UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
| o | Preliminary Proxy Statement |
| o | Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| þ | Definitive Proxy Statement |
| o | Definitive Additional Materials |
| o | Soliciting Material Pursuant to § 240.14a-11(c) or § 240.14a-12 |
UNITED BANCORP, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
| þ | No Fee Required | |
| o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11 | |
| • | Title of each class of securities to which transaction applies: | |
| • | Aggregate number of securities to which transaction applies: | |
| • | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): | |
| • | Proposed maximum aggregate value of transaction: | |
| • | Total fee paid: | |
| o | Fee paid previously with preliminary materials. | |
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |
| (1) | Amount Previously Paid: | |
| (2) | Form, Schedule or Registration Statement No.: | |
| (3) | Filing Party: | |
| (4) | Date Filed: | |
March 26, 2012
Dear Shareholder:
You are invited to attend the 2012 Annual Meeting of Shareholders of United Bancorp, Inc., which will be held at 4:30 p.m. local time on Tuesday, May 8, 2012, at the Downing Center, United Bank & Trust, 209 E. Russell Road, Tecumseh, Michigan.
Please carefully read the accompanying Notice of Annual Meeting and Proxy Statement for information pertaining to the matters to be considered and acted upon at the Annual Meeting.
Your continued interest in the business of United Bancorp, Inc. and its subsidiary, United Bank & Trust, is appreciated, and we hope you will attend the Annual Meeting.
Whether or not you attend, it is important that your shares be represented at the Annual Meeting. Accordingly, please sign, date, and mail the Proxy promptly in the enclosed envelope, or vote your shares online according to the instructions included with your Proxy.
If you wish to vote in accordance with the recommendations of the Board of Directors, it is not necessary to specify your choices; merely sign, date, and return the enclosed Proxy.
Sincerely,
| /s/ James C. Lawson | /s/ Robert K. Chapman | |
| James C. Lawson | Robert K. Chapman | |
| Chairman of the Board | President and Chief Executive Officer |
United Bancorp, Inc. Ÿ Post Office Box 1127 Ÿ 2723 South State Street Ÿ Ann Arbor, Michigan 48104 Ÿ Phone 734.214.3700
Notice of
Annual Meeting of Shareholders
and
Proxy Statement
| 2012 |
P. O. Box 1127
Ann Arbor, MI 48104
Notice of Annual Meeting
of Shareholders
May 8, 2012
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of United Bancorp, Inc. will be held at the Downing Center, United Bank & Trust, 209 E. Russell Road, Tecumseh, Michigan, on Tuesday, May 8, 2012 at 4:30 p.m., local time. At the meeting, we will consider and vote on the following matters:
| 1. | To elect three directors constituting Class III of the Board of Directors, to serve until the 2015 Annual Meeting of Shareholders and upon the election of their successors. |
| 2. | To consider and approve an advisory proposal to approve the Company’s executive compensation practices as disclosed in the Proxy Statement. |
| 3. | To ratify the appointment of BKD, LLP as independent auditors. |
We will also conduct such other business as may properly come before the meeting or any adjournment of the meeting.
The Board of Directors has fixed the close of business on March 12, 2012 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting.
You are invited to attend the meeting in person. However, whether or not you expect to attend in person, please promptly sign and date your Proxy, and mail it in the return envelope that is enclosed for that purpose. It will assist us in preparing for the meeting, and it is important that your shares be represented at the meeting.
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on May 8, 2012. Our Proxy Statement, form of Proxy and 2011 Annual Report to Shareholders are available free of charge on our website, www.ubat.com.
| March 26, 2012 | By Order of the Board of Directors |
/s/ Randal J. Rabe | |
| Randal J. Rabe |
2012 Proxy Statement
| 1 | |
| 2 | |
| 3 | |
| 3 | |
| 4 | |
| 4 | |
| 4 | |
| 6 | |
| 7 | |
| 7 | |
| 7 | |
| 8 | |
| 10 | |
| 10 | |
| 10 | |
| 19 | |
| 20 | |
| 21 | |
| 23 | |
| 23 | |
25 | |
26 | |
| 27 | |
27 | |
28 | |
| 29 | |
| 29 | |
29 | |
30 | |
| AR-1 |
Annual Meeting of Shareholders
May 8, 2012
This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of United Bancorp, Inc. (the "Company" or “UBI”) of the accompanying Proxy to be used at the 2012 Annual Meeting of Shareholders of the Company and any adjournment of the meeting. The meeting will be held on May 8, 2012 at the time and place and for the purposes stated in the accompanying Notice of Annual Meeting of Shareholders.
This Proxy Statement, Proxy and Notice of Annual Meeting are being mailed to shareholders on or after March 26, 2012. If you have elected to receive your Proxy Statement and Annual Report electronically, we will mail your Proxy by that same date, along with the address of the website where you may download and view your other materials. The mailing address of the principal executive offices of the Company is P.O. Box 1127, Ann Arbor, Michigan 48104.
Only shareholders of record at the close of business on March 12, 2012 will be entitled to notice of and to vote at the meeting. On March 12, 2012, there were 12,697,265 shares of the Company’s Common Stock outstanding and entitled to vote at the meeting. Each share of Common Stock is entitled to one vote. Common Stock constitutes the only voting security of the Company entitled to vote upon the proposals to be presented at the meeting.
Shares represented by properly executed Proxies received by the Company will be voted at the meeting in the manner specified in the Proxies. If no instructions are specified in any Proxy, the shares represented by the Proxy will be voted in favor of the proposals presented at the meeting by the Board of Directors. Any Proxy may be revoked by the person giving it at any time before being voted, either by giving another Proxy bearing a later date or by notifying the Secretary of the Company, Randal J. Rabe, at the Company’s principal executive offices, in writing of revocation or by attending the meeting and voting in person.
The cost of soliciting Proxies will be borne by the Company. The solicitation of Proxies will be made primarily by mail. Officers and regular employees of the Company and its subsidiaries may also solicit proxies, personally and by telephone or other means, for which they will receive no additional compensation and at a minimal cost to the Company. Arrangements may also be made directly by the Company with banks, brokerage houses, custodians, nominees, and fiduciaries to forward soliciting matter to the beneficial owners of stock held of record by them and to obtain authorization for the execution of Proxies. The Company may reimburse institutional holders for reasonable expenses incurred by them in connection with this process.
| Planning to attend the meeting? If your Company stock is held in a brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares “held in street name,” and this Proxy Statement is being forwarded to you by your broker or nominee. Your name does not appear on the register of shareholders and, in order to be admitted to the meeting, you must bring a letter or account statement showing that you are the beneficial owner of the shares. You will not be able to vote at the meeting, and should instruct your broker or nominee how to vote on your behalf, unless you have a legal proxy from the shareholder of record appointing you as its proxy. If you have any questions about the meeting or require special assistance, please call Diane Skeels, Executive Assistant, at (517) 423-1760. |
Generally, broker non-votes occur when shares held by a broker in street name for a beneficial owner are not voted with respect to a particular proposal because the broker has not received voting instructions from the beneficial owner and the broker lacks discretionary voting power to vote those shares. If you do not provide your broker with voting instructions, then your broker has discretionary authority to vote your shares on certain "routine" matters. Election of directors and Proposal 2 are not considered routine matters and your broker will not have discretionary authority to vote your shares on election of directors and Proposal 2. It is important that you promptly provide your broker with voting instructions if you want your shares voted in the election of directors and on Proposal 2. We expect that Proposal 3 will be considered a routine matter and your broker will have discretionary authority to vote your shares on the proposal.
Vote Necessary to Approve Proposals
Election of Directors. A plurality of the shares voting is required to elect Directors. This means that if there are more nominees than positions to be filled, the nominees who receive the most votes will be elected to the open director positions. Abstentions, broker non-votes and other shares that are not voted in person or by proxy will not be included in the vote count.
Proposals 2 and 3. Proposals 2 and 3 will be approved if a majority of the shares that are voted on each proposal at the meeting are voted in favor of each proposal. Abstentions, broker non-votes and other shares that are not voted on Proposals 2 and 3 in person or by proxy will not be included in the vote count.
Required Vote for Other Matters. We do not know of any other matters to be presented at the meeting. Generally, any other proposal to be voted on at the meeting would be approved if a majority of the shares that are voted on the proposal at the meeting are voted in favor of the proposal. Abstentions, broker non-votes and other shares that are not voted on the proposal in person or by proxy would not be included in the vote count.
If any other matter should be presented upon which a vote properly may be taken, the shares represented by Proxies will be voted on the matter in accordance with the judgment of the person or persons named in the Proxies.
Under the Company's Articles of Incorporation and Bylaws, the Board of Directors is divided into three classes. Each year, on a rotating basis, the term of office of the Directors in one of the three classes will expire. Successors to the class of Directors whose terms have expired will be elected for a three-year term. The terms of Directors Robert K. Chapman, Norman G. Herbert and Len M. Middleton expire at the 2012 Annual Meeting of Shareholders. These individuals are Class III Directors.
The Compensation & Governance Committee and the Board of Directors have nominated Robert K. Chapman, Norman G. Herbert and Len M. Middleton for election as Class III Directors at the 2012 Annual Meeting of Shareholders. If elected as Class III Directors at the 2012 Annual Meeting of Shareholders, these individuals will hold office until their terms expire at the 2015 Annual Meeting of Shareholders and thereafter until their successor is elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
It is intended that the shares represented by Proxies will be voted for the election of the three nominees unless a contrary direction is indicated. If any of the nominees is unable to serve, the number of Directors to be elected at the meeting may be reduced by the number unable to serve or the individuals named in your Proxy may vote the shares to elect any substitute nominee recommended by the Board of Directors.
Your Board of Directors and Compensation & Governance Committee, which consists entirely of
independent directors, recommend that you vote “FOR” the election of all three nominees as Class III Directors
The Company believes that our executive compensation programs appropriately align executives’ incentives with shareholder interests and are designed to attract and retain high quality executive talent. We also believe that both the Company and shareholders benefit from responsive corporate governance policies and dialogue. In accordance with these beliefs and as required by the Emergency Economic Stabilization Act of 2009 because of the Company’s participation in the U.S. Treasury’s Capital Purchase Program, the Board of Directors has requested an advisory shareholder vote on the Company’s executive compensation.
This proposal (sometimes referred to as a “Say-on-Pay” proposal) gives you as a shareholder the opportunity to endorse or not endorse the compensation of our executives through the following resolution:
“Resolved, that the shareholders approve the Company’s compensation of executives as disclosed in the Proxy Statement, including the Compensation Discussion and Analysis, the tabular disclosure regarding named executive officer compensation and the accompanying narrative disclosure.”
The vote is not binding upon the Board, and may not be construed as overruling a decision by the board or creating an additional fiduciary duty of the Board. However, the Compensation &
Governance Committee will take into account the outcome of the vote when considering future executive compensation decisions.
Your Board of Directors and Compensation & Governance Committee, which consists entirely
of independent directors, recommend that you vote “FOR” Proposal 2.
The Audit Committee and the Board of Directors recommend the ratification of the appointment of BKD, LLP as independent auditors for the Company for the year ending December 31, 2012 to audit the consolidated financial statements of the Company and to perform such other appropriate accounting services as may be approved by the Audit Committee. BKD, LLP has been appointed as the Company’s independent public accountants to audit the Company's financial statements since the year ended December 31, 2002. One or more representatives of the firm of BKD, LLP are expected to be present at the meeting, will have the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.
Your Board of Directors and Audit Committee, which consists entirely of
independent directors, recommend that you vote “FOR” Proposal 3.
Information Concerning Nominees and Incumbent Directors
The following table discloses the name and age of each incumbent Director and Director Nominee, his or her five year business experience, the specific experience qualifications, attributes and skills that led to the conclusion of the Compensation & Governance Committee and the Board of Directors that the person should serve as a Director, and the year each became a Director of the Company. All information is as of the date of this proxy statement.
Name, Age, and Five Year Business Experience | Director Since |
| Director Nominees – Terms to Expire in 2015 (Class III) | |
Robert K. Chapman, age 68; President (since 2003) and Chief Executive Officer (since 2006) of the Company; Chief Executive Officer (2001– 2007) of the Company’s former subsidiary, United Bank & Trust – Washtenaw (“UBTW”). President and Chief Executive Officer of UBT (since 2010). Mr. Chapman is a CPA, and brings over thirty years of experience in the financial industry to the Board. More than twenty of those years were in a financial role, and five years were spent in mergers and acquisitions. Mr. Chapman has a strong background in risk management. | 2001 |
Norman G. Herbert, age 69; Independent financial consultant. Director of UBT since 2010; Director of UBTW (2006 – 2010). Mr. Herbert has an extensive financial background. For thirty-five years, he was a part of the financial management team for the University of Michigan, with responsibilities including management of endowment and working capital, real estate acquisitions and dispositions, external financing activities and risk management. He has long been active with a number of professional, civic and non-profit organizations. He brings an analytical background and a meticulous attention to detail to the Board. | 2009 |
Name, Age, and Five Year Business Experience | Director Since |
Director Nominees – Terms to Expire in 2015 (Class III) (continued) | |
Len M. Middleton, age 48: Professor of Strategy and Entrepreneurship, Ross School of Business at the University of Michigan. Director of UBT since 2010; Director of UBTW (2009 – 2010). Trustee at the Ann Arbor Hands-On Museum. In his role as a faculty member in the business school of the University of Michigan, Mr. Middleton works with entrepreneurial companies, non-profit organizations and major corporations. He holds an MBA, and is founder of a private equity firm that specializes in buyouts and other investment opportunities. He has worked in a family business and has a broad range of entrepreneurial experience. | 2010 |
| Incumbent Directors – Terms Expiring in 2013 (Class I) | |
James D. Buhr, age 64; Owner, J.D. Buhr & Company, LLC, corporate finance advisors, Ann Arbor, MI; Director of UBT since 2010; Director of UBTW (2001 – 2010). Mr. Buhr has an extensive financial background, including experience as a bank credit analyst, commercial lender and investment banker. He is a native of Washtenaw County, is a registered stock broker, and holds an MBA from the University of Michigan. Mr. Buhr currently owns his own corporate finance advisory practice, which provides corporate finance advisory services to Michigan and Midwestern based companies. | 2004 |
James C. Lawson, age 64; General Manager, Avery Oil & Propane, Tecumseh, MI; Chairman of the Board of United Bancorp, Inc. (2011); Vice-Chairman of the Board of United Bancorp, Inc. (2010 – 2011). Director of UBT. Mr. Lawson is an entrepreneur in Lenawee County, serving as owner or partner in a number of local businesses. These experiences have provided a diverse background into the formation and operation of a successful business. He is a lifelong resident of Lenawee County, and brings leadership, strategic planning, human resources and administrative skills and background to the Board. | 1986 |
| Incumbent Directors – Terms Expiring in 2014 (Class II) | |
Stephanie H. Boyse, age 43; President and Chief Executive Officer, Brazeway, Inc., manufacturer of extruded aluminum tubing and related products, Adrian, MI; Director of UBT. Ms. Boyse brings a diverse range of experience to the Board, including sales, marketing, operations, human resources, licensing and acquisitions as well as international experience. Her leadership is exhibited not only through her role as President of the world’s largest manufacturer of frost-free evaporators for household refrigeration, but also through board positions with many other local organizations. | 2008 |
Kenneth W. Crawford, age 54; Independent financial consultant. Retired Senior Vice President, Chief Financial Officer, Corporate Controller and Assistant Secretary of Kaydon Corporation, Ann Arbor, MI. Kaydon Corporation is a leading designer and manufacturer of custom engineered, performance-critical products, supplying a broad and diverse group of alternative energy, military, industrial, aerospace, medical and electronic equipment, and aftermarket customers. Mr. Crawford has held various accounting and finance positions with a number of public companies, and brings a strong accounting and financial background to the Board. | 2011 |
John H. Foss, age 69; Director, La-Z-Boy Incorporated; Retired Director, Vice President, Treasurer and Chief Financial Officer, Tecumseh Products Company, manufacturer of compressors and refrigeration components, engines, and power train components, Tecumseh, MI; Director of UBT. Mr. Foss is a CPA, and his work experience includes financial management and auditing. He has served as CFO of two publicly traded companies and as Chairman of the Audit Committee of La-Z-Boy. He provides practical experience and understanding in the areas of strategic planning, compensation management, internal controls, mergers and acquisitions and corporate governance. | 1992 |
None of the Director nominees or incumbents, with the exception of John H. Foss and Len M. Middleton, serves as a director, or at any time during the past five years served as a director, of any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such act, or any company registered as an investment company under the Investment Company Act of 1940, as amended. Mr. Foss is a director of La-Z-Boy Incorporated. Mr. Middleton is a Director
of Arcadia Funds, Castle Oaks and One Tree. With the exception of Mr. Chapman, each Director and Director Nominee, and each person who served as a Director at any time during the last fiscal year, is or was independent as that term is defined under NASDAQ Listing Rules for service on the Board of Directors and each committee on which the Director serves. While the Company is not subject to these standards, it has chosen to comply with them voluntarily.
The Board of Directors reviews transactions with companies owned or managed by Directors, for the purpose of determining whether those transactions impact the independence of Directors. The Company conducted transactions in the normal course of business with companies affiliated with a single director during 2011 and 2010. The Board determined that these transactions did not impact the independence of that Director.
Board of Directors Leadership Structure |
The Board of Directors of United is led by its Chairman of the Board, who is not the Chief Executive Officer of the Company. The Compensation & Governance Committee believes that separation of the positions of Chairman of the Board and Chief Executive Officer recognizes the difference between the two roles and reflects good corporate governance practice. The Chairman of the Board leads the Board of Directors in adopting an overall strategic plan for the Company, sets the agenda for the meetings of the Board of Directors, presides over all meetings of the Board of Directors, and provides guidance to the Chief Executive Officer. The Chief Executive Officer implements the strategic plan for the Company, as adopted by the Board of Directors, and leads the Company, its management and its employees on a day-to-day basis. Because of these differences, the Company currently believes keeping the Chairman of the Board and Chief Executive Officer as separate positions is the appropriate leadership structure for the Company.
James C. Lawson was elected as Chairman of the Board following the 2011 Annual Meeting of Shareholders. Mr. Lawson has a diverse background in the formation and operation of a successful business, and has served as a Director of the Company since 1986. Robert K. Chapman serves as the Company’s President and Chief Executive Officer, and brings more than thirty years of banking experience in various roles, as well as leadership in the Washtenaw County market, to his role.
| Board of Directors Role in Risk Oversight |
The Company continues to enhance and implement its enterprise risk management (“ERM”) process. The Board is responsible for overseeing the ERM process. The Enterprise Risk Management Committee implements the ERM process by overseeing policies, procedures and practices relating to enterprise-wide risk and compliance with bank and regulatory obligations. The committee consists of members of the executive management team and other appointed individuals from the various identified risk areas. The Chief Financial Officer serves as chair of the committee.
Among other things, the committee is responsible for designing and implementing effective ERM processes and practices, ensuring that management understands and accepts responsibility for identifying, assessing and managing risk, ensuring that risk assessments are completed for each identified risk area, and reviewing and updating risk assessments on at least a quarterly basis. The committee has identified and monitors 12 risk areas. In 2010 and 2011, the ERM
process involved a heightened focus on risks related to credit quality of the loan portfolio and earnings and capital, as both of these areas presented elevated levels of risk to the Company. The committee must meet at least four times per year. The Chief Financial Officer must report on the ERM process to the Board of Directors on at least a quarterly basis.
Communicating with the Board of Directors |
Shareholders may communicate with the Board of Directors, its committees or any member of the Board of Directors by sending a letter to Chairman of the Board, United Bancorp, Inc., P. O. Box 1127, Ann Arbor, Michigan, 48104. All shareholder communications will be forwarded to the Board, the committee or the Director as indicated in the letter. The Board of Directors reserves the right to revise this policy in the event that this process is abused, becomes unworkable or otherwise does not efficiently serve the purpose of the policy.
Meetings of the Board of Directors |
During the year ended December 31, 2011, the Board of Directors of the Company met a total of five times. Each of the Directors attended at least 75% of the aggregate of the total number of meetings of the Board and of the Board committees of which he or she is a member.
The Company encourages members of its Board of Directors to attend the Annual Meeting of Shareholders. All directors serving at April 26, 2011 attended the Company’s 2011 Annual Meeting of Shareholders held on that date.
| Committees of the Board of Directors |
The Board of Directors has established a standing Audit Committee and Compensation & Governance Committee. The Compensation & Governance Committee also performs the functions of a nominating committee.
Audit Committee Report, Charter, and Independence |
The Audit Committee consists of Kenneth W. Crawford, John H. Foss, Norman G. Herbert and Len M. Middleton. The Audit Committee met eight times during the year ended December 31, 2011. Each of the current members meets the requirements for independence as defined under NASDAQ listing rules. While the Company is not subject to these standards, it has chosen to comply with them voluntarily. In addition, the Board of Directors determined that Mr. Crawford and Mr. Foss have met the qualifications to be considered an “audit committee financial expert” as set forth under rules adopted by the Securities and Exchange Commission.
The Audit Committee has selected BKD LLP (“BKD”) as its independent registered public accounting firm for 2012. BKD has served in that capacity since 2002. The services provided by BKD are limited by the Audit Committee to audit services and certain permitted audit related and tax services.
The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is available on the Company's website at www.ubat.com. The Board of Directors reviews and approves changes to the Audit Committee charter annually.
The Audit Committee assists the Board in its oversight responsibilities of the integrity of the Company’s financial statements, the system of internal control over financial reporting, the Company’s internal audit function and independence, the independent registered public accounting firm’s qualifications, independence and performance, and the Company’s process for monitoring compliance with ethics policies and legal and regulatory requirements. Management is responsible for the Company’s financial statements and the financial reporting process, and for establishing and maintaining the Company’s system of internal controls. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of the Company’s financial statements with U.S. generally accepted accounting principles.
The Audit Committee reports that with respect to the audit of the Company's consolidated financial statements for the year ended December 31, 2011:
| • | The Audit Committee has reviewed and discussed the Company's 2011 audited consolidated financial statements with the Company's management. |
| • | The Audit Committee has discussed with its independent registered public accounting firm, BKD, LLP, the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380) as adopted by the Public Company Accounting Oversight Board in Rule 3200T. |
| • | The Audit Committee has received the written disclosures and the letter from its independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding BKD’s communications with the Audit Committee concerning independence, and has discussed with BKD its independence. |
Based on the review and the discussions referenced above, the Audit Committee recommended to the Board of Directors that the Company's 2011 audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
| Audit Committee | |
| Norman G. Herbert, Chairman | |
| Kenneth W. Crawford | |
| John H. Foss | |
| Len M. Middleton |
Compensation & Governance Committee |
The Board of Directors of the Company has established a Compensation & Governance Committee, which addresses matters relating to employment, compensation, and management performance. The Compensation & Governance Committee also performs the functions of a nominating committee for the Board of Directors. The Board of Directors has adopted a written charter for the Compensation & Governance Committee, a copy of which is available on the Company’s website at www.ubat.com.
Our Compensation & Governance Committee annually reviews and approves our compensation program, evaluates the performance of our Chief Executive Officer and, with input from the Chief Executive Officer, reviews the performance of the executive officers in achieving our business objectives, and recommends executive officers’ compensation to our Board of Directors for its approval. The Chief Executive Officer of the Company provides input into the recommended compensation of the other executive officers to the Compensation & Governance Committee, but does not participate or deliberate in compensation decisions regarding his own compensation. Although input from the Chief Executive Officer is considered by the Compensation & Governance Committee and the Board, it is not given any disproportionate weight. The committee also recommends targets for bonuses and profit sharing and has sole authority to grant stock options and other equity awards to eligible individuals. The Compensation & Governance Committee and the Board have the final authority on compensation matters. Except to the extent prohibited by exchange rules (if applicable) and state law, the committee may delegate its authority to subcommittees when it deems it appropriate and in the best interests of the Company.
The Compensation & Governance Committee considers various potential candidates for Director that may come to its attention through current board members, shareholders or other persons. The Compensation & Governance Committee will review and evaluate candidates for Director nominated by shareholders in the same manner as it evaluates all other candidates. When considering and evaluating candidates for nomination to the Board, the committee considers a number of factors. The Compensation & Governance Committee considers board diversity as a factor in identifying nominees for Director, but diversity is not a dispositive factor and the committee has no formal diversity policy. In addition, the Compensation & Governance Committee believes that a Board candidate should:
| • | Be a shareholder of United Bancorp, Inc. |
| • | Be willing and able to devote full interest and attendance to the Board and its committees |
| • | Bring their financial business to the Company, including personal and business accounts |
| • | Lend credibility to the Company and enhance its image |
| • | Help develop business and promote the Company and its subsidiaries |
| • | Provide advice and counsel to the CEO |
| • | Maintain integrity and confidentiality at all times. |
The Compensation & Governance Committee will consider shareholder nominations for candidates for membership on the Board when properly submitted in accordance with the Company’s bylaws. The bylaws provide that no less than 120 days prior to the date of the meeting, in the case of an annual meeting, and not more than seven days following the date of notice of the meeting, in the case of a special meeting, any shareholder who intends to make a nomination at the meeting shall deliver a notice to the secretary of the Company setting forth (i) the name, age, business address and residence of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of each class and series of capital stock of the Company which are beneficially owned by each such nominee and (iv) such other information concerning each such nominee as would be required,
under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominee.
The Compensation & Governance Committee met eight times during 2011, and is composed of the following Directors of the Company: Stephanie H. Boyse, James D. Buhr, John H. Foss and James C. Lawson. All members of the Company’s Compensation & Governance Committee meet the requirements for independence under NASDAQ Listing Rules. While the Company is not subject to these standards, it has chosen to comply with them voluntarily.
Information Concerning Executive Officers |
Following is a current listing of executive officers of the Company, setting forth the name, age, five year business experience, and year each became an executive officer of the Company. All information is as of the date of this proxy statement. Officer appointments for the Company are made or reaffirmed annually at the Organizational Meeting of the Board of Directors. The Board may also designate executive officers at regular or special meetings of the Board.
Name, Age, and Five Year Business Experience | Executive Officer Since |
Robert K. Chapman, age 68; Director of UBI; President (since 2003) and Chief Executive Officer (since 2006) of the Company; President and Chief Executive Officer of UBT (since 2010); President (2001–2005) and Chief Executive Officer (2001 – 2007) of UBTW; Director of UBTW (2001–2010) | 2001 |
Randal J. Rabe, age 53; Executive Vice President (since 2003) and Chief Financial Officer (since December, 2007) of the Company; President (2003 – 2007) & Chief Executive Officer (2005–2007) and Director (2003–2007) of UBT | 2003 |
Todd C. Clark, age 42; Executive Vice President of the Company; Chief Operating Officer and Washtenaw Community President (since 2010); President (2006–2010) and Chief Executive Officer (2007–2010) of UBTW; Director (2006–2010) of UBTW | 2005 |
Gary D. Haapala, age 48; Executive Vice President of the Company; Executive Vice President – Wealth Management Group of UBT | 2006 |
Joseph R. Williams, age 48; Executive Vice President of the Company (since December, 2007); Lenawee Community President (since 2010); President and Chief Executive Officer and Director of UBT (2007–2010); Executive Vice President – Community Banking of UBT (2003–2007) | 2007 |
| Compensation Discussion and Analysis |
This discussion describes all material elements of our compensation program for our executive officers named in the Summary Compensation Table below ("named executive officers").
Compensation Philosophy and Objectives
Our executive compensation program is overseen by our Compensation & Governance Committee. The Compensation & Governance Committee believes that our compensation program should be designed to tie annual and long-term cash and stock incentives to achievement of measurable business and individual performance objectives. The Compensation
& Governance Committee believes that this approach aligns executives’ incentives with shareholder value creation and allows the Company to attract and retain high quality executive talent. Accordingly, a portion of our executives’ overall compensation is tied to our financial performance (including our return on assets and net income). Our compensation philosophy is intended to compensate our executives with base salary targeted at the midrange of market competitive levels, while rewarding for outstanding corporate performance with our performance based plans. If performance goals are achieved, they will result in above-average total compensation based on a market comparison.
The Company provides its shareholders with the opportunity to cast an annual advisory vote on executive compensation (a “say-on-pay proposal”). At the Company’s annual meeting of shareholders held in April 2011, 89.9% of the votes cast on the say-on-pay proposal at that meeting were voted in favor of the Company’s executive compensation for 2010. The Compensation & Governance Committee believes this affirms shareholders’ support of the Company’s approach to executive compensation. In light of the voting results, the Committee did not materially change its approach in 2011. The Compensation & Governance Committee will continue to consider the outcome of advisory votes on the Company’s say-on-pay proposals when making future compensation decisions for the named executive officers.
Compensation Process
In its process for deciding how to compensate our named executive officers, the Compensation & Governance Committee considers, among other things, competitive market data. The Compensation & Governance Committee periodically engages the services of compensation consultants to help evaluate our executive compensation and to help select appropriate market data for comparison. Some of the resources considered were the ABA Executive Compensation Standard Report, American Bankers Association Compensation Benefits Survey, BAI Bank Cash Compensation Survey, Crowe Chizek Financial Institutions Compensation Survey, Mercer Benchmark Database Human Resource Management, Michigan Bankers Association Compensation Survey and Watson Wyatt Benchmark Compensation Report for Financial Institutions. None of the resources was specifically prepared or customized for the Company and each resource contained only aggregate data with regard to the institutions surveyed. While the Compensation & Governance Committee considered these resources, it determined compensation levels in its judgment based on what it considered to be reasonable and appropriate for the Company.
For 2011, the Committee engaged the services of Findley Davies as compensation consultants. Findley Davies assisted the Compensation & Governance Committee in evaluating the mix of cash and equity compensation for our executives. Based on their recommendations and comparison to the market data they have provided, we believe that our mix of cash and equity compensation is appropriate and is consistent with that of similar financial institutions. Findley Davies also was engaged to assist with the development of certain non-equity based compensation plans, which have not yet been finalized or adopted. Findley Davies did not provide any other services to the Company.
The Compensation & Governance Committee also uses tally sheets prepared by our payroll department with respect to each of our named executive officers. Tally sheets include the dollar value of each component of the named executive officers’ compensation, including current cash compensation, accumulated deferred compensation balances, outstanding equity awards,
retirement benefits, perquisites and any other compensation. The primary purpose of the tally sheets is to bring together in one place all of the elements of compensation of our named executive officers so that the Compensation & Governance Committee may analyze both the individual elements of compensation (including the compensation mix) as well as the aggregate total amount of compensation. The Compensation & Governance Committee generally compares the information on the tally sheets, on an individual and aggregate basis, to the extent comparisons are available, to market data. In addition, such tallies are also used to determine internal equity conformance.
We believe that it is important that our executive compensation reflect the relative financial performance of the Company. The table below shows the base pay, bonus and awards of the named executive officers, compared to the return on average assets (“ROA”) of the Company for the past six years. We have included 2006 for comparison, as it was the most recent year in which cash bonuses were paid.
Targets and Peer Data
The Compensation & Governance Committee has the authority to set targets at other than those contained in the current year Board-approved financial plan. For 2011, the targets for payouts under the 2009 Management Committee Incentive Compensation Plan were set at a level that was considerably higher than the 2011 board-approved financial plan, and targets for performance based vesting of Restricted Stock Units granted in 2011 were based on the 2011 board-approved financial plan.
The Compensation & Governance Committee has utilized comparison to a number of peer groups for the purpose of ranking our financial performance with peers in order to validate our performance targets. However, these peer groups were not used specifically to compare our compensation practices and levels to peer companies.
Compensation Components
The key components of our executive compensation program consist of a base salary and participation in various performance-based compensation plans, including our Management Committee Incentive Compensation Plan, Senior Management Bonus Deferral Stock Plan, 401(k) Plan, and our Stock Incentive Plan of 2010.
Base Salary
We use base salary to attract and retain executive officers near the midpoint of market rates, and rely on our performance-based plans to reward for performance. The Company generally hires executive officers at market rates necessary to attract talent. Raises and salary adjustments for named executive officers are provided primarily to allow us to retain our existing talent.
Generally, we believe that base salary should be set at mid-level market competitive levels. Base salaries are reviewed annually and are compared to several databases and public information, and adjusted from time to time.
2009 Management Committee Incentive Compensation Plan
The named executive officers participate in the Management Committee Incentive Compensation Plan. Under the plan, a participant is paid a percentage of his or her base salary based on the achievement of business and individual performance objectives. Bonuses under the plan are based all or in part on our achieving a target return on assets as established annually by the Board of Directors. For 2011, our target ROA was 1.0%.
The plan is divided into groups, each with differing payout levels based on a percentage of base salary. Participants in the plan may earn more or less than the prescribed bonus percentages at target levels, with threshold and maximum bonus levels established. The table below details the range of minimum, target and maximum thresholds and payouts for each group of the plan, relating to the named executive officers.
No Bonus is Earned if Performance is Below: | Bonus Earned at Minimum Threshold | Bonus Earned at 100% of Target | Maximum Bonus That Can Be Earned | Maximum Bonus is Earned At or Above: | |||
| Group 1 | 0.50% | ROA | 11.25% | 45% | 90% | 1.625% | ROA |
| Group 2 | 0.50% | ROA | 8.75% | 35% | 70% | 1.625% | ROA |
Targets for 2011 for all participants were based 100% on ROA, as participants each have responsibilities with regard to the overall performance of the Company. Targets were not achieved in 2011, and as a result, no incentive compensation was paid to any of the named executive officers under the plan.
The table below details the respective named executive officers in each group, the group within the plan that each participates in, the basis upon which the bonus is determined, and the payout percentages for calendar year 2011.
| Executive Officer | Group | Based on: | 2011 Payout |
| Chapman | 1 | Target ROA (100%) | 0% |
| Rabe | 2 | Target ROA (100%) | 0% |
| Clark | 2 | Target ROA (100%) | 0% |
Under the 1996 Senior Management Bonus Deferral Stock Plan, participating officers are eligible to elect cash bonus deferrals and, after employment termination, to receive payment in
the form of shares of Company stock. During 2010 and 2011, none of the named executive officers received bonuses eligible to be deferred under the plan and, as of December 31, 2011, none of the named executive officers had any balance in the plan.
Stock Incentive Plan of 2010
At the 2010 Annual Meeting of Shareholders, shareholders approved the United Bancorp, Inc. Stock Incentive Plan of 2010 (the “Incentive Plan”). The Incentive Plan is intended to supplement and continue the compensation policies and practices of our other equity compensation plans, which we have used for many years. The Board of Directors believes that the Incentive Plan is important to attract, retain and motivate corporate and subsidiary directors, officers and key employees of exceptional abilities, and to recognize the significant contributions these individuals have made to the long-term performance and growth of the Company and its subsidiaries. The Compensation & Governance Committee awarded grants in 2011 under the Incentive Plan based on the Company’s 2010 performance. No awards were made in 2010 under the Incentive Plan.
The Incentive Plan includes a number of components, as follows:
| Stock Options |
The Incentive Plan permits the Company to grant to participants options to purchase shares of common stock at stated prices for specific periods of time. Stock options that may be granted under the Incentive Plan could be either nonqualified stock options or incentive stock options as defined in Section 422 of the Internal Revenue Code. The Compensation & Governance Committee may award options for any amount of consideration or no consideration, as the committee determines. No stock options were granted in 2011.
| Stock Appreciation Rights |
The Incentive Plan permits the Compensation & Governance Committee to grant stock appreciation rights. A stock appreciation right permits the holder to receive the difference between the market value of a share of common stock subject to the stock appreciation right on the exercise date of the stock appreciation right and a “base” price set by the Compensation & Governance Committee. Stock appreciation rights are exercisable on dates determined by the Compensation & Governance Committee at the time of grant. The committee may award stock appreciation rights for any amount of consideration or no consideration, as the committee determines.
Stock appreciation rights are subject to terms and conditions determined by the Compensation & Governance Committee. A stock appreciation right may relate to a particular stock option and may be granted simultaneously with or subsequent to the stock option to which it relates. The Company granted Stock-Only Stock Appreciation Rights (“SOSARs”) in 2011.
| Restricted Stock and Restricted Stock Units |
The Incentive Plan permits the Compensation & Governance Committee to award restricted stock and restricted stock units, subject to the terms and conditions set by the committee that are consistent with the Incentive Plan. Shares of restricted stock are shares of common stock, the retention, vesting and transferability of which are subject, for specified periods of time, to such terms and conditions as the Compensation & Governance Committee deems appropriate (including continued service or employment and/or achievement of performance goals
established by the committee). The Compensation & Governance Committee may award restricted stock or restricted stock units for any amount of consideration or no consideration, as the committee determines.
As with stock option grants, the Compensation & Governance Committee establishes the terms of individual awards of restricted stock and restricted stock units in award agreements or certificates of award. Restricted stock and restricted stock units granted to a participant “vest” (i.e., the restrictions on them would lapse) in the manner and at the times that the Compensation & Governance Committee determines. The Company granted restricted stock and restricted stock units (“RSUs”) during 2011.
The period during which restricted stock and RSU grants are unvested under the Plan are known as the “Restricted Period.” The restrictions imposed on 100% of the restricted stock awarded are time-based, and lapse two years from the date of award.
RSUs vest upon satisfaction of time based and performance based vesting requirements. Vesting for RSUs granted in 2011 is as follows:
| · | Time Based Vesting. The percentage of RSUs awarded that satisfy the performance based vesting requirements will generally vest and be settled three years from the date of the grant. |
| · | Performance Based Vesting. The performance period for the RSUs granted in 2011 is the period beginning January 1, 2011 and ending December 31, 2011. The percentage specified below of RSUs awarded will satisfy the performance based vesting requirements of the award if the Company’s core earnings, as measured by pre-tax, pre-provision return on assets (“PTPP ROA”), earnings, as measured by return on assets (“ROA”) and asset quality, as measured by the ratio of non-performing assets1 to total assets (“NPA/Assets”), as determined by the Company in a manner consistent with the information reported in its filings with the Securities and Exchange Commission, meet the standards set forth in the following schedule: |
| Performance Measure (Metric) | Weight | Performance Standard | % of RSU Award Performance Vested |
| Core Earnings (PTPP ROA) | 1/3 | 1.35% | 25% |
| 1.45% | 50% | ||
| 1.55% | 75% | ||
| 1.65% | 100% | ||
| Earnings (ROA) | 1/3 | 0.08% | 25% |
| 0.17% | 50% | ||
| 0.25% | 75% | ||
| 0.33% | 100% | ||
| Asset Quality (NPA/Assets) | 1/3 | 4.00% | 25% |
| 3.80% | 50% | ||
| 3.60% | 75% | ||
| 3.40% | 100% |
1 | Nonperforming assets includes non-accrual loans, 90 day delinquent loans and OREO, but does not include accruing restructured loans. |
RSUs will not vest upon performance below the minimum performance standards provided above. Vesting upon performance between the performance standards provided above will be interpolated based on the actual performance. For 2011, RSUs performance vested at 60.2% of target.
| Stock Awards |
The Incentive Plan permits the Compensation & Governance Committee to make stock awards. The committee may make stock awards for any amount of consideration, or no consideration, as the committee determines. A stock award of common stock is subject to terms and conditions set by the Compensation & Governance Committee at the time of the award. Stock award recipients generally have all voting, dividend, liquidation and other rights with respect to awarded shares of common stock. However, the committee may impose restrictions on the assignment or transfer of common stock awarded under the Incentive Plan. No stock awards were granted in 2011.
| Other Stock-Based Awards |
Finally, the Incentive Plan permits the Compensation & Governance Committee to grant a participant one or more types of awards based on or related to shares of common stock, other than the types described above. Any such awards are subject to such terms and conditions as the Compensation & Governance Committee deems appropriate, as set forth in the respective award agreements and as permitted under the Incentive Plan. No other stock-based awards were granted in 2011.
Stock Option Plans
Before December 31, 2009, we granted stock options under one of two stock option plans: the 1999 and 2005 stock option plans. The 1999 and 2005 stock option plans have expired and been replaced by the Stock Incentive Plan of 2010. Options granted under the plans and not exercised are still outstanding, and no new options may be granted under either plan.
Under the plans, options were granted at the then-current market price at the time the option was granted. The options have a three-year vesting period and, with certain exceptions, expire at the end of ten years from the date of grant, or three years after retirement. Options granted under our plans are non-qualified stock options as defined under the Internal Revenue Code.
Our Compensation & Governance Committee administers our stock option plans. Option grants for any certain year were generally determined by evaluating the number of option grants available under the plan, divided by the number of years remaining in the plan. The Committee allocated some or all of the options available for a particular year to eligible participants based on a number of factors, including the relative rank of the executive officer within our Company and his or her specific contributions to the success of the Company for the prior year. The committee did not time the grant of stock options to take advantage of material non-public information, or time the release of material non-public information to increase the value of option grants.
We believe the options served to enhance shareholder value by aligning the interests of our executive officers with those of the shareholders and also by acting to retain our executive officers through the vesting of the options. The exercise price of all options granted under the plans was higher than the Company’s stock price as of December 31, 2011, and accordingly,
unless the stock price significantly improves, the ability of those options to assist in retention of our executive officers may not be realized.
401(k) Plan
Under our 401(k) plan, named executive officers and other participants may defer a portion of their compensation, and the Company’s 401(k) plan provides for a match of up to 4% of salary, subject to IRS regulations. In addition to the match contributions, the plan includes a profit-sharing feature based on achievement of a net income target as established annually by the Board of Directors. Effective July 1, 2009, the Company discontinued its match and profit sharing contributions to the 401(k) plan as a cost-cutting measure, and no match or profit sharing payments were paid in 2010. The Company reinstated match contributions beginning January 1, 2011, but did not make profit sharing contributions in 2011.
Severance Arrangements
Each named executive officer has an employment agreement with the Company. As part of our goal to attract and retain our executive officers, such employment agreements provide that if the Company terminates the employee’s employment before a Change in Control (as defined in the agreement) other than for Cause (as defined in the agreement), the employee will receive severance pay consisting of six months’ salary continuation and six months of COBRA payments, provided that the severance pay will end if the employee secures other employment. If the Company terminates the employee’s employment other than for Cause within 12 months after a Change in Control, or if the employee resigns for Good Reason (as defined in the agreement) within 12 months after a Change in Control, the employee will receive severance pay consisting of a lump sum payment equal to one year’s salary, and will also receive 12 months of COBRA payments. However, no severance payments will be made either before or after a Change in Control during the period in which any obligation arising from financial assistance under the Troubled Assets Relief Program remains outstanding, if such payments would be prohibited as to any employee of the Company under Section 111 of the Emergency Economic Stabilization Act of 2008 as amended by Section 7001 of the American Recovery and Reinvestment Act of 2009.
The contracts provide for a general release from the employee as a condition to eligibility for severance pay. The contracts also provide that to be eligible for severance pay the employee must comply with confidentiality requirements and 12-month non-solicitation and non-competition commitments included in the contracts. The purpose of the severance arrangements is to minimize the uncertainty and distraction caused by the current climate of bank acquisitions, and to allow our executive officers to focus on performance by providing transition assistance if we are acquired or if there is a change in control.
Inter-Relationship of Elements of Compensation Packages
The various elements of the compensation package are not inter-related. There is no significant interplay of the various elements of total compensation between each other. While the Compensation & Governance Committee may recommend, and the Board has discretion to make exceptions to any compensation or bonus payouts under existing plans, the Compensation &
Governance Committee has not recommended, and the Board has not approved, any exceptions to the plans with regard to any named executive officer.
Limitations on Executive Compensation
The Company participated in the United States Department of the Treasury’s (“Treasury”) Capital Purchase Program (“CPP”) effective January, 2009. The Company made immaterial, technical amendments to certain employment agreements and plans with the Corporation’s executive officers to comply with the limits on executive compensation as required by the CPP and the Emergency Economic Stabilization Act of 2008 as that Act existed at the time of the Company’s participation in the CPP.
The Company’s compensation plans are in compliance with the requirements of the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), which significantly amended the executive compensation requirements for all CPP participants. The Recovery Act prohibits the following practices:
| • | making any payments (other than accrued wages and benefits) to senior executive officers and the five most highly-compensated employees upon departure from United for any reason; |
| • | paying or accruing any bonus, retention award or incentive compensation to our highest-compensated employee (subject to certain exceptions); and |
| • | using any compensation plan that would encourage earnings manipulation to enhance the compensation of any employee. |
On September 15, 2009, the Company approved certain amendments to its compensation plans to comply with applicable requirements under the Economic Stabilization Act of 2008 as amended by the Recovery Act and related regulations.
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies participating in the CPP for taxable compensation in excess of $500,000 paid to their chief executive officer or certain other highly compensated officers. Qualifying performance-based compensation is not subject to the deduction limitation if certain requirements are met. We consider the impact of Section 162(m) when structuring the performance based portion of our executive compensation, but Section 162(m) is not a dispositive consideration. No compensation was non-deductible because of Section 162(m) in 2011, and we do not expect any compensation to be non-deductible because of Section 162(m) in 2012.
As a condition to participation in the CPP, we are required to recover from any named executive officer and any of the next twenty highest-compensated employees any bonus or incentive compensation paid to such named executive officer if the financial statement or payment method on which the payment was based later proves to be materially inaccurate. Each named executive officer has consented to provisions which require him to repay any such amount. This obligation will continue for as long as the U.S. Treasury holds a debt or equity position in the Company. It is anticipated that actions to be taken under such circumstances would be determined by the Compensation & Governance Committee. We offer minor perquisites to some executive officers,
none of which have an annual aggregate incremental cost to us of more than $10,000 per executive.
Stock Ownership Guidelines
We believe that stock ownership by our executive officers is the clearest, most direct way to align their interests with those of our stockholders and that, by holding an equity position in the Company, executive officers demonstrate their commitment to and belief in the long-term profitability of the Company. Accordingly, guidelines for stock ownership by executive officers were adopted in 2008. As of December 31, 2011, all of the named executive officers had stock ownership in compliance with the stock ownership guidelines. We currently have no policies regarding hedging the economic risk of any ownership of our common stock.
Compensation of Executive Officers |
The following table sets forth information concerning the compensation earned by each person who served as Chief Executive Officer during 2011 and the two most highly compensated executive officers other than the Chief Executive Officer during 2011.
Summary Compensation Table
| Name and Principal Position | Year | Salary (1) | Option Awards (2) | Stock Awards (3) | Non-Equity Incentive Comp (4) | All Other Compen-sation (5) | Total Compen-sation | |||||||||||||||||||
Robert K. Chapman, President and Chief Executive Officer | 2011 | $ | 267,692 | $ | 0 | $ | 44,976 | $ | 0 | $ | 20,300 | $ | 332,968 | |||||||||||||
| 2010 | 260,000 | 0 | 0 | 0 | 10,500 | 270,500 | ||||||||||||||||||||
| 2009 | 260,000 | 20,813 | 0 | 0 | 15,507 | 296,320 | ||||||||||||||||||||
Randal J. Rabe, Executive Vice President & Chief Financial Officer | 2011 | $ | 199,231 | $ | 0 | $ | 22,488 | $ | 0 | $ | 11,694 | $ | 233,413 | |||||||||||||
| 2010 | 190,000 | 0 | 0 | 0 | 3,725 | 193,725 | ||||||||||||||||||||
| 2009 | 190,000 | 11,655 | 0 | 0 | 7,384 | 209,039 | ||||||||||||||||||||
Todd C. Clark, Executive Vice President | 2011 | $ | 200,385 | $ | 0 | $ | 22,488 | $ | 0 | $ | 10,201 | $ | 233,074 | |||||||||||||
| 2010 | 195,000 | 0 | 0 | 0 | 2,400 | 197,400 | ||||||||||||||||||||
| 2009 | 195,000 | 11,655 | 0 | 0 | 6,156 | 212,811 | ||||||||||||||||||||
| (1) | Salary amounts include amounts deferred under the Company’s 401(k) plan. |
| (2) | Amounts reflect the grant date fair value computed in accordance with FASB ASC Topic 718 (formerly FAS 121R). Amounts include awards of stock options. Further information regarding grant valuation is contained in Note 16 of the Notes to Consolidated Financial Statements. |
| (3) | Amounts reflect the grant date fair value computed in accordance with FASB ASC Topic 718 (formerly FAS 121R). Amounts include awards of restricted stock, RSUs and SOSARs. Further information regarding grant valuation is contained in Note 16 of the Notes to Consolidated Financial Statements. |
| (4) | “Non-Equity Incentive Compensation” includes amounts paid under the Management Committee Incentive Compensation Plan and as a profit-sharing contribution under the Company’s 401(k) plan as further described in the “Compensation Discussion and Analysis” section of this Proxy Statement. Detail is shown in the table below. |
| (5) | "All other Compensation" includes matching contributions made by us under our 401(k) plan and life insurance premiums paid by the Company for the benefit of the named executive officers. Detail is shown in the table below. |
| Name | Year | Management Committee Incentive Pay | 401(k) Profit Sharing | Total Non-Equity Incentive Pay | 401(k) Match Contribu-tions (a) | Life Insurance Premiums | Total Other Compen-sation | |||||||||||||||||||||
| Chapman | 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 9,800 | $ | 10,500 | $ | 20,300 | |||||||||||||||
| 2010 | 0 | 0 | 0 | 0 | 10,500 | 10,500 | ||||||||||||||||||||||
| 2009 | 0 | 0 | 0 | 5,007 | 10,500 | 15,507 | ||||||||||||||||||||||
| Rabe | 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 7,969 | $ | 3,725 | $ | 11,694 | |||||||||||||||
| 2010 | 0 | 0 | 0 | 0 | 3,725 | 3,725 | ||||||||||||||||||||||
| 2009 | 0 | 0 | 0 | 3,659 | 3,725 | 7,384 | ||||||||||||||||||||||
| Clark | 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 7,801 | $ | 2,400 | $ | 10,201 | |||||||||||||||
| 2010 | 0 | 0 | 0 | 0 | 2,400 | 2,400 | ||||||||||||||||||||||
| 2009 | 0 | 0 | 0 | 3,756 | 2,400 | 6,156 | ||||||||||||||||||||||
| (a) | The match, which was discontinued July 1, 2009, was reinstated January 1, 2011 at a maximum of 4%. | |||||||||||||||||||||||||||
Narrative disclosure of the material terms of the compensation components shown in the Summary Compensation Table may be found above under the heading "Compensation Components" and is here incorporated by reference.
Outstanding Equity Awards at Fiscal Year End 2011 |
The following table provides information as of December 31, 2011 regarding the Company’s outstanding equity awards under the Company’s equity compensation plans. As of December 31, 2011, the exercise price of all of the stock options shown below was higher than the Company’s stock price, and accordingly, the options cannot be exercised profitably at this time. All shares issuable under the Senior Management Bonus Deferral Stock Plan are fully vested, and are not included in the table below.
| Option and SOSAR Awards | Stock Awards | ||||||||||||||||||||||
| Name | Grant Date (1) | # of Shares Underlying Unexercised Grants at Year-End (2) | Option Exercise Price (2) | Option Expiration Date (3) | Number of Shares or Units of Stock Not Vested 4,5That Have | Market Value of Shares or Units of Stock That Have Not Vested 4,5 | |||||||||||||||||
| Exercisable | Unexercisable | ||||||||||||||||||||||
| Robert K. Chapman | |||||||||||||||||||||||
Stock Option Grants | 01/09/02 | 4,135 | - - | $ | 19.98 | 01/09/12 | |||||||||||||||||
| 01/10/03 | 5,348 | - - | 22.21 | 01/10/13 | |||||||||||||||||||
| 01/09/04 | 5,788 | - - | 27.21 | 01/09/14 | |||||||||||||||||||
| 01/03/05 | 5,512 | - - | 30.39 | 01/03/15 | |||||||||||||||||||
| 01/03/06 | 5,880 | - - | 29.52 | 01/03/16 | |||||||||||||||||||
| 01/02/07 | 6,000 | - - | 22.50 | 01/02/17 | |||||||||||||||||||
| 02/15/08 | 4,752 | - - | 19.75 | 02/15/18 | |||||||||||||||||||
| 03/04/09 | 8,250 | 4,250 | 7.24 | 03/04/19 | |||||||||||||||||||
| SOSAR Grants | 03/02/11 | - - | 16,000 | 3.35 | 03/02/21 | ||||||||||||||||||
| RSU Grants | 03/02/11 | 3,612 | $ | 9,030 | |||||||||||||||||||
| Restricted Stock | 03/02/11 | 2,000 | 5,000 | ||||||||||||||||||||
| Option and SOSAR Awards | Stock Awards | ||||||||||||||||||||||
| Grant | # of Shares Underlying Unexercised Grants at Year-End (2) | �� | Option Exercise | Option Expiration | Number of Shares or Units of Stock That Have | Market Value of Shares or Units of Stock That Have | |||||||||||||||||
| Name | Date (1) | Exercisable | Unexercisable | Price (2) | Date (3) | Not Vested 4,5 | Not Vested 4,5 | ||||||||||||||||
| Randal J. Rabe | |||||||||||||||||||||||
Stock Option Grants | 02/17/03 | 2 | - - | $ | 23.04 | 02/17/13 | |||||||||||||||||
| 01/09/04 | 4,630 | - - | 27.21 | 01/09/14 | |||||||||||||||||||
| 4,410 | - - | 30.39 | 01/03/15 | ||||||||||||||||||||
| 3,990 | - - | 29.52 | 01/03/16 | ||||||||||||||||||||
| 01/02/07 | 3,800 | - - | 22.50 | 01/02/17 | |||||||||||||||||||
| 02/15/08 | 4,000 | - - | 19.75 | 02/15/18 | |||||||||||||||||||
| 03/04/09 | 4,620 | 2,380 | 7.24 | 03/04/19 | |||||||||||||||||||
| SOSAR Grants | 03/02/11 | - - | 8,000 | 3.35 | 03/02/21 | ||||||||||||||||||
| RSU Grants | 03/02/11 | 1,806 | $ | 4,515 | |||||||||||||||||||
| Restricted Stock | 03/02/11 | 1,000 | 2,500 | ||||||||||||||||||||
| Todd C. Clark | |||||||||||||||||||||||
Stock Option Grants | 01/10/03 | 992 | - - | $ | 22.21 | 01/10/13 | |||||||||||||||||
| 01/09/04 | 2,018 | - - | 27.21 | 01/09/14 | |||||||||||||||||||
| 01/03/05 | 3,528 | - - | 30.39 | 01/03/15 | |||||||||||||||||||
| 01/03/06 | 4,200 | - - | 29.52 | 01/03/16 | |||||||||||||||||||
| 01/02/07 | 4,600 | - - | 22.50 | 01/02/17 | |||||||||||||||||||
| 02/15/08 | 5,000 | - - | 19.75 | 02/15/18 | |||||||||||||||||||
| 03/04/09 | 4,620 | 2,380 | 7.24 | 03/04/19 | |||||||||||||||||||
| SOSAR Grants | 03/02/11 | - - | 8,000 | 3.35 | 03/02/21 | ||||||||||||||||||
| RSU Grants | 03/02/11 | 1,806 | $ | 4,515 | |||||||||||||||||||
| Restricted Stock | 03/02/11 | 1,000 | 2,500 | ||||||||||||||||||||
| (1) | Option grants are fully vested at the end of the first three years following the grant date; 33% per year at the end of each of the first two years and 34% at the end of the third year. The right to exercise SOSARs vests 1/3 on each of the first three anniversaries of the date of the award. | |
| (2) | The number of shares granted and the exercise price for each stock option grant is adjusted in accordance with the Company’s stock option plans to reflect stock dividends paid. | |
| (3) | Dates shown for Stock Option and SOSAR awards are the award expiration dates. | |
| (4) | Shares of restricted stock and RSUs are subject to risks of forfeiture as follows: | |
| - | Restricted stock awards. The restrictions imposed on 100% of the restricted stock awarded lapse two years from the date of award. | |
- | RSUs: Performance based vesting requirements for 2011 are described previously under “Compensation Components – Stock Incentive Plan of 2010.” For 2011, RSUs performance vested at 60.2% of target. The performance vested RSUs are subject to time-based vesting requirements and will generally vest and be settled three years from the date of grant. | |
| (5) | The market value of the shares of restricted stock and RSUs that have not vested is based on the closing price of the Company's common stock on December 31, 2011. | |
The Company has not adjusted or amended the exercise price of options previously awarded to any executive officer.
Retirement, Termination or Change of Control Payments. |
As discussed in the Compensation Discussion & Analysis section of this Proxy Statement, the Recovery Act directs the Secretary of the Treasury to establish standards that would prohibit the Company from making payments (other than accrued wages and benefits) to any named executive officer who departs the Company for any reason for as long as Treasury owns an
equity position in United. The Company modified its employment agreements in 2009 to comply with Treasury requirements.
The Company has entered into employment agreements with each of the named executive officers. Additional information about retirement, termination or change in control payments under the employment agreements may be found above under the heading "Severance Arrangements" and is here incorporated by reference.
Under the terms of the Company’s 2005 stock option plan, upon the earlier of the occurrence of an Applicable Event (as defined in the plan), and the death or total disability of a Participant, all Options granted to the Participant shall be fully exercisable in accordance with terms of the plan. At December 31, 2011, the exercise price of all of the options granted to our named executive officers was higher than the Company’s stock price, and therefore, the options could not have been exercised profitably.
Under the terms of the Incentive Plan, if an Incentive Plan participant retires, dies, or becomes disabled while an employee of the Company or one of its subsidiaries, SOSAR grants under the Incentive Plan shall become fully vested and exercisable for one year following employee’s death or disability and for three years following employee’s retirement; however, in no event will the employee’s retirement, death, or disability extend the last date to exercise the SOSARs. Notwithstanding any provisions of the Incentive Plan, all of the SOSAR grants under the Incentive Plan shall be immediately exercisable in the event of any change in control (as defined in the Incentive Plan) and may be exercised for the remaining term of the award.
If the Employee’s employment or officer status with United or any of its subsidiaries is terminated during any restricted period as defined by the Incentive Plan, all Restricted Stock still subject to restrictions at the date of such termination shall either vest or automatically be forfeited and returned to United as provided in the plan. Notwithstanding any provisions of the Incentive Plan, 100% of the Restricted Stock shall fully vest upon the following events resulting in termination of employment or officer status: (a) death; (b) disability; (c) change in control; or (d) retirement.
Notwithstanding any provisions of the Incentive Plan, a portion of Restricted Stock Units shall satisfy the time based vesting requirement upon the following events resulting in termination of employment or officer status: (a) death; (b) disability; or (c) retirement (collectively any of (a), (b) or (c) are an “Acceleration Event”). Upon the occurrence of an Acceleration Event, the percentage of Restricted Stock Unit awards that shall satisfy the time based vesting requirement shall be determined by dividing the number of full calendar months between the date of this Agreement and the date of the Acceleration Event by thirty six (36) and in no event may the percentage accelerated exceed 100%. Notwithstanding the preceding two sentences, the Restricted Stock Units that satisfy the time based vesting requirements due to an Acceleration Event remain subject to the performance based vesting requirements.
Notwithstanding any provisions of the Incentive Plan or this Agreement, 100% of the Restricted Stock Units outstanding shall fully vest, including both time based vesting and performance based vesting, upon a change in control.
At December 31, 2011, there were no fully vested grants under the Incentive Plan.
Named executive officers may participate in the Company’s 401(k) plan, which will provide payment following retirement dependent on contributions by the officer and the Company during their term as an employee. Terms of the plan are disclosed above in the “Compensation Components” section. Named executive officers are not eligible for other Company benefits following retirement.
Equity Compensation Plan Information |
The following table provides information regarding equity compensation plans approved by shareholders as of December 31, 2011.
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) | |||||||||
| Equity compensation plans approved by shareholders | (A) | (B) | (C) | |||||||||
Stock Option Plans (1) | 381,743 | $ | 21.19 | - | ||||||||
| Stock Incentive Plan of 2010 | 102,606 | 3.35 | 359,250 | |||||||||
Director Retainer Stock Plan (2) | 104,489 | NA | 243,008 | |||||||||
Senior Management Bonus Deferral Stock Plan (2) | 4,568 | NA | 21,373 | |||||||||
| Total | 593,406 | $ | 17.92 | 623,631 | ||||||||
| (1) | The Company's 2005 Stock Option Plan expired on January 1, 2010, and no additional options can be issued under the plan. |
| (2) | The number of shares credited to participants under the Director Retainer Stock and Senior Management Bonus Deferral Stock Plans is determined by dividing the amount of each deferral by the market price of stock at the date of that deferral. |
The Company has no equity compensation plans not approved by shareholders.
Compensation of Directors |
All of the Company’s Directors are Directors of United Bank & Trust. As of January 1, 2010, payment of the annual retainer for Directors was suspended. Effective January 1, 2011, the Company reinstated its annual retainer for Directors, and board fees were increased modestly.
The table below details the fees paid to Directors for 2011:
| Director Fees for 2011 | UBI | UBT | ||||||
| Annual retainer | ||||||||
| Non-officer directors | $ | 1,000 | $ | 4,000 | ||||
| Committee Chairs | 2,500 | 2,500 | ||||||
| Meeting attendance fee | ||||||||
| Board meeting | 500 | 500 | ||||||
| Board Committee | 250 | 250 | ||||||
We have established community boards for each of our Lenawee and Washtenaw markets. Certain of our Directors also serve as a member of one of those community boards. For this service as a member of a community board, Directors receive an annual retainer of $1,000 and meeting fees of $500 per community board meeting and $250 per community board committee meeting.
The Chairman of the Board of the Company receives an annual fee of $40,000 for his services, and receives no other compensation for services as a Director.
Directors that are not otherwise employees do not participate in our employee benefit programs, and receive no direct or indirect compensation.
Under the 1996 Director Retainer Stock Plan, a Director may elect to defer all or a portion of the payments received for serving as a Director, except for fees for serving on or as chairman of a committee. A Director who elects to defer payment will instead be awarded units equal to the cash payment that was earned divided by the market price of our common stock on such date. The common stock earned will be issued to the Director on the date on which such Director no longer is serving as a Director. An election to defer made no later than 30 days after a Director is eligible is generally given effect commencing as of the next calendar quarter after the election. An election to defer made after 30 days from the date that a Director was eligible is generally given effect commencing as of the next calendar year. The plan is administered by the Company’s Chief Executive Officer. Up to 400,000 shares may be issued pursuant to the plan.
No Director who is also an employee of either the Company or the Bank receives any compensation for his or her services as a Director. Accordingly, Mr. Chapman's compensation is not set forth below, but is disclosed above in the Summary Compensation Table.
Below is a summary of compensation paid to Directors of UBI for 2011:
| (1) | Amounts include fees earned as a Director of the Company, the Bank and where applicable, as a member of a community board. All Directors except for Mr. Crawford serve as a member of a community board. Amounts deferred are included in this column, and were as follows for 2011: Boyse, $18,500; Buhr, $19,500; Crawford, $6,500; Lawson, $23,499 and Middleton, $19,500. |
| (2) | The amount shown reflects the amount paid to Mr. Hickman under the Company’s SERP during the time he was a Director of the Company in 2011. |
| (3) | Aggregate number of shares of stock awards outstanding December 31, 2011, representing payments deferred under the Director Retainer Stock Plan, along with accumulated cash dividends earned on deferred amounts. |
| (4) | Director Crawford was elected as a Director of the Company in May, 2011. Director Hickman retired as Director effective with the 2011 Annual Meeting of Shareholders. |
Compensation Committee Report |
The Compensation & Governance Committee has reviewed and discussed the foregoing “Compensation Discussion and Analysis” section with Company management. Based on our review and discussion with management, the Compensation & Governance Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” section be included in this proxy statement and incorporated by reference into our annual report on Form 10-K for the year ended December 31, 2011.
The Compensation & Governance Committee has reviewed the Company’s compensation plans for its senior executive officers (“SEOs”), and has determined that the plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company. The Committee does not believe that the structure of the SEO incentive compensation plans, when considered within the overall compensation of the SEOs, is likely to encourage the SEOs to take risks, for the following reasons:
| • | Compensation Mix – Because SEO salary makes up the majority of the overall compensation, there is inherently less risk to the Company’s shareholders that the SEOs would undertake unnecessary and excessive risks than if short-term incentives comprised the majority of the SEO’s compensation. |
| Stock Incentive Plan – The committee has determined that this plan does not encourage unnecessary and excessive risk taking because: 1) the awards are determined subjectively based upon overall performance, including performance measures pertaining to asset quality, and 2) the exercise of the grants aligns the SEO with shareholders in the desire to build long-term value. | |
| • | Management Committee Incentive Compensation Plan – For the SEOs, the primary component of this plan is the Company’s return on assets. Increasing net income is the best method for SEOs to maximize this short-term incentive. While there is some chance that SEOs could take on unnecessary risk to maximize net income, this risk is mitigated by Company policies and procedures and Board oversight. Significant windfalls provided by new or changed accounting standards or large one-time events that were not included in the plan can be excluded at the discretion of the Compensation & Governance Committee, so SEOs do not have an incentive to undertake these potentially risky events. |
The Compensation & Governance Committee certifies that
| 1. | It has reviewed with senior risk officers the senior executive officer compensation plans and has made all reasonable efforts to ensure that these plans do not encourage the senior executive officers to take unnecessary and excessive risks that threaten the value of the Company; |
| 2. | It has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Company; and |
| 3. | It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Company to enhance the compensation of any employee. |
| Submitted by the Compensation & Governance Committee | |
| James D. Buhr, Chairman | |
| Stephanie H. Boyse | |
| John H. Foss | |
| James C. Lawson |
Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that incorporate future filings, including this proxy statement in whole or in part, the foregoing Compensation & Governance Committee Report shall not be incorporated by reference into any such filings.
Compensation Committee Interlocks and Insider Participation
No officer, or employee or former officer or employee of the Company or any of its subsidiaries served as a member of the Compensation & Governance Committee during 2011. During 2011, other than for relationships involving subsidiaries of the Company:
| 1. | No executive officer of the Company served on the compensation committee of another entity, one of whose executive officers served on the Compensation & Governance Committee of the Company; |
| 2. | No executive officer of the Company served as a director of another entity, one of whose executive officers served on the Compensation & Governance Committee of the Company; |
| 3. | No executive officer of the Company served as a member of the compensation committee of another entity, one of whose executive officers served as a Director of the Company. |
Members of the Compensation & Governance Committee were clients of and had transactions (loans and commitments to lend) with the Bank in the ordinary course of business during 2011. All such loans and commitments were made by the Bank on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features. See “Directors, Executive Officers, Principal Shareholders and Their Related Interests – Transactions with the Bank.”
Security Ownership of Certain Beneficial Owners
To the extent known by the Company, as of March 12, 2012, no shareholders except those listed in the following table owned beneficially more than five percent (5%) of the voting securities of the Company. The following table discloses the name and address of such beneficial owner, the total number of shares beneficially owned, and the percentage of ownership in relation to the total Common Stock of the Company outstanding and entitled to vote as of March 12, 2012. The Company is not responsible for the accuracy of this information.
| Name of Beneficial Owner | Sole Voting Power | Sole Dispositive Power | Shared Voting and Dispositive Power | Total Beneficial Ownership | Percent of Class | |||||||||||||||
Wellington Management Company LLP (1) 280 Congress Street Boston, MA 02210 | - | - | 1,256,491 | 1,256,491 | 9.90 | % | ||||||||||||||
Jacobs Asset Management, LLC (2) 11 East 26 Street, Suite 1900 New York, NY 10010 | - | - | 899,000 | 899,000 | 7.08 | % | ||||||||||||||
Manulife Asset Management (US) LLC (3) 101 Huntington Avenue Boston, MA 02199 | 892,859 | - | - | 892,859 | 7.03 | % | ||||||||||||||
Raffles Associates, LLP (4) 2 Penn Plaza, Suite 1920A New York, NY 10121 | - | - | 775,700 | 775,700 | 6.11 | % | ||||||||||||||
| (1) | Wellington Management, in its capacity as investment adviser, may be deemed to beneficially own 1,256,491 shares of common stock, which are held of record by clients of Wellington Management. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of such class of securities. |
| (2) | Based on a Schedule 13G filed February 14, 2012 by Jacobs Asset Management, LLC |
(3) | Manulife Asset Management (US) LLC (“MAM (US)”) has beneficial ownership of 892,859 shares of common stock. Through its parent-subsidiary relationship to MAM (US), Manulife Financial Corporation may be deemed to have beneficial ownership of these same shares. |
(4) | Based on a Schedule 13G filed February 14, 2012 by Raffles Associates, L.P. |
Security Ownership of Management
The table below discloses the number and percentage of shares of Company Common Stock beneficially owned by each of our Directors and Director Nominees, each named executive officer in the Summary Compensation table above, and all Directors, Director nominees and named executive officers of the Company as a group. The information is based on the total number of shares of Company Common Stock outstanding and entitled to vote as of March 12, 2012 plus shares of Common Stock that could be acquired within 60 days after March 12, 2012 pursuant to the exercise or vesting of stock options and stock awards. The information is based on information furnished to the Company by the listed persons and the Company is not responsible for its accuracy.
The numbers of shares shown below includes shares owned directly or indirectly, through any contract, arrangement, understanding, relationship, or which the listed persons otherwise have
voting power, shared voting power, sole investment power or shared investment power. Amounts deferred under the Director Retainer Stock Plan or the Senior Management Bonus Deferral Stock Plan do not result in shares issued until the date upon which a person ceases being a member of the plan and are not included in the table below.
| Amount and Nature of Beneficial Ownership | |||||||||||||||||||||
| Name of Beneficial Owner | Shared | Sole (1) | Vested Options and Stock Awards (2) | Total Beneficial Ownership | Percent of Class (3) | ||||||||||||||||
| Directors and Director Nominees of the Company | |||||||||||||||||||||
| Stephanie H. Boyse | - | 7,270 | 3,032 | 10,302 | * | ||||||||||||||||
| James D. Buhr | 15,000 | 48,472 | 4,636 | 68,108 | * | ||||||||||||||||
| Robert K. Chapman | 3,070 | 60,784 | 57,644 | 121,498 | * | ||||||||||||||||
| Kenneth W. Crawford | - | - | - | - | * | ||||||||||||||||
| John H. Foss | - | 25,306 | 2,205 | 27,511 | * | ||||||||||||||||
| Norman G. Herbert | 4,000 | - | 2,000 | 6,000 | * | ||||||||||||||||
| James C. Lawson | 47,742 | 99,362 | 2,205 | 149,309 | 1.16 | % | |||||||||||||||
| Len M. Middleton | - | 4,000 | 666 | 4,666 | * | ||||||||||||||||
| Executive Officers who are not Directors of the Company | |||||||||||||||||||||
| Todd C. Clark | 5,026 | 16,354 | 29,977 | 51,357 | * | ||||||||||||||||
| Randal J. Rabe | 1,464 | 33,065 | 30,472 | 65,001 | * | ||||||||||||||||
| All Directors And Executive Officers As A Group (10 Persons) | 503,752 | 3.93 | % | ||||||||||||||||||
| (1) | Includes restricted shares subject to time-based vesting as follows: Chapman, 2,000; Clark, 1,000; Rabe, 1,000. | ||||||||||||||||||||
| (2) | Excludes unvested RSUs as follows: Chapman, 3,612; Clark, 1,806; Rabe, 1,806. | ||||||||||||||||||||
(3) | The symbol “*”shown in this column indicates ownership of less than 1% of the current outstanding Common Stock of the Company, which is the Company’s only class of voting securities. | ||||||||||||||||||||
Directors, Executive Officers, Principal Shareholders And
Their Related Interests – Transactions With The Bank
Directors and executive officers of the Company, and their related interests, were clients of and had transactions (including loans and commitments to lend) with the Bank in the ordinary course of business during 2011. All such loans and commitments were made by the Bank in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loan relationships presently in effect are in default as of the date of this Proxy Statement.
Under the charter of the Audit Committee, the Audit Committee is to review and approve all related party transactions for potential conflicts of interest to the extent such transactions are ongoing business relationships with United Bancorp, Inc. and its subsidiaries. Related party transactions are those involving United Bancorp, Inc. and its subsidiaries, which are required to be disclosed pursuant to SEC Regulation S-K, Item 404.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the Company’s Directors and officers, and persons who own more than 10% of the Company’s Common Stock, are required to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, Directors and greater than 10% shareholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, all officers, Directors and greater than 10% beneficial owners timely filed required reports under Section 16(a) during 2011.
Relationship With Independent Public Accountants
The Company has appointed BKD, LLP as its independent public accountants to audit the Company’s consolidated financial statements for the year ending December 31, 2012. BKD, LLP has been appointed as the Company’s independent public accountants to audit the Company's consolidated financial statements since the year ended December 31, 2002. The following table details the fees billed by BKD, LLP for work performed for the fiscal years ended December 31, 2011 and 2010, by category of fee:
| 2011 | 2010 | |||||||
| Audit Fees | $ | 138,000 | $ | 224,700 | ||||
| Audit Related Fees | - - | - - | ||||||
| Tax Fees | 29,800 | 19,770 | ||||||
| All Other Fees | - - | - - | ||||||
| Total | $ | 167,800 | $ | 244,470 | ||||
Audit fees consist of fees for the audit of the Company’s financial statements, or for services that are usually provided by an auditor in connection with statutory and regulatory filings and engagements. Audit related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of financial statements. Tax fees consist of fees billed for tax preparation, tax compliance, tax advice and tax planning.
The Company’s Audit Committee has concluded that the provision of services covered under the captions “Audit Related Fees” and “Tax Fees” with respect to BKD, LLP is compatible with BKD, LLP maintaining its independence. In compliance with its Audit Committee charter, which requires all audit and permitted non-audit services to be pre-approved by the Audit Committee, all audit and non-audit services as disclosed above were pre-approved by the Audit Committee. None of the hours expended on BKD, LLP’s appointment to audit the consolidated financial statements for the year ended December 31, 2011 were attributed to work performed by persons other than BKD, LLP’s full-time, permanent employees.
Shareholder Proposals
To be considered timely, any proposal by a shareholder of the Company for the 2013 Annual Meeting of Shareholders, whether or not intended to be included in the proxy statement and form of proxy for that meeting, must be received by Randal J. Rabe, Executive Vice President and
Chief Financial Officer, at the principal executive offices of the Company by November 26, 2012. All shareholder proposals must fully comply with the notice and procedural requirements in the Company's Bylaws.
Other Matters
As permitted by Securities and Exchange Commission rules, only one copy of this 2012 Proxy Statement and the 2011 Annual Report to Shareholders is being delivered to multiple shareholders sharing the same address who have notified us of their election to receive only one copy of such documents. We will deliver on a one-time basis, promptly upon written or oral request from a shareholder at a shared address, a separate copy of our 2012 Proxy Statement and the 2011 Annual Report to Shareholders. Shareholders sharing an address who are currently receiving multiple copies of the proxy statement and annual report to shareholders may instruct us to deliver a single copy of such documents on an ongoing basis. Such instructions must be in writing, must be signed by each shareholder who is currently receiving a separate copy of the documents, and will continue in effect unless and until we receive contrary instructions as provided below. Any shareholder sharing an address may request to receive and instruct us to send separate copies of the proxy statement and annual report to shareholders on an ongoing basis by written or oral request. We will begin sending separate copies of such documents within thirty days of receipt of such instructions. All requests or instructions should be addressed to United Bancorp, Inc., Attn: Diane Skeels, P.O. Box 248, Tecumseh, MI, 49286, phone 517/423-1760.
| March 26, 2012 | By Order of the Board of Directors |
| /s/ Randal J. Rabe | |
| Randal J. Rabe |
2011 Annual Report
A Message to Our Shareholders
This 2011 Annual Report contains audited financial statements and a detailed financial review. This is the Company's 2011 annual report to shareholders as required by Rule 14a-3 of the Securities and Exchange Commission (the "SEC"). Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material, and is not deemed to be filed with the SEC, except to the extent that it is expressly incorporated by reference in a document filed with the SEC.
Shareholders who would like to receive even more detailed information than that contained in this 2011 Annual Report are invited to request our Annual Report on Form 10-K or obtain a copy of it from the SEC's website at www.sec.gov. The Annual Report on Form 10-K, including the financial statements and the financial statement schedules, will be provided to any shareholder, without charge, upon written request to: Randal J. Rabe, Executive Vice President and Chief Financial Officer, United Bancorp, Inc., P.O. Box 248, Tecumseh, Michigan 49286.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and United Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as “outlook” or “strategy”; that an event or trend “may”, "could", “should”, “will”, “is likely”, or is “probable” or "projected" to occur or “continue” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, or “expects” a particular result, or is “confident,” “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, or “tend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to deployment of liquidity and loan demand, future economic conditions, future investment opportunities, future levels of expenses associated with other real estate owned, real estate valuation, future recognition of income, future levels of non-performing loans, the rate of asset dispositions, future capital levels, future dividends, market growth potential, future growth and funding sources, future liquidity levels, future profitability levels, future compliance with our memorandum of understanding, the effects on earnings of changes in interest rates and the future level of other revenue sources. All of the information concerning interest rate sensitivity is forward-looking. All statements referencing future time periods are forward-looking.
Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including mortgage servicing rights and deferred tax assets) and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated or that other real estate owned can be sold for its carrying value or at all. Our ability to fully comply with all of the provisions of our memorandum of understanding, successfully implement new programs and initiatives, increase efficiencies, utilize our deferred tax asset, address regulatory issues, respond to declines in
collateral values and credit quality, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on United Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. United Bancorp, Inc. undertakes no obligation to update, clarify or revise forward-looking statements to reflect developments that occur or information obtained after the date of this report.
Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
Selected Financial Data
The following table shows summarized historical consolidated financial data for the Company. The table is unaudited, and the information in the table is derived from the Company's audited financial statements for 2007 through 2011. This information is only a summary. You should read it in conjunction with the consolidated financial statements, related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and other information included in this report. Information is in thousands, except per share data.
| FINANCIAL CONDITION | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and demand balances in other banks | $ | 15,798 | $ | 10,623 | $ | 10,047 | $ | 12,147 | $ | 17,996 | ||||||||||
| Federal funds sold and interest bearing balances with banks | 91,794 | 95,599 | 115,542 | 6,325 | 11,130 | |||||||||||||||
| Securities available for sale | 173,197 | 124,544 | 92,146 | 82,101 | 83,128 | |||||||||||||||
| Net loans | 551,359 | 577,111 | 638,012 | 683,695 | 637,994 | |||||||||||||||
| Other assets | 52,861 | 53,833 | 53,581 | 48,125 | 45,439 | |||||||||||||||
| Total Assets | $ | 885,009 | $ | 861,710 | $ | 909,328 | $ | 832,393 | $ | 795,687 | ||||||||||
| Liabilities and shareholders' equity: | ||||||||||||||||||||
| Noninterest bearing deposits | $ | 139,346 | $ | 113,206 | $ | 99,893 | $ | 89,487 | $ | 77,878 | ||||||||||
| Other interest bearing deposits | 625,510 | 620,792 | 682,908 | 620,062 | 593,659 | |||||||||||||||
| Total deposits | 764,856 | 733,998 | 782,801 | 709,549 | 671,537 | |||||||||||||||
| Short term borrowings | - | 1,234 | - | - | - | |||||||||||||||
| Other borrowings | 24,035 | 30,321 | 42,098 | 50,036 | 44,611 | |||||||||||||||
| Other liabilities | 2,344 | 3,453 | 3,562 | 3,357 | 6,572 | |||||||||||||||
| Total liabilities | 791,235 | 769,006 | 828,461 | 762,942 | 722,720 | |||||||||||||||
| Total shareholders' equity | 93,774 | 92,704 | 80,867 | 69,451 | 72,967 | |||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 885,009 | $ | 861,710 | $ | 909,328 | $ | 832,393 | $ | 795,687 | ||||||||||
| RESULTS OF OPERATIONS | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| Interest income | $ | 36,165 | $ | 39,770 | $ | 43,766 | $ | 47,041 | $ | 51,634 | |||||||||||
| Interest expense | 6,114 | 8,687 | 12,251 | 17,297 | 21,873 | ||||||||||||||||
| Net interest income | 30,051 | 31,083 | 31,515 | 29,744 | 29,761 | ||||||||||||||||
| Noninterest income | 17,211 | 16,298 | 16,899 | 13,510 | 13,652 | ||||||||||||||||
Noninterest expense (1) | 34,618 | 32,497 | 33,647 | 29,963 | 27,559 | ||||||||||||||||
Pre-tax, pre-provision income (2) | 12,644 | 14,884 | 14,767 | 13,291 | 15,854 | ||||||||||||||||
| Provision for loan losses | 12,150 | 21,530 | 25,770 | 14,607 | 8,637 | ||||||||||||||||
| Goodwill impairment | - | - | 3,469 | - | - | ||||||||||||||||
| Federal income tax (benefit) | (423 | ) | (2,938 | ) | (5,639 | ) | (1,280 | ) | 1,635 | ||||||||||||
| Net income (loss) | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | ||||||||
Basic and diluted earnings (loss) per share (3) (4) | $ | (0.02 | ) | $ | (0.89 | ) | $ | (1.93 | ) | $ | (0.01 | ) | $ | 1.06 | |||||||
Cash dividends paid per common share (4) | - | - | 0.02 | 0.70 | 0.79 | ||||||||||||||||
(1) | Excludes 2009 goodwill impairment. | ||||||||||||||||||||
(2) | In an attempt to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company's management focuses on pre-tax, pre-provision income as useful and consistent measures of the Company's earnings capacity. This calculation adusts net income by the amount of the Company's federal income tax (benefit) and provision for loan losses. While this information is not consistent with, or intended to replace, presentation under generally accepted accounting principles, it is presented here for comparison. | ||||||||||||||||||||
(3) | Earnings per share data is based on average shares outstanding plus average contingently issuable shares. | ||||||||||||||||||||
(4) | Adjusted to reflect stock dividends paid in 2007. | ||||||||||||||||||||
UNITED BANCORP, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
and
Consolidated Financial Statements
| Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
| Consolidated Financial Statements | ||
United Bancorp, Inc. (the "Company" or “United”) is a Michigan bank holding company headquartered in Ann Arbor, Michigan. The Company, through its subsidiary bank, United Bank & Trust ("UBT" or the “Bank”), offers a full range of financial services through a system of sixteen banking offices located in Lenawee, Monroe and Washtenaw Counties and one loan production office in Livingston County. The Bank is 100% owner of United Mortgage Company. United Structured Finance Company (“USFC”) is a DBA of the Bank’s structured finance group. While the Company's chief decision makers monitor the revenue streams of the Company’s various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's financial services operations are considered by management to be aggregated in one reportable operating segment – commercial banking.
This discussion provides information about the consolidated financial condition and results of operations of the Company and the Bank.
We are a Michigan corporation headquartered in Ann Arbor, Michigan and serve as the holding company for UBT, a Michigan-chartered bank organized over 115 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At December 31, 2011, we had total assets of approximately $885.0 million, deposits of approximately $764.9 million, and total shareholders' equity of approximately $93.8 million. Our common stock is quoted on the OTC Bulletin Board under the symbol "UBMI."
We have four primary lines of business under one operating segment of commercial banking: banking services, residential mortgage, wealth management and structured finance. Subject to our overall business strategy, each line of business is encouraged to be entrepreneurial in how it develops and implements its business. We believe that these four lines of business provide us with a diverse and strong core revenue stream that is unmatched by our community bank competitors and positions us well for future revenue growth and profitability. During the twelve month period ended December 31, 2011, our non-interest income equaled 36.4% of our operating revenues and for each of the last five years ended December 31, 2011 approximated 33.7% of our operating revenues. This diverse revenue stream has enabled us to recognize a pre-tax, pre-provision return on average assets of 1.44% for the twelve month period ended December 31, 2011. Our average pre-tax, pre-provision return on average assets over the last five years ended December 31, 2011 was approximately 1.70%. The presentation of pre-tax, pre-provision return on average assets is not consistent with, or intended to replace, presentation under generally accepted accounting principles. For additional information about our pre-tax, pre-provision income and pre-tax, pre-provision return on average assets, please see "Earnings Summary and Key Ratios” under “Results of Operations” on Pages A-16 and A-18.
Our Bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking accounts, NOW accounts, savings accounts, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing. The Bank offers a full complement of online services, including internet banking and bill payment. In 2011, the Bank opened its first loan production office in neighboring Livingston County, Michigan.
Our mortgage company, United Mortgage Company, offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans. Due to our local decision making and fully-functional back office, we have consistently been the most active originator of mortgage loans in our market area. United Mortgage Company was the leading residential mortgage lender in Lenawee and Washtenaw Counties for 2010. Information for 2011 is not yet available.
Our Wealth Management Group is a key focus of our growth and diversification strategy and offers a variety of investment services to individuals, corporations and governmental entities. Our Wealth Management Group generated 29.5% of our noninterest income for the twelve months ended December 31, 2011.
Our structured finance group, United Structured Finance Company, offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources. For the twelve months ended September 30, 2011 and 2010, United Structured Finance Company was the leading SBA lender in each of Lenawee, Washtenaw and Livingston Counties. For the twelve months ended September 30, 2011, USFC was the third largest SBA 7A lender in Michigan, based on loan volume.
Our primary market area is Washtenaw, Livingston, Lenawee, and Monroe Counties in Michigan, and generally encompasses the Ann Arbor metropolitan area, which we believe is our primary area for future organic growth.
Michigan had the eleventh highest seasonally-adjusted unemployment rate in the United States at November 20111, improving from the fourth highest as of December 2010.2 The Michigan seasonally-adjusted unemployment rate of 9.3%3 for December 2011 was the lowest monthly rate since September 2008.4 University of Michigan economists estimate that Michigan will see employment growth for 2011 of 63,000 total net jobs when final numbers are available, just two years after losing 245,000 jobs during 2009. Michigan lost just 12,900 jobs in all of 2010, representing a significant decrease from the monthly average loss of 16,500 in 2008 and 17,000 in 2009, to an average monthly decline of 1,100 jobs in 2010. 5
Washtenaw County had the lowest unadjusted unemployment rate in the state at 5.2% for November 2011.6 Washtenaw County had a population of approximately 345,000 for 20107 and had a median household income of approximately $54,900 for 2009, which was the fourth highest in the state.8
The economic base of Washtenaw County has a substantial reliance on health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total employment, in large part due to the University of Michigan and the University of Michigan Medical Center.
1U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, Unemployment Rates for November 2011.
2 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, Unemployment Rates for December 2010.
3 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, Statewide, Adjusted (Monthly Historical).
4 Id..
5 University of Michigan News Service, Michigan's Economy Will Continue to Add Jobs, November 18, 2011.
6 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, by County (November, 2011).
7 Michigan State Senate, Senate Fiscal Agency, Michigan Population by County.
8 Michigan Labor Market Information, Data Explorer – Income (2009 Annual).
Livingston County had an unadjusted unemployment rate of 7.6% for November 2011.9 The county had a population of approximately 181,000 for 201010 and had a median household income of approximately $68,500 for 2009, which was the highest in the state.11 Approximately 35 percent of the land in Livingston County is used for farming, and a large portion of the population works outside the county. Manufacturing in the county is dominated by auto-related sectors. 12 Of the 171 counties in Michigan and Ohio, Livingston County is projected to have the highest market growth potential over the next five years.13
The economic base of Lenawee and Monroe Counties is primarily agricultural and light manufacturing, with their manufacturing sectors exhibiting moderate dependence on the automotive industry. Lenawee County had a population of approximately 100,000 for 201014 and a median household income of approximately $46,700 for 2009.15 Monroe County had a population of approximately 152,000 for 201016 and a median household income of approximately $53,200 for 2009.17 Lenawee County had an unadjusted unemployment rate of 8.5% for November 201118 and Monroe County had an unadjusted unemployment rate of 7.5% for that same month.19
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act") was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection ("CFPB"), and will require the CFPB and other federal agencies to implement many new and significant rules and regulations. The act is categorized into 16 titles and requires regulators to create rules, conduct studies, and issue periodic reports. The rulemaking phase began shortly after enactment. Implementation is occurring in stages, and widespread and complex changes are expected.The Dodd-Frank Act contains more than 300 provisions that expressly indicate that rulemaking is either required or permitted.20 At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Company's business. Compliance with these new laws and regulations will likely result in additional costs, which could be significant and could adversely impact the Company's results of operations, financial condition or liquidity.
9 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, by County (November 2011).
13 BankIntelligence.com.
15 Michigan Labor Market Information, Data Explorer – Income (2009 Annual).
17 Michigan Labor Market Information, Data Explorer – Income (2009 Annual).
19 Id.
20 Navigating Dodd-Frank: An Implementation Update and Resource Guide; SRC Insights: First Quarter 2011; Federal Reserve Bank of Philadelphia
Deposit Insurance
In 2011, the FDIC changed the assessment base for FDIC insurance assessments from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act.21 The new measurement defines tangible equity as Tier 1 capital. Since the new base is larger than the current base, the FDIC lowered assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. Initial assessment rates were determined by combining supervisory ratings with financial ratios. Under the new rule, the Bank pays 20% to 35% less in FDIC assessments than under the prior methodology, at similar risk ratings and balance sheet size. Those reductions were realized in 2011 beginning with the assessment for the second quarter of 2011 and payable at the end of September 2011.
As a result of provisions of the Dodd-Frank Act, all funds in a "noninterest-bearing transaction account" are insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. The increase in maximum deposit insurance coverage to $250,000 was made permanent under the Dodd-Frank Act.
On January 15, 2010, UBT entered into a Memorandum of Understanding with the Federal Deposit Insurance Corporation (“FDIC”) and the Michigan Office of Financial and Insurance Regulation (“OFIR”). On January 11, 2011, we entered into a revised Memorandum of Understanding (“MOU”) with substantially the same requirements as the MOU dated January 15, 2010. The MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU.
Board Leadership
James C. Lawson was elected as Chairman of the Board following the 2011 Annual Meeting of Shareholders. Mr. Lawson has a diverse background in the formation and operation of a successful business, and has served as a Director of the Company since 1986. Lawson succeeded David S. Hickman, who reached mandatory Board retirement age in 2011. Director James D. Buhr was elected as Vice Chairman of the Board following the 2011 Annual Meeting of Shareholders.
Capital Management
In December, 2010, the Company closed its public offering of 7,583,800 shares of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company has contributed $12.0 million of the net proceeds of the offering to the capital of the Bank to increase the Bank's capital and regulatory capital ratios. As a result of the additional capital, the Bank was in compliance with the capital requirements of its MOU with the FDIC and OFIR at December 31, 2011 and 2010. At December 31, 2011 the Bank’s Tier 1 capital ratio was 9.20%, and its ratio of total capital to risk-weighted assets was 15.49%.
The Company achieved consolidated net income of $917,000 for the twelve months ended December 31, 2011, improving from a full year loss of $3.7 million in 2010. While the Company’s provision for loan losses has declined significantly from 2010 levels, net interest margin has also declined as a result of continued low interest rates and continued elevated levels of liquidity. In addition, while credit quality continues to improve, expenses relating to collection and disposition of troubled assets have increased.
The Company’s return on average assets for the twelve month period ended December 31, 2011 was 0.10%, compared to -0.42% for the same period of 2010. Return on average shareholders’ equity of 0.98% for the twelve months ended December 31, 2011 was up from -4.66% for the same period of 2010.
Net interest income for 2011 was 3.3% lower than achieved in 2010, in spite of an increase in average earning assets. At the same time, the Company’s net interest margin has declined in part as a result of a 40.1% increase in average balances of investments in 2011 compared to 2010, continued declines in loan balances, increased deposit balances and elevated levels of short-term liquid assets, and in spite of a relatively large increase in non-interest bearing deposits.
Noninterest income improved by $913,000, or 5.6%, in 2011 as compared to 2010. Most categories of noninterest income contributed to this improvement, while deposit service charges continued the decline noted over the past two years, with a decrease of 10.0% in 2011 compared to 2010. That followed a decline of 19.8% for 2010 compared to 2009.
Total noninterest expenses increased by 6.5% for all of 2011 compared to 2010. Substantial decreases in FDIC insurance premiums and modest decreases in occupancy and equipment expense were more than offset by increases in most other noninterest expense categories.
The Company’s provision for loan losses for the twelve months ended December 31, 2011 of $12.2 million was down 43.6% from $21.5 million for the same period of 2010. This significantly reduced level of provision for loan losses is a result of a decline in nonperforming loans, a reduction in nonperforming asset formation, and a slowdown in loan rating downgrades during 2011.
Total consolidated assets of the Company were $885.0 million at December 31, 2011, up 2.7% from $861.7 million at December 31, 2010. Gross portfolio loans have continued to decline in 2011 as a result of stagnant loan demand, charge-offs and the Company’s effective use of loan sales and servicing to mitigate credit and interest rate risk. The Company generally sells its fixed rate long-term residential mortgages on the secondary market, and retains adjustable rate mortgages in its loan portfolio. While the Company’s portfolio loans have declined by $28.3 million, or 4.8%, since December 31, 2010, the balance of loans serviced for others has increased by $80.1 million, or 12.2%, over the same period.
The Company continued to hold elevated levels of investments, federal funds sold and cash equivalents in order to protect the balance sheet during this prolonged period of economic uncertainty. United’s balances in federal funds sold and other short-term investments were $91.8 million at December 31, 2011, compared to $95.6 million at December 31, 2010. Balances of securities held for sale increased by $48.7 million, or 39.1% during the same period.
United experienced significant growth in balances of non-interest bearing deposits during 2011, while interest-bearing deposits were up modestly during the same period. Total deposits increased by $30.9 million, or 4.2%, from December 31, 2010 to December 31, 2011. The majority of the Bank’s deposits are derived from core client sources, relating to long-term relationships with local individual, business and public clients. Public clients include local government and municipal bodies, hospitals, universities and other educational institutions. As a result of its strong core funding, the Company’s cost of deposits was 0.83% for all of 2011, down from 1.13% for 2010.
The Company’s ongoing proactive efforts to resolve nonperforming loans have contributed to the Company’s improving credit quality trends in 2011. Within the Company’s loan portfolio, $25.8 million of loans were considered nonperforming at December 31, 2011, compared to $29.2 million as of December 31, 2010. Total nonperforming loans as a percent of total portfolio loans improved from 4.94% at the end of 2010 to 4.57% at December 31, 2011. For purposes of this presentation, nonperforming loans consist of nonaccrual loans and accruing loans that are past due 90 days or more and exclude accruing restructured loans. Balances of accruing restructured loans at December 31, 2011 and 2010 were $21.8 million and $17.3 million, respectively.
The Company’s ratio of allowance for loan losses to total loans at December 31, 2011 was 3.66%, and covered 80.0% of nonperforming loans, compared to 4.25%, and 86.0%, respectively, at December 31, 2010. The Company’s allowance for loan losses decreased by $4.5 million, or 18.0%, from December 31, 2010 to December 31, 2011. Net charge-offs of $16.7 million for 2011 were 1.8% above the $16.4 million charged off in 2010.
Securities
Balances in the securities portfolio increased in recent periods, generally reflecting deposit growth in excess of loan growth. The makeup of the Company’s investment portfolio evolves with the changing price and risk structure, and liquidity needs of the Company. The table below
reflects the carrying value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of the end of 2011 and 2010.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| In thousands of dollars | Balance | % of total | Balance | % of total | ||||||||||||
| U.S. Treasury and agency securities | $ | 49,366 | 28.5 | % | $ | 33,687 | 27.0 | % | ||||||||
| Mortgage-backed agency securities | 102,697 | 59.3 | % | 66,098 | 53.1 | % | ||||||||||
| Obligations of states and political subdivisions | 20,977 | 12.1 | % | 24,605 | 19.8 | % | ||||||||||
| Corporate, asset backed and other securities | 126 | 0.1 | % | 126 | 0.1 | % | ||||||||||
| Equity securities | 31 | 0.0 | % | 28 | 0.0 | % | ||||||||||
| Total Investment Securities | $ | 173,197 | 100.0 | % | $ | 124,544 | 100.0 | % | ||||||||
Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The municipal portfolio contains a small level of geographic risk, as approximately 2.0% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan and 2.7% in Washtenaw County, Michigan. The Company's portfolio contains no mortgage-backed securities or structured notes that the Company believes to be “high risk.” The Bank’s investment in local municipal issues also reflects our commitment to the development of the local area through support of its local political subdivisions. The Company has no investments in securities of issuers outside of the United States.
Management believes that the unrealized gains and losses within the investment portfolio are temporary, since they are a result of market changes, rather than a reflection of credit quality. Management has no specific intent to sell any securities, although the entire investment portfolio is classified as available for sale. The following chart summarizes net unrealized gains (losses) in each category of the portfolio at the end of 2011 and 2010.
| In thousands of dollars | 12/31/11 | 12/31/10 | Change | |||||||||
| U.S. Treasury and agency securities | $ | 367 | $ | (210 | ) | $ | 577 | |||||
| Mortgage-backed agency securities | 842 | 384 | 458 | |||||||||
| Obligations of states and political subdivisions | 1,287 | 764 | 523 | |||||||||
| Equity securities | 5 | 2 | 3 | |||||||||
| Total Net Unrealized Gains | $ | 2,501 | $ | 940 | $ | 1,561 | ||||||
FHLB Stock
The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and holds a $2.6 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. If total Federal Home Loan Bank gross unrealized losses were deemed “other than temporary” for accounting purposes, this would significantly impair the Federal Home Loan Bank capital levels and the resulting value of FHLBI stock. The FHLBI reported a profit of $74.3 million for the first nine months of 201122, and continues to pay dividends on its stock. The Company regularly reviews the credit quality of FHLBI stock for
impairment, and determined that no impairment of FHLBI stock was necessary as of December 31, 2011.
Loans
As a full service lender, the Bank offers a variety of loan products in its markets. Portfolio loan balances declined by 4.8% in 2011, with the declines across all major categories of the portfolio. Personal loans on the Company's balance sheet included home equity lines of credit, direct and indirect loans for automobiles, boats and recreational vehicles, and other items for personal use. Personal loan balances declined by 3.7% for the year. Business loan balances were down 5.4% during 2011, following a decline of 9.7% in 2010. The decline in loans to commercial enterprises reflects a continued stagnation in demand, primarily relating to the current economic conditions, as well as write-downs, charge-offs and payoffs.
The Bank generally sells its production of fixed-rate mortgages on the secondary market, and retains high credit quality mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate mortgages in its portfolio. As a result, the mix of mortgage production for any given year will have an impact on the amount of mortgages held in the portfolio of the Bank. Refinancing activity has resulted in a decline in residential mortgage balances on the Bank's portfolio of 3.4% in 2011 and 0.5% in 2010.
The Bank’s loan portfolio includes $7.4 million of purchased participations in business loans originated by other institutions. These participations represent 1.4% of total portfolio loans. Of those participation loans, 75.5% of the outstanding balances are the result of participations purchased from other Michigan banks.
Outstanding balances of loans for construction and development declined by approximately $1.8 million, or 4.4%, during 2011. The change in balances reflects an increase in the amount of individual construction loan volume, combined with the shift of some construction loans to permanent financing and the payoff or charge-off of a number of construction and development loans. Residential construction loans generally convert to residential mortgages to be retained in the Bank's portfolios or to be sold in the secondary market, while commercial construction loans generally will be converted to commercial mortgages.
The following table shows the balances of each of the various categories of loans of the Company, along with the percentage of the total portfolio, as of the end of 2011 and 2010.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| In thousands of dollars | Balance | % of total | Balance | % of total | ||||||||||||
| Personal | $ | 103,405 | 18.3 | % | $ | 107,399 | 18.1 | % | ||||||||
| Business, including commercial mortgages | 335,133 | 59.5 | % | 354,340 | 59.9 | % | ||||||||||
| Tax exempt | 2,045 | 0.4 | % | 2,169 | 0.4 | % | ||||||||||
| Residential mortgage | 83,072 | 14.7 | % | 86,006 | 14.5 | % | ||||||||||
| Construction and development | 39,721 | 7.0 | % | 41,554 | 7.0 | % | ||||||||||
| Deferred loan fees and costs | 326 | 0.1 | % | 517 | 0.1 | % | ||||||||||
| Total portfolio loans | $ | 563,702 | 100.0 | % | $ | 591,985 | 100.0 | % | ||||||||
Credit Quality
Nonperforming Assets. The Company actively monitors delinquencies, nonperforming assets and potential problem loans. The accrual of interest income is discontinued when a loan becomes 90 days past due unless the loan is both well secured and in the process of collection, or the borrower's capacity to repay the loan and the collateral value appears sufficient. The chart below shows the amount of nonperforming assets by category at December 31, 2011 and 2010.
| December 31, | Change | |||||||||||||||
| Nonperforming Assets, in thousands of dollars | 2011 | 2010 | $ | % | ||||||||||||
| Nonaccrual loans | $ | 25,754 | $ | 28,661 | $ | (2,907 | ) | -10.1 | % | |||||||
| Accruing loans past due ninety days or more | 31 | 583 | (552 | ) | -94.7 | % | ||||||||||
| Total nonperforming loans | 25,785 | 29,244 | (3,459 | ) | -11.8 | % | ||||||||||
| Other assets owned | 3,669 | 4,304 | (635 | ) | -14.7 | % | ||||||||||
| Total nonperforming assets | $ | 29,454 | $ | 33,548 | $ | (4,094 | ) | -12.2 | % | |||||||
| Percent of nonperforming loans to total loans | 4.57 | % | 4.94 | % | -0.37 | % | ||||||||||
| Percent of nonperforming assets to total assets | 3.33 | % | 3.89 | % | -0.57 | % | ||||||||||
| Allowance coverage of nonperforming loans | 80.0 | % | 86.0 | % | -6.03 | % | ||||||||||
| Loans delinquent 30-89 days | $ | 6,468 | $ | 7,838 | $ | (1,370 | ) | -17.5 | % | |||||||
| Accruing restructured loans | ||||||||||||||||
| Business, including commercial mortgages | $ | 10,404 | $ | 10,382 | $ | 22 | 0.2 | % | ||||||||
| Construction and development | 8,186 | 4,045 | 4,141 | 102.4 | % | |||||||||||
| Residential mortgage | 3,078 | 2,844 | 234 | 8.2 | % | |||||||||||
| Home Equity | 171 | - | 171 | 0.0 | % | |||||||||||
| Total accruing restructured loans | $ | 21,839 | $ | 17,271 | $ | 4,568 | 26.4 | % | ||||||||
Total nonaccrual loans have decreased by $2.9 million, or 10.1% since the end of 2010, while accruing loans past due ninetydays or more have decreased by $552,000, or 94.7% for the same period. The change in nonaccrual loans principally reflects the payoff or charge-off of some nonperforming loans, net of the migration of some loans to nonaccrual status. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
Total nonperforming loans have decreased by $3.5 million, or 11.8%, since December 31, 2010. Total nonperforming loans as a percent of total portfolio loans were 4.57% at December 31, 2011, down from 4.94% at December 31, 2010, while the allowance coverage of nonperforming loans decreased from 86.0% at December 31, 2010 to 80.0% at December 31, 2011. Loan
workout and collection efforts continue with all delinquent clients, in an effort to bring them back to performing status.
Other assets owned includes other real estate owned and other repossessed assets, which may include automobiles, boats and other personal property. Holdings of other assets owned decreased by 14.7% since the end of 2010, as the Bank continued to sell assets while others have been added to its totals. At December 31, 2011, other real estate owned included 42 properties that were acquired through foreclosure or in lieu of foreclosure. The properties included 26 commercial properties, seven of which were the result of out-of-state loan participations, and sixteen residential properties. All properties are for sale. Other repossessed assets at December 31, 2011 consisted of one automobile.
The following table reflects the changes in other assets owned during 2011.
| In thousands of dollars | Other Real Estate | Other Assets | Total | |||||||||
| Balance at January 1 | $ | 4,278 | $ | 26 | $ | 4,304 | ||||||
| Additions | 3,250 | 95 | 3,345 | |||||||||
| Sold | (2,942 | ) | (119 | ) | (3,061 | ) | ||||||
| Write-downs of book value | (928 | ) | - | (928 | ) | |||||||
| Balance at December 31 | $ | 3,657 | $ | 12 | $ | 3,669 | ||||||
Troubled Debt Restructurings. In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.
It is the Bank’s policy to have any restructured loans 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. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $10.7 million at December 31, 2011 and $8.5 million at December 31, 2010. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $21.8 million at December 31, 2011 and $17.3 million at December 31, 2010.
Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than ninety days delinquent as of the end of the most recent quarter. All TDRs are considered impaired by the Company. When it is determined that the borrower has met the six month satisfactory performance period (or six payments) under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan, the loan is considered to be performing. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets both of these criteria.
Accruing restructured loans at December 31, 2011 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of $18.6 million of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate. Within this category are $8.2 million of construction and land development ("CLD") loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower.
The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans. The average yield on modified commercial loans was 5.38%, compared to 5.54% earned on the entire commercial loan portfolio in the fourth quarter of 2011.
The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance. This category consists of fifteen loans for a total of $3.2 million at December 31, 2011. The average yield on modified residential mortgage and home equity loans was 3.96%, compared to 5.71% earned on the entire residential mortgage loan portfolio in the fourth quarter of 2011. The Company has no personal loans other than the loans described in the paragraph above that are classified as troubled debt restructurings.
As a result of adopting the amendments in Accounting Standards Update ("ASU") No. 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) to determine whether they are now considered troubled debt restructurings. The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in Accounting Standards Codification ("ASC") 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $4.0 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss, was $1.5 million.
In addition, the Company performed its quarterly evaluation of the specific reserves on all of its loans previously identified as TDRs at December 31, 2011. Where current appraisals were previously performed in the fourth quarter of 2010, properties were re-appraised during the fourth quarter of 2011. In addition, the Company utilized collateral values to estimate the fair value of certain TDR loans. All of the Company’s accruing TDRs are performing in accordance with their modified terms and have demonstrated the necessary performance for the accrual of interest.
The following table compares the recorded investment in accruing TDR loans and their specific reserve amount, as of December 31, 2011 and 2010.
| Thousands of dollars | 12/31/11 | 12/31/10 | Increase | |||||||||
| Balance of TDR loans | $ | 21,839 | $ | 17,271 | $ | 4,568 | ||||||
| Specific reserve on above loans | 4,764 | 1,566 | 3,198 | |||||||||
| Percent | 21.8 | % | 9.1 | % | ||||||||
Impaired Loans. A loan is classified as impaired when it is probable that the Bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Within the Bank’s loan portfolio, $52.0 million of impaired loans have been identified as of December 31, 2011, up from $48.8 million as of December 31, 2010. The specific allowance for impaired loans was $9.0 million at December 31, 2011, compared to $9.2 million at December 31, 2010. The ultimate amount of the impairment and the potential losses to the Company may be substantially higher or lower than estimated, depending on the realizable value of the collateral. The level of the provision made in connection with impaired loans reflects the amount management believes to be necessary to maintain the allowance for loan losses at an adequate level, based upon the Bank’s current analysis of losses inherent in its loan portfolios.
Business loans carry the largest balances per loan, and any single loss would be proportionally larger than losses in other portfolios. In addition to internal loan rating systems and active monitoring of loan trends, the Bank uses an independent loan review firm to assess the quality of its business loan portfolio. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal.
CLD loans include residential and non-residential construction and land development loans. The residential CLD loan portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. The non-residential CLD loan portfolio consists mainly of loans for the construction and development of office buildings and other non-residential commercial properties. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline.
The Bank’s portfolio of residential mortgages consists of loans to finance 1-4 family residences, second homes, vacation homes, and residential investment properties. In the second quarter of 2010, the Company began recognizing losses on specific residential mortgage loans in the process of foreclosure at an earlier point in the foreclosure process, in accordance with regulatory guidance.
The personal loan portfolio consists of direct and indirect installment, home equity and unsecured revolving line of credit loans. Installment loans consist primarily of home equity loans and loans for consumer durable goods, principally automobiles. Indirect personal loans, which make up a small percent of the personal loans, consist of loans for automobiles, boats and manufactured housing.
Allowance for Loan Losses. The Company’s allowance for loan losses has decreased by $3.7 million in the fourth quarter of 2011 and by $4.5 million over the twelve months ended December 31, 2011. A number of factors caused the decline in the fourth quarter and full year of 2011. Net charge-offs for the fourth quarter of 2011 were $4.0 million, most of which represented specific reserves which had been provided for in previous quarters.
As discussed in Note 5 of the Notes to Consolidated Financial Statements, the Company’s allowance for loan losses for loans evaluated collectively for impairment decreased by $3.7 million as a result of a change in allocation methodology as of September 30, 2011. The impact of the decrease in the allowance due to the new methodology was largely offset by an increase in the specific reserve associated with the Company’s troubled debt restructurings of $3.2 million during 2011, which included the impact of adopting the amendments in ASU No. 2011-02.
The allowance as a percent of total loans decreased from 4.25% at December 31, 2010 to 3.66% at December 31, 2011. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, amount and composition of the loan portfolio, and other factors management believes to be relevant.
Further information concerning credit quality is contained in Note 5 of the Notes to Consolidated Financial Statements, which information is incorporated here by reference.
Deposits
United internally funds its operations through a large, stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At December 31, 2011, core deposits accounted for 98.8% of total deposits, as compared to 97.3% at December 31, 2010. For this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. Core deposits include deposits held through the Certificate of Deposit Account Registry Service® (“CDARS”) as they represent deposits originated in the Bank’s market area.
The table below shows the change in the various categories of the deposit portfolio for the reported periods.
| 2011 Change | 2010 Change | |||||||||||||||
| In thousands of dollars | Amount | Percent | Amount | Percent | ||||||||||||
| Noninterest bearing deposits | $ | 26,140 | 23.1 | % | $ | 13,313 | 13.3 | % | ||||||||
| Interest bearing deposits | 4,718 | 0.8 | % | (62,116 | ) | -9.1 | % | |||||||||
| Total deposits | $ | 30,858 | 4.2 | % | $ | (48,803 | ) | -6.2 | % | |||||||
Total deposits grew by $30.9, or 4.2%, in the twelve months ended December 31, 2011, compared to a decline of $48.8 million, or 6.2%, in the twelve months ended December 31, 2010. The Bank’s noninterest bearing deposits increased by 23.1% during 2011, while interest bearing deposits grew by 0.8%. As part of its capital ratio improvement initiatives, United generally did not replace maturing wholesale deposits in 2011 or 2010. The Bank utilizes purchased or brokered deposits for interest rate risk management purposes, but does not support its growth through the use of those products. In addition, the Bank participates in the CDARS program, which allows it to provide competitive CD products while maintaining FDIC insurance for clients with larger balances. The Bank's deposit rates are consistently competitive with other banks in its market areas.
Noninterest bearing deposits made up 18.2% of total deposits at December 31, 2011, compared to 15.4% at December 31, 2010. The table below shows the makeup of the Company’s deposits at December 31, 2011 and 2010.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| In thousands of dollars | Balance | % of total | Balance | % of total | ||||||||||||
| Noninterest bearing deposits | $ | 139,346 | 18.2 | % | $ | 113,206 | 15.4 | % | ||||||||
| Interest bearing deposits | 625,510 | 81.8 | % | 620,792 | 84.6 | % | ||||||||||
| Total deposits | $ | 764,856 | 100.0 | % | $ | 733,998 | 100.0 | % | ||||||||
Cash Equivalents and Borrowed Funds
The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. The Bank is also a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. The Bank maintains interest-bearing deposit accounts with the Federal Reserve Bank and the FHLBI, as alternatives to federal funds.
The Bank also has the ability to utilize short term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Federal funds and equivalents were used during 2011 and 2010, while short term advances and discount window borrowings were not utilized during either year.
At December 31, 2010, the Company’s balance sheet included short-term borrowings representing the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16 in 2010. Qualifying loans were carried as loans held for sale, while the sold portion of the loans was carried as secured borrowing for a 90-day period. In the first quarter of 2011, the Company modified its SBA 7a loan sales contract to eliminate a 90-day warranty period to the purchaser of the loans, eliminating the requirement to record a liability for the sold portion of the loans, and the Company’s balance sheet included no short-term borrowings related to SBA loans at December 31, 2011.
The Company periodically finds it advantageous to utilize longer-term borrowings from the FHLBI. These long-term borrowings, as detailed in Note 11 of the Notes to Consolidated Financial Statements, serve to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. Additional information regarding borrowed funds is found in the Liquidity section below.
The Company achieved consolidated net income of $917,000 for 2011, improving from a loss of $3.7 million in 2010. Net interest income for 2011 was 3.3% lower than in 2010, as investments increased while average loan balances declined. At the same time, the Company’s net interest margin continued to decline as a result of a decline in loan balances and continued elevated levels of investments and short-term liquid assets, and in spite of a relatively large increase in non-interest bearing deposits. The Company’s return on average assets for 2011 was 0.10%, compared to -0.42% for 2010 and -1.00% for 2009. Return on average shareholders’ equity for 2011 was 0.98%, compared to -4.66% for 2010 and -10.47% for 2009.
Total noninterest income for the twelve months ended December 31, 2011 improved by $913,000, or 5.6%, as compared to the same period of 2010. Most categories of noninterest income contributed to this improvement, while deposit service charges continued the decline noted over the past two years. Noninterest income represented 36.4% of the Company’s total revenues for 2011, compared to 34.4% for 2010.
Noninterest expense for the twelve month period ended December 31, 2011 was up 6.5% compared to the same period of 2011. The largest dollar amount of increase for 2011 was in salaries and employee benefits. Expenses relating to ORE properties, and attorney and other professional fees reflect costs related to the Company’s credit quality concerns, and expenses in those categories increased in the twelve months ended December 31, 2011 compared to the same period of 2010. Those items are discussed in more detail later in this discussion.
The following table shows the trends of the major components of earnings and related ratios for the five most recent quarters.
| 2011 | 2010 | |||||||||||||||||||
| Dollars in thousands | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | |||||||||||||||
| Net interest income before provision | $ | 7,687 | $ | 7,437 | $ | 7,525 | $ | 7,402 | $ | 7,735 | ||||||||||
| Provision for loan losses | 250 | 6,000 | 3,100 | 2,800 | 4,930 | |||||||||||||||
| Noninterest income | 4,635 | 4,256 | 4,395 | 3,925 | 4,553 | |||||||||||||||
| Noninterest expense | 8,815 | 9,084 | 8,501 | 8,218 | 8,225 | |||||||||||||||
| Federal income taxes | 960 | (1,291 | ) | (42 | ) | (50 | ) | (440 | ) | |||||||||||
| Net income (loss) | $ | 2,297 | $ | (2,100 | ) | $ | 361 | $ | 359 | $ | (427 | ) | ||||||||
| Basic and diluted earnings (loss) per share | $ | 0.16 | $ | (0.19 | ) | $ | 0.01 | $ | 0.01 | $ | (0.11 | ) | ||||||||
| Return on average assets | 1.03 | % | -0.95 | % | 0.17 | % | 0.17 | % | -0.20 | % | ||||||||||
| Return on average shareholders' equity | 9.89 | % | -8.85 | % | 1.55 | % | 1.57 | % | -2.12 | % | ||||||||||
| Net interest margin | 3.67 | % | 3.58 | % | 3.69 | % | 3.62 | % | 3.81 | % | ||||||||||
| Efficiency Ratio (tax equivalent basis) | 70.9 | % | 77.0 | % | 70.7 | % | 71.8 | % | 66.3 | % | ||||||||||
| Dividend payout ratio | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||
| Tier 1 Leverage Ratio | 9.9 | % | 9.6 | % | 10.1 | % | 10.0 | % | 10.2 | % | ||||||||||
In an attempt to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company calculates pre-tax, pre-provision income (“PTPP Income”) and pre-tax, pre-provision return on average assets (“PTPP ROA”). PTPP Income adjusts net income before federal income tax by the amount of the Company’s provision for loan losses, which is excluded because its level is elevated and volatile in times of economic stress. PTPP ROA measures PTPP Income as a percent of average assets. While this information is not consistent with, or intended to replace, presentation under generally accepted accounting principles, it is presented here for comparison. Management believes that PTPP Income and PTPP ROA are useful and consistent measures of the Company’s earning capacity, as these financial measures enable investors and others to assess the Company’s ability to generate capital to cover losses through a credit cycle, particularly in times of economic stress.
United’s PTPP ROA for the twelve month period ended December 31, 2011 of 1.44% was down from 1.70% for the twelve month period ended December 31, 2010. The Company’s relatively strong PTPP Income has been achieved through a substantial core funding base which has resulted in a comparatively strong net interest margin, a diversity of noninterest income sources and expansion of our markets. The reduction in PTPP ROA in 2011 was in part a result of increases in noninterest expenses relating to collection and disposition of troubled assets.
The table below shows the calculation and trend of PTPP Income and PTPP ROA for the twelve month periods ended December 31, 2011, 2010 and 2009.
| Twelve Months Ended December 31, | |||||||||||||||||||||
| Dollars in thousands | 2011 | 2010 | Change | 2009 | Change | ||||||||||||||||
| Interest income | $ | 36,165 | $ | 39,770 | -9.1 | % | $ | 43,766 | -9.1 | % | |||||||||||
| Interest expense | 6,114 | 8,687 | -29.6 | % | 12,251 | -29.1 | % | ||||||||||||||
| Net interest income | 30,051 | 31,083 | -3.3 | % | 31,515 | -1.4 | % | ||||||||||||||
| Noninterest income | 17,211 | 16,298 | 5.6 | % | 16,899 | -3.6 | % | ||||||||||||||
Noninterest expense (1) | 34,618 | 32,497 | 6.5 | % | 33,647 | -3.4 | % | ||||||||||||||
| Pre-tax, pre-provision income | $ | 12,644 | $ | 14,884 | -15.0 | % | $ | 14,767 | 0.8 | % | |||||||||||
| Average assets | $ | 876,008 | $ | 874,768 | 0.1 | % | $ | 883,711 | -1.0 | % | |||||||||||
| Pre-tax, pre-provision ROA | 1.44 | % | 1.70 | % | -0.26 | % | 1.67 | % | 0.03 | % | |||||||||||
| Reconcilement to GAAP income: | |||||||||||||||||||||
| Provision for loan losses | $ | 12,150 | $ | 21,530 | -43.6 | % | $ | 25,770 | -16.5 | % | |||||||||||
| Goodwill impairment | - | - | 0.0 | % | 3,469 | -100.0 | % | ||||||||||||||
| Income tax benefit | (423 | ) | (2,938 | ) | NA | (5,639 | ) | NA | |||||||||||||
| Net income (loss) | $ | 917 | $ | (3,708 | ) | NA | $ | (8,833 | ) | NA | |||||||||||
| (1) | Excludes goodwill impairment charge in 1st quarter of 2009 | ||||||||||||||||||||
Net Interest Income
Declining interest rates over the past few years have significantly reduced the Company’s yield on earning assets, but have also resulted in a reduction in its cost of funds. Interest income decreased 9.1% in 2011 compared to 2010, while interest expense decreased 29.6% for 2011 compared to 2010, resulting in a reduction in net interest income of 3.3% for 2011 compared to 2010. Net interest margin for all of 2011 was 3.64%, compared to 3.79% for 2010. The Company’s net interest margin has continued to trend downward year over year, as a result of a decline in loan balances and continued elevated levels of investments and short-term liquid assets, and in spite of a relatively large increase in non-interest bearing deposits.
Tax-equivalent yields on earning assets declined from 4.83% for 2010 to 4.37% for 2011, for a reduction of 46 basis points. The Company's average cost of funds decreased by 32 basis points, and tax-equivalent spread declined from 3.56% for 2010 to 3.42% for all of 2011. The following table provides a summary of the various components of net interest income, as well as the results of changes in average balance sheet makeup that have resulted in the changes in spread and net interest margin for 2011, 2010 and 2009.
| 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||
| Assets | Average Balance | Interest (b) | Yield/ Rate | Average Balance | Interest (b) | Yield/ Rate | Average Balance | Interest (b) | Yield/ Rate | ||||||||||||||||||||||||||||
| Interest earning assets (a) | |||||||||||||||||||||||||||||||||||||
| Federal funds sold and equivalents | $ | 101,985 | $ | 260 | 0.25 | % | $ | 93,072 | $ | 235 | 0.25 | % | $ | 61,027 | $ | 153 | 0.25 | % | |||||||||||||||||||
| Taxable securities | 127,448 | 2,731 | 2.14 | % | 79,088 | 2,136 | 2.69 | % | 60,363 | 1,896 | 3.14 | % | |||||||||||||||||||||||||
| Tax exempt securities (b) | 22,276 | 1,147 | 5.15 | % | 27,805 | 1,455 | 5.69 | % | 33,594 | 1,989 | 5.92 | % | |||||||||||||||||||||||||
| Taxable loans (c) | 581,283 | 32,291 | 5.56 | % | 632,319 | 36,279 | 5.74 | % | 690,299 | 40,238 | 5.83 | % | |||||||||||||||||||||||||
| Tax exempt loans (b) | 2,105 | 174 | 8.28 | % | 2,359 | 194 | 8.23 | % | 2,767 | 210 | 7.57 | % | |||||||||||||||||||||||||
| Total interest earning assets (b) | 835,097 | $ | 36,604 | 4.37 | % | 834,643 | $ | 40,299 | 4.83 | % | 848,049 | $ | 44,486 | 5.25 | % | ||||||||||||||||||||||
| Cash and due from banks | 13,742 | 13,683 | �� | 12,301 | |||||||||||||||||||||||||||||||||
| Other nonearning assets | 52,475 | 48,768 | 46,027 | ||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (25,306 | ) | (22,326 | ) | (22,666 | ) | |||||||||||||||||||||||||||||||
| Total Assets | $ | 876,008 | $ | 874,768 | $ | 883,711 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities | |||||||||||||||||||||||||||||||||||||
| NOW and savings deposits | $ | 350,985 | $ | 854 | 0.24 | % | $ | 356,153 | $ | 1,378 | 0.39 | % | $ | 340,509 | $ | 1,752 | 0.51 | % | |||||||||||||||||||
| Other interest bearing deposits | 265,143 | 4,242 | 1.60 | % | 292,693 | 5,975 | 2.04 | % | 308,962 | 8,650 | 2.80 | % | |||||||||||||||||||||||||
| Total interest bearing deposits | 616,128 | 5,096 | 0.83 | % | 648,846 | 7,353 | 1.13 | % | 649,471 | 10,402 | 1.60 | % | |||||||||||||||||||||||||
| Short term borrowings | 190 | 65 | NM | 2,022 | 144 | 7.10 | % | - | - | 0.00 | % | ||||||||||||||||||||||||||
| Long term borrowings | 26,947 | 953 | 3.49 | % | 32,524 | 1,190 | 3.66 | % | 44,896 | 1,849 | 4.12 | % | |||||||||||||||||||||||||
| Total interest bearing liabilities | 643,265 | 6,114 | 0.95 | % | 683,392 | 8,687 | 1.27 | % | 694,367 | 12,251 | 1.76 | % | |||||||||||||||||||||||||
| Noninterest bearing deposits | 136,389 | 108,390 | 102,549 | ||||||||||||||||||||||||||||||||||
| Total including noninterest bearing deposits | 779,654 | 6,114 | 0.78 | % | 791,782 | 8,687 | 1.10 | % | 796,916 | 12,251 | 1.54 | % | |||||||||||||||||||||||||
| Other liabilities | 3,096 | 3,442 | 2,462 | ||||||||||||||||||||||||||||||||||
| Shareholders' equity | 93,258 | 79,544 | 84,333 | ||||||||||||||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 876,008 | $ | 874,768 | $ | 883,711 | |||||||||||||||||||||||||||||||
| Net interest income (b) | $ | 30,490 | $ | 31,612 | $ | 32,236 | |||||||||||||||||||||||||||||||
| Net spread (b) | 3.42 | % | 3.56 | % | 3.49 | % | |||||||||||||||||||||||||||||||
| Net yield on interest earning assets (b) | 3.64 | % | 3.79 | % | 3.80 | % | |||||||||||||||||||||||||||||||
| Tax equivalent adjustment on interest income | 439 | 529 | 721 | ||||||||||||||||||||||||||||||||||
| Net interest income per income statement | $ | 30,051 | $ | 31,083 | $ | 31,515 | |||||||||||||||||||||||||||||||
| Ratio of interest earning assets to interest bearing liabilities | 1.30 | 1.22 | 1.22 | ||||||||||||||||||||||||||||||||||
| �� | |||||||||||||||||||||||||||||||||||||
| (a) | Nonaccrual loans and overdrafts are included in the average balances of loans. | ||||||||||||||||||||||||||||||||||||
| (b) | Fully tax-equivalent basis; 34% tax rate. | ||||||||||||||||||||||||||||||||||||
| (c) | Loan fee income of $460, $372 and $755 is included in the computation of loan income for 2011, 2010 and 2009, respectively. | ||||||||||||||||||||||||||||||||||||
Provision for Loan Losses
The Company’s provision for loan losses for 2011 was $12.2 million, down 43.6% from $21.5 million for 2010. This significantly reduced level of provision for loan losses is a result of a decline in nonperforming loans, a reduction in nonperforming asset formation, and a slowdown in loan rating downgrades. For 2011, the Company’s net charge offs exceeded its provision for loan losses by $4.5 million, as the Company realized losses for which it had previously provided for in its allowance for loan losses.
In addition, as discussed in Note 5 of the Notes to Consolidated Financial Statements, the Company’s allowance for loan losses for loans evaluated collectively for impairment decreased by $3.7 million as a result of a change in allocation methodology as of September 30, 2011. The impact of the decrease in the allowance (and provision for loan losses) due to the new methodology was largely offset by an increase in the specific reserve associated with the Company’s troubled debt restructurings of $3.2 million during 2011, which included the impact of adopting the amendments in ASU No. 2011-02.
While the local real estate markets and the economy in general have experienced some signs of stabilization, the loan portfolio of the Bank is affected by loans to a number of residential real estate developers that continue to struggle to meet their financial obligations. Loans in the Bank's residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. In addition, loans secured by commercial real estate are continuing to experience stresses resulting from the current economic conditions.
Generally, lot sales by the developers/borrowers continue to take place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income of residential developers, contractors and other real estate-dependent borrowers has also been reduced. The Bank has continued to closely monitor the impact of economic circumstances on its lending clients, and is working with these clients to minimize losses. Additional information regarding the provision for loan losses is included in the “Credit Quality” discussion above.
Noninterest Income
Total noninterest income increase by 5.6% in 2011, following a decline of 3.6% in 2010 compared with 2009. The following table summarizes changes in noninterest income by category for the twelve month periods ended December 31, 2011, 2010 and 2009.
| Dollars in thousands | 2011 | 2010 | Change | 2009 | Change | |||||||||||||||
| Service charges on deposit accounts | $ | 1,971 | $ | 2,191 | -10.0 | % | $ | 2,731 | -19.8 | % | ||||||||||
| Wealth Management fee income | 5,079 | 4,518 | 12.4 | % | 4,070 | 11.0 | % | |||||||||||||
| Gains (losses) on securities transactions | - | 31 | -100.0 | % | (24 | ) | -229.2 | % | ||||||||||||
| Income from loan sales and servicing | 6,434 | 6,351 | 1.3 | % | 6,689 | -5.1 | % | |||||||||||||
| ATM, debit and credit card fee income | 2,176 | 1,940 | 12.2 | % | 2,174 | -10.8 | % | |||||||||||||
| Other income | 1,551 | 1,267 | 22.4 | % | 1,259 | 0.6 | % | |||||||||||||
| Total noninterest income | $ | 17,211 | $ | 16,298 | 5.6 | % | $ | 16,899 | -3.6 | % | ||||||||||
Service charges on deposit accounts were down 10.0% in 2011 following a decrease of 19.8% in 2010 over 2009. This continuing decline is in spite of the Company's 23.1% growth of noninterest bearing deposit account balances over the twelve months ended December 31, 2011. No significant changes to service charge structure were implemented in 2011 or 2010, and substantially all of the decline in service charges in 2010 and 2011 was due to a reduction in NSF and overdraft fees collected in part as a result of changes in banking regulations governing collection of these fees, effective in mid-2010.
The Wealth Management Group of UBT provides a relatively large component of the Company's noninterest income, and in 2011, was responsible for the largest dollars of increase in the Company’s total noninterest income. Wealth Management income includes trust fee income and income from the sale of nondeposit investment products within the Bank’s offices. Wealth Management income improved by 12.4% in 2011 compared to 2010, following an increase of 11.0% in 2010 compared to 2009. Market values of assets managed by the Wealth Management Group have continued to recover in the past two years as financial markets have rebounded, resulting in improvement in fee income.
The Bank generally markets its production of fixed rate long-term residential mortgages in the secondary market, and retains adjustable rate mortgages for its portfolio. The Company maintains a portfolio of sold residential real estate mortgages that it services, and this servicing provides ongoing income for the life of the loans. Loans serviced consist primarily of residential mortgages sold on the secondary market. The Bank also originates, sells and services SBA loans through its structured finance group, United Structured Finance Company (“USFC”). The guaranteed portion of SBA loans originated by USFC is typically sold on the secondary market, and gains on the sale of those loans contribute to income from loan sales and servicing.
Income from loan sales and servicing increased by 1.3% in 2011 compared to 2010, following a decrease of 5.1% in 2010 compared to 2009. The decrease from 2009 to 2010 was due in part to a positive valuation adjustment to loan servicing rights of $520,000 in 2009, and the Company had no servicing rights valuation adjustment in 2010 or 2011. The loan servicing rights valuation adjustment in 2009 was a reflection of a slowing of prepay speeds in the industry. The following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.
| In thousands of dollars | 2011 | 2010 | Change | 2009 | Change | |||||||||||||||
| Residential mortgage sales and servicing | $ | 5,307 | $ | 5,272 | 0.7 | % | $ | 6,009 | -12.3 | % | ||||||||||
| USFC loan sales and servicing | 1,127 | 1,079 | 4.4 | % | 680 | 58.7 | % | |||||||||||||
| Total income from loan sales and servicing | $ | 6,434 | $ | 6,351 | 1.3 | % | $ | 6,689 | -5.1 | % | ||||||||||
ATM, debit and credit card fee income provides a steady source of noninterest income for the Company. The Bank operates twenty ATMs throughout its market areas, and Bank clients are active users of debit cards. The Bank receives ongoing fee income from credit card referrals and operation of its credit card merchant business. Fee income in these areas improved by 12.2% in 2011 compared to 2010, following a reduction in 2010 compared to 2009. That decrease
reflected changes made in its provider of credit card services for the Bank late in 2009. Expenses relating to production of that fee income were also reduced, with a net benefit to the Bank.
Other income includes income from various fee-based banking services, such as sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees, income from bank-owned life insurance, as well as gains on the sale of assets, which generally represent gains realized on the sale of other real estate owned. Gains on the sale of ORE property was $301,000 in 2011, compared to $41,000 in 2010.Total other income was up 22.4% in 2011 compared to 2010, following an increase of 0.6% from 2009 to 2010
Noninterest Expense
Total noninterest expense for the twelve month period ended December 31, 2011 was up 6.5% compared to the same period of 2011, following a decrease of 12.4% in 2010 compared to 2009. The following table summarizes changes in the Company's noninterest expense by category for 2011, 2010 and 2009.
| In thousands of dollars | 2011 | 2010 | Change | 2009 | Change | |||||||||||||||
| Salaries and employee benefits | $ | 18,971 | $ | 17,217 | 10.2 | % | $ | 17,904 | -3.8 | % | ||||||||||
| Occupancy and equipment expense, net | 5,015 | 5,207 | -3.7 | % | 5,255 | -0.9 | % | |||||||||||||
| External data processing | 1,342 | 1,206 | 11.3 | % | 1,590 | -24.2 | % | |||||||||||||
| Advertising and marketing | 625 | 610 | 2.5 | % | 605 | 0.8 | % | |||||||||||||
| Attorney, accounting and other professional fees | 1,678 | 1,561 | 7.5 | % | 1,183 | 32.0 | % | |||||||||||||
| Expenses relating to ORE property | 2,019 | 1,698 | 18.9 | % | 1,797 | -5.5 | % | |||||||||||||
| FDIC Insurance premiums | 1,315 | 1,806 | -27.2 | % | 1,954 | -7.6 | % | |||||||||||||
| Goodwill impairment | - | - | 0.0 | % | 3,469 | -100.0 | % | |||||||||||||
| Other expenses | 3,653 | 3,192 | 14.4 | % | 3,359 | -5.0 | % | |||||||||||||
| Total Noninterest Expense | $ | 34,618 | $ | 32,497 | 6.5 | % | $ | 37,116 | -12.4 | % | ||||||||||
Salaries and employee benefits, which are the Company’s largest single area of expense, increased by 10.2% in 2011 compared to 2010, following a decrease of 3.8% in 2010 compared to 2009. The increase in 2011 reflects, in part, the reinstatement of the Company’s match portion of its 401(k) effective January 1, 2011, increased health and life insurance premiums, and continued higher levels of commissions and other compensation costs related to the generation of wealth management income and income from loan sales and servicing. In addition, the Company has increased its staffing levels modestly to accommodate its future anticipated growth, and salary increases were reinstated effective April 1, 2011. However, the Company did not pay or accrue any cash bonus or other payout to executive officers or non-commissioned employees under our bonus plans in 2010 or 2011.
Occupancy and equipment expenses decreased by 3.7% in 2011 compared to 2010, following a decrease of 0.9% in 2010 compared to 2009. This decrease in 2011 compared to 2010 is primarily a result of reduced costs of software and depreciation of furniture and equipment.
The increase in external data processing costs in 2011 compared to 2010 reflects in part conversion expenses in the third quarter of 2011 relating to the conversion of the Wealth Management Group to a different processing provider. Advertising and marketing expenses for 2011 were up 2.5% compared to 2010, following an increase of 0.8% in 2010 compared to 2009.
Attorney, accounting and other professional fees were up 7.5% in 2011 compared to 2010, following an increase of 32.0% for 2010 compared to 2009. While much of the increase in both years represents attorney and appraisal fees related to the Bank’s credit issues, the Company also incurred data processing conversion costs during the second and third quarters of 2010 relating to the consolidation of the Company’s subsidiary banks, which resulted in the large increase in 2010 compared to 2009.
Expenses related to ORE property included write-downs of the value and losses on the sale of property held as ORE, along with costs to maintain and carry those properties. Expenses in this category increased by 18.9% in the twelve months ended December 31, 2011 compared to the same period of 2010, following a decrease of 5.5% from 2009 to 2010. Deterioration in the value of certain of these properties resulted in write-downs and losses on the sale of properties of $1.0 million in 2011, $873,000 for 2010, and $1.2 million for 2009. Assets were written down to their estimated fair value less costs to sell, as a result of a decline in prevailing real estate prices and the Bank’s experience with increased foreclosures resulting from the weakened economy.
As a result of an evaluation of the value of its goodwill, United took an impairment charge of $3.47 million during the first quarter of 2009. Additional information regarding the 2009 goodwill impairment charge is included in Note 8 of the Notes to the Consolidated Financial Statements, which information is incorporated here by reference.
Other expenses were up 14.4% in 2011 compared to 2010, with most of the increase in this category resulting from unreimbursed fraud losses on debit cards and losses related to serviced loans. That increase followed a decline of 5.0% in 2010 compared to 2009.
Federal Income Tax
The following chart shows the effective federal tax rates of the Company for the past three years.
| Dollars in thousands | 2011 | 2010 | 2009 | |||||||||
| Income (Loss) before tax | $ | 494 | $ | (6,646 | ) | $ | (14,472 | ) | ||||
| Federal income tax benefit | (423 | ) | (2,938 | ) | (5,639 | ) | ||||||
| Effective federal tax rate | -85.6 | % | 44.2 | % | 39.0 | % | ||||||
The effective tax rates for 2010 and 2009 were a calculated benefit based upon a pre-tax loss. For 2011, 2010 and 2009, the differences between the effective rates and the Company’s expected tax rate were primarily due to the benefit from tax-exempt income.
At December 31, 2011, the Company had net operating losses of $7.6 million that are being carried forward to reduce future taxable income. The carryforwards expire in 2030 and 2031. As of December 31, 2011, the Company had low income housing and alternative minimum tax credits available to offset future federal income taxes. The low income housing credits expire in 2028 through 2031, and the alternative minimum tax credits have no expiration date.
The Company’s net deferred tax asset was $9.9 million at December 31, 2011. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Based upon analysis of the evidence (both negative and positive), management has determined that no valuation allowance was required at December 31, 2011 or 2010. See Note 13 of the Notes to Consolidated Financial Statements for further discussion.
Liquidity
The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. At times, the Bank is a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. In 2011 and 2010, the Bank generally utilized short-term interest-bearing balances with banks as an alternative to federal funds sold.
The Company’s balances in federal funds sold and short-term interest-bearing balances with banks were $91.8 million at December 31, 2011, down from $95.6 million at December 31, 2010. The 4.0% decrease has resulted from increases in investments, along with planned decreases in wholesale funding that exceeded reductions in loan balances, as United did not replace maturing FHLB advances or wholesale deposits in 2011. The Company continued to maintain high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during this period of economic uncertainty, and the Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.
The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Short-term advances and discount window borrowings were not utilized during 2011 or 2010.
At December 31, 2010, the Company’s balance sheet included short-term borrowings representing the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16 in 2010. In the first quarter of 2011, the Company eliminated the 90-day warranty period to borrowers in its sales contracts for SBA 7a loans, and there were no short-term borrowings on the books of the Company at December 31, 2011.
The Company periodically finds it advantageous to utilize longer term borrowings from the FHLBI. Theselong-term borrowings serve primarily to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. During 2011, the Bank procured no new
advances and repaid $6.3 million in matured borrowings and scheduled principal payments, resulting in a decrease in total FHLBI borrowings outstanding for the year. Information concerning available lines is contained in Note 10 of the Notes to Consolidated Financial Statements.
Funds Management and Market Risk
The composition of the Company’s balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk.
Policies of the Company place strong emphasis on stabilizing net interest margin while managing interest rate, liquidity and market risks, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during times of fluctuating interest rates.
Interest rate risk is the exposure of the Company’s financial condition to adverse movements in interest rates. It results from differences in the maturities or timing of interest adjustments of the Company’s assets, liabilities and off-balance-sheet instruments; from changes in the slope of the yield curve; from imperfect correlations in the adjustment of interest rates earned and paid on different financial instruments with otherwise similar repricing characteristics; and from interest rate related options embedded in the Company’s products such as prepayment and early withdrawal options.
A number of measures are used to monitor and manage interest rate risk, including interest sensitivity and income simulation analyses. An interest sensitivity model is the primary tool used to assess this risk, with supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 300 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments; changes in market conditions, loan volumes and pricing; and management’s determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions.
The Funds Management Committee is also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, pricing for credit risk and liquidity risk. The Committee is made up of senior members of management, and continually monitors the makeup of interest sensitive assets and liabilities to assure appropriate liquidity,
maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors.
The Funds Management policy provides for a level of interest sensitivity that, management believes, allows the Company to take advantage of opportunities within the market relating to liquidity and interest rate risk, allowing flexibility without subjecting the Company to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of management's decisions.
We conducted multiple simulations as of December 31, 2011, in which it was assumed that changes in market interest rates occurred ranging from up 400 basis points to down 200 basis points in equal quarterly installments over the next twelve months. The following table reflects the suggested impact on net interest income over the next twelve months in comparison to estimated net interest income based on our balance sheet structure, including the balances and interest rates associated with our specific loans, securities, deposits and borrowed funds as of December 31, 2011. The resulting estimates are within our policy parameters established to manage and monitor interest rate risk.
| Dollars in thousands | Change in Net Interest Income | |||||||
| Interest Rate Scenario | Amount | Percent | ||||||
| Interest rates down 200 basis points | $ | (3,061 | ) | -9.7 | % | |||
| Interest rates down 100 basis points | (2,123 | ) | -6.7 | % | ||||
| No change in interest rates | (611 | ) | -1.9 | % | ||||
| Interest rates up 100 basis points | 252 | 0.8 | % | |||||
| Interest rates up 200 basis points | 1,176 | 3.7 | % | |||||
| Interest rates up 300 basis points | 2,293 | 7.3 | % | |||||
| Interest rates up 400 basis points | 3,390 | 10.8 | % | |||||
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including the growth, composition and levels of loans, deposits and other earnings assets and interest-bearing liabilities, level of nonperforming assets, economic and competitive conditions, potential changes in lending, investing and deposit gathering strategies, client preferences and other factors.
The common stock of the Company is quoted on the OTC Bulletin Board under the symbol “UBMI.” As was the case with much of the financial services industry, the stock of the Company continued to experience significant price declines during 2011 and 2010. In December 2010, the Company closed its public offering of 7,583,800 shares of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. Since the public offering, the Company has contributed $12 million to the capital of the Bank to increase the Bank's capital and regulatory capital ratios.
UBT is party to an MOU as described under “Other Developments – Memorandum of Understanding” on Page A-5 hereof. The Bank has continued to maintain its ratio of total capital to risk-weighted assets above the prescribed minimum level of 12%. The Bank did not reach the Tier 1 capital ratio level required to comply with the timeframe provided in the January 15, 2010 memorandum of understanding, but was in compliance with the minimum Tier 1 capital ratio at December 31, 2011. At December 31, 2011, the Bank’s Tier 1 capital ratio was 9.20%, and its ratio of total capital to risk-weighted assets was 15.49%.
Current capital ratios for the Company and the Bank are shown in Note 18 of the Notes to Consolidated Financial Statements. At December 31, 2011, the Company’s Tier 1 capital ratio was 9.87%, its ratio of total capital to risk-weighted assets was 16.53% and its tangible common equity ratio was 8.29%. As a result of a small amount of net income in 2011, book value per share of the Company’s common stock increased from $5.72 at the end of 2010 to $5.78 at December 31, 2011.
The following table details the Company's known contractual obligations at December 31, 2011, in thousands of dollars:
| Contractual Obligations | Less than | More than | ||||||||||||||||||
| Thousands of dollars | 1 year | 1-3 years | 3-5 years | 5 years | Total | |||||||||||||||
| Long term debt (FHLB advances) | $ | 2,296 | $ | 19,819 | $ | 91 | $ | 1,829 | $ | 24,035 | ||||||||||
| Operating lease arrangements | 1,243 | 2,419 | 1,956 | 2,455 | 8,073 | |||||||||||||||
| Total | $ | 3,539 | $ | 22,238 | $ | 2,047 | $ | 4,284 | $ | 32,108 | ||||||||||
Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. The Company's management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see "Notes to the Consolidated Financial Statements" on pages A-34 to A-73 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements.
Allowance for Loan Losses
The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently
subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of incurred losses, including volatility of default probabilities, credit rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral value for collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.
Regardless of the extent of the Company’s analysis of client performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a client’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or client-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.
Loan Servicing Rights
Loan servicing rights (“LSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for LSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of LSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the LSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.
Deferred Tax Assets
Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. If the Company is required in the future to take a valuation allowance with respect to its deferred tax asset, its financial condition, results of operations and regulatory capital levels would be negatively affected.
Audit Committee, Board of Directors and Stockholders
United Bancorp, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. (Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancorp, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD LLP
Indianapolis, Indiana
Indianapolis, Indiana
February 24, 2012
| United Bancorp, Inc. and Subsidiary | ||||||||
| In thousands of dollars | December 31, | |||||||
| Assets | 2011 | 2010 | ||||||
| Cash and demand balances in other banks | $ | 15,798 | $ | 10,623 | ||||
| Interest bearing balances with banks | 91,428 | 95,599 | ||||||
| Federal funds sold | 366 | - | ||||||
| Total cash and cash equivalents | 107,592 | 106,222 | ||||||
| Securities available for sale | 173,197 | 124,544 | ||||||
| FHLB Stock | 2,571 | 2,788 | ||||||
| Loans held for sale | 8,290 | 10,289 | ||||||
| Portfolio loans | 563,702 | 591,985 | ||||||
| Less allowance for loan losses | 20,633 | 25,163 | ||||||
| Net portfolio loans | 543,069 | 566,822 | ||||||
| Premises and equipment, net | 10,795 | 11,241 | ||||||
| Bank-owned life insurance | 13,819 | 13,391 | ||||||
| Accrued interest receivable and other assets | 25,676 | 26,413 | ||||||
| Total Assets | $ | 885,009 | $ | 861,710 | ||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Noninterest bearing deposits | $ | 139,346 | $ | 113,206 | ||||
| Interest bearing deposits | 625,510 | 620,792 | ||||||
| Total deposits | 764,856 | 733,998 | ||||||
| Short term borrowings | - | 1,234 | ||||||
| Other borrowings | 24,035 | 30,321 | ||||||
| Accrued interest payable and other liabilities | 2,344 | 3,453 | ||||||
| Total Liabilities | 791,235 | 769,006 | ||||||
| Commitments and Contingent Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding in 2011 and 2010 | 20,364 | 20,258 | ||||||
| Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,697,265 and 12,667,111 shares issued and outstanding at December 31, 2011 and 2010 | 85,505 | 85,351 | ||||||
| Accumulated deficit | (13,746 | ) | (13,526 | ) | ||||
| Accumulated other comprehensive income, net of tax | 1,651 | 621 | ||||||
| Total Shareholders' Equity | 93,774 | 92,704 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 885,009 | $ | 861,710 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| United Bancorp, Inc. and Subsidiary | ||||||||||||
For the years ended December 31, | ||||||||||||
| In thousands of dollars, except per share data | 2011 | 2010 | 2009 | |||||||||
| Interest Income | ||||||||||||
| Interest and fees on loans | $ | 32,408 | $ | 36,411 | $ | 40,379 | ||||||
| Interest on securities | ||||||||||||
| Taxable | 2,731 | 2,136 | 1,896 | |||||||||
| Tax exempt | 766 | 988 | 1,338 | |||||||||
| Interest on federal funds sold and balances with banks | 260 | 235 | 153 | |||||||||
| Total interest income | 36,165 | 39,770 | 43,766 | |||||||||
| Interest Expense | ||||||||||||
| Interest on deposits | 5,096 | 7,353 | 10,402 | |||||||||
| Interest on fed funds and other short term borrowings | 65 | 144 | - | |||||||||
| Interest on FHLB advances | 953 | 1,190 | 1,849 | |||||||||
| Total interest expense | 6,114 | 8,687 | 12,251 | |||||||||
| Net Interest Income | 30,051 | 31,083 | 31,515 | |||||||||
| Provision for loan losses | 12,150 | 21,530 | 25,770 | |||||||||
| Net Interest Income After Provision for Loan Losses | 17,901 | 9,553 | 5,745 | |||||||||
| Noninterest Income | ||||||||||||
| Service charges on deposit accounts | 1,971 | 2,191 | 2,731 | |||||||||
| Wealth Management fee income | 5,079 | 4,518 | 4,070 | |||||||||
| Gains (losses) on securities transactions | - | 31 | (24 | ) | ||||||||
| Income from loan sales and servicing | 6,434 | 6,351 | 6,689 | |||||||||
| ATM, debit and credit card fee income | 2,176 | 1,940 | 2,174 | |||||||||
| Other income | 1,551 | 1,267 | 1,259 | |||||||||
| Total noninterest income | 17,211 | 16,298 | 16,899 | |||||||||
| Noninterest Expense | ||||||||||||
| Salaries and employee benefits | 18,971 | 17,217 | 17,904 | |||||||||
| Occupancy and equipment expense, net | 5,015 | 5,207 | 5,255 | |||||||||
| External data processing | 1,342 | 1,206 | 1,590 | |||||||||
| Advertising and marketing | 625 | 610 | 605 | |||||||||
| Attorney, accounting and other professional fees | 1,678 | 1,561 | 1,183 | |||||||||
| Expenses relating to ORE property | 2,019 | 1,698 | 1,797 | �� | ||||||||
| FDIC Insurance premiums | 1,315 | 1,806 | 1,954 | |||||||||
| Goodwill impairment | - | - | 3,469 | |||||||||
| Other expenses | 3,653 | 3,192 | 3,359 | |||||||||
| Total noninterest expense | 34,618 | 32,497 | 37,116 | |||||||||
| Income (Loss) Before Federal Income Tax | 494 | (6,646 | ) | (14,472 | ) | |||||||
| Federal income tax | (423 | ) | (2,938 | ) | (5,639 | ) | ||||||
| Net Income (Loss) | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | ||||
| Preferred stock dividends and accretion | (1,136 | ) | (1,130 | ) | (1,078 | ) | ||||||
| Loss Available to Common Shareholders | $ | (219 | ) | $ | (4,838 | ) | $ | (9,911 | ) | |||
| Basic and diluted loss per share | $ | (0.02 | ) | $ | (0.89 | ) | $ | (1.93 | ) | |||
| Cash dividend declared per share of common stock | $ | - | $ | - | $ | 0.02 | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
| United Bancorp, Inc. and Subsidiary | ||||||||||||
| For the years ended December 31, 2011, 2010, 2009 | ||||||||||||
| Years Ended December 31, | ||||||||||||
| In thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Net income (loss) | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | ||||
| Other comprehensive income net of tax: | ||||||||||||
| Net change in unrealized gains (losses) on securities available for sale | 1,030 | (634 | ) | 342 | ||||||||
| Reclass adjustment for realized losses (gains) and related taxes | - | (21 | ) | 16 | ||||||||
| Total comprehensive income (loss) | $ | 1,947 | $ | (4,363 | ) | $ | (8,475 | ) | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
| United Bancorp, Inc. and Subsidiary | ||||||||||||||||||||
| For the years ended December 31, 2011, 2010, 2009 | ||||||||||||||||||||
| In thousands of dollars, except per share data | ||||||||||||||||||||
| Preferred Stock | Common Stock and Paid In Capital | Retained Earnings (Accumulated Deficit) | AOCI (1) | Total | ||||||||||||||||
| Balance, December 31, 2008 | $ | - | $ | 67,340 | $ | 1,193 | $ | 918 | $ | 69,451 | ||||||||||
| Net loss, 2009 | (8,833 | ) | (8,833 | ) | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Net change in unrealized gains on securities available for sale, net of reclass adjustments for realized losses and related taxes | 358 | 358 | ||||||||||||||||||
| Preferred stock issued | 20,067 | 20,067 | ||||||||||||||||||
| Warrants issued | 533 | 533 | ||||||||||||||||||
| Accretion of discount on preferred stock | 91 | (91 | ) | - | ||||||||||||||||
| Cash dividends paid on preferred shares | (855 | ) | (855 | ) | ||||||||||||||||
| Cash dividends declared, $0.02 per share | (102 | ) | (102 | ) | ||||||||||||||||
| Common stock transactions | 150 | 150 | ||||||||||||||||||
| Director and management deferred stock plans | - | 99 | (1 | ) | - | 98 | ||||||||||||||
| Balance, December 31, 2009 | $ | 20,158 | $ | 68,122 | $ | (8,689 | ) | $ | 1,276 | $ | 80,867 | |||||||||
| Net loss, 2010 | (3,708 | ) | (3,708 | ) | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Net change in unrealized gains on securities available for sale, net of reclass adjustments for realized losses and related taxes | (655 | ) | (655 | ) | ||||||||||||||||
| Common stock issued | 17,068 | 17,068 | ||||||||||||||||||
| Accretion of discount on preferred stock | 100 | (100 | ) | - | ||||||||||||||||
| Cash dividends paid on preferred shares | (1,030 | ) | (1,030 | ) | ||||||||||||||||
| Other common stock transactions | 89 | 1 | 90 | |||||||||||||||||
| Director and management deferred stock plans | - | 72 | - | - | 72 | |||||||||||||||
| Balance, December 31, 2010 | 20,258 | 85,351 | (13,526 | ) | 621 | 92,704 | ||||||||||||||
| Net income, 2011 | 917 | 917 | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Net change in unrealized gains on securities available for sale, net of reclass adjustments for realized losses and related taxes | 1,030 | 1,030 | ||||||||||||||||||
| Accretion of discount on preferred stock | 106 | (106 | ) | - | ||||||||||||||||
| Cash dividends paid on preferred shares | (1,030 | ) | (1,030 | ) | ||||||||||||||||
| Other common stock transactions | 86 | (1 | ) | 85 | ||||||||||||||||
| Director and management deferred stock plans | - | 68 | - | - | 68 | |||||||||||||||
| Balance, December 31, 2011 | $ | 20,364 | $ | 85,505 | $ | (13,746 | ) | $ | 1,651 | $ | 93,774 | |||||||||
(1) Accumulated other comprehensive income, net of tax | ||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||
| United Bancorp, Inc. and Subsidiary | ||||||||||||
| Years Ended December 31, | ||||||||||||
| In thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net income (loss) | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | ||||
| Adjustments to Reconcile Net Income to Net Cash from Operating Activities | ||||||||||||
| Depreciation and amortization | 3,884 | 2,743 | 2,121 | |||||||||
| Provision for loan losses | 12,150 | 21,530 | 25,770 | |||||||||
| Gain on sale of loans | (5,581 | ) | (5,698 | ) | (5,891 | ) | ||||||
| Proceeds from sales of loans originated for sale | 248,631 | 268,874 | 309,558 | |||||||||
| Loans originated for sale | (241,051 | ) | (265,486 | ) | (306,658 | ) | ||||||
| Losses (gains) on securities transactions | - | (31 | ) | 24 | ||||||||
| Change in deferred income taxes | (661 | ) | (2,748 | ) | (2,672 | ) | ||||||
| Stock option expense | 138 | 92 | 150 | |||||||||
| Increase in cash surrender value on bank owned life insurance | (428 | ) | (451 | ) | (493 | ) | ||||||
| Change in investment in limited partnership | (93 | ) | (106 | ) | (135 | ) | ||||||
| Goodwill impairment | - | - | 3,469 | |||||||||
| Change in accrued interest receivable and other assets | 3,741 | 4,933 | (5,410 | ) | ||||||||
| Change in accrued interest payable and other liabilities | (928 | ) | 117 | 441 | ||||||||
| Total adjustments | 19,802 | 23,769 | 20,274 | |||||||||
| Net cash from operating activities | 20,719 | 20,061 | 11,441 | |||||||||
| Cash Flows from Investing Activities | ||||||||||||
| Securities available for sale | ||||||||||||
| Purchases | (82,544 | ) | (82,785 | ) | (43,373 | ) | ||||||
| Sales | - | 4,376 | - | |||||||||
| Maturities and calls | 15,873 | 32,517 | 26,789 | |||||||||
| Principal payments | 17,122 | 11,397 | 6,629 | |||||||||
| Sale of FHLB stock | 217 | 204 | - | |||||||||
| Net change in portfolio loans | 8,353 | 38,302 | 21,090 | |||||||||
| Premises and equipment expenditures | (719 | ) | (201 | ) | (514 | ) | ||||||
| Net cash from investing activities | (41,698 | ) | 3,810 | 10,621 | ||||||||
| Cash Flows from Financing Activities | ||||||||||||
| Net change in deposits | 30,858 | (48,803 | ) | 73,252 | ||||||||
| Net change in short term borrowings | (1,234 | ) | 1,234 | - | ||||||||
| Principal payments on other borrowings | (6,286 | ) | (11,777 | ) | (18,438 | ) | ||||||
| Proceeds from other borrowings | - | - | 10,500 | |||||||||
| Proceeds from issuance of preferred stock and warrants | - | - | 20,600 | |||||||||
| Proceeds from public stock offering and other common stock transactions | 41 | 17,138 | 98 | |||||||||
| Cash dividends paid on common and preferred | (1,030 | ) | (1,030 | ) | (957 | ) | ||||||
| Net cash from financing activities | 22,349 | (43,238 | ) | 85,055 | ||||||||
| Net Change in Cash and Cash Equivalents | 1,370 | (19,367 | ) | 107,117 | ||||||||
| Cash and cash equivalents at beginning of year | 106,222 | 125,589 | 18,472 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 107,592 | $ | 106,222 | $ | 125,589 | ||||||
| Supplemental Disclosures: | ||||||||||||
| Interest paid | $ | 6,235 | $ | 9,004 | $ | 12,707 | ||||||
| Income tax paid | 20 | - | - | |||||||||
| Loans transferred to other real estate | 3,250 | 3,379 | 1,814 | |||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
United Bancorp, Inc. and Subsidiaries
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of United Bancorp, Inc. and its wholly owned subsidiary, United Bank & Trust (“UBT” or “the Bank”) after elimination of significant intercompany transactions and accounts. The Company is engaged 100% in the business of commercial and retail banking, including trust and investment services, with operations conducted through its offices located in Lenawee, Washtenaw, Livingston and Monroe Counties in southeastern Michigan. These counties are the source of substantially all of the Company's deposit, loan, trust and investment activities.
Effective April 1, 2010, the Company completed the consolidation of its subsidiary banks, United Bank & Trust and United Bank & Trust – Washtenaw. Under the consolidation, United Bank & Trust – Washtenaw was consolidated and merged with and into United Bank & Trust, and the consolidated bank operates under the charter and name of United Bank & Trust.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as affecting the disclosures provided. Actual results could differ from those estimates. The allowance for loan losses, loan servicing rights and the fair values of financial instruments are particularly subject to change.
Securities
Securities available for sale consist of bonds and notes that might be sold prior to maturity. Securities classified as available for sale are reported at their fair values and the related net unrealized holding gain or loss is reported in other comprehensive income. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and the allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Loans are placed on nonaccrual status at ninety days or more past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. This policy applies to each of the Company’s portfolio segments.
The Company’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance; (1) specific allowances allocated to loans evaluated individually for impairment under the Accounting Standards Codification (“ASC”) Section 310-10-35 of the Financial Accounting Standards Board (“FASB”), and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20. Until the third quarter of 2011, the Company’s past loan loss experience was determined by evaluating the average charge-offs over the most recent eight quarters. Effective September 30, 2011, the Company changed its allocation methodology as described in detail below.
For the quarter ended September 30, 2011, the Company changed its methodology for evaluating the adequacy of the allowance for loan losses by revising and enhancing the methodology for loans evaluated collectively for impairment. Under its new methodology, the Company revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools are analyzed by general loan types, and further analyzed by collateral types, where appropriate. However, under the new methodology, pools are further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types.
Allowance allocations for each pool are determined through a migration analysis based on activity for the period beginning March 2008. The analysis computes loss rates based on a probability of default (“PD”) and loss given default (“LGD”). Allowance allocations were previously computed based on weighted average charge-off rates as opposed to the use of credit migration matrices, which computes PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories. The March 2008 date was selected in an effort to capture sufficient data points to provide a meaningful migration analysis using available data in comparable formats.
Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under the new methodology, the Company applies a more detailed analysis of qualitative factors that are assessed on a quarterly basis based upon gradings specific to the Company, as well as regional economic metrics. As of September 30, 2011, the allowance for loan losses for loans evaluated collectively for impairment decreased from $15.6 million under the Company’s prior methodology to $11.9 million under the new methodology.
Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations require an increase in the allowance for loan losses, that
increase is recorded as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification. This policy applies to each class of the Company’s loan portfolio.
Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including loans to the borrower by United Bank & Trust (the “Bank”), the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans are charged off, in part or in full, when deemed uncollectible. This typically occurs when the loan is 120 or more days past due, unless the loan is both well-secured and in the process of collection. This policy applies to each class of the Company’s loan portfolio.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The provisions for depreciation are computed principally by the straight-line method, based on useful lives of ten to forty years for premises and three to eight years for equipment.
Other Real Estate Owned
Other real estate consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure and property acquired for possible future expansion. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed and the real estate is carried at the lower of cost basis or fair value, less estimated selling costs. The historical average holding period for such properties is less than eighteen months. As of December 31, 2011 and 2010, other real estate owned totaled $3,657,000 and $4,278,000, and is included in other assets on the consolidated balance sheets.
Servicing Rights
Servicing rights are recognized as assets for the allocated value of retained servicing on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates, remaining loan terms and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Long-term Assets
Long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to their fair value.
Income Tax
The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates, adjusted for allowances made for uncertainty regarding the realization of deferred tax assets. The Company has no uncertain tax positions as defined by the Tax Position Topic of the FASB Accounting Standards Codification (“FASB ASC”) Topic 740-10-05.
The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2010.
Earnings (Loss) Per Share
Amounts reported as earnings or loss per share are based on income or loss available to common shareholders divided by weighted average shares outstanding. Income or loss available to common shareholders is calculated by subtracting dividends on preferred stock and the accretion of discount on preferred stock from net income or loss. Weighted average shares outstanding include the weighted average number of common shares outstanding plus the weighted average number of contingently issuable shares associated with the Directors' and Senior Management Group's deferred stock plans.
Stock Based Compensation
At December 31, 2011, the Company has a stock-based employee compensation plan, which is described more fully in Note 16. The Company’s disclosure regarding this plan is in accordance with the fair value recognition provisions of FASB ASC Topic 718-10.
Statements of Cash Flows
For purposes of this Statement, cash and cash equivalents include cash on hand, demand balances with banks, and federal funds sold. Federal funds are generally sold for one-day periods. The Company reports net cash flows for client loan and deposit transactions, deposits made with other financial institutions, and short-term borrowings with an original maturity of ninety days or less.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income or loss and other comprehensive income (loss). Other comprehensive income (loss) includes net unrealized gains and losses on securities available for sale, net of tax, which are also recognized as separate components of shareholders' equity.
Industry Segment
The Company and its subsidiary are primarily organized to operate in the banking industry. Substantially all revenues and services are derived from banking products and services in southeastern Michigan. While the Company's chief decision makers monitor various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one business segment.
Recently Issued Accounting Standards
ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. The Company adopted the methodologies prescribed by this ASU effective with its third quarter 2011 financial statements.
ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements. In April 2011, FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.
The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.
The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-05 and ASU 2011-12; Amendments to Topic 220, Comprehensive Income. In June 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the
components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company adopted the methodologies prescribed by this ASU effective with its third quarter financial statements.
In December, 2011, FASB issued ASU 2011-12, which included additional information to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05 to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities.
Accounting Standards Update No. 2011-09—Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715–80); On September 21, 2011, FASB issued ASU 2011-09. The amendments in this update require additional disclosures about an employer's participation in a multiemployer plan. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. The Company does not participate in multiemployer plans as defined by the ASU, and does not anticipate that adoption of this ASU will have an impact on its financial position or results of operations.
Accounting Standards Update No. 2011-10—Property, Plant, and Equipment (Topic 360); On December 14, 2011, FASB issued ASU 2011-10. The objective of the amendments in this Update is to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate.
The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. Early adoption is permitted. The Company does not anticipate that adoption of this ASU will have an impact on its financial position or results of operations.
Accounting Standards Update No. 2011-11—Balance Sheet (Topic 210). In December 2011, FASB issued ASU 2011-11. The objective of this Update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting
arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.
An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with circumstances and challenges that in many cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.
At December 31, 2011, the Company held $2.6 million in commercial real estate and $269.3 million in loans collateralized by commercial and development real estate. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
NOTE 2 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Bank is subject to average reserve and clearing balance requirements in the form of cash on hand or balances due from the Federal Reserve Bank. The amount of reserve and clearing balances required at December 31, 2011 were $473,000. These reserve balances vary depending on the level of client deposits in the Bank.
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2011 and 2010, cash equivalents consisted primarily of interest-bearing balances with banks.
As a result of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, all funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the general FDIC deposit insurance
coverage of up to $250,000 available to depositors. The financial institution holding the Company’s cash accounts is insured by the FDIC. At December 31, 2011, the Company’s cash accounts did not exceed federally insured limits. At December 31, 2011, the Company had cash balances of $91,673,000 at the FRB and FHLB that did not have FDIC insurance coverage.
NOTE 3 - SECURITIES
Balances of securities by category are shown below, as of December 31, 2011 and 2010:
| Thousands of dollars | Securities Available for Sale | |||||||||||||||
| 2011 | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| U.S. Treasury and agency securities | $ | 48,999 | $ | 385 | $ | (18 | ) | $ | 49,366 | |||||||
| Mortgage backed agency securities | 101,855 | 1,321 | (479 | ) | 102,697 | |||||||||||
| Obligations of states and political subdivisions | 19,690 | 1,287 | - | 20,977 | ||||||||||||
| Corporate, asset backed and other debt securities | 126 | - | - | 126 | ||||||||||||
| Equity securities | 26 | 5 | - | 31 | ||||||||||||
| Total | $ | 170,696 | $ | 2,998 | $ | (497 | ) | $ | 173,197 | |||||||
| 2010 | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 33,897 | $ | 157 | $ | (367 | ) | $ | 33,687 | |||||||
| Mortgage backed agency securities | 65,714 | 821 | (437 | ) | 66,098 | |||||||||||
| Obligations of states and political subdivisions | 23,841 | 817 | (53 | ) | 24,605 | |||||||||||
| Corporate, asset backed and other debt securities | 126 | - | - | 126 | ||||||||||||
| Equity securities | 26 | 2 | - | 28 | ||||||||||||
| Total | $ | 123,604 | $ | 1,797 | $ | (857 | ) | $ | 124,544 | |||||||
The following table shows the gross unrealized loss and fair value of the Company's investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010.
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Thousands of dollars | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| 2011 | ||||||||||||||||||||||||
| U.S. Treasury and agency securities | $ | 5,101 | $ | (18 | ) | $ | - | $ | - | $ | 5,101 | $ | (18 | ) | ||||||||||
| Mortgage backed agency securities | 36,420 | (424 | ) | 5,764 | (55 | ) | 42,184 | (479 | ) | |||||||||||||||
| Total | $ | 41,521 | $ | (442 | ) | $ | 5,764 | $ | (55 | ) | $ | 47,285 | $ | (497 | ) | |||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| In thousands of dollars | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| 2010 | ||||||||||||||||||||||||
| U.S. Treasury and agency securities | $ | 22,677 | $ | (367 | ) | $ | - | $ | - | $ | 22,677 | $ | (367 | ) | ||||||||||
| Mortgage backed agency securities | 35,933 | (437 | ) | - | - | 35,933 | (437 | ) | ||||||||||||||||
| Obligations of states and political subdivisions | 2,214 | (53 | ) | - | - | 2,214 | (53 | ) | ||||||||||||||||
| Total | $ | 60,824 | $ | (857 | ) | $ | - | $ | - | $ | 60,824 | $ | (857 | ) | ||||||||||
Unrealized losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during 2011 or 2010. Loss from other than temporary impairment for 2009 consisted of write-down of one equity security that was deemed to be impaired.
The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate changes. 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, 2011.
The unrealized losses on the Company’s investment in residential mortgage-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2011.
The entire investment portfolio is classified as available for sale. However, management has no specific intent to sell any securities, and management believes that it is more likely than not that the Company will not have to sell any security before recovery of its cost basis. Sales activities for securities for the years indicated are shown in the following table. All sales were of securities identified as available for sale.
| Thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Sales proceeds | $ | - | $ | 4,376 | $ | - | ||||||
| Gross gains on sales | - | 38 | - | |||||||||
| Gross loss on sales | - | (7 | ) | - | ||||||||
| Loss from other than temporary impairment | - | - | (24 | ) | ||||||||
The fair value of securities available for sale by contractual maturity as of December 31, 2011 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities are included in the “Due in one year or less” category.
| Thousands of dollars | Amortized Cost | Fair Value | ||||||
| Due in one year or less | $ | 31,166 | $ | 31,445 | ||||
| Due after one year through five years | 135,985 | 137,814 | ||||||
| Due after five years through ten years | 3,034 | 3,343 | ||||||
| Due after ten years | 485 | 564 | ||||||
| Equity securities | 26 | 31 | ||||||
| Total securities | $ | 170,696 | $ | 173,197 | ||||
Securities carried at $3,060,000 and $4,857,000 as of December 31, 2011 and 2010, respectively, were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.
NOTE 4 - LOANS
The following table shows total loans outstanding at December 31 and the percentage change in balances from the prior year. All loans are domestic and contain no significant concentrations by industry or client.
| Thousands of dollars | 2011 | % Change | 2010 | % Change | ||||||||||||
| Personal | $ | 103,405 | -3.7 | % | $ | 107,399 | -3.0 | % | ||||||||
| Business, including commercial mortgages | 335,133 | -5.4 | % | 354,340 | -9.7 | % | ||||||||||
| Tax exempt | 2,045 | -5.7 | % | 2,169 | -27.8 | % | ||||||||||
| Residential mortgage | 83,072 | -3.4 | % | 86,006 | -0.5 | % | ||||||||||
| Construction and development | 39,721 | -4.4 | % | 41,554 | -26.7 | % | ||||||||||
| Deferred loan fees and costs | 326 | -36.9 | % | 517 | -29.0 | % | ||||||||||
| Total portfolio loans | $ | 563,702 | -4.8 | % | $ | 591,985 | -8.9 | % | ||||||||
NOTE 5 - ALLOWANCE FOR LOAN LOSSES AND CREDIT RISK
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. This policy applies to each of the Company’s portfolio segments.
The Company’s established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance; (1) specific allowances allocated to loans evaluated individually for impairment under the Accounting Standards Codification (“ASC”) Section 310-10-35 of the Financial Accounting Standards Board (“FASB”), and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20.
Prior to the fourth quarter of 2009, the Company determined its past loan loss experience by using a rolling twelve quarter historical approach. Beginning in the fourth quarter of 2009, the Company began using a rolling eight quarter historical approach. The change in methodology was implemented as management believed this shorter period was more reflective of the current
economic conditions at that time and that the collectively-evaluated allowance could be better estimated by using a shorter loss period rather than a longer loss period combined with a larger emphasis on estimating additional qualitative and environment factors. The impact of the change in methodology increased the allowance for loan losses in the fourth quarter of 2009 by approximately $235,000.
For the quarter ended September 30, 2011, the Company changed its methodology for evaluating the adequacy of the allowance for loan losses by revising and enhancing the methodology for loans evaluated collectively for impairment. Under its new methodology, the Company revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools are analyzed by general loan types, and further analyzed by collateral types, where appropriate. However, under the new methodology, pools are further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types.
Allowance allocations for each pool are determined through a migration analysis based on activity for the period beginning March 2008. The analysis computes loss rates based on a probability of default (“PD”) and loss given default (“LGD”). Allowance allocations were previously computed based on weighted average charge-off rates as opposed to the use of credit migration matrices, which computes PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories. The March 2008 date was selected in an effort to capture sufficient data points to provide a meaningful migration analysis using available data in comparable formats.
Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under the new methodology, the Company applies a more detailed analysis of qualitative factors that are assessed on a quarterly basis based upon gradings specific to the Company, as well as regional economic metrics. As of September 30, 2011, the allowance for loan losses for loans evaluated collectively for impairment decreased from $15.6 million under the Company’s prior methodology to $11.9 million under the new methodology.
Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations require an increase in the allowance for loan losses, that increase is recorded as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification. This policy applies to each class of the Company’s loan portfolio.
Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including
loans to the borrower by United Bank & Trust (the “Bank”), the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more.
Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans are charged off, in part or in full, when deemed uncollectible. This typically occurs when the loan is 120 or more days past due, unless the loan is both well-secured and in the process of collection. This policy applies to each class of the Company’s loan portfolio.
An analysis of the allowance for loan losses for the twelve-month periods ended December 31, 2011, 2010 and 2009 follows:
| Twelve Months Ended December 31, 2011 | ||||||||||||||||||||
| Thousands of dollars | Business & Commercial | CLD (1) | Residential Mortgage | Personal | Total | |||||||||||||||
| Balance, January 1 | $ | 16,672 | $ | 3,248 | $ | 2,661 | $ | 2,582 | $ | 25,163 | ||||||||||
| Provision charged to expense | 9,863 | 2,886 | 1,579 | 1,536 | 15,864 | |||||||||||||||
| Amounts related to change in allocation methodology | (2,246 | ) | 49 | (990 | ) | (527 | ) | (3,714 | ) | |||||||||||
| Net provision after amounts related to change in allocation methodology | 7,617 | 2,935 | 589 | 1,009 | 12,150 | |||||||||||||||
| Losses charged off | (12,063 | ) | (2,908 | ) | (1,387 | ) | (2,006 | ) | (18,364 | ) | ||||||||||
| Recoveries | 1,111 | 278 | 68 | 227 | 1,684 | |||||||||||||||
| Balance, December 31 | $ | 13,337 | $ | 3,553 | $ | 1,931 | $ | 1,812 | $ | 20,633 | ||||||||||
| Ending balance: individually evaluated for impairment | $ | 5,213 | $ | 2,907 | $ | 871 | $ | 40 | $ | 9,031 | ||||||||||
| Ending balance: collectively evaluated for impairment | $ | 8,124 | $ | 646 | $ | 1,060 | $ | 1,772 | $ | 11,602 | ||||||||||
| Total Loans: | ||||||||||||||||||||
| Ending balance | $ | 333,979 | $ | 39,723 | $ | 86,029 | $ | 103,971 | $ | 563,702 | ||||||||||
| Ending balance: individually evaluated for impairment | $ | 31,225 | $ | 14,486 | $ | 5,241 | $ | 183 | $ | 51,135 | ||||||||||
| Ending balance: collectively evaluated for impairment | $ | 302,754 | $ | 25,237 | $ | 80,788 | $ | 103,788 | $ | 512,567 |
| Twelve Months Ended December 31, 2010 | 2009 | |||||||||||||||||||||||
| Thousands of dollars | Business & Commercial | CLD (1) | Residential Mortgage | Personal | Total | |||||||||||||||||||
| Balance, January 1 | $ | 12,221 | $ | 5,164 | $ | 760 | $ | 1,875 | $ | 20,020 | $ | 18,312 | ||||||||||||
| Provision charged to expense | 11,710 | 3,716 | 3,655 | 2,449 | 21,530 | 25,770 | ||||||||||||||||||
| Losses charged off | (7,683 | ) | (5,919 | ) | (1,820 | ) | (1,907 | ) | (17,329 | ) | (24,368 | ) | ||||||||||||
| Recoveries | 424 | 287 | 66 | 165 | 942 | 306 | ||||||||||||||||||
| Balance, December 31 | $ | 16,672 | $ | 3,248 | $ | 2,661 | $ | 2,582 | $ | 25,163 | $ | 20,020 | ||||||||||||
| Ending balance: individually evaluated for impairment | $ | 6,402 | $ | 1,765 | $ | 708 | $ | 283 | $ | 9,158 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 10,270 | $ | 1,483 | $ | 1,953 | $ | 2,299 | $ | 16,005 | ||||||||||||||
| Total Loans: | ||||||||||||||||||||||||
| Ending balance | $ | 354,020 | $ | 32,924 | $ | 90,867 | $ | 114,174 | $ | 591,985 | ||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 26,628 | $ | 14,699 | $ | 3,290 | $ | 566 | $ | 45,183 | ||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 327,392 | $ | 18,225 | $ | 87,577 | $ | 113,608 | $ | 546,802 | ||||||||||||||
| (1) Construction and land development loans | ||||||||||||||||||||||||
Credit Exposure and Quality Indicators
The Company categorizes commercial and tax-exempt loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, management capacity, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant. The risk characteristics of each loan portfolio segment are as follows:
Business and Commercial Mortgages. The Business and Commercial Mortgages segment consists of commercial and industrial loans and commercial real estate loans. Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
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 loans versus non-owner occupied loans.
Construction and Land Development. Construction and Land Development (“CLD”) loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. CLD loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. CLD loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Consumer. Consumer loans consist of two segments – residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and personal loans are secured by personal assets, such as automobiles or recreational vehicles. Some personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Internal Risk Categories
Commercial and tax-exempt loans that are analyzed individually are assigned one of eight internal risk categories. Categories 1-4 are considered to be Pass-rated loans. Other risk category definitions for individually-analyzed commercial and tax-exempt loans are as follows:
| 5 | Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. |
| 6 | Substandard. Loans classified as substandard are inadequately protected by the current net |
| worth and paying capacity of the obligor or of the collateral securing the loans, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. | |
| 7 | Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. |
| 8 | Loss. Loans classified as loss are regarded as uncollectible and should be charged off. |
Consumer loans are not rated on the above-listed risk categories, but are classified by their payment activity, either as performing, accruing restructured, delinquent less than 90 days, or nonperforming.
Quality indicators for portfolio loans as of December 31, 2011 and 2010 based on the Bank’s internal risk categories are detailed in the following tables.
| In thousands of dollars | As of December 31, 2011 | ||||||||||||||||||||
| Commercial & Tax-exempt Loans | CLD | Owner- Occupied CRE | Other CRE | Commercial & Industrial | Total Commercial | ||||||||||||||||
| Credit Risk Profile by Internally Assigned Rating | |||||||||||||||||||||
| 1-4 | Pass | $ | 11,940 | $ | 77,447 | $ | 96,864 | $ | 63,466 | $ | 249,717 | ||||||||||
| 5 | Special Mention | 2,920 | 15,526 | 15,897 | 17,212 | 51,555 | |||||||||||||||
| 6 | Substandard | 14,020 | 5,803 | 17,818 | 8,799 | 46,440 | |||||||||||||||
| 7 | Doubtful | 827 | 72 | - | 625 | 1,524 | |||||||||||||||
| 8 | Loss | - | - | - | - | - | |||||||||||||||
| Total | $ | 29,707 | $ | 98,848 | $ | 130,579 | $ | 90,102 | $ | 349,236 | |||||||||||
| Consumer Loans | ||||||||||||||||||||
| Credit risk profile based on payment activity | Residential Mortgage | Consumer Construction | Home Equity | Other Consumer | Total Consumer | |||||||||||||||
| Performing | $ | 95,045 | $ | 10,016 | $ | 74,387 | $ | 22,394 | $ | 201,842 | ||||||||||
| Accruing restructured | 3,078 | - | 171 | - | 3,249 | |||||||||||||||
| Delinquent less than 90 days | 3,072 | - | 239 | 70 | 3,381 | |||||||||||||||
| Nonperforming | 3,404 | - | 118 | 107 | 3,629 | |||||||||||||||
| Total | $ | 104,599 | $ | 10,016 | $ | 74,915 | $ | 22,571 | $ | 212,101 | ||||||||||
| Subtotal | $ | 561,337 | ||||||||||||||||||
| Deferred loan fees and costs, overdrafts, in-process accounts | 2,365 | |||||||||||||||||||
| Total Portfolio Loans | $ | 563,702 | ||||||||||||||||||
| In thousands of dollars | As of December 31, 2010 | ||||||||||||||||||||
| Commercial & Tax-exempt Loans | CLD | Owner-Occupied CRE | Other CRE | Commercial & Industrial | Total Commercial | ||||||||||||||||
| Credit Risk Profile by Internally Assigned Rating | |||||||||||||||||||||
| 1-4 | Pass | $ | 16,246 | $ | 79,929 | $ | 106,379 | $ | 51,751 | $ | 254,305 | ||||||||||
| 5 | Special Mention | 5,942 | 12,556 | 20,467 | 22,697 | 61,662 | |||||||||||||||
| 6 | Substandard | 13,381 | 12,641 | 10,773 | 9,350 | 46,145 | |||||||||||||||
| 7 | Doubtful | 427 | 416 | 74 | 120 | 1,037 | |||||||||||||||
| 8 | Loss | - | - | - | - | - | |||||||||||||||
| Total | $ | 35,996 | $ | 105,542 | $ | 137,693 | $ | 83,918 | $ | 363,149 | |||||||||||
| Consumer Loans | ||||||||||||||||||||
| Credit risk profile based on payment activity | Residential Mortgage | Consumer Construction | Home Equity | Other Consumer | Total Consumer | |||||||||||||||
| Performing | $ | 104,078 | $ | 5,558 | $ | 76,978 | $ | 24,507 | $ | 211,121 | ||||||||||
| Accruing restructured | 2,844 | - | - | - | 2,844 | |||||||||||||||
| Delinquent less than 90 days | 1,854 | - | 411 | 125 | 2,390 | |||||||||||||||
| Nonperforming | 4,765 | - | 762 | 56 | 5,583 | |||||||||||||||
| Total | $ | 113,541 | $ | 5,558 | $ | 78,151 | $ | 24,688 | $ | 221,938 | ||||||||||
| Subtotal | $ | 585,087 | ||||||||||||||||||
| Deferred loan fees and costs, overdrafts, in-process accounts | 6,898 | |||||||||||||||||||
| Total Portfolio Loans | $ | 591,985 | ||||||||||||||||||
Loan totals in the classifications above are based on categories of loans as classified within the Bank’s regulatory reporting. As a result, they may differ from totals of similar classifications in Note 4 and in the tables above.
Loan Portfolio Aging Analysis
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Schedules detailing the loan portfolio aging analysis as of December 31, 2011 and 2010 follow.
| Loan Portfolio Aging Analysis | ||||||||||||||||||||||||||||
| December 31, 2011 | Delinquent Loans | Total | Total | |||||||||||||||||||||||||
| Thousands of dollars | 30-89 Days Past Due | 90 Days and Over (a) (1) | Total Past Due (b) | Current (c-b-d) | Portfolio Loans (c) | Nonaccrual Loans (d) | Nonper-forming (a+d) | |||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Commercial CLD | $ | 426 | $ | - | $ | 426 | $ | 23,277 | $ | 29,707 | $ | 6,004 | $ | 6,004 | ||||||||||||||
| Owner-Occupied CRE | 1,511 | - | 1,511 | 92,828 | 98,848 | 4,509 | 4,509 | |||||||||||||||||||||
| Other CRE | 703 | - | 703 | 122,672 | 130,579 | 7,204 | 7,204 | |||||||||||||||||||||
| Commercial & Industrial | 447 | - | 447 | 85,216 | 90,102 | 4,439 | 4,439 | |||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Residential Mortgage | 3,072 | - | 3,072 | 98,123 | 104,599 | 3,404 | 3,404 | |||||||||||||||||||||
| Consumer Construction | - | - | - | 10,016 | 10,016 | - | - | |||||||||||||||||||||
| Home Equity | 239 | 31 | 270 | 74,558 | 74,915 | 87 | 118 | |||||||||||||||||||||
| Other Consumer | 70 | - | 70 | 22,394 | 22,571 | 107 | 107 | |||||||||||||||||||||
| Subtotal | $ | 6,468 | $ | 31 | $ | 6,499 | $ | 529,084 | $ | 561,337 | $ | 25,754 | $ | 25,785 | ||||||||||||||
| Deferred loan fees and costs, overdrafts, in-process accounts | 2,365 | |||||||||||||||||||||||||||
| Total Portfolio Loans | $ | 563,702 | ||||||||||||||||||||||||||
| Loan Portfolio Aging Analysis | ||||||||||||||||||||||||||||
| December 31, 2010 | Delinquent Loans | Total | Total | |||||||||||||||||||||||||
| Thousands of dollars | 30-89 Days Past Due | 90 Days and Over (a) (1) | Total Past Due (b) | Current (c-b-d) | Portfolio Loans (c) | Nonaccrual Loans (d) | Nonper-forming (a+d) | |||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Commercial CLD | $ | 1,044 | $ | - | $ | 1,044 | $ | 26,393 | $ | 35,996 | $ | 8,559 | $ | 8,559 | ||||||||||||||
| Owner-Occupied CRE | 688 | - | 688 | 101,317 | 105,542 | 3,537 | 3,537 | |||||||||||||||||||||
| Other CRE | 2,982 | - | 2,982 | 128,126 | 137,693 | 6,585 | 6,585 | |||||||||||||||||||||
| Commercial & Industrial | 734 | 142 | 876 | 78,204 | 83,918 | 4,838 | 4,980 | |||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Residential Mortgage | 1,854 | 441 | 2,295 | 106,922 | 113,541 | 4,324 | 4,765 | |||||||||||||||||||||
| Consumer Construction | - | - | - | 5,558 | 5,558 | - | - | |||||||||||||||||||||
| Home Equity | 411 | - | 411 | 76,978 | 78,151 | 762 | 762 | |||||||||||||||||||||
| Other Consumer | 125 | - | 125 | 24,507 | 24,688 | 56 | 56 | |||||||||||||||||||||
| Subtotal | $ | 7,838 | $ | 583 | $ | 8,421 | $ | 548,005 | $ | 585,087 | $ | 28,661 | $ | 29,244 | ||||||||||||||
| Deferred loan fees and costs, overdrafts, in-process accounts | 6,898 | |||||||||||||||||||||||||||
| Total Portfolio Loans | $ | 591,985 | ||||||||||||||||||||||||||
| (1) All are accruing. | ||||||||||||||||||||||||||||
Impaired Loans
Information regarding impaired loans as of December 31, 2011 and 2010 follows. Data for December 31, 2010 has been modified from presentation in previous periods to match the current period presentation:
| Impaired Loans at December 31, 2011 | Year Ended December 31, 2011 | |||||||||||||||||||
| Thousands of dollars | Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 5,977 | $ | 15,366 | $ | - | $ | 7,222 | $ | - | ||||||||||
| Owner-Occupied CRE | 1,622 | 2,502 | - | 1,997 | 54 | |||||||||||||||
| Other CRE | 4,922 | 8,031 | - | 5,822 | 165 | |||||||||||||||
| Commercial & Industrial | 1,696 | 3,774 | - | 1,141 | 11 | |||||||||||||||
| Consumer | - | |||||||||||||||||||
| Residential Mortgage | 1,042 | 1,778 | - | 867 | 4 | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 43 | 43 | - | 295 | - | |||||||||||||||
| Other Consumer | 189 | 189 | - | 358 | - | |||||||||||||||
| Subtotal | $ | 15,491 | $ | 31,683 | $ | - | $ | 17,702 | $ | 234 | ||||||||||
| Impaired Loans at December 31, 2011 | Year Ended December 31, 2011 | |||||||||||||||||||
| Thousands of dollars | Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 8,509 | $ | 8,594 | $ | 2,907 | $ | 6,956 | $ | 328 | ||||||||||
| Owner-Occupied CRE | 6,391 | 7,925 | 2,344 | 5,441 | 107 | |||||||||||||||
| Other CRE | 15,259 | 17,205 | 2,085 | 13,502 | 574 | |||||||||||||||
| Commercial & Industrial | 1,335 | 2,372 | 785 | 1,727 | 38 | |||||||||||||||
| Consumer | ||||||||||||||||||||
| Residential Mortgage | 4,792 | 5,998 | 870 | 5,740 | 148 | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 171 | 171 | 35 | 184 | 5 | |||||||||||||||
| Other Consumer | 5 | 5 | 5 | 5 | 1 | |||||||||||||||
| Subtotal | $ | 36,462 | $ | 42,270 | $ | 9,031 | $ | 33,555 | $ | 1,201 | ||||||||||
| Total Impaired Loans | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 14,486 | $ | 23,960 | $ | 2,907 | $ | 14,178 | $ | 328 | ||||||||||
| Owner-Occupied CRE | 8,013 | 10,427 | 2,344 | 7,438 | 161 | |||||||||||||||
| Other CRE | 20,181 | 25,236 | 2,085 | 19,324 | 739 | |||||||||||||||
| Commercial & Industrial | 3,031 | 6,146 | 785 | 2,868 | 49 | |||||||||||||||
| Consumer | ||||||||||||||||||||
| Residential Mortgage | 5,834 | 7,776 | 870 | 6,607 | 152 | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 214 | 214 | 35 | 479 | 5 | |||||||||||||||
| Other Consumer | 194 | 194 | 5 | 363 | 1 | |||||||||||||||
| Total Impaired Loans | $ | 51,953 | $ | 73,953 | $ | 9,031 | $ | 51,257 | $ | 1,435 | ||||||||||
| Impaired Loans at December 31, 2010 | Year Ended December 31, 2010 | |||||||||||||||||||
| Thousands of dollars | Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 3,434 | $ | 8,194 | $ | - | $ | 3,872 | $ | - | ||||||||||
| Owner-Occupied CRE | 2,457 | 2,853 | - | 2,225 | 60 | |||||||||||||||
| Other CRE | 1,300 | 1,681 | - | 1,405 | 16 | |||||||||||||||
| Commercial & Industrial | 1,301 | 1,330 | - | 783 | 48 | |||||||||||||||
| Consumer | ||||||||||||||||||||
| Residential Mortgage | 3,129 | 3,693 | - | 4,418 | - | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 257 | 257 | - | 478 | - | |||||||||||||||
| Other Consumer | 253 | 253 | - | 542 | - | |||||||||||||||
| Subtotal | $ | 12,131 | $ | 18,262 | $ | - | $ | 13,723 | $ | 124 | ||||||||||
| Impaired Loans at December 31, 2010 | Year Ended December 31, 2010 | |||||||||||||||||||
| Thousands of dollars | Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 10,519 | $ | 17,999 | $ | 1,627 | $ | 9,786 | $ | 161 | ||||||||||
| Owner-Occupied CRE | 6,511 | 7,185 | 1,532 | 5,595 | 198 | |||||||||||||||
| Other CRE | 14,062 | 18,043 | 4,305 | 13,230 | 408 | |||||||||||||||
| Commercial & Industrial | 1,713 | 2,397 | 703 | 917 | 20 | |||||||||||||||
| Consumer | ||||||||||||||||||||
| Residential Mortgage | 3,290 | 3,327 | 708 | 2,396 | 105 | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 588 | 611 | 278 | 430 | 13 | |||||||||||||||
| Other Consumer | 8 | 8 | 5 | 10 | 7 | |||||||||||||||
| Subtotal | $ | 36,691 | $ | 49,571 | $ | 9,158 | $ | 32,364 | $ | 911 | ||||||||||
| Total Impaired Loans | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial CLD | $ | 13,953 | $ | 26,193 | $ | 1,627 | $ | 13,658 | $ | 161 | ||||||||||
| Owner-Occupied CRE | 8,968 | 10,038 | 1,532 | 7,820 | 257 | |||||||||||||||
| Other CRE | 15,362 | 19,724 | 4,305 | 14,635 | 424 | |||||||||||||||
| Commercial & Industrial | 3,014 | 3,728 | 703 | 1,700 | 68 | |||||||||||||||
| Consumer | ||||||||||||||||||||
| Residential Mortgage | 6,419 | 7,020 | 708 | 6,814 | 105 | |||||||||||||||
| Consumer Construction | - | - | - | - | - | |||||||||||||||
| Home Equity | 845 | 868 | 278 | 908 | 13 | |||||||||||||||
| Other Consumer | 261 | 261 | 5 | 552 | 7 | |||||||||||||||
| Total Impaired Loans | $ | 48,822 | $ | 67,833 | $ | 9,158 | $ | 46,087 | $ | 1,035 | ||||||||||
Included in the above impaired loan totals were $21.8 million and $17.3 million of loan modifications meeting the definition of a troubled debt restructuring that were accruing interest and performing in accordance with their agreements at December 31, 2011 and 2010, respectively. Substantially all of the interest income recognized in the tables above was recorded on a cash basis.
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. These policies apply to each class of the Company’s loan portfolio.
Troubled Debt Restructurings
In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
It is the Bank’s policy to have any restructured loans 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. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $10.7 million at December 31, 2011 and $8.5 million at December 31, 2010. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $21.8 million at December 31, 2011 and $17.3 million at December 31, 2010.
Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter. All TDRs are considered impaired by the Company. When it is determined that the borrower has met the six month satisfactory performance period (or six payments) under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan, the loan is considered to be performing. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets both of these criteria.
Accruing restructured loans at December 31, 2011 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of $18.6 million of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate. Within this category are $8.2 million of CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower.
The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans. The average yield on modified commercial loans was 5.38%, compared to 5.54% earned on the entire commercial loan portfolio in the fourth quarter of 2011.
The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance. This category consists of fifteen loans for a total of $3.2 million at December 31, 2011. The average yield on modified residential mortgage and home equity loans was 3.96%, compared to 5.71% earned on the entire residential mortgage loan portfolio in the fourth quarter of 2011.
The Company has no personal loans other than the loans described in the paragraph above that are classified as troubled debt restructurings.
With regard to determination of the amount of the allowance for loan losses, all restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above.
The following tables present information regarding troubled debt restructurings for the years ended December 31, 2011 and 2010.
| Newly Classified Accruing Troubled Debt Restructurings | ||||||||||||||||||||||||
| Twelve months ended | December 31, 2011 | December 31, 2010 | ||||||||||||||||||||||
| Dollars in thousands | Total Number of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | Total Number of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Commercial CLD | 4 | $ | 3,858 | $ | 3,858 | 6 | $ | 4,508 | $ | 4,508 | ||||||||||||||
| Owner-Occupied CRE | 2 | 479 | 479 | - | - | - | ||||||||||||||||||
| Other CRE | 3 | 3,128 | 3,128 | 5 | 6,853 | 6,853 | ||||||||||||||||||
| Commercial & Industrial | 3 | 704 | 704 | 4 | 443 | 443 | ||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Residential Mortgage | 3 | 1,199 | 1,199 | 9 | 1,879 | 1,879 | ||||||||||||||||||
| Total | 15 | $ | 9,368 | $ | 9,368 | $ | 25 | $ | 13,858 | $ | 13,858 | |||||||||||||
| Twelve months ended December 31, 2011 | Troubled Debt Restructurings that Subsequently Defaulted | |||||||
| Dollars in thousands | Number of Loans | Recorded Balance | ||||||
| Commercial | ||||||||
| Commercial CLD | 1 | $ | 119 | |||||
| Other CRE | 3 | 740 | ||||||
| Commercial & Industrial | - | - | ||||||
| Consumer | ||||||||
| Residential Mortgage | 3 | 1,236 | ||||||
| Total | 7 | $ | 2,095 | |||||
As a result of adopting the amendments in ASU No. 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) to determine whether they are now considered troubled debt restructurings. The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $4.0 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss, was $1.5 million.
NOTE 6 - LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others was $735,108,000 and $655,054,000 at December 31, 2011 and 2010, respectively. The balance of loans serviced for others related to servicing rights that have been capitalized was $732,591,000 and $651,629,000 at December 31, 2011 and 2010, respectively.
Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the years ended December 31 was as follows:
| In thousands of dollars | 2011 | 2010 | ||||||
| Balance, January 1 | $ | 4,763 | $ | 3,775 | ||||
| Amount capitalized | 1,791 | 1,922 | ||||||
| Amount amortized | (1,149 | ) | (935 | ) | ||||
| Change in valuation allowance | - | 1 | ||||||
| Balance, December 31 | $ | 5,405 | $ | 4,763 | ||||
The fair value of servicing rights was as follows at December 31:
| In thousands of dollars | 2011 | 2010 | ||||||
| Fair value, January 1 | 5,806 | $ | 4,535 | |||||
| Fair value, December 31 | $ | 7,331 | $ | 5,806 | ||||
NOTE 7 - PREMISES AND EQUIPMENT
Depreciation expense was approximately $1,124,000 in 2011, $1,251,000 in 2010 and $1,387,000 in 2009. Premises and equipment as of December 31 consisted of the following:
| In thousands of dollars | 2011 | 2010 | ||||||
| Land | $ | 1,863 | $ | 1,863 | ||||
| Buildings and improvements, including building in progress | 15,131 | 14,726 | ||||||
| Furniture and equipment | 14,680 | 14,470 | ||||||
| Total cost | 31,674 | 31,059 | ||||||
| Less accumulated depreciation | (20,879 | ) | (19,818 | ) | ||||
| Premises and equipment, net | $ | 10,795 | $ | 11,241 | ||||
The Company has a small number of non-cancellable operating leases, primarily for banking facilities that expire over the next fifteen years. The leases generally contain renewal options for periods ranging from one to five years. Rental expense for these leases was $1.2 million for the year ended December 31, 2011 and $1.1 million for the years ended December 31, 2010 and 2009, respectively.
Future minimum lease payments under operating leases are shown in the table below:
| In thousands of dollars | ||||
| 2012 | $ | 1,243 | ||
| 2013 | 1,249 | |||
| 2014 | 1,170 | |||
| 2015 | 1,016 | |||
| 2016 | 940 | |||
| Thereafter | 2,455 | |||
| Total Minimum Lease Payments | $ | 8,073 | ||
NOTE 8 - GOODWILL
In 2009, management performed an impairment evaluation to identify potential impairment of goodwill carried by the Company’s subsidiary banks. As a result of the impairment evaluation, a goodwill impairment charge was taken in the first quarter of 2009 for the Company’s entire book value of goodwill of $3.469 million. This non-cash charge was recorded as a component of noninterest expense. The goodwill on the books of the banks originally resulted from the acquisition of various banking offices between 1992 and 1999.
NOTE 9 - DEPOSITS
Information relating to maturities of time deposits as of December 31 is summarized below:
| In thousands of dollars | 2011 | 2010 | ||||||
| Within one year | $ | 168,471 | $ | 152,392 | ||||
| Between one and two years | 50,150 | 49,765 | ||||||
| Between two and three years | 19,923 | 24,690 | ||||||
| Between three and four years | 4,351 | 7,742 | ||||||
| Between four and five years | 2,380 | 4,625 | ||||||
| Total time deposits | $ | 245,275 | $ | 239,214 | ||||
| Interest bearing time deposits in denominations of $100,000 or more | $ | 82,018 | $ | 87,482 | ||||
NOTE 10 - SHORT TERM BORROWINGS
The Company has several credit facilities in place for short term borrowing which are used on occasion as a source of liquidity. These facilities consist of borrowing authority totaling $7.0 million from correspondent banks to purchase federal funds on a daily basis. There were no fed funds purchased outstanding at December 31, 2011 and 2010.
The Company’s balance sheet includes short-term borrowings of $1.234 million at December 31, 2010, representing the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16 in 2010. In the first quarter of 2011, the Company modified its SBA 7a loan sales contract to eliminate a 90-day warranty period to the purchaser of the loans, eliminating the requirement to record a liability for the sold portion of the loans, and the Company’s balance sheet included no short term borrowings related to SBA loans at December 31, 2011.
The Bank may also enter into sales of securities under agreements to repurchase ("repurchase agreements"). These agreements generally mature within one to 120 days from the transaction date. U.S. Treasury, agency and other securities involved with the agreements are recorded as assets and are generally held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain clients as an investment alternative to deposit products. There were no balances outstanding at any time during 2011 or 2010.
NOTE 11 - OTHER BORROWINGS
The Bank carried fixed rate, non-callable advances from the Federal Home Loan Bank of Indianapolis totaling $24.0 million and $30.3 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the rates on the advances ranged from 2.74% to 5.36% with a weighted average rate of 3.43%.
Advances are primarily collateralized by residential mortgage loans under a blanket security agreement. Additional coverage is provided by Other Real Estate Related (“ORER”) and Community Financial Institution (“CFI”) collateral. The unpaid principal balance of the loans pledged as collateral required is between 155% and 250%, depending on the type of collateral
and was $150.3 million at year-end 2011. Interest payments are made monthly, with principal due annually and at maturity. If principal payments are paid prior to maturity, advances are subject to a prepayment penalty.
Maturities and scheduled principal payments for other borrowings over the next five years as of December 31 are shown below.
| In thousands of dollars | 2011 | |||
| Within one year | $ | 2,296 | ||
| Between one and two years | 10,306 | |||
| Between two and three years | 9,513 | |||
| Between three and four years | 44 | |||
| Between four and five years | 47 | |||
| More than five years | 1,829 | |||
| Total | $ | 24,035 | ||
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its clients. These financial instruments include commitments to make loans, unused lines of credit, and letters of credit. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for loans and investments recorded in the consolidated financial statements. The Bank's commitments to extend credit are agreements at predetermined terms, as long as the client continues to meet specified criteria, with fixed expiration dates or termination clauses.
The following table shows the commitments to make loans and the unused lines of credit available to clients at December 31:
| 2011 | 2010 | |||||||||||||||
| In thousands of dollars | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | ||||||||||||
| Commitments to make loans | $ | 21,309 | $ | 7,017 | $ | 1,729 | $ | 2,566 | ||||||||
| Unused lines of credit | 96,948 | 4,116 | 88,973 | 3,236 | ||||||||||||
| Standby letters of credit | 10,262 | - | 10,718 | - | ||||||||||||
Commitments to make loans generally expire within thirty to ninety days, while unused lines of credit expire at the maturity date of the individual loans. At December 31, 2011, the rates for amounts in the fixed rate category ranged from 3.25% to 7.00%.
In 2001, United Bank & Trust entered into a limited partnership agreement to purchase tax credits awarded from the construction, ownership and management of an affordable housing project and a residual interest in the real estate. As of December 31, 2011 and 2010, the total
recorded investment including the obligation to make additional future investments were $900,000 and $1,014,000 respectively, and was included in other assets. As of December 31, 2011 and 2010, the obligation of UBT to the limited partnership was $457,000 and $664,000, respectively, which was reported in other liabilities. While UBT is a 99% partner, the investment is accounted for on the equity method as UBT is a limited partner and has no control over the operation and management of the partnership or the affordable housing project.
NOTE 13 - FEDERAL INCOME TAX
Income tax benefit consists of the following for the years ended December 31:
| In thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Current | $ | 238 | $ | (190 | ) | $ | (2,967 | ) | ||||
| Deferred | (661 | ) | (2,748 | ) | (2,672 | ) | ||||||
| Total income tax benefit | $ | (423 | ) | $ | (2,938 | ) | $ | (5,639 | ) | |||
The Company’s effective tax rates were a calculated benefit based upon pre-tax losses, resulting in a tax benefit for each year presented.
The components of deferred tax assets and liabilities at December 31 are as follows:
| In thousands of dollars | 2011 | 2010 | ||||||
| Deferred tax assets: | ||||||||
| Allowance for loan losses | $ | 7,054 | $ | 8,555 | ||||
| Other real estate owned | 1,280 | 878 | ||||||
| Deferred compensation | 778 | 726 | ||||||
| Low income housing and Alternative Minimum Tax credit | 947 | 1,284 | ||||||
| Net Operating Loss | 2,590 | 510 | ||||||
| Other | 1,120 | 1,038 | ||||||
| Total deferred tax assets | $ | 13,769 | $ | 12,991 | ||||
| 2011 | 2010 | |||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | $ | (286 | ) | $ | (328 | ) | ||
| Mortgage servicing rights | (1,838 | ) | (1,620 | ) | ||||
| Unrealized appreciation on securities available for sale | (850 | ) | (320 | ) | ||||
| Other | (908 | ) | (967 | ) | ||||
| Total deferred tax liabilities | $ | (3,882 | ) | $ | (3,235 | ) | ||
| Net deferred tax asset | $ | 9,887 | $ | 9,756 | ||||
At December 31, 2011, the Company had net operating losses of $7.6 million that are being carried forward to reduce future taxable income. The carryforwards expire in 2030 and 2031. As of December 31, 2011, the Company had approximately $947,000 of low income housing and alternative minimum tax credits available to offset future federal income taxes. The low income
housing credits expire in 2028 through 2031, and the alternative minimum tax credits have no expiration date.
The Company’s net deferred tax asset is included in the category “Accrued interest receivable and other assets” on the balance sheet. The Company’s net deferred tax asset was $9.9 million at December 31, 2011. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. The following lists the evidence considered in determining whether a valuation allowance was necessary for deferred tax assets:
Negative Evidence
| · | As a result of cumulative losses over the past few years, the Company has a tax Net Operating Loss (“NOL”) of $7.6 million as of December 31, 2011 |
Positive Evidence
| · | The Company had many years of consistently profitable operations before 2009; |
| · | The Company’s NOL carry-forward position of $7.6 million at December 31, 2011 is not large in comparison to historical profitability (taxable income of $41.6 million from 2004 to 2008); |
| · | The Company can carry forward losses for twenty years; |
| · | The Company’s pre-tax loss has been reduced from $14.5 million in 2009 to $6.6 million in 2010. The Company generated a pre-tax profit of $0.5 million in 2011; |
| · | The Company’s 2009-2010 losses were due to a goodwill impairment of $3.5 million in 2009 along with high provision for loan losses, which have been reduced from $25.8 million in 2009 to $21.5 million in 2010, and $12.2 in 2011; |
| · | Management expects a return to sustained profitability in future years as a result of strong core earnings and continued reduction in loan losses. |
| · | Available tax planning strategies, including: |
| o | Sale and leaseback of premises |
| o | Sale of mortgage servicing rights |
| o | Sale of municipal securities |
Based upon our analysis of the evidence (both negative and positive), management has determined that no valuation allowance was required at December 31, 2011 or 2010.
Reconciliation between total federal income tax and the amount computed through the use of the federal statutory tax rate for the years ended is as follows:
| In thousands of dollars | 2011 | 2010 | 2009 | ||||||||||
| Income taxes at statutory rate of 34% | $ | 169 | $ | (2,259 | ) | $ | (4,920 | ) | |||||
| Non-taxable income, net of nondeductible interest expense | (289 | ) | (363 | ) | (476 | ) | |||||||
| Income on non-taxable bank owned life insurance | (145 | ) | (153 | ) | (168 | ) | |||||||
| Affordable housing credit | (188 | ) | (188 | ) | (188 | ) | |||||||
| Goodwill write-off | - | - | 150 | ||||||||||
| Other | 30 | 25 | (37 | ) | |||||||||
| Total federal income tax | $ | (423 | ) | $ | (2,938 | ) | $ | (5,639 | ) | ||||
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which they are principal owners, are clients of the Bank. Loans to these parties did not, in the judgment of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of these loans at December 31, 2010 was $1,677,000. That balance was adjusted to exclude directors and officers that were not with the Company at the end of 2011. During 2011, new and newly reportable loans to such related parties amounted to $804,000 and repayments amounted to $1,318,000, resulting in a balance at December 31, 2011 of $1,164,000. Related party deposits totaled $1,315,000 and $1,046,000 at December 31, 2011 and 2010, respectively. The balance of deposits at December 31, 2010 was adjusted to exclude directors and officers that were not with the Company at the end of 2011.
NOTE 15 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Banking laws and regulations restrict the amount the Bank can transfer to the Company in the form of cash dividends and loans. Under the Memorandum of Understanding described in Note 18, United Bank & Trust may not declare or pay any dividends without prior approval of its regulators. It is not the intent of management to pay dividends in amounts that would reduce the capital of the Bank to a level below that which is considered prudent by management and in accordance with the guidelines of regulatory authorities.
NOTE 16 - EMPLOYEE BENEFIT PLANS
Employee Savings Plan
The Company maintains a 401(k) employee savings plan ("plan") which is available to substantially all employees. Individual employees may make contributions to the plan up to 100% of their compensation up to a maximum of $16,500 for 2011, 2010 and 2009. Prior to July, 2009, the Company offered discretionary matching of funds for a percentage of the employee contribution, plus an amount based on Company earnings. In July 1, 2009, the Company discontinued its profit sharing and employer matching contributions to the plan, and had no expense for the plan for 2010. The Company reinstated matching contributions beginning January 1, 2011, but did not make profit sharing contributions in 2011. The expense for the plan
for 2011 and 2009 was $459,000 and $238,000, respectively. The plan offers employees the option of purchasing Company stock with the match portion of their 401(k) contribution, and shares available to employees within the plan are purchased on the open market.
Director Retainer Stock Plan
The Company maintains a deferred compensation plan designated as the Director Retainer Stock Plan ("Director Plan"). The plan provides eligible directors of the Company and the Bank with a means of deferring payment of retainers and certain fees payable to them for Board service. Under the Director Plan, any retainers or fees elected to be deferred under the plan by an eligible director ultimately will be payable in common stock at the time of payment.
Senior Management Bonus Deferral Stock Plan
The Company maintains a deferred compensation plan designated as the Senior Management Bonus Deferral Stock Plan ("Management Plan"). The Management Plan has essentially the same purposes as the Director Plan discussed above and permits eligible employees of the Company and its affiliates to elect cash bonus deferrals and, after employment termination, to receive payouts in whole or in part in the form of common stock on terms substantially similar to those of the Director Plan.
Stock Options and Other Equity Awards
The Company has stock based compensation plans as described below. The Company has recorded approximately $138,000, $92,000 and $150,000 in compensation expense related to stock based compensation plans for the periods ended December 31, 2011, 2010 and 2009, respectively. The Company has a policy of issuing authorized but unissued shares to satisfy exercises of stock options or stock only stock appreciation rights.
Stock Incentive Plan
The Company’s Stock Incentive Plan of 2010 (the "Incentive Plan") permits the grant and award of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and other stock-based and stock-related awards (collectively referred to as "incentive awards") to directors, consultative board members, officers and other key employees of the Company and its subsidiaries.
The following table shows activity for the twelve months ended December 31, 2011 for the Company’s Incentive Plan:
SOSARs (1) | RSU (2) | Restricted Stock | ||||||||||||||||||||||
Awards Outstanding | Weighted Avg. Exercise Price | Awards Outstanding | Grant Date Fair Value | Awards Outstanding | Grant Date Fair Value | |||||||||||||||||||
| Balance at January 1 | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
| Awards granted | 87,250 | 3.35 | 28,000 | 3.35 | 25,500 | 3.35 | ||||||||||||||||||
| Awards forfeited | (1,500 | ) | 3.35 | (11,144 | ) | - | (500 | ) | 3.35 | |||||||||||||||
| Balance at Dec. 31 | 85,750 | $ | 3.35 | 16,856 | $ | 3.35 | 25,000 | $ | 3.35 | |||||||||||||||
(1) Stock Only Stock Appreciation Rights | ||||||||||||||||||||||||
(2) Restricted Stock Units | ||||||||||||||||||||||||
As of December 31, 2011, unrecognized compensation expense related to the Incentive Plan totaled $160,225. Costs for SOSARs are recognized over approximately three years. The compensation costs for RSUs are based on an expected level of achievement of performance targets as determined at the time of each grant, and are expected to be recognized over three years. Compensation costs for restricted stock grants will be recognized over two years.
The fair value of restricted stock grants is considered to be the market price of Company stock at the grant date. The fair value of RSU grants is considered to be the market price of Company stock at the grant date, adjusted for an estimated probability of achieving performance targets.
The fair value of each SOSAR grant is estimated on the grant date using the Black-Scholes option pricing model. Fair value of 2011 grants is based on the weighted-average assumptions shown in the table below.
| 2011 | ||||
| Dividend yield | 0.00 | % | ||
| Expected life | 5 years | |||
| Expected volatility | 35.00 | % | ||
| Risk-free interest rate | 2.16 | % | ||
| Fair value | $ | 1.136 | ||
At December 31, 2011, the SOSARs outstanding had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2011 and the exercise price of the SOSARs, multiplied by the number of in-the-money units held by each holder, assuming all option holders had exercised their SOSARs on December 31, 2011. The weighted–average period over which nonvested SOSARs are expected to be recognized is 1.18 years.
Stock Option Plan
Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company. Under the 2005 Plan, directors and management of the Company and subsidiaries were given the right to purchase stock of the Company at the then-current market price at the time the option was granted. The options have a three-year vesting period, and with certain exceptions, expire at the end of ten years, three years after retirement or ninety days after other separation from the Company. The 2005 Plan expired effective January 1, 2010, and no additional options may be granted under the plan. The following summarizes year to date option activity for the 2005 Plan:
| Stock Options | Options Outstanding | Weighted Avg. Exercise Price | ||||||
| Balance, January 1, 2011 | 407,730 | $ | 21.02 | |||||
| Options expired | (17,925 | ) | 18.27 | |||||
| Options forfeited | (8,062 | ) | 19.26 | |||||
| Balance, December 31, 2011 | 381,743 | $ | 21.19 | |||||
| Options exercisable at year-end | 352,176 | $ | 22.36 | |||||
The table below provides information regarding stock options outstanding under the 2005 Plan at December 31, 2011.
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Avg. Exercise Price | Number Outstanding | Weighted Avg. Exercise Price | ||||||||||||||||
| $6.00 to $32.14 | 381,743 | 4.48 | Years | $ | 21.19 | 352,176 | $ | 22.36 | |||||||||||||
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the weighted-average assumptions shown below. No figures are shown for 2011 or 2010, as there were no options granted during those years:
| 2009 | ||||
| Dividend yield | 1.00 | % | ||
| Expected life | 5 years | |||
| Expected volatility | 25.67 | % | ||
| Risk-free interest rate | 1.98 | % | ||
As of the end of 2011, unrecognized compensation expense related to the stock options granted under the 2005 Plan totaled $8,782 and is expected to be recognized over six months.
At December 31, 2011, the total outstanding stock options granted under the 2005 Plan had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2011 and the exercise price of each option, multiplied by the number of in-the-money stock options held by each holder, assuming all holders had exercised their stock options on December 31, 2011.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements. The Fair Value Measurements Topic of the FASB Accounting Standards Codification (“FASB ASC”) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes use of observable inputs and minimizes use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level 1 | Quoted prices in active markets for identical assets or liabilities |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of those instruments under the valuation hierarchy.
| Available-for-sale Securities |
| Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities include U.S. Government agency securities, mortgage backed securities, obligations of states and municipalities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather, relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no Level 3 securities. |
The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010:
| In thousands of dollars | Fair Value Measurements Using | |||||||||||||||
| December 31, 2011 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 49,366 | $ | - | $ | 49,366 | $ | - | ||||||||
| Mortgage backed agency securities | 102,697 | - | 102,697 | - | ||||||||||||
| Obligations of states and political subdivisions | 20,977 | - | 20,977 | - | ||||||||||||
| Corporate, asset backed and other debt securities | 126 | - | 126 | - | ||||||||||||
| Equity securities | 31 | 31 | - | - | ||||||||||||
| Total available for sale securities | $ | 173,197 | $ | 31 | $ | 173,166 | $ | - | ||||||||
| Fair Value Measurements Using | ||||||||||||||||
| December 31, 2010 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 33,687 | $ | - | $ | 33,687 | $ | - | ||||||||
| Mortgage backed agency securities | 66,098 | - | 66,098 | - | ||||||||||||
| Obligations of states and political subdivisions | 24,605 | - | 24,605 | - | ||||||||||||
| Corporate, asset backed and other debt securities | 126 | - | 126 | - | ||||||||||||
| Equity securities | 28 | 28 | - | - | ||||||||||||
| Total available for sale securities | $ | 124,544 | $ | 28 | $ | 124,516 | $ | - | ||||||||
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 those instruments under the valuation hierarchy.
Impaired Loans (Collateral Dependent) Loans for which it is believed to be probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral dependent, the fair value of collateral method of measuring the amount of impairment is utilized. The Company’s practice is to obtain new or updated appraisals on the loans subject to the initial impairment review and to generally update on an annual basis thereafter. The Company discounts the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan’s impairment review, the Company typically applies a discount to the value of a previous appraisal to reflect the property's current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. The results of the impairment review results in an increase in the allowance for loan loss or in a partial charge-off of the loan, if warranted. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. |
The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010:
| Fair Value Measurements Using | ||||||||||||||||
| In thousands of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Impaired Loans (Collateral Dependent) | ||||||||||||||||
| December 31, 2011 | $ | 39,438 | $ | - | $ | - | $ | 39,438 | ||||||||
| December 31, 2010 | 33,961 | - | - | 33,961 | ||||||||||||
The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows:
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| In thousands of dollars | Value | Fair Value | Value | Fair Value | ||||||||||||
| Financial Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 107,592 | $ | 107,592 | $ | 106,222 | $ | 106,222 | ||||||||
| Securities available for sale | 173,197 | 173,197 | 124,544 | 124,544 | ||||||||||||
| FHLB Stock | 2,571 | 2,571 | 2,788 | 2,788 | ||||||||||||
| Loans held for sale | 8,290 | 8,290 | 10,289 | 10,289 | ||||||||||||
| Net portfolio loans | 543,069 | 551,616 | 566,822 | 571,830 | ||||||||||||
| Accrued interest receivable | 2,772 | 2,772 | 2,777 | 2,777 | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Total deposits | $ | (764,856 | ) | $ | (768,783 | ) | $ | (733,998 | ) | $ | (738,117 | ) | ||||
| Short term borrowings | - | - | (1,234 | ) | (1,234 | ) | ||||||||||
| FHLB advances | (24,035 | ) | (25,475 | ) | (30,321 | ) | (31,700 | ) | ||||||||
| Accrued interest payable | 491 | 491 | (612 | ) | (612 | ) | ||||||||||
Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimated fair value:
Cash and cash equivalents, FHLB stock, loans held for sale, accrued interest receivable and accrued interest payable – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates. | |
Net portfolio loans – The carrying amount is a reasonable estimate of fair value for personal loans for which rates adjust quarterly or more frequently, and for business and tax-exempt loans that are prime related and for which rates adjust immediately or quarterly. The fair value of all other loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. | |
Total deposits – With the exception of certificates of deposit, the carrying value is deemed to be the fair value due to the demand nature of the deposits. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the current rates paid on certificates of deposit with similar maturities. | |
Short Term Borrowings – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates. |
FHLB Advances – The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities. | |
Off-balance-sheet financial instruments – Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates. |
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets.
On January 15, 2010, UBT entered into a Memorandum of Understanding with the Federal Deposit Insurance Corporation (“FDIC”) and the Michigan Office of Financial and Insurance Regulation (“OFIR”). On January 11, 2011, we entered into a revised Memorandum of Understanding (“MOU”) with substantially the same requirements as the MOU dated January 15, 2010. The MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU.
In December 2010, the Company closed its public offering of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company has contributed $12.0 million of the net proceeds of the offering to the capital of the Bank to increase the Bank's capital and regulatory capital ratios. As a result of the additional capital, the Bank was in compliance with the capital requirements of its MOU with the FDIC and OFIR at December 31, 2011 and 2010 At December 31, 2011, the Bank’s Tier 1 leverage capital ratio was 9.20%, and its ratio of total capital to risk-weighted assets was 15.49%.
The following table shows information about the Company's and the Banks' capital levels compared to regulatory requirements at year-end 2011 and 2010.
| Actual | Regulatory Minimum for Capital Adequacy (1) | Regulatory Minimum to be Well Capitalized (2) | Required by MOU (3) | |||||||||||||||||||||||||||||
| As of December 31, 2011 | $000 | % | $000 | % | $000 | % | $000 | % | ||||||||||||||||||||||||
| Tier 1 Capital to Average Assets | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 86,430 | 9.9 | % | $ | 35,031 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Bank | 80,388 | 9.2 | % | 34,950 | 4.0 | % | 43,688 | 5.0 | % | 78,638 | 9.0 | % | ||||||||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | ||||||||||||||||||||||||||||||||
| Consolidated | 86,430 | 15.3 | % | 22,675 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
| Bank | 80,388 | 14.2 | % | 22,628 | 4.0 | % | 33,942 | 6.0 | % | N/A | N/A | |||||||||||||||||||||
| Total Capital to Risk Weighted Assets | ||||||||||||||||||||||||||||||||
| Consolidated | 93,683 | 16.5 | % | 45,349 | 8.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
| Bank | 87,627 | 15.5 | % | 45,256 | 8.0 | % | 56,570 | 10.0 | % | 67,884 | 12.0 | % | ||||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||||||||||
| Tier 1 Capital to Average Assets | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 88,022 | 10.2 | % | $ | 34,380 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
| Bank | 78,806 | 9.2 | % | 34,232 | 4.0 | % | 42,791 | 5.0 | % | 77,023 | 9.0 | % | ||||||||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | ||||||||||||||||||||||||||||||||
| Consolidated | 88,022 | 15.0 | % | 23,510 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
| Bank | 78,806 | 13.4 | % | 23,491 | 4.0 | % | 35,237 | 6.0 | % | N/A | N/A | |||||||||||||||||||||
| Total Capital to Risk Weighted Assets | ||||||||||||||||||||||||||||||||
| Consolidated | 95,589 | 16.3 | % | 47,020 | 8.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
| Bank | 86,367 | 14.7 | % | 46,982 | 8.0 | % | 58,728 | 10.0 | % | 70,474 | 12.0 | % | ||||||||||||||||||||
(1) | Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements. | ||||||||||||||||||||||||||||||||
(2) | Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions. The Memorandum of Understanding described above in Note 18 subjects the Bank to higher requirements. | ||||||||||||||||||||||||||||||||
(3) | Represents requirements by the Bank's regulators under terms of the MOU. | ||||||||||||||||||||||||||||||||
NOTE 19 – EARNINGS (LOSS) PER SHARE
A reconciliation of basic and diluted earnings and loss per share follows:
| In thousands, except per share data | 2011 | 2010 | 2009 | ||||||||||
| Net income (loss) | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | |||||
| Less: | Accretion of discount on preferred stock | (106 | ) | (100 | ) | (91 | ) | ||||||
| Dividends on preferred stock | (1,030 | ) | (1,030 | ) | (987 | ) | |||||||
| (Loss) available to common shareholders | $ | (219 | ) | $ | (4,838 | ) | $ | (9,911 | ) | ||||
| Basic and diluted loss per share: | 2011 | 2010 | 2009 | |||||||||
| Weighted average common shares outstanding | 12,688.2 | 5,389.9 | 5,059.7 | |||||||||
| Weighted average contingently issuable shares | 82.9 | 60.9 | 67.2 | |||||||||
| Total weighted average shares outstanding | 12,771.2 | 5,450.8 | 5,126.9 | |||||||||
| Basic and diluted loss per share | $ | (0.02 | ) | $ | (0.89 | ) | $ | (1.93 | ) | |||
There was no dilutive effect of stock warrants in 2011, 2010 or 2009. Stock options for 381,743 407,730 and 416,594 shares of common stock were not considered in computing diluted earnings per share for 2011, 2010 and 2009 because they were not dilutive.
NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows:
| In thousands of dollars | 2011 | 2010 | 2009 | ||||||||||
| Unrealized gains (losses) on securities available for sale | $ | 1,561 | $ | (962 | ) | $ | 519 | ||||||
| Reclassification for realized amount included in income | - | (31 | ) | 24 | |||||||||
| Other comprehensive income (loss) before tax effect | 1,561 | (993 | ) | 543 | |||||||||
| Tax expense (benefit) | 531 | (338 | ) | 185 | |||||||||
| Other comprehensive income (loss) | $ | 1,030 | $ | (655 | ) | $ | 358 | ||||||
The components of accumulated other comprehensive income included in shareholders’ equity at December 31, 2011 and, 2010 were as follows:
| In thousands of dollars | 12/31/11 | 12/31/10 | ||||||
| Net unrealized gains on securities available for sale | $ | 2,501 | $ | 940 | ||||
| Tax expense | 850 | 319 | ||||||
| Accumulated other comprehensive income | $ | 1,651 | $ | 621 | ||||
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financial information for United Bancorp, Inc. is summarized below.
| CONDENSED BALANCE SHEETS | December 31, | |||||||
| In thousands of dollars | 2011 | 2010 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 4,914 | $ | 8,800 | ||||
| Securities available for sale | 31 | 28 | ||||||
| Investment in subsidiaries | 87,747 | 83,486 | ||||||
| Other assets | 1,122 | 438 | ||||||
| Total Assets | $ | 93,814 | $ | 92,752 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Liabilities | $ | 40 | $ | 48 | ||||
| Shareholders' equity | 93,774 | 92,704 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 93,814 | $ | 92,752 | ||||
| CONDENSED STATEMENTS OF OPERATIONS | For the years ended December 31, | |||||||||||
| In thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Income | ||||||||||||
| Dividends from subsidiaries | $ | - | $ | - | $ | - | ||||||
| Other income | 1 | 2,398 | 11,144 | |||||||||
| Total Income | 1 | 2,398 | 11,144 | |||||||||
| Total Noninterest Expense | 480 | 3,083 | 11,757 | |||||||||
| Loss before undistributed net income of subsidiary and income taxes | (479 | ) | (685 | ) | (613 | ) | ||||||
| Income tax benefit | (163 | ) | (222 | ) | (258 | ) | ||||||
| Net loss before undistributed net income of subsidiary | (316 | ) | (463 | ) | (355 | ) | ||||||
| Equity in undistributed (excess distributed) net income of subsidiary | 1,233 | (3,245 | ) | (8,478 | ) | |||||||
| Net Income (Loss) | 917 | (3,708 | ) | (8,833 | ) | |||||||
| Other comprehensive income (loss), including net change in unrealized gains on securities available for sale | 1,030 | (655 | ) | 358 | ||||||||
| Comprehensive Income (Loss) | $ | 1,947 | $ | (4,363 | ) | $ | (8,475 | ) | ||||
| CONDENSED STATEMENTS OF CASH FLOWS | For the years ended December 31, | |||||||||||
| In thousands of dollars | 2011 | 2010 | 2009 | |||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net Loss | $ | 917 | $ | (3,708 | ) | $ | (8,833 | ) | ||||
| Adjustments to Reconcile Net Income to Net Cash from Operating Activities | ||||||||||||
| (Undistributed) Excess distributed net income of subsidiary | (1,233 | ) | 3,245 | 8,478 | ||||||||
| Stock option expense | 114 | 92 | 150 | |||||||||
| Change in other assets | (687 | ) | 1,684 | (727 | ) | |||||||
| Change in other liabilities | (8 | ) | (626 | ) | (292 | ) | ||||||
| Total adjustments | (1,814 | ) | 4,395 | 7,609 | ||||||||
| Net cash from operating activities | (897 | ) | 687 | (1,224 | ) | |||||||
| Cash Flows from Investing Activities | ||||||||||||
| Investments in subsidiary | (2,000 | ) | (13,500 | ) | (15,600 | ) | ||||||
| Change in loan to subsidiary | - | 2,400 | (2,400 | ) | ||||||||
| Net change in premises and equipment | - | 2,261 | 309 | |||||||||
| Net cash from investing activities | (2,000 | ) | (8,839 | ) | (17,691 | ) | ||||||
| Cash Flows from Financing Activities | ||||||||||||
| Proceeds from issuance of preferred stock and warrants | - | - | 20,600 | |||||||||
| Proceeds from common stock transactions | 41 | 17,138 | 98 | |||||||||
| Cash dividends paid on common and preferred stock | (1,030 | ) | (1,030 | ) | (957 | ) | ||||||
| Net cash from financing activities | (989 | ) | 16,108 | 19,741 | ||||||||
| Net Change in Cash and Cash Equivalents | (3,886 | ) | 7,956 | 826 | ||||||||
| Cash and cash equivalents at beginning of year | 8,800 | 844 | 18 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 4,914 | $ | 8,800 | $ | 844 | ||||||
NOTE 22 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is summarized below:
| In thousands of dollars, except per share data | Full Year | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | |||||||||||||||
2011 | ||||||||||||||||||||
| Interest Income | $ | 36,165 | $ | 9,079 | $ | 8,906 | $ | 9,091 | $ | 9,089 | ||||||||||
| Interest Expense | 6,114 | 1,392 | 1,469 | 1,566 | 1,687 | |||||||||||||||
| Net Interest Income | 30,051 | 7,687 | 7,437 | 7,525 | 7,402 | |||||||||||||||
| Provision for Loan Losses | 12,150 | 250 | 6,000 | 3,100 | 2,800 | |||||||||||||||
| Net Income (Loss) | $ | 917 | $ | 2,297 | $ | (2,100 | ) | $ | 361 | $ | 359 | |||||||||
Basic and Diluted Earnings (Loss) per Share (1) | $ | (0.02 | ) | $ | 0.16 | $ | (0.19 | ) | $ | 0.01 | $ | 0.01 | ||||||||
| 2010 | Full Year | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | ||||||||||||||||
| Interest Income | $ | 39,770 | $ | 9,567 | $ | 9,993 | $ | 9,962 | $ | 10,248 | |||||||||||
| Interest Expense | 8,687 | 1,832 | 2,029 | 2,285 | 2,541 | ||||||||||||||||
| Net Interest Income | 31,083 | 7,735 | 7,964 | 7,677 | 7,707 | ||||||||||||||||
| Provision for Loan Losses | 21,530 | 4,930 | 3,150 | 8,650 | 4,800 | ||||||||||||||||
| Net Income (Loss) | $ | (3,708 | ) | $ | (427 | ) | $ | 1,027 | $ | (3,499 | ) | $ | (809 | ) | |||||||
Basic and Diluted Earnings (Loss) per Share (1) | $ | (0.89 | ) | $ | (0.11 | ) | $ | 0.14 | $ | (0.74 | ) | $ | (0.21 | ) | |||||||
(1) | As a result of rounding and a large number of shares issued in the fourth quarter of 2010, the sum of the EPS figures for the four quarters do not equal the calculation of EPS for the full year 2011 and 2010. | ||||||||||||||||||||
NOTE 23 — CAPITAL PURCHASE PROGRAM
On January 16, 2009, the Company entered into a Letter Agreement (“Purchase Agreement”) with the U.S. Department of the Treasury (“Treasury”), pursuant to which United issued and sold (a) 20,600 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Preferred Stock”) for an aggregate purchase price of $20,600,000 and (b) a 10-year warrant (“Warrant”) to purchase 311,492 shares of our common stock at an aggregate exercise price of $3,090,000.
The Preferred Stock qualifies as Tier I capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Preferred Stock is non-voting except with respect to certain matters affecting the rights of the holders, and may be redeemed by United after three years. The Warrant has a ten year term and is immediately exercisable with an exercise price of $9.92 per share of the Company’s common stock. Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect to any shares of United common stock issued upon exercise of the Warrant.
In the Purchase Agreement, the Company agreed that, until such time as Treasury ceases to own any debt or equity securities of the Company acquired pursuant to the Purchase Agreement, United will take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (“EESA”) as implemented by any guidance or regulation under EESA that has been issued and is in effect as of the date of issuance of the Preferred Stock and the Warrant, and has agreed to not adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.
As a result of issuance of the Preferred Stock on January 16, 2009, the ability of United to declare or pay dividends on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions. The Company may not pay any dividends on its common stock unless the Company is current on its dividend payments on the TARP CPP preferred stock. As of December 31, 2010 and 2011, the Company was current on its dividend payments on the TARP CPP preferred stock.
NOTE 24 – LEGAL PROCEEDINGS
A class action lawsuit was filed against the Bank in early 2011that alleges the Bank violated the Electronic Funds Transfer Act (“EFTA”), 15 U.S.C. §1693 et seq., by allegedly failing to provide adequate notice of automated teller machines (“ATMs”) fees at the Bank’s ATMs. The plaintiff is seeking class certification of the lawsuit, statutory damages, payment of costs of the lawsuit and payment of reasonable attorneys' fees. This case is in the discovery stage, and the class has not been certified. The Company is unable to determine potential liability in this case. Although the Bank intends to vigorously defend the lawsuit, the likelihood of an unfavorable outcome is neither probable nor remote, and as such, no conclusion can be made at this time. The Bank believes this complaint is a routine legal proceeding occurring in the ordinary course of its business as an operator of ATMs. The Company believes that this lawsuit is without merit, but that disclosure of the potential liability is prudent.
Other than the above-referenced matter, the Company is involved in routine legal proceedings occurring in the ordinary course of its business, which, in the aggregate, are believed to be immaterial to the financial condition of the Company.
Market for Common Stock
The following table shows the high and low bid prices of common stock of the Company for each quarter of 2011 and 2010 as quoted on the OTC Bulletin Board, under the symbol of "UBMI” and cash dividends declared for each quarter of 2011 and 2010. The quoted bid prices listed below are OTC Bulletin Board quotations. They reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. They also do not include private transactions not involving brokers or dealers. The Company had 1,236 shareholders of record as of December 31, 2011.
| 2011 | 2010 | |||||||||||||||||||||||
| Cash | Cash | |||||||||||||||||||||||
| Market Price | Dividends | Market Price | Dividends | |||||||||||||||||||||
| Quarter | High | Low | Declared | High | Low | Declared | ||||||||||||||||||
| 1st | $ | 4.05 | $ | 3.35 | $ | - | $ | 8.50 | $ | 4.35 | $ | - | ||||||||||||
| 2nd | 3.75 | 3.00 | - | 7.00 | 4.00 | - | ||||||||||||||||||
| 3rd | 3.50 | 2.90 | - | 6.25 | 3.65 | - | ||||||||||||||||||
| 4th | 2.80 | 2.20 | - | 4.00 | 2.65 | - | ||||||||||||||||||
Banking laws and regulations restrict the amount the Bank can transfer to the Company in the form of cash dividends and loans. Those restrictions are discussed in Note 15 of the consolidated financial statements, which appear in this report.
| Board of Directors of United Bancorp, Inc. | ||
| Stephanie H. Boyse | President and Chief Executive Officer, Brazeway, Inc. | |
| James D. Buhr | President, J.D. Buhr & Company, LLC | |
| Robert K. Chapman | President and Chief Executive Officer, United Bancorp, Inc. | |
| Kenneth W. Crawford | Independent financial consultant | |
| John H. Foss | Retired Vice President, Treasurer, and Chief Financial Officer, Tecumseh Products Co. | |
| Norman G. Herbert | Independent financial consultant | |
| James C. Lawson | General Manager, Avery Oil & Propane | |
| Len M. Middleton | Professor of Strategy and Entrepreneurship, Ross School of Business, University of Michigan | |
| Executive Officers of United Bancorp, Inc. | ||
| Robert K. Chapman | President and Chief Executive Officer | |
| Randal J. Rabe | Executive Vice President, Chief Financial Officer, Secretary to the Board | |
| Todd C. Clark | Executive Vice President | |
| Gary D. Haapala | Executive Vice President | |
| Joseph R. Williams | Executive Vice President | |
| Proxy Solicited on Behalf of the Board of Directors for the Annual Meeting of Shareholders to be Held on May 8, 2012 |
The undersigned shareholder appoints James C. Lawson and Robert K. Chapman, or either of them, with full power of substitution, as attorneys and proxies for the undersigned, to attend the meeting referred to above and any adjournment thereof, and to vote and act with respect to all shares of common stock of United Bancorp, Inc. (the "Company") that the undersigned is entitled to vote at the meeting and any adjournment thereof, on all matters that come before the meeting and on all matters incident to the conduct of the meeting, including any vote to adjourn the meeting.
If this proxy is properly executed and delivered, the shares represented by this proxy will be voted as specified. If no specification is made, the shares will be voted for approval of the proposals. The shares represented by this proxy will be voted in the discretion of the proxies on any other matters that may come before the meeting and on any matter incident to the conduct of the meeting, including any adjournment of the meeting.
Your Board of Directors recommends that you vote FOR all proposals.
| Proposal 1 | ||
To elect three directors constituting Class III of the Board of Directors, to serve until the 2015 Annual Meeting of Shareholders and upon the election of their successors. | ||
Class III Director Nominees: | ||
| ROBERT K. CHAPMAN | NORMAN G. HERBERT | LEN M. MIDDLETON |
| PLEASE MARK ONLY ONE BOX | ||
o FOR ALL NOMINEES | o FOR, EXCEPT VOTE WITHHELD FROM THE FOLLOWING NOMINEES: | |
o WITHHELD FROM ALL NOMINEES | ||
| Proposal 2 | |||||||
To consider and approve an advisory proposal to approve the Company’s executive compensation practices as disclosed in the Proxy Statement. | |||||||
q FOR | q AGAINST | q ABSTAIN | |||||
| Proposal 3 | |||||||
To ratify the appointment of BKD, LLP as independent auditors for 2012. | |||||||
q FOR | q AGAINST | q ABSTAIN | |||||
Signed this _______ day of __________________, 2012. | ||
(Signature) | (Signature) | |
Note: Please sign exactly as your name appears on this Proxy. If signing for estates, trusts, corporations or partnerships, title or capacity should be stated. If shares are held jointly, each holder should sign. | ||
United Bancorp, Inc. ● Post Office Box 1127 ● 2723 South State Street ● Ann Arbor, Michigan 48104 ● Phone 734.214.3700