities totaled $62.5 million. The changes in net cash from investing activities include loan growth, security purchases as well as normal maturities, security calls and reinvestments of securities and premises and equipment expenditures.

 

Net cash provided by financing activities totaled $76.9 million and $67.7 for the years ended December 31, 2019 and 2018, respectively. The net cash provided by financing activities in 2019 was primarily attributable to an increase in deposits net of repayments in borrowings from the Federal Home Loan Bank. The net cash provided by financing activities in 2018 was primarily attributable to an increase in total deposits.

 

Management feels that it has the capital adequacy, profitability, liquidity and reputation to meet the current and projected financial needs of its customers.

 

 

Inflation

 

The majority of assets and liabilities of the Company are monetary in nature and therefore the Company differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company’s ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity.

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders, Board of Directors and Audit Committee

United Bancorp, Inc.

Martins Ferry, Ohio

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.

 

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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 included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company's auditor since 2007.

 

Cincinnati, Ohio March 20, 2020

 

 

 

United Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2019 and 2018

(In thousands, except share data)

 

		2019				2018
Assets
Cash and due from banks		$	5,697			$	15,573
Interest-bearing demand deposits			9,288				9,680
Cash and cash equivalents			14,985				25,253
Available-for-sale securities			188,785				123,991
Loans, net of allowance for loan losses of $2,231 and $2,043 at December 31, 2019 and 2018, respectively			439,317				407,640
Premises and equipment			12,402				12,117
Federal Home Loan Bank stock			4,012				4,243
Foreclosed assets held for sale, net			819				91
Core deposit and other intangible assets			1,542				1,692
Accrued interest receivable			2,697				1,798
Bank-owned life insurance			17,196				13,115
Other assets			3,951				3,273
Total Assets		$	685,706			$	593,213
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	334,380			$	309,505
Savings			108,218				111,251
Time			105,471				104,687
Total deposits			548,069				525,443
Securities sold under repurchase agreements			6,915				8,068
Federal Home Loan Bank advances			39,800				106
Subordinated debentures			23,543				4,124
Deferred federal income tax			1,736				219
Interest payable and other liabilities			5,721				4,610
Total liabilities			625,784				542,570
Stockholders’ Equity
Preferred stock, no par value, authorized 2,000,000 shares; no shares issued			––				––
Common stock, $1 par value; authorized 10,000,000 shares; issued  2019 – 5,959,351 shares, 2018 - 5,926,851 shares; outstanding 2019 – 5,516,203, 2018 – 5,739,203			5,959				5,927
Additional paid-in capital			22,871				22,556
Retained earnings			27,905				24,321
Stock held by deferred compensation plan; 2019 – 176,134 shares, 2018 – 182,457 shares			(1,659	)			(1,701	)
Unearned ESOP compensation			(228	)			(404	)
Accumulated other comprehensive income (loss)			5,536				(10	)
Treasury stock, at cost 2019 – 42,400 shares, 2018 – 5,744 shares			(462	)			(46	)
Total stockholders’ equity			59,922				50,643
Total liabilities and stockholders’ equity		$	685,706			$	593,213

 

See Notes to Consolidated Financial Statements

 

 

United Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2019 and 2018

(In thousands except per share data)

 

		2019				2018
Interest and Dividend Income
Loans		$	21,790			$	18,875
Securities
Taxable			996				765
Tax-exempt			3,704				1,234
Federal funds sold			333				197
Dividends on Federal Home Loan Bank and other stock			211				249
Total interest and dividend income			27,034				21,320
Interest Expense
Deposits			4,827				2,591
Borrowings			1,296				587
Total interest expense			6,123				3,178
Net Interest Income			20,911				18,142
Provision for Loan Losses			908				297
Net Interest Income After Provision for Loan Losses			20,003				17,845
Noninterest Income
Customer service fees			2,843				2,608
Net gains on loan sales			54				66
Earnings on bank-owned life insurance			533				477
Bank-owned life insurance death benefit			––				100
Other			458				409
Total noninterest income			3,888				3,660
Noninterest Expense
Salaries and employee benefits			8,776				7,964
Net occupancy and equipment expense			2,263				2,140
Provision for losses on foreclosed real estate			––				71
Professional fees			1,292				2,173
Insurance			468				433
Deposit insurance premiums			75				190
Franchise and other taxes			408				364
Marketing expense			383				493
Printing and office supplies			136				165
OREO and  repossession losses			5				27
Other			2,676				2,403
Total noninterest expense			16,482				16,423
Income Before Federal Income Taxes			7,409				5,082
Provision for Federal Income Taxes			599				800
Net Income		$	6,810			$	4,282
Basic Earnings Per Share		$	1.19			$	0.82
Diluted Earnings Per Share		$	1.19			$	0.82

 

See Notes to Consolidated Financial Statements

 

 

United Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2019 and 2018

(In thousands)

 

		2019				2018
Net income		$	6,810			$	4,282
Other comprehensive income (loss), net of tax
Unrealized holding gains on available-for-sale securities during the period, net of taxes of $1,622 and $199 for each respective period			6,107				749
Change in funded status of defined benefit plan, net of tax benefits of $150 and $82 for each respective period			(564	)			(309	)
Amortization of prior service included in net periodic pension expense, net of tax benefits of $19 and $19 for each respective period			(70	)			(70	)
Amortization of net loss included in net periodic pension cost, net of taxes of $20 and $11 for each respective period			73				40
Comprehensive income		$	12,356			$	4,692

 

See Notes to Consolidated Financial Statements

 

 

United Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2019 and 2018

(In thousands except per share data)

 

										Treasury				Shares								Accumulated
						Additional				Stock and				Acquired								Other
		Common				Paid-in				Deferred				By				Retained				Comprehensive
		Stock				Capital				Compensation				ESOP				Earnings				Loss				Total
Balance, January 1, 2018		$	5,435			$	18,020			$	(1,717	)		$	(683	)		$	23,260			$	(420	)		$	43,895
Net income			––				––				––				––				4,282				––				4,282
Other comprehensive loss			––				––				––				––				––				410				410
Share issuance in connection with merger			367				4,344				---				---				---				---				4,711
Cash dividends - $0.570 per share			––				––				––				––				(3,221	)			––				(3,221	)
Shares purchased for deferred compensation plan			––				30				(30	)			––				––				––				––
Expense related to share-based compensation plans			––				287				––				––				––				––				287
Restricted stock activity			125				(125	)			---				––				––				––				---
Amortization of ESOP			––								––				279				––				––				279
Balance, December 31, 2018			5,927				22,556				(1,747	)			(404	)			24,321				(10	)			50,643
Net income			––				––				––				––				6,810				––				6,810
Other comprehensive income			––				––				––				––				––				5,546				5,546
Cash dividends - $0.545 per share			––				––				––				––				(3,226	)			––				(3,226	)
Shares purchased for deferred compensation plan			––				(42	)			42				––				––				––				––
Shares purchased for treasury stock			––				---				(416	)			––				––				––				(416	)
Expense related to share-based compensation plans			––				293				––				––				––				––				293
Restricted stock activity			32				(32	)			––				––				––				––				––
Amortization of ESOP			––				96				––				176				––				––				272
Balance, December 31, 2019		$	5,959			$	22,871			$	(2,121	)		$	(228	)		$	27,905			$	5,536			$	59,922

 

See Notes to Consolidated Financial Statements

 

 

United Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2019 and 2018

(In thousands)

 

		2019				2018
Operating Activities
Net income		$	6,810			$	4,282
Items not requiring (providing) cash
Depreciation and amortization			1,040				974
Provision for loan losses			908				297
Provision for losses on foreclosed real estate			––				70
Amortization of premiums and discounts on securities-net			326				135
Amortization of intangible assets			150				42
Deferred income taxes			42				375
Originations of loans held for sale			(2,796	)			(3,064	)
Proceeds from sale of loans held for sale			2,850				3,130
Net gains on sales of loans			(54	)			(66	)
Amortization of ESOP			272				280
Expense related to share-based compensation plans			293				287
Loss on sale of real estate and other repossessed assets			5				27
Increase in cash surrender value of bank-owned life insurance			(81	)			(389	)
Gain on sale of fixed assets			(8	)			––
Amortization of debt issuance costs			36				––
Changes in
Accrued interest receivable			(898	)			(660	)
Other assets			(1,188	)			589
Interest payable and other liabilities			910				(554	)
Net cash provided by operating activities			8,617				5,755
Investing Activities
Purchases of available-for-sale securities			(102,645	)			(78,117	)
Sale of available-for-sale securities			45,255				23,865
Sale of interest-bearing time deposits			––				3,461
Net change in loans			(33,403	)			(34,971	)
Mandatory redemption of Federal Home Loan Bank Stock			231
Purchases of bank-owned life insurance			(4,000	)			––
Purchases of premises and equipment, net			(1,336	)			(785	)
Net cash received from acquisition of Powhatan Point Community Bancshares, Inc.			––				23,457
Proceeds from sale of premises and equipment			19				––
Proceeds from sales of foreclosed assets			86				543
Net cash used in investing activities			(95,793	)			(62,547	)

 

See Notes to Consolidated Financial Statements

 

 

United Bancorp, Inc.

Consolidated Statements of Cash Flows (continued)

December 31, 2019 and 2018

(In thousands)

 

		2019				2018
Financing Activities
Net increase in deposits		$	22,626			$	83,884
Proceeds of Federal Home Loan Bank advances			39,800				---
Repayments of Federal Home Loan Bank advances			(106	)			(9,916	)
Proceeds from issuance of subordinated debentures, net of origination fees			19,383				---
Net change in securities sold under repurchase agreements			(1,153	)			(3,017	)
Repurchase of common stock			(416	)
Cash dividends paid			(3,226	)			(3,221	)
Net cash provided by financing activities			76,908				67,730
Decrease (Increase) in Cash and Cash Equivalents			(10,268	)			10,938
Cash and Cash Equivalents, Beginning of Year			25,253				14,315
Cash and Cash Equivalents, End of Year		$	14,985			$	25,253
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	6,098			$	3,285
Federal income taxes paid		$	25			$	715
Supplemental Disclosure of Non-Cash Investing Activities
Transfers from loans to foreclosed assets held for sale		$	818			$	280

 

The Company purchased all of the stock of Powhatan Point Community Bancshares, Inc. on October 15, 2018. In conjunction with the acquisition, liabilities were assumed as follows:

 

Fair value of assets acquired		$	62,328
Less common stock issued			4,711
Less cash paid for common stock			1,529
Liabilities assumed		$	56,088

 

See Notes to Consolidated Financial Statements

 

 

 

Note 1:

Nature of Operations and Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Nature of Operations

 

The Company’s revenues, operating income and assets are almost exclusively derived from banking. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. Customers are mainly located in Athens, Belmont, Carroll, Fairfield, Harrison, Jefferson and Tuscarawas Counties and the surrounding localities in northeastern, east-central and southeastern Ohio and include a wide range of individuals, businesses and other organizations. Unified Bank conducts its business through its main office in Martins Ferry, Ohio and branches in Amesville, Bridgeport, Colerain, Dellroy, Dillonvale, Dover, Glouster, Jewett, Lancaster Downtown, Lancaster East, Nelsonville, New Philadelphia, Powhatan Point, St. Clairsville East, St. Clairsville West, Sherrodsville, Strasburg and Tiltonsville, Ohio. The Bank also operates a Loan Production Office in Wheeling, West Virginia.

 

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

 

Revenue Recognition

 

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, investment securities, as well as revenue related to our mortgage banking activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures.

 

 

Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:

 

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.

 

Cash Equivalents

 

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2019 and 2018, cash equivalents consisted primarily of due from accounts with the Federal Reserve and other correspondent banks.

 

Currently, the FDIC’s insurance limits are $250,000. At December 31, 2019 and 2018, the Company’s various cash accounts did not exceed the federally insured limit of $250,000. At December 31, 2019 and 2018, the Company held $7,830,000 and $6,566,000 at the Federal Home Loan Bank and the Federal Reserve Bank, respectively, which are not subject to FDIC limits.

 

Securities

 

Certain debt securities that management has the positive intent and ability to hold to maturity would be classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

For debt securities with fair value below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

 

 

Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. At December 31, 2019 and 2018, the Company did not have any loans held for sale.

 

Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

 

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

 

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

 

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

 

 

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

 

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

 

Premises and Equipment

 

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. An accelerated method is used for tax purposes.

 

Federal Home Loan Bank Stock

 

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

 

Foreclosed Assets Held for Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

 

Bank-Owned Life Insurance

 

The Company and the Bank have purchased life insurance policies on certain key executives. Company and bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

 

Treasury Stock

 

Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average cost.

 

Restricted Stock Awards

 

The Company has a share-based employee compensation plan, which is described more fully in Note 14.

 

 

Income Taxes

 

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if based on the weight of evidence available it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. At December 31, 2019, the Company had no uncertain tax positions.

 

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

 

The Company files consolidated income tax returns with its subsidiary. With a few exceptions, the Company is no longer subject to the examination by tax authorities for years before 2016.

 

Deferred Compensation Plan

 

Directors have the option to defer all or a portion of fees for their services into a deferred stock compensation plan that invests in common shares of the Company. Officers of the Company have the option to defer up to 50% of their annual incentive award into this plan. The plan does not permit diversification and must be settled by the delivery of a fixed number of shares of the Company stock. The stock held in the plan is included in equity as deferred shares and is accounted for in a manner similar to treasury stock. Subsequent changes in the fair value of the Company’s stock are not recognized. The deferred compensation obligation is also classified as an equity instrument and changes in the fair value of the amount owed to the participant are not recognized.

 

The Company has entered into supplemental income agreements for certain individuals. These agreements call for a fixed payment over 180 months after the individual reaches normal retirement age.

 

 

Stockholders’ Equity and Dividend Restrictions

 

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Generally, the Bank’s payment of dividends is limited to net income for the current year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Dividend payments to the stockholders may be legally paid from additional paid-in capital or retained earnings.

 

Earnings Per Share

 

Basic earnings per share allocated to common stockholders is calculated using the two-class method and is computed by dividing net income allocated to common stockholders by the weighted average number of commons shares outstanding during the period. Diluted earnings per share is adjusted for the dilutive effects of stock based compensation and is calculated using the two-class method or the treasury method. There were no dilutive effects for the years ended December 31, 2019 and 2018.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and changes in the funded status of the defined benefit pension plan.

 

Advertising

 

Advertising costs are expensed as incurred.

 

 

 

Note 2:

Restriction on Cash and Due From Banks

 

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2019 and 2018, was $5.8 million and $2.7 million, respectively.

 

Note 3:

Securities

 

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale Securities:
December 31, 2019:
U.S. government agencies		$	40,000			$	––			$	(472	)		$	39,528
Subordinated notes			4,500				36				(4	)			4,532
State and municipal obligations			135,897			$	8,993				(165	)			144,725
Total debt securities		$	180,397			$	9,029			$	(641	)		$	188,785
Available-for-sale Securities:
December 31, 2018:
U.S. government agencies		$	45,250			$	––			$	(500	)		$	44,750
State and municipal obligations		$	78,083			$	1,194			$	(36	)		$	79,241
Total debt securities		$	123,333			$	1,194			$	(536	)		$	123,991

 

The amortized cost and fair value of available-for-sale securities at December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

		Amortized Cost				Fair Value
		(In thousands)
Under 1 year		$	6,000			$	5,995
One to five years			38,500				38,065
Over ten years			135,897				144,725
Totals		$	180,397			$	188,785

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $46.8 million and $48.4 million at December 31, 2019 and 2018, respectively.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at December 31, 2019 and 2018, was $50.3 million and $49.9 million, which represented approximately 27% and 40%, respectively, of the Company’s available-for-sale investment portfolio.

 

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

 

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:

 

		December 31, 2019
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(In thousands)
US government agencies		$	39,528			$	(472	)		$	––			$	––			$	39,528			$	(472	)
Subordinated notes			996			$	(4	)		$	––			$	––			$	996			$	(4	)
State and municipal obligations		$	9,831			$	(165	)		$	––			$	––			$	9,831			$	(165	)
Total temporarily impaired securities		$	50,355			$	(641	)		$	––			$	––			$	50,355			$	(641	)

 

 

		December 31, 2018
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(In thousands)
US government agencies		$	––			$	––			$	44,750			$	(500	)		$	44,750			$	(500	)
State and municipal obligations		$	5,182			$	(36	)		$	––			$	––			$	5,182			$	(36	)
Total temporarily impaired securities		$	5,182			$	(36	)		$	44,750			$	(500	)		$	49,932			$	(536	)

 

The unrealized losses on the Company’s investments in direct obligations of U. S. Government agencies and state and political obligation were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2019.

 

Note 4:

Loans and Allowance for Loan Losses

 

Categories of loans at December 31, include:

 

		2019				2018
		(In thousands)
Commercial loans		$	99,995			$	93,690
Commercial real estate			254,651				223,461
Residential real estate			77,205				78,767
Installment loans			9,697				13,765
Total gross loans			441,548				409,683
Less allowance for loan losses			(2,231	)			(2,043	)
Total loans		$	439,317			$	407,640

 

 

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

 

Commercial

 

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

 

Commercial Real Estate

 

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

 

Residential and Consumer

 

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

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2019 and 2018:

 

		2019
		Commercial				Commercial Real Estate				Residential				Installment				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Balance, beginning of year		$	389			$	672			$	519			$	463			$	––			$	2,043
Provision charged to expense			196				551				180				(19	)			––				908
Losses charged off			(18	)			(431	)			(141	)			(180	)			––				(770	)
Recoveries			1				––				14				35				––				50
Balance, end of year		$	568			$	792			$	572			$	299			$	––			$	2,231
Ending balance:  individually evaluated for impairment		$	––			$	––			$	––			$	––			$	––			$	––
Ending balance:  collectively evaluated for impairment		$	568			$	792			$	572			$	299			$	––			$	2,231
Loans:
Ending balance:  individually evaluated for impairment		$	71			$	371			$	594			$	––			$	––			$	1,036
Ending balance:  collectively evaluated for impairment		$	99,924			$	254,280			$	76,611			$	9,697			$	––			$	440,512

 

		2018
		Commercial				Commercial Real Estate				Residential				Installment				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Balance, beginning of year		$	537			$	843			$	436			$	218			$	88			$	2,122
Provision charged to expense			(151	)			(173	)			287				422				(88	)			297
Losses charged off			––				––				(208	)			(241	)			––				(449	)
Recoveries			3				2				4				64				––				73
Balance, end of year		$	389			$	672			$	519			$	463			$	––			$	2,043
Ending balance:  individually evaluated for impairment		$	––			$	85			$	––			$	––			$	––			$	85
Ending balance:  collectively evaluated for impairment		$	389			$	587			$	519			$	463			$	––			$	1,958
Loans:
Ending balance:  individually evaluated for impairment		$	57			$	809			$	––			$	93			$	––			$	959
Ending balance:  collectively evaluated for impairment		$	93,633			$	222,652			$	78,767			$	13,672			$	––			$	408,724

 

 

 

 

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

 

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

 

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

 

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

 

The following table shows the portfolio quality indicators as of December 31, 2019:

 

Loan Class		Commercial				Commercial Real Estate				Residential				Installment				Total
		(In thousands)
Pass Grade		$	99,924			$	249,563			$	76,611			$	9,697			$	435,795
Special Mention			––				4,016				––				––				4,016
Substandard			71				1,072				594				––				1,737
Doubtful			––				––				––				––				––
		$	99,995			$	254,651			$	77,205			$	9,697			$	441,548

 

 

The following table shows the portfolio quality indicators as of December 31, 2018:

 

Loan Class		Commercial				Commercial Real Estate				Residential				Installment				Total
		(In thousands)
Pass Grade		$	93,620			$	219,485			$	78,767			$	13,672			$	405,544
Special Mention			––				2,710				––				––				2,710
Substandard			70				1,266				––				93				1,429
Doubtful			––				––				––				––				––
		$	93,690			$	223,461			$	78,767			$	13,765			$	409,683

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant methodology changes were made during 2019 and 2018.

 

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2019:

 

		30-59 Days Past Due and Accruing				60-89 Days Past Due and Accruing				Greater Than 90 Days and Accruing				Non Accrual				Total Past Due and Non Accrual				Current				Total Loans Receivable
		(In thousands)
Commercial		$	129			$	132			$	––			$	30			$	291			$	99,704			$	99,995
Commercial real estate			––				214				197				348				759				253,892				254,651
Residential			448				––				29				1,074				1,551				75,654				77,205
Installment			58				1				––				––				59				9,638				9,697
Total		$	635			$	347			$	226			$	1,452			$	2,660			$	438,888			$	441,548

 

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2018:

 

		30-59 Days Past Due and Accruing				60-89 Days Past Due and Accruing				Greater Than 90 Days and Accruing				Non Accrual				Total Past Due and Non Accrual				Current				Total Loans Receivable
		(In thousands)
Commercial		$	98			$	94			$	––			$	––			$	192			$	93,498			$	93,690
Commercial real estate			––				––				––				741				741				222,720				223,461
Residential			1,704				262				155				485				2,606				76,161				78,767
Installment			72				4				––				19				95				13,670				13,765
Total		$	1,874			$	360			$	155			$	1,245			$	3,634			$	406,049			$	409,683

 

 

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

 

The following table presents impaired loans for the year ended December 31, 2019:

 

		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Commercial		$	71			$	71			$	––			$	71			$	13
Commercial real estate			371				371				––				356				8
Real Estate			594				594				––				683				23
			1,036				1,036				––				1,110				44
Loans with a specific valuation allowance:
Commercial		$	––			$	––			$	––			$	––			$	––
Commercial real estate			––				––				––				––				––
Real Estate			––				––				––				––				––
		$	––			$	––			$	––			$	––			$	––
Total:
Commercial		$	71			$	71			$	––			$	71			$	13
Commercial Real Estate		$	371			$	371			$	––			$	356			$	8
Real Estate		$	594			$	594			$	––			$	683			$	23

 

 

The following table presents impaired loans for the year ended December 31, 2018:

 

		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Commercial		$	57			$	57			$	––			$	59			$	2
Commercial real estate			409				409				––				444				18
Installment			93				93				––				99				4
			559				559				––				602				24
Loans with a specific valuation allowance:
Commercial		$	––			$	––			$	––			$	––			$	1
Commercial real estate			400				400				85				407				––
Installment			––				––				––				––				––
			400				400				85				407				1
Total:
Commercial		$	57			$	57			$	––			$	59			$	3
Commercial Real Estate		$	809			$	809			$	85			$	851			$	18
Installment		$	93			$	93			$	––			$	99			$	4

 

At December 31, 2019 and 2018, the Company had certain loans that were modified in troubled debt restructurings and impaired.  The modification of terms of such loans included one or a combination of the following:  an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

 

 

The Company did not have any troubled debt restructurings that occurred during the year ended December 31, 2018. The following tables present information regarding troubled debt restructurings by class and by type of modification for the year ended December 31, 2019:

 

			Year Ended December 31, 2019
			Number of Contracts				Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
							(In thousands)
Commercial				2		$	83		$	83

 

			Year Ended December 31, 2019
			Interest Only				Term				Combination				Total Modification
							(In thousands)
Commercial			$	––			$	83			$	––			$	83

 

During the 2019, troubled debt restructurings did not have an impact on the allowance for loan losses. At December 31, 2019 and 2018 and for the years then ended, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.

 

Note 5:

Premises and Equipment

 

Major classifications of premises and equipment, stated at cost, are as follows:

 

		2019				2018
		(In thousands)
Land, buildings and improvements		$	18,297			$	17,839
Furniture and equipment			14,220				13,359
Computer software			2,196				2,164
			34,713				33,362
Less accumulated depreciation			(22,311	)			(21,245	)
Net premises and equipment		$	12,402			$	12,117

 

Note 6:

Time Deposits

 

Time deposits in denominations of $250,000 or more were $14.0 million at December 31, 2019 and $16.0 million at December 31, 2018. At December 31, 2019, the scheduled maturities of time deposits are as follows:

 

 

			(In thousands)
Due during the year ending December 31,
	2020		$	52,902
	2021			38,655
	2022			12,023
	2023			1,161
	2024			393
	Thereafter			337
			$	105,471

 

Note 7:

Borrowings

 

At December 31, advances from the Federal Home Loan Bank were as follows:

 

		2019				2018
		(In thousands)
Maturities March 2019 through August 2025, primarily at fixed rates ranging from 4.64% to 6.65%, averaging 5.29%		$	––			$	106
Cash Management Advances maturities from January 2020 to March 2020 at floating rates averaging 1.73%			39,800				––
		$	39,800			$	106

 

At December 31, 2019 and 2018, as a member of the Federal Home Loan Bank system the Bank had the ability to obtain up to $119.0 million and $117.6 million, respectively, in additional borrowings based on securities and certain loans pledged to the FHLB. At December 31, 2019 and 2018, the Bank had approximately $79.7 million and $113.3 million, respectively of one- to four-family residential real estate and commercial real estate loans pledged as collateral for borrowings. Also at December 31, 2019 and 2018, the Company and the Bank have cash management lines of credit with various correspondent banks (excluding FHLB cash management lines of credit) enabling additional borrowings of up to $18.0 million.

 

Securities sold under repurchase agreements were approximately $6.9 million and $8.1 million at December 31, 2019 and 2018.

 

Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase is summarized as follows:

 

		2019				2018
		(Dollars in thousands)
Balance outstanding at year end		$	6,915			$	8,068
Average daily balance during the year		$	9,272			$	12,874
Average interest rate during the year			1.37	%			1.06	%
Maximum month-end balance during the year		$	13,441			$	16,161
Weighted-average interest rate at year end			1.40	%			1.13	%

 

 

All repurchase agreements are subject to term and conditions of repurchase/security agreements between the Company and the customer and are accounted for as secured borrowings. The Company’s repurchase agreements reflected in short-term borrowings consist of customer accounts and securities which are pledged on an individual security basis.

 

The following table presents the Company’s repurchase agreements accounted for as secured borrowings:

 

Remaining Contractual Maturity of the Agreement

 

(In thousands)

 

December 31, 2019		Overnight and Continuous				Up to 30 Days				30-90 Days				Greater than 90 Days				Total
Repurchase Agreements
U.S government agencies		$	6,915			$	––			$	––			$	––			$	6,915
Total		$	6,915			$	––			$	––			$	––			$	6,915

 

December 31, 2018		Overnight and Continuous				Up to 30 Days				30-90 Days				Greater than 90 Days				Total
Repurchase Agreements
U.S government agencies		$	8,068			$	––			$	––			$	––			$	8,068
Total		$	8,068			$	––			$	––			$	––			$	8,068

 

Securities with an approximate carrying value of $9.4 million and $18.3 million at December 31, 2019 and 2018, respectively, were pledged as collateral for repurchase borrowings.

 

Note 8:

Subordinated Debentures

 

On May 14, 2019 the Company issued $20,000,000 of junior subordinated debentures in denominations of not less than $250,000. The debentures bear interest at a fixed rate of 6.0% until May 2024, which then becomes a floating interest rate equal to the three-month LIBOR (or an equivalent index) plus 3.625%, resetting quarterly. Interest on the subordinated notes will be payable semiannually through May 2024 and quarterly thereafter through the maturity date of May 2029. Principal is due upon maturity. The debentures are unsecured and payable to various investors. For purposes of computing regulatory capital, the debentures are included in Tier 2 Capital. The subordinated notes may not be repaid in whole or in part prior to the fifth anniversary of the issue date (May 2019). Unamortized debt costs were 580,787 as of December 31, 2019.

 

In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I (“Trust I” or the “Trust”), issued $4.1 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.1 million of the Company’s subordinated debentures which mature in 2035. The Company’s subordinated debentures are the sole asset of Trust I. The Company’s investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.1 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company’s Tier I Capital. Interest on the Company’s subordinated debentures is equal to three month LIBOR plus 1.35% and is payable quarterly.

 

Subordinated debentures, net of unamortized debt costs, totaled $23.5 million and $4.1 million at December 31, 2019 and 2018, respectively.

 

 

Note 9:

Income Taxes

 

The provision for income taxes includes these components:

 

		2019				2018
		(In thousands)
Taxes currently payable		$	557			$	425
Deferred income taxes			42				375
Income tax expense		$	599			$	800

 

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

 

		2019				2018
		(In thousands)
Computed at the statutory rate (21%)		$	1,556			$	1,067
(Decrease) increase resulting from
Tax exempt interest			(780	)			(262	)
Earnings on bank-owned life insurance - net			(112	)			(121	)
Deferred tax re-valuation			—				—
Low income housing credit			(74	)			(73	)
Merger related expenses			—				55
Other			9				134
Actual tax expense		$	599			$	800

 

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

 

		2019				2018
		(In thousands)
Deferred tax assets
Allowance for loan losses		$	326			$	292
Stock based compensation			138				282
Allowance for losses on foreclosed real estate			—				11
Deferred compensation and ESOP			494				521
Intangible assets			—				54
Non-accrual loan interest			8				11
Other			13				—
Total deferred tax assets			979				1,171
Deferred tax liabilities
Depreciation			(266	)			(208	)
Deferred loan costs, net			(73	)			(97	)
FHLB stock dividends			(321	)			(321	)
Unrealized gains on securities available for sale			(1,762	)			(138	)
Prepaid expenses			(48	)			(163	)
Intangibles			(138	)			(280	)
Employee benefit expense			(107	)			(183	)
Total deferred tax liabilities			(2,715	)			(1,390	)
Net deferred tax (liability) asset		$	(1,736	)		$	(219	)

 

 

Note 10:

Accumulated Other Comprehensive Income (Loss)

 

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

 

		2019				2018
		(In thousands)
Net unrealized gain on securities available-for-sale		$	8,389			$	658
Net unrealized loss for funded status of defined benefit plan liability			(1,381	)			(671	)
			7,008				(13	)
Tax effect			(1,472	)			3
Net-of-tax amount		$	5,536			$	(10	)

 

Note 11:

Regulatory Matters

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

 

 

In July 2013, the Federal Reserve approved final rules, referred to herein as the Basel III Rules, establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Rules generally implement the Basel Committee on Banking Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Basel III Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and Citizens, as compared to the current U.S. general risk-based capital rules. The Basel III Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the computation of regulatory capital ratios. The Basel III rules added another capital ratio component “Tier 1 Common Capital Ratio” which is a measurement of a bank’s core equity capital compared with its total risk-weighted assets The Basel III Rules also prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current categories to a larger more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.

 

The Basel III capital rules became effective for the Company and Unified on January 1, 2015, subject to phase-in periods for certain components. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

 

As of December 31, 2019, the Company exceeded its minimum regulatory capital requirements with a total risk-based capital ratio of 16.7%, common equity tier 1 ratio of 13.1%, Tier 1 risk-based capital ratio of 14.0% and a Tier 1 leverage ratio of 9.5%.

 

As of December 31, 2019, the most recent notification from Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

 

The Company’s and Bank’s actual capital amounts and ratios are presented in the following table.

 

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of December 31, 2019
Total Capital (to Risk-Weighted Assets)
Consolidated		$	83,653				16.7	%		$	40,027				8.0	%			N/A				N/A
Unified			68,953				13.8				39,972				8.0			$	49,776				10.0	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Consolidated		$	57,422				11.5	%		$	22,515				4.5	%			N/A				N/A
Unified			66,722				13.4				22,484				4.5			$	32,355				6.5	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		$	61,422				12.3	%		$	30,020				6.0	%			N/A				N/A
Unified			66,722				13.4				29,979				6.0			$	39,821				8.0	%
Tier I Capital (to Average Assets)
Consolidated		$	61,422				9.5	%		$	30,020				4.0	%			N/A				N/A
Unified			66,722				10.1				29,979				4.0			$	33,10				5.0	%
As of December 31, 2018
Total Capital (to Risk-Weighted Assets)
Consolidated		$	53,461				12.0	%		$	35,720				8.0	%			N/A				N/A
Unified			50,690				11.4				35,643				8.0			$	44,554				10.0	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Consolidated		$	47,418				10.6	%		$	20,092				4.5	%			N/A				N/A
Unified			48,647				10.9				20,049				4.5			$	28,960				6.5	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		$	51,418				11.5	%		$	26,790				6.0	%			N/A				N/A
Unified			48,647				10.9				26,733				6.0			$	35,643				8.0	%
Tier I Capital (to Average Assets)
Consolidated		$	51,418				8.8	%		$	23,275				4.0	%			N/A				N/A
Unified			48,647				8.4				23,189				4.0			$	28,986				5.0	%

 

 

 

Note 12:

Related Party Transactions

 

At December 31, 2019 and 2018, the Bank had loan commitments outstanding to executive officers, directors, significant stockholders and their affiliates (related parties). In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features. Such loans are summarized below.

 

		2019				2018
		(In thousands)
Aggregate balance – January 1		$	14,106			$	12,996
New loans			4,459				2,386
Repayments			(797	)			(1,276	)
Aggregate balance – December 31		$	17,768			$	14,106

 

Deposits from related parties held by the Bank at December 31, 2018 and 2018, totaled approximately $2.5 million and $2.3 million, respectively.

 

Note 13:

Benefit Plans

 

Pension and Other Postretirement Benefit Plans

 

The Company has a noncontributory defined benefit pension plan covering all employees who meet the eligibility requirements. The Company’s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Company may determine to be appropriate from time to time. The Company expects to contribute $378,000 to the plan in 2020.

 

In connection with the acquisition of Powhatan Point Community Bancshares, Inc., the Company assumed supplemental income agreements for certain individuals. The agreements provide for a fixed number of payments once the individual reaches normal retirement age. At December 31, 2019, the present value of these future payments was approximately $429,000.

 

 

The Company uses a December 31st measurement date for the plan. Information about the plan’s funded status and pension cost follows:

 

		Pension Benefits
		2019				2018
		(In thousands)
Change in benefit obligation
Beginning of year		$	(4,157	)		$	(4,672	)
Service cost			(299	)			(302	)
Interest cost			(218	)			(221	)
Actuarial (loss) gain			(1,276	)			470
Benefits paid			362				568
End of year			(5,588	)			(4,157	)
Change in fair value of plan assets
Beginning of year			5,041				5,605
Actual return on plan assets			967				(417	)
Employer contribution			465				421
Benefits paid			(362	)			(568	)
End of year			6,111				5,041
Funded status at end of year		$	523			$	884

 

Amounts recognized in accumulated other comprehensive loss not yet recognized as components of net periodic benefit cost consist of:

 

		Pension Benefits
		2019				2018
		(In thousands)
Unamortized net loss		$	2,009			$	1,388
Unamortized prior service			(581	)			(670	)
		$	1,428			$	718

 

 

The estimated net loss and prior service credit for the defined benefit pension plan that will be amortized from accumulated other comprehensive income as a credit into net periodic benefit cost over the next fiscal year is approximately $56,000. The accumulated benefit obligation for the defined benefit pension plan was $5.0 million and $3.8 million at December 31, 2019 and 2018, respectively.

 

Information for the pension plan with respect to accumulated benefit obligation and plan assets is as follows:

 

		December 31,
		2019				2018
		(In thousands)
Projected benefit obligation		$	5,588			$	4,157
Accumulated benefit obligation		$	5,032			$	3,840
Fair value of plan assets		$	6,111			$	5,041

 

		December 31,
		2019				2018
		(In thousands)
Components of net periodic benefit cost
Service cost		$	299			$	302
Interest cost			218				221
Expected return on plan assets			(468	)			(445	)
Amortization of prior service (credit) cost			(89	)			(89	)
Amortization of net loss			145				51
Net periodic benefit cost		$	105			$	40

 

Significant assumptions include:

 

		Pension Benefits
		2019				2018
Weighted-average assumptions used to determine benefit obligation:
Discount rate			4.39	%			5.37	%
Rate of compensation increase			3.50	%			3.00	%
Weighted-average assumptions used to determine benefit cost:
Discount rate			4.39	%			5.37	%
Expected return on plan assets			7.50	%			7.50	%
Rate of compensation increase			3.00	%			3.00	%

 

 

The Company has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations and recent changes in long-term interest rates based on publicly available information. The long-term rate of return did not change from 2018 to 2019.

 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2019:

 

		Pension Benefits
		(In thousands)
2020		$	516
2021			639
2022			412
2023			329
2024			339
2025-2029			3,055
Total		$	5,290

 

Plan assets are held by an outside trustee which invests the plan assets in accordance with the provisions of the plan agreement. All equity and fixed income investments are held in various mutual funds with quoted market prices. Mutual fund equity securities primarily include investment funds that are comprised of large-cap, mid-cap and international companies. Fixed income mutual funds primarily include investments in corporate bonds, mortgage-backed securities and U.S. Treasuries. Other types of investments include a prime money market fund.

 

The asset allocation strategy of the plan is designed to allow flexibility in the determination of the appropriate investment allocations between equity and fixed income investments. This strategy is designed to help achieve the actuarial long term rate on plan assets of 7.5%. The target asset allocation percentages for both 2019 and 2018 are as follows:

 

Large-Cap stocks		Not to exceed 68%
Small-Cap stocks		Not to exceed 23%
Mid-Cap stocks		Not to exceed 23%
International equity securities		Not to exceed 30%
Fixed income investments		Not to exceed 35%
Alternative investments		Not to exceed 19%

 

 

At December 31, 2019 and 2018, the fair value of plan assets as a percentage of the total was invested in the following:

 

		December 31,
		2019				2018
Equity securities			70.6	%			71.8	%
Debt securities			29.1				27.0
Cash and cash equivalents			0.3				1.2
			100.0	%			100.0	%

 

Pension Plan Assets

 

Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy.

 

Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include investments in mutual funds that involve equity, bond and money market investments. All of the Plan’s assets are classified as Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. At December 31, 2019 and 2018, the Plan did not contain Level 2 or Level 3 investments.

 

 

The fair values of Company’s pension plan assets at December 31st, by asset category are as follows:

 

December 31, 2019
						Fair Value Measurements Using
Asset Category		Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
Mutual money market		$	186			$	186			$	––			$	––
Mutual funds – equities
ETF mutual funds			3,404				3,404				––				––
Large and small Cap			317				317				––				––
International			419				419
Commodities			178				178				––				––
Mutual funds – fixed income
Fixed income			1,324				1,324				––				––
ETF fixed income			283				283				––				––
Total		$	6,111			$	6,111			$	––			$	––

 

December 31, 2018
						Fair Value Measurements Using
Asset Category		Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
Mutual money market		$	63			$	63			$	––			$	––
Mutual funds – equities
ETF mutual funds			2,860				2,860				––				––
Large and small Cap			260				260				––				––
International			346				346
Commodities			149				149				––				––
Mutual funds – fixed income
Fixed income			996				996				––				––
ETF fixed income			367				367				––				––
Total		$	5,041			$	5,041			$	––			$	––

 

 

Employee Stock Ownership Plan

 

The Company has an Employee Stock Ownership Plan (“ESOP”) with an integrated 401(k) plan covering substantially all employees of the Company. The ESOP acquired 354,551 shares of Company common stock at $9.64 per share in 2005 with funds provided by a loan from the Company. Accordingly, $3.4 million of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. The Company’s 401(k) matching percentage was 50% of the employees’ first 6% of contributions for 2019 and 2018.

 

ESOP and 401(k) expense for the years ended December 31, 2019 and 2018 was approximately $272,000 and $280,000, respectively.

 

Share information for the ESOP is as follows at December 31, 2019 and 2018:

 

		2019				2018
Allocated shares at beginning of the year		$	416,982			$	407,268
Shares released for allocation during the year			23,635				23,635
Net shares distributed due to retirement/diversification			(52,841	)			(61,192	)
Unearned shares			23,635				47,271
Total ESOP shares			411,411				416,982
Fair value of unearned shares at December 31st		$	338,000			$	539,000

 

At December 31, 2019, the fair value of the 387,776 allocated shares held by the ESOP was approximately $5,545,000.

 

Split Dollar Life Insurance Arrangements

 

The Company has split-dollar life insurance arrangements with its executive officers and certain directors that provide certain death benefits to the executive’s beneficiaries upon his or her death. The agreements provide a pre- and post-retirement death benefit payable to the beneficiaries of the executive in the event of the executive’s death. The Company has purchased life insurance policies on the lives of all participants covered by these agreements in amounts sufficient to provide the sums necessary to pay the beneficiaries, and the Company pays all premiums due on the policies. In the case of an early separation from the Company, the nonvested executive portion of the death benefit is retained by the Company. The accumulated post retirement benefit obligation was $1.6 million at December 31, 2019 and December 31, 2018.

 

 

 

Note 14:

Restricted Stock Plan

 

During 2018, the Company’s stockholders authorized the adoption of the United Bancorp, Inc. 2018 Stock Incentive Plan (the “2018 Plan”). No more than 500,000 shares of the Company’s common stock may be issued under the 2018 Plan. As of December 31, 2019, 32,500 shares have been issued under this plan. The shares that may be issued can be authorized but unissued shares or treasury shares. The 2018 Plan permits the grant of incentive awards in the form of options, stock appreciation rights, restricted share and share unit awards, and performance share awards. The 2018 Plan contains annual limits on certain types of awards to individual participants. In any calendar year, no participant may be granted awards covering more than 25,000 shares.

 

During 2008, the Company’s stockholders authorized the adoption of the United Bancorp, Inc. 2008 Stock Incentive Plan (the “2008 Plan”). No more than 500,000 shares of the Company’s common stock may be issued under the 2008 Plan. The shares that may be issued can be authorized but unissued shares or treasury shares. The 2008 Plan permits the grant of incentive awards in the form of options, stock appreciation rights, restricted share and share unit awards, and performance share awards. The 2008 Plan contains annual limits on certain types of awards to individual participants. In any calendar year, no participant may be granted awards covering more than 25,000 shares. As of December 31, 2018, no additional shares can be awarded under the 2008 Plan.

 

The Company believes that such awards better align the interests of its employees with those of its stockholders. Stock options are generally granted with an exercise price, and restricted stock awards are valued, equal to the market price of the Company’s stock at the date of grant; stock option awards generally vest within 9.25 years of continuous service and have a 9.5 year contractual term. Restricted stock awards generally vest over a 9.5 year contractual term, or over the period to retirement, whichever is shorter. Restricted stock awards have no post-vesting restrictions. Restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

 

A summary of the status of the Company’s nonvested restricted shares as of December 31, 2019, and changes during the year then ended, is presented below:

 

		Shares				Weighted- Average Grant-Date Fair Value
Nonvested, beginning of year			300,000			$	10.23
Granted			32,500				11.35
Vested			(95,000	)			8.40
Forfeited			––				––
Nonvested, end of year			237,500			$	11.15

 

 

Total compensation cost recognized in the income statement for share-based payment arrangements during the years ended December 31, 2019 and 2018 was $293,000 and $287,000, respectively.

 

The recognized tax benefits related thereto were $62,000 and $55,000, for the years ended December 31, 2019 and 2018, respectively.

 

As of December 31, 2019 and 2018, there was $2,114,000 and $1,918,000, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 7.2 years.

 

Note 15:

Earnings Per Share

 

Earnings per share (EPS) were computed as follows:

 

		Year Ended December 31, 2019
		Net Income				Weighted- Average Shares				Per Share Amount
		(In thousands)
Net income		$	6,810
Less allocated earnings on non-vested restricted stock			(111	)
Less allocated dividends on non-vested restricted stock			(145	)
Net income allocated to common stockholders			6,554
							5,525,965
Basic and diluted earnings per share										$	1.19

 

		Year Ended December 31, 2018
		Net Income				Weighted- Average Shares				Per Share Amount
			(In thousands)
Net income		$	4,282
Less allocated earnings on non-vested restricted stock			(59	)
Less allocated dividends on non-vested restricted stock			(155	)
Net income allocated to common stockholders			4,068
							4,952,471
Basic and diluted earnings per share										$	0.82

 

Note 16:

Disclosures about Fair Value of Financial Instruments and Other Assets and Liabilities

 

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

 

Level 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

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

 

Level 3

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

 

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

 

Available-for-sale Securities

 

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

 

 

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2019 and 2018:

 

						December 31, 2019 Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
U.S government agencies		$	39,528			$	––			$	39,528			$	––
Subordinated notes		$	4,500				––			$	4,532				––
State and Municipal Obligations		$	144,725				––			$	144,725				––

 

						December 31, 2018 Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
U.S government agencies		$	44,750			$	––			$	44,750			$	––
State and Municipal Obligations		$	79,241				––			$	79,241				––

 

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

 

Impaired Loans (Collateral Dependent)

 

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

 

 

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

 

Foreclosed Assets Held for Sale

 

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

 

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

 

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2019 and 2018:

 

December 31, 2019 Fair Value Measurements Using

Fair Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(In thousands)

Collateral dependent impaired loans

$

––

$

––

$

––

$

––

Foreclosed assets held for sale

––

––

––

––

 

 

						December 31, 2018 Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
Collateral dependent impaired loans		$	314			$	––			$	––			$	314
Foreclosed assets held for sale			91				––				––				91

 

Unobservable (Level 3) Inputs

 

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

 

			Fair Value at 12/31/19			Valuation Technique		Unobservable Inputs		Range
			(In thousands)
Collateral-dependent impaired loans		$	––			Market comparable properties		Comparability adjustments		Not available
Foreclosed assets held for sale			––			Market comparable properties		Marketability discount		10% – 35%

 

		Fair Value at 12/31/18				Valuation Technique		Unobservable Inputs		Range
			(In thousands)
Collateral-dependent impaired loans		$	314			Market comparable properties		Comparability adjustments		Not available
Foreclosed assets held for sale			91			Market comparable properties		Marketability discount		10% – 35%

 

There were no significant changes in the valuation techniques used during 2019.

 

 

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

Fair Value Measurements Using

Carrying Amount

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(In thousands)

December 31, 2019

Financial assets

Cash and cash equivalents

$

14,985

$

14,985

$

––

$

––

Loans, net of allowance

439,317

––

––

437,688

Federal Home Loan Bank stock

4,012

––

4,012

––

Accrued interest receivable

2,697

––

2,697

––

Financial liabilities

Deposits

548,069

––

548,130

––

Short term borrowings

6,915

––

6,915

––

Federal Home Loan Bank advances

39,800

––

39,800

––

Subordinated debentures

23,543

––

22,857

––

Interest payable

213

––

213

––

 

 

The classification of the assets and liabilities pursuant to the valuation hierarchy as of December 31, 2018 in the following table have not been audited. The fair value has been derived from the December 31, 2018 audited consolidated financial statements.

 

Fair Value Measurements Using

Carrying Amount

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(In thousands)

December 31, 2018

Financial assets

Cash and cash equivalents

$

25,253

$

25,253

$

––

$

––

Loans, net of allowance

407,640

––

––

405,033

Federal Home Loan Bank stock

4,243

––

4,243

––

Accrued interest receivable

1,798

––

1,798

––

Financial liabilities

Deposits

525,443

––

524,010

––

Short term borrowings

8,068

––

8,068

––

Federal Home Loan Bank advances

106

––

101

––

Subordinated debentures

4,124

––

3,647

––

Interest payable

188

––

188

––

 

 

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

 

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

 

The carrying amounts approximate fair value.

 

Loans

 

Fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

 

Deposits

 

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

 

Interest Payable

 

The carrying amount approximates fair value.

 

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

 

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

 

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

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Fair values of commitments were not material at December 31, 2019 and 2018.

 

 

 

Note 17:    Significant Estimates and Concentrations

 

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.

 

The Company invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is possible that changes in the values of investment securities may occur and that such changes could affect the amounts reported in the accompanying statements of financial position.

 

Note 18:    Commitments and Credit Risk

 

At December 31, 2019 and 2018, total commercial and commercial real estate loans made up 80.3% and 77.4%, respectively, of the loan portfolio. Installment loans account for 2.2% and 3.4%, respectively, of the loan portfolio. Real estate loans comprise 17.5% and 19.2% of the loan portfolio as of December 31, 2019 and 2018, respectively, and primarily include first mortgage loans on residential properties and home equity lines of credit.

 

Commitments to Originate Loans

 

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

 

At December 31, 2019 and 2018, the Company had outstanding commitments to originate variable rate loans aggregating approximately $38.7 million and $21.3 million, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period.

 

Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, some of which are intended for sale to investors in the secondary market. The Company did not have any mortgage loans in the process of origination which are intended for sale at December 31, 2019 or 2018.

 

 

Standby Letters of Credit

 

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit are initially recorded by the Company as deferred revenue and are included in earnings at the termination of the respective agreements. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.

 

The Company had $46,000 at both December 31, 2018 and 2019 in outstanding standby letters of credit. At both December 31, 2019 and 2018, the Company had no deferred revenue under standby letter of credit agreements.

 

Lines of Credit and Other

 

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

 

At December 31, 2019, the Company had granted unused lines of credit to borrowers aggregating approximately $40.5 million and $38.6 million for commercial lines and open-end consumer lines, respectively. At December 31, 2018, the Company had granted unused lines of credit to borrowers aggregating approximately $34.1 million and $38.0 million for commercial lines and open-end consumer lines, respectively.

 

Note 19:    Recent Accounting Pronouncements

 

On February 25, 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” ASU 2016-02 is intended to improve financial reporting about leasing transactions. This ASU affects all companies and other organization that lease assets such as real estate, airplanes, and manufacturing equipment.

 

Under the current accounting model, an organization applies a classification test to determine the accounting for the lease arrangement:

 

(a)

Some leases are classified as capital where by the lessee would recognize lease assets and liabilities on the balance sheet.

 

(b)

Other leases are classified as operating leases whereby the lessee would not recognize lease assets and liabilities on the balance sheet.

 

 

Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

 

However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. Right of use assets represents the Company’s right to use the underlying assets for their lease terms and lease liabilities represent the obligation to make lease payments.

 

The Company adopted ASU 2016-02 January 1, 2019. The right of use asset and lease obligation recorded as of March 31, 2019 was approximately $126,000 and is reflected in other assets and interest payable and other liabilities, respectively on the balance sheet. The modified retrospective method was applied. Due to the immateriality of the impact, certain disclosures under ASU 842 have been omitted.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

 

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

 

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

 

 

On October 16, 2019, FASB approved a final ASU delaying the effective date of ASU 2016-13 for small reporting companies to interim and annual periods beginning after December 15, 2022. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. The Allowance for Loan Losses (ALL) estimate is material to the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for the other-than-temporary impairment on available-for-sale securities will be replaced with an allowance approach. The Company continues to run projections and review segmentation to ensure it is fully compliant with the amendments at adoption date. Additional work will be needed once additional guidance or clarification in the standard is given during the delay. For additional information on the allowance for loan losses, see Note 3.

 

Note 20:    Condensed Financial Information (Parent Company Only)

 

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

 

Condensed Balance Sheets

 

		December 31,
		2019				2018
		(In thousands)
Assets
Cash and cash equivalents		$	6,846			$	1,595
Investment in the Bank			74,890				50,813
Other assets			2,719				2,913
Total assets		$	84,455			$	55,321
Liabilities and Stockholders’ Equity
Subordinated debentures		$	23,543			$	4,124
Other liabilities			990				555
Stockholders’ equity			59,922				50,642
Total liabilities and stockholders’ equity		$	84,455			$	55,321

 

 

Condensed Statements of Income and Comprehensive Income

 

		Years Ended December 31,
		2019				2018
		(In thousands)
Operating Income
Dividends from subsidiary		$	7,625			$	5,501
Interest and dividend income from securities and federal funds			1				––
Total operating income			7,626				5,501
Merger related expenses			––				1,306
General, Administrative and Other Expenses			3,456				2,220
Income Before Income Taxes and Equity in Undistributed Income of Subsidiary			4,170				1,975
Income Tax Benefits			710				750
Income Before Equity in Undistributed Income of Subsidiary			4,880				2,725
Equity in Undistributed Income of Subsidiary			1,930				1,557
Net Income		$	6,810			$	4,282
Comprehensive Income		$	12,356			$	4,692

 

 

Condensed Statements of Cash Flows

 

		Years Ended December 31,
		2019				2018
		(In thousands)
Operating Activities
Net income		$	6,810			$	4,282
Items not requiring (providing) cash
Equity in undistributed income of subsidiary			(1,930	)			(1,557	)
Amortization of ESOP and share-based compensation plans			565				567
Net change in other assets and other liabilities			65				282
Net cash provided by operating activities			5,510				3,574
Investing Activities
Equity infusion into the Bank			(16,000	)			––
Cash paid for acquisition of Powhatan Point Community Bancshares, Inc.			––				(1,529	)
Net cash used in investing activities			(16,000	)			(1,529	)
Financing Activities
Proceeds from issuance of subordinated debentures, net of origination fees			19,383				––
Repurchase of Common Stock			(416	)			––
Dividends paid to stockholders			(3,226	)			(3,221	)
Net cash provided by (used in) financing activities			15,741				(3,221	)
Net Change in Cash and Cash Equivalents			5,251				(1,176	)
Cash and Cash Equivalents at Beginning of Year			1,595				2,771
Cash and Cash Equivalents at End of Year		$	6,846			$	1,595

 

 

 

Note 21: Quarterly Financial Data (Unaudited)

 

The following tables summarize the Company’s quarterly results of operations for the years ended December 31, 2019 and 2018.

 

		Three Months Ended
2019:		March 31,				June 30,				September 30,				December 31,
		(In thousands, except per share data)
Total interest income		$	6,315			$	6,648			$	6,921			$	7,150
Total interest expense			1,207				1,469				1,727				1,721
Net interest income			5,108				5,179				5,194				5,429
Provision for loan losses			90				120				120				578
Other income			945				947				1,003				993
General, administrative and other expense			4,162				4,172				4,162				3,986
Income before income taxes			1,801				1,834				1,916				1,858
Federal income taxes			187				188				135				89
Net income		$	1,614			$	1,646			$	1,781			$	1,769
Earnings per share
Basic		$	0.28			$	0.29			$	0.31			$	0.31
Diluted		$	0.28			$	0.29			$	0.31			$	0.31

 

 

		Three Months Ended
2018:		March 31,				June 30,				September 30,				December 31,
		(In thousands, except per share data)
Total interest income		$	4,625			$	5,107			$	5,523			$	6,065
Total interest expense			523				707				893				1,055
Net interest income			4,102				4,400				4,630				5,010
Provision for loan losses			57				72				72				96
Other income			880				888				897				995
General, administrative and other expense			3,579				3,754				3,855				5,235
Income before income taxes			1,346				1,462				1,600				674
Federal income taxes			198				250				269				83
Net income		$	1,148			$	1,212			$	1,331			$	591
Earnings per share
Basic		$	0.23			$	0.23			$	0.25			$	0.11
Diluted		$	0.23			$	0.23			$	0.25			$	0.11

 

Note 22: Core Deposits and Other Intangible Assets

 

The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 (in thousands):

 

		2019				2018
Balance beginning of year		$	682			$	––
Additions from acquisition			––				682
Balance, end of year		$	682			$	682

 

Intangible assets in the consolidated balance sheets at December 31, 2019 and 2018 were as follows (in thousands):

 

		2019												2018
		Gross Intangible Assets				Accumulated Amortization				Net Intangible Assets				Gross Intangible Assets				Accumulated Amortization				Net Intangible Assets
Core deposit intangibles		$	1,041				181				860				1,041				31				1,010

 

The estimated aggregate future amortization expense for each of the next five years for intangible assets remaining as of December 31, 2019 is as follows (in thousands):

 

2020		$	181
2021			181
2022			181
2023			181
2024			136

 

 

Note 23: Acquisition

 

On June 14, 2018, the Company and Powhatan Point Community Bancshares, Inc. (“Powhatan Point”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Powhatan Point merged with and into the Company on October 15, 2018. The First National Bank of Powhatan Point, wholly-owned subsidiary of Powhatan Point, operated from one full-service office located in Powhatan Point, Ohio. That office became a branch of Unified Bank after the merger.

 

Under the terms of the Merger Agreement, the shareholders of Powhatan Point received 6.9233 shares of common stock of United Bancorp and $28.52 in cash per outstanding share of Powhatan Point stock.

 

The merger with Powhatan Point was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the merger date. The following table summarizes the allocation purchase prices for Powhatan Point.

 

(in thousands)
ASSETS						LIABILITIES
Cash and cash equivalents		$	24,986			Deposits
Deposits in other banks			3,461			Non interest bearing		$	19,287
FHLB stock			78			Savings			30,533
Investments			23,865			Certificates of Deposit			5,772
Commercial			3,019			Total Deposits			55,592
Residential			2,403
Installment			1,357
Total loans			6,779
Premise and equipment, net			548			Interest payable and other liabilities			496
Core deposit intangible			1,028
Goodwill			682
Bank owned life insurance			612
Accrued interest receivable			145
Deferred federal income taxes			20
Other assets			124
Total assets purchased		$	62,328			Total liabilities assumed
Common shares issued		$	4,711					$	56,088
Cash paid			1,529
Estimated purchase price		$	6,240

 

 

Of the total purchase price of $6.2 million, $1.0 million has been allocated to core deposit intangible. Additionally, $682,000 has been allocated to goodwill. The core deposit will be amortized over 7 years on a straight line basis. Direct costs related to the acquisition were expensed as incurred and reflected in other noninterest expense in the consolidated statement of income for the year ended December 31, 2018. The amount of goodwill reflects the Company’s expansion in the Powhatan Point market and related synergies that are expected to result from the acquisition and represent the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable in the Company’s financial statements and will not be deductible for tax purposes. Goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment.

 

The Company acquired various loans in the acquisition for which none had evidence of deterioration of credit quality since origination. The fair value of assets acquired includes loans with a fair value of $6,779,000. The gross principal and contractual interest due under the contracts is $6,875,000, of which $86,000 is expected to be uncollectible.

 

The results of Powhatan Point have been included in the Company’s consolidated financial statements since the October 15, 2018 acquisition date. The following schedule includes pro-forma results for the period ended December 31, 2018 and 2017 as if Powhatan Point had occurred as of the beginning of the comparable prior-reporting periods.

 

Summary of Operations (Unaudited):		Dec 31, 2018				Dec 31, 2017
Net Interest Income		$	19,409			$	16,977
Provision for Loan Losses			302				110
Net Interest Income after Provision for Loan Losses			19,107				16,817
Non-interest Income			3,736				3,547
Non-interest Expense			16,017				14,500
Income before Income Taxes			6,826				5,914
Income Tax Expense			563				2,088
Net Income			6,263				3,825
Net Income Available to Common Shareholders		$	6,049			$	3,710
Basic and Diluted Earnings Per Share		$	1.22			$	0.79

 

 

The pro forma information includes adjustments for merger related expenses, amortization of intangible, adjustments to accruals and related tax effects. The pro-forma information for the year ended 2018 includes approximately $220,000, net of tax operating revenue from Powhatan Point since the acquisition, $1.1 million of non-recurring expenses directly related to the acquisition, and approximately $156,000 net of tax related to an accrual adjustment for retirement benefits.

 

The pro-forma financial information is presented for informational purposes as is not indicative of the results of operations that actually would of have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.