Toggle SGML Header (+)


Section 1: 10-K (FORM 10-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from N/A to N/A

 

Commission File Number 0-16540

 

UNITED BANCORP, INC.
(Exact name of registrant as specified in its Charter.)

 

Ohio   34-1405357
(State or other jurisdiction of incorporation or organization)   (IRS) Employer Identification No.)

 

201 South Fourth Street, Martins Ferry, Ohio   43935
(Address of principal executive offices)   (ZIP Code)

 

Registrant’s telephone number, including area code: (740) 633-0445

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of class) (Name of each exchange on which registered)
Common Stock, Par Value $1.00 a share NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨ Accelerated filer                     ¨
   
Non-accelerated filer     ¨ Smaller reporting company  x

(Do not check if a smaller reporting company

 

Emerging growth company          ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨ No x

 

As of June 30, 2017 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $55,140,242 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Registrant had 5,244,105 common shares outstanding as of March 6, 2018.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the Annual Shareholders meeting to be held April 18, 2018 are incorporated by reference into Part III.

 

Portions of the Annual Report to Shareholders for the year ended December 31, 2017 are incorporated by reference into Parts I and II.

 

 

 

 

 

 

 

PART I

 

Item 1Business

 

Business

 

United Bancorp, Inc. (Company) is a bank holding company headquartered in Martins Ferry, Ohio. The Company is an Ohio corporation which filed its initial articles of incorporation on July 8, 1983. At December 31, 2017 the Company has one wholly-owned subsidiary bank, Unified Bank, Martins Ferry, Ohio (Unified, or the Bank).

 

Unified serves customers in northeastern, eastern, southeastern and south central Ohio and is engaged in the business of commercial and retail banking in Belmont, Harrison, Jefferson, Tuscarawas, Carroll, Athens, Hocking, and Fairfield counties and the surrounding localities. The Bank provides a broad range of banking and financial services, which includes accepting demand, savings and time deposits and granting commercial, real estate and consumer loans. Unified conducts its business through its main office and stand alone operations center in Martins Ferry, Ohio and eighteen branches located in the counties mentioned above. Unified operates a Loan Production Office in Wheeling, west Virginia. Unified also offers full brokerage service through LPL Financial® member NASD/SIPC.

 

Unified has no single customer or related group of customers whose banking activities, whether through deposits or lending, would have a material impact on the continued earnings capabilities if those activities were removed.

 

Competition

 

The markets in which Unified operates continue to be highly competitive. Unified competes for loans and deposits with other retail commercial banks, savings and loan associations, finance companies, credit unions and other types of financial institutions within the Mid-Ohio valley geographic area along the eastern border of Ohio including Belmont, Harrison and Jefferson counties and extending into the northern panhandle of West Virginia and the Tuscarawas and Carroll County geographic areas of northeastern Ohio. Unified also encounters similar competition for loans and deposits throughout the Athens, and Fairfield County geographic areas of central and southeastern Ohio.

 

In its primary market, including the Ohio counties of Belmont, Harrison, Jefferson, Tuscarawas, Carroll, Athens and Fairfiled, Unified ranks seventh in total deposit market share out of thirty-two non-credit union insured depository institutions operating in the market. The Bank’s market share, as reported by the FDIC, was 5.39% as of June 30, 2017. JPMorgan Chase Bank, NA, The Huntington National Bank and PNC Bank, NA are the top three in the Bank’s primary market, with each institution having in excess of 10% of the deposit market share. No other institution in the market had a deposit market share in excess of 10% as of June 30, 2017.

 

Supervision and Regulation

 

General

 

The Company is a corporation organized under the laws of the State of Ohio. The business in which the Company and its subsidiary are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities. The supervision, regulation and examination to which the Company and its subsidiary are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of shareholders.

 

Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Company and Unified are subject are discussed below. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and Unified.

 

 

 

 

Regulatory Agencies

 

The Company is a registered bank holding company and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal ReserveFederal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended.

 

Unified is an Ohio chartered commercial bank. It is subject to regulation and examination by both the Ohio Division of Financial Institutions (the “ODFI”) and the Federal Deposit Insurance Corporation (the “FDIC”).

 

Regulatory Reform

 

Overview. Congress, the U.S. Department of the Treasury (“Treasury”), and the federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the U.S. banking system and financial markets. Beginning in late 2008, the U.S. and global financial markets experienced deterioration of the worldwide credit markets, which created significant challenges for financial institutions both in the United States and around the world. These actions included the adoption by Congress of both the Emergency Economic Stabilization Act of 2008 (“EESA”), and the American Recovery and Reinvestment Act of 2009 (“ARRA”). The most recent significant piece of legislation adopted in response to this crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which was signed into law on July 21, 2010, and which is discussed more thoroughly below.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act created many new restrictions and an expanded framework of regulatory oversight for financial institutions, including insured depository institutions. Currently, federal regulators are still in the process of drafting the implementing regulations for many portions of the Dodd-Frank Act. Federal regulators continue to implement many provisions of the Dodd-Frank Act. The Dodd-Frank Act created an independent regulatory body, the Bureau of Consumer Financial Protection (“Bureau”), with authority and responsibility to set rules and regulations for most consumer protection laws applicable to all banks - both large and small. Oversight of Federal consumer financial protection functions have been transferred to the Bureau. The Bureau has responsibility for mortgage reform and enforcement, as well as broad new powers over consumer financial activities which could impact what consumer financial services would be available and how they are provided. The following consumer protection laws are the designated laws that fall under the Bureau’s rulemaking authority: the Alternative Mortgage Transactions Parity Act of 1928, the Consumer Leasing Act of 1976, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act subject to certain exclusions, the Fair Debt Collection Practices Act, the Home Owners Protection Act, certain privacy provisions of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act (HMDA), the Home Ownership and Equity Protection Act of 1994, the Real Estate Settlement Procedures Act (RESPA), the S.A.F.E. Mortgage Licensing Act of 2008 (SAFE Act), and the Truth in Lending Act. Review and revision of current financial regulations in conjunction with added new financial service regulations will heighten the regulatory compliance burden and increase litigation risk for the banking industry.

 

The following discussion summarizes other significant aspects of the Dodd-Frank Act that may affect the Company and the Bank:

 

·The deposit insurance assessment base for federal deposit insurance has been shifted from domestic deposits to average assets minus average tangible equity;

 

·The Dodd-Frank Act instructs appropriate federal banking agencies to make the capital requirements for banks and savings and loan holding companies and insured depository institutions countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness;

 

·The prohibition on the payment of interest on business demand deposits has been repealed, effective July 21, 2011, thereby permitting depository institutions to pay interest on business transaction and other accounts;

 

 

 

 

·The standard maximum amount of deposit insurance per customer has been permanently increased to $250,000.;

 

·Financial holding companies are required to be well-capitalized and well-managed and must continue to be both well-capitalized and well-managed in order to acquire banks located outside their home state;

 

·The Dodd-Frank Act extended the application to most bank holding companies of the same leverage and risk-based capital requirements that apply to insured depository institutions, which, among other things, will disallow treatment of trust preferred securities as Tier 1 capital under certain circumstances;

 

·New corporate governance requirements, which are generally applicable to most larger public companies, now require new compensation practices, including, but not limited to, providing shareholders the opportunity to cast a non-binding vote on executive compensation, to consider the independence of compensation advisors and new executive compensation disclosure requirements;

 

·The Dodd-Frank Act amended the Electronic Fund Transfer Act to, among other things, give the FRB the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; and

 

·The authority of the FRB to examine financial holding companies and their non-bank subsidiaries was expanded.

 

Many aspects of the Dodd-Frank Act are still subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its subsidiaries, their respective customers or the financial services industry more generally. The Company is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with these regulatory requirements.

 

The Holding Company Regulation

 

As a holding company incorporated and doing business within the State of Ohio, the Company is subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the "Act"). The Company is required to file with the Federal Reserve on quarterly basis information pursuant to the Act. The Federal Reserve may conduct examinations or inspections of the Company and Unified.

 

The Company is required to obtain prior approval from the Federal Reserve for the acquisition of more than five percent of the voting shares or substantially all of the assets of any bank or bank holding company. In addition, the Company is generally prohibited by the Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. The Company may, however, subject to certain prior approval requirements of the Federal Reserve, engage in, or acquire shares of companies engaged in activities which are deemed by the Federal Reserve by order or by regulation to be financial in nature or closely related to banking.

 

On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a "financial holding company," provided that all of the depository institution subsidiaries of the bank holding company are “well capitalized” and “well managed” under applicable regulatory standards.

 

 

 

 

Under the GLB Act, a bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve has determined to be closely related to banking. No Federal Reserve approval is required for a financial holding company to acquire a company, other than a bank holding company, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. As with bank holding companies, prior Federal Reserve approval is required before a financial holding company may acquire the beneficial ownership or control of more than five percent of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. If any subsidiary bank of a financial holding company ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the Federal Reserve may, among other actions, order the Company to divest the subsidiary bank. Alternatively, the company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act of 1977 of less than satisfactory, the company will be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Company is not a financial holding company and has no current intention of making such an election.

 

Control Acquisitions. The Federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of the Company unless the Federal Reserve has been notified and has not objected to the transaction. The acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, is rebuttably presumed to constitute the acquisition of control of the bank holding company. In addition, a company is required to obtain the approval of the Federal Reserve under the Federal Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a "controlling influence" over that bank holding company.

 

Liability for Banking Subsidiaries. Under the current Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to its subsidiary bank and to maintain resources adequate to support the Bank. This support may be required at times when the Company may not have the resources to provide it. In the event of the Company's bankruptcy, any commitment to a U.S. federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to priority of payment.

 

 

 

 

Regulation of the Bank

 

General. Unified is an Ohio-chartered bank that is not a member of the Federal Reserve System. Unified is therefore regulated by the ODFI as well as the FDIC. The regulatory agencies have the authority to regularly examine Unified, which is subject to all applicable rules and regulations promulgated by its supervisory agencies. In addition, the deposits of Unified are insured by the FDIC to the fullest extent permitted by law.

 

Deposit Insurance. As an FDIC-insured institution, Unified is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.

 

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of Unified.

 

The Dodd-Frank Act revised the statutory authorities governing the FDIC’s management of the DIF. Key requirements from the Dodd-Frank Act resulted in the FDIC’s adoption of new rules in February 2011 regarding Assessments, Dividends, Assessment Base, and Large Bank Pricing. The new rules implemented the following changes: (1) redefined the definition of an institution’s deposit insurance assessment base from one based on domestic deposits to one based on assets now defined as “average consolidated total assets minus average tangible equity”; (2) changed the assessment rate adjustments to better account for risk based on an institution’s funding sources; (3) revised the deposit insurance assessment rate schedule in light of the new assessment base and assessment rate adjustments; (4) implemented Dodd-Frank Act dividend provisions; (5) revised the large insured depository institution assessment system to better differentiate for risk and to take into account losses the FDIC may incur from large institution failures; and (6) provided technical and other changes to the FDIC’s assessment rules. Though deposit insurance assessments maintain a risk-based approach, the FDIC imposed a more extensive risk-based assessment system on large insured depository institutions with at least $10 billion in total assets since they are more complex in nature and could pose greater risk.

 

Regulatory Capital Requirements Unified is required to maintain minimum levels of capital in accordance with FDIC capital adequacy guidelines. If capital falls below minimum guideline levels, a bank, among other things, may be denied approval to acquire or establish additional branches or organize or acquire other non-bank businesses. The required capital levels and the Bank’s's capital position at December 31, 2017 and 2016 are summarized in the table included in Note 11 to the consolidated financial statements.

 

Beginning in 2015, bank holding companies and banks were required to measure capital adequacy using Basel III accounting. Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. Implementation of the rules will be overseen by the Federal Reserve, the FDIC and the OCC. Reporting under the new rules began with the March 2015 quarterly regulatory filings.

 

FDICIA

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions-well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized-and requires U.S. federal bank regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. An undercapitalized bank must develop a capital restoration plan and its parent bank holding company must guarantee the bank's compliance with the plan up to the lesser of 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2017 the Bank was well capitalized pursuant to these prompt corrective action guidelines.

 

 

 

 

Dividends. Ohio law prohibits Unified, without the prior approval of the ODFI, from paying dividends in an amount greater than the lesser of its undivided profits or the total of its net income for that year, combined with its retained net income from the preceding two years. The payment of dividends by any financial institution or its holding company is also affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. To this effect, the Board of Governors of the Federal Reserve has issued Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases by Bank Holding Companies (the “Policy Statement”). In the Policy Statement, the Federal Reserve stated that it is important for a banking organization’s board of directors to ensure that the dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. As a general matter, the Policy Statement provides that the board of directors of a bank holding company should inform the Federal Reserve and should eliminate, defer, or significantly reduce its dividends if:

 

(1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

(2) the prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition; or

(3) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

 

Failure to do so could result in a supervisory finding that the organization is operating in an unsafe and unsound manner. Moreover, the Policy Statement requires a bank holding company to inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Declaring or paying a dividend in either circumstance could raise supervisory concerns. As described above, Unifed exceeded its minimum capital requirements under applicable guidelines as of December 31, 2017.

 

Branching Authority. Ohio chartered banks have the authority under Ohio law to establish branches anywhere in the State of Ohio, subject to receipt of all required regulatory approvals. Additionally, in May 1997 Ohio adopted legislation “opting in” to the provisions of Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) which allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. Effective with the enactment of The Dodd-Frank Act, the FDI Act and the National Bank Act have been amended to remove the expressly required “opt-in” concept applicable to de novo interstate branching and now permits national and insured state banks to engage in de novo in interstate branching if, under the laws of the state where the new branch is to be established, a state bank chartered in that state would be permitted to establish a branch.

 

Affiliate Transactions. Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit borrowings by holding companies and non-bank subsidiaries from affiliated insured depository institutions, and also limit various other transactions between holding companies and their non-bank subsidiaries, on the one hand, and their affiliated insured depository institutions on the other. Section 23A of the Federal Reserve Act also generally requires that an insured depository institution's loan to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution's transactions with its non-bank affiliates be on arms-length terms.

 

Depositor Preference. The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non deposit creditors and shareholders of the institution.

 

Privacy Provisions of Gramm-Leach-Bliley Act. Under GLB, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provisions of GLB affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

 

 

 

 

Anti-Money Laundering Provisions of the USA Patriot Act of 2001. On October 26, 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was signed into law. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence community’s ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (a) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for verifying customer identification at account opening; and (c) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

 

Fiscal and Monetary Policies. Unified’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. Unified is particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions’ deposits, and (d) imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve have a material effect on the earnings of Unified.

 

Additional and Pending Regulation. Unified is also subject to federal regulation as to such matters as the maintenance of required reserves against deposits, limitations in connection with affiliate transactions, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement by Unified of its own securities and other aspects of banking operations. In addition, the activities and operations of Unified are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws.

 

Congress regularly considers legislation that may have an impact upon the operation of the Company and Unified. At this time, the Company is unable to predict whether any proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company.

 

Employees

 

The Company itself, as a holding company, has no compensated employees. Unified has 101 full time employees, with 25 of these serving in a management capacity, and 25 part time employees.

 

Industry Segments

 

United Bancorp and its subsidiary are engaged in one line of business, banking. Item 8 of this 10-K provides financial information for United Bancorp’s business.

 

Statistical Disclosures by Bank Holding Companies

 

IDistribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

 

Refer to Management’s Discussion and Analysis “Average Balances, Net Interest Income and Yields Earned and Rates Paid” and “Rate/Volume Analysis on pages 19 and 20 of our 2017 Annual Report filed herewith as Exhibit 13, which is incorporated by reference.

 

 

 

 

   2016 Compared to 2015
lncrease/(Decrease)
 
       Change   Change 
   Total   Due To   Due To 
(In thousands)  Change   Volume   Rate 
Interest and dividend income               
Loans  $695   $1,174   $(479)
Taxable securities available for sale   (2)   20    (22)
Tax-exempt securities available for sale   (102)   (106)   4 
Tax-exempt securities held to maturity   (14)   (14)   - 
Federal funds sold   (25)   (55)   30 
FHLB stock and other   (37)   (2)   (35)
Total interest and dividend income   515    1,017    (502)
                
Interest expense               
Demand deposits   26    4    22 
Savings deposits   2    2    - 
Time deposits   (267)   (103)   (164)
FHLB advances   (85)   (110)   25 
Trust Preferred debentures   (176)   -    (176)
Repurchase agreements   1    2    (1)
Total interest expense   (499)   (205)   (294)
                
Net interest income  $1,014   $1,222   $(208)

 

   2016   2015 
       Interest           Interest     
   Average   Income/   Yield/   Average   Income/   Yield/ 
(Dollars In thousands)  Balance   Expense   Rate   Balance   Expense   Rate 
Assets                              
Interest-earning assets                              
Loans  $343,243    16,041    4.67%  $318,337    15,346    4.82%
Taxable securities - AFS   31,292    325    1.04    29,427    327    1.11 
Tax-exempt securities - AFS   2,003    123    6.13    3,733    225    6.03 
Tax-exempt securities - HTM   -    -    -    195    14    6.99 
Federal funds sold   8,547    36    0.42    25,523    61    0.24 
FHLB stock and other   4,169    175    4.20    4,211    212    5.03 
Total interest-earning 'assets   389,254    16,700    4.29    381,426    16,185    4.24 
                               
Noninterest-earning assets                              
Cash and due from banks   4,972              4,700           
Premises and equipment (net)   11,340              10,422           
Other nonearning assets   13,955              13,437           
Less: allowance for loan losses   (752)             (2,634)          
Total noninterest-earning assets   29,515              25,925           
Total assets   418,769              407,351           
                               
Liabilities & stockholders' equity                              
Interest-bearing liabilities                              
Demand deposits  $123,051    136    0.11%  $118,545    110    0.09%
Savings deposits   78,811    36    0.05    73,819    34    0.05 
Time deposits   54,954    593    1.08    63,149    860    1.36 
FHLB advances   30,885    924    2.99    26,623    1,009    3.79 
Trust preferred debentures   4,124    82    1.99    4,124    258    6.25 
Repurchase agreements   11,094    13    0.12    9,769    12    0.12 
Total interest-bearing liabilities   302,919    1,784    0.59    296,029    2,283    0.77 
                               
Noninterest-bearing liabilities                              
Demand deposits   70,723              69,427           
Other liabilities   2,493              3,554           
Total noninterest-bearing liabilities   73,216              72,981           
Total liabilities   376,135              369,010           
Total stockholders' equity   42,634              38,341           
Total liabilities & stockholders' equity   418,769             $407,351           
Net interest income        14,916             $13,902      
Net interest spread             3.70%             3.47%
                               
Net yield on interest-earning assets             3.83%             3.64%

 

 

 

 

IIInvestment Portfolio

 

AThe following table sets forth the carrying amount of securities at December 31, 2017, 2016 and 2015.

  

   December 31, 
   2017   2016   2015 
   (In thousands) 
Available for sale (at fair value)               
U. S. Government agencies  $44,959   $38,514   $31,961 
State and political subdivision       1,252    2,662 
                
Total securities availabe for sale  $44,959   $39,766   $34,623 

 

BContractual maturities of securities at year-end 2017 were as follows:

 

   Amortized
Cost
   Estimated
Fair Value
   Average Tax
Equivalent Yield
 
   (dollars in
thousands)
 
Available for Sale               
                
US Government agencies               
1 – 5 Years   45,249    44,959    1.53%
                
Total securities available for sale  $45,249   $44,959    1.53%

 

CExcluding holdings of U.S. Government agency obligations, there were no investments in securities of any one issuer exceeding 10% of the Company’s consolidated shareholders’ equity at December 31, 2017.

 

IIILoan Portfolio

 

ATypes of Loans

 

The amounts of gross loans outstanding at December 31, 2017, 2016, 2015, 2014 and 2013 are shown in the following table according to types of loans:

 

   December 31, 
   2017   2016   2015   2014   2013 
   (In thousands) 
                     
Commercial loans  $81,327   $74,514   $67,247   $52,286   $55,136 
Commercial real estate loans   198,936    191,686    163,459    158,314    144,972 
Residential real estate loans   75,853    76,154    81,498    83,870    82,832 
Installment loans   12,473    14,367    17,459    21,284    26,562 
                          
Total loans  $368,589   $356,721   $329,663   $315,754   $309,502 

 

Construction loans were not significant at any date indicated above.

  

 

 

 

BMaturities and Sensitivities of Loans to Changes in Interest Rates

 

The following is a schedule of commercial and commercial real estate loans at December 31, 2017 maturing within the various time frames indicated:

 

   One Year or
Less
   One Through
Five Years
   After
Five Years
   Total 
   (In thousands) 
                 
Commercial loans  $9,976   $42,374   $28,977   $81,327 
Commercial real estate loans   3,385    8,486    187,065    198,936 
                     
Total  $13,361   $50,860   $216,042   $280,263 

 

The following is a schedule of fixed-rate and variable-rate commercial and commercial real estate loans at December 31, 2017 due to mature after one year:

 

   Fixed Rate   Variable Rate   Total > One
Year
 
   (In thousands) 
             
Commercial loans  $38,117   $33,234   $71,351 
Commercial real estate loans   10,378    185,173    195,551 
                
Total  $48,495   $218,407   $266,902 

 

Variable rate loans are those loans with floating or adjustable interest rates.

 

CRisk Elements

 

1.Nonaccrual, Past Due, Restructured and Impaired Loans

 

The following schedule summarizes nonaccrual loans, accruing loans which are contractually 90 days or more past due, impaired loans and newly classified troubled debt restructurings at December 31, 2017, 2016, 2015, 2014 and 2013:

 

   December 31, 
   2017   2016   2015   2014   2013 
   (In thousands) 
                     
Nonaccrual basis  $1,395   $1,361   $1,044   $958   $2,880 
Accruing loans 90 days or greater past due       236    132    127    189 
Total Impaired loans   1,008    4,652    1,410    1,868    6,330 
Impaired loan with related allowance for unconfirmed losses   410    693    822    1,067    5,306 
Impaired loan without related allowance for unconfirmed losses   598    3,959    588    801    1,024 
Troubled debt restructings   228    133    102    155    3,243 

  

The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled approximately $284,000 for the year ended December 31, 2017. Interest income that was recorded for the year on nonaccrual loans, totaled $243,000 for the year ended December 31, 2016.

 

The Company’s policy is to generally not allow loans greater than 90 days past due to accrue interest unless the loan is both well secured and in the process of collection. Interest income is not reported when full loan repayment is doubtful, typically when the loan is impaired. Payments received on such loans are reported as principal reductions.

 

 

 

 

2.Potential Problem Loans

 

The Company had no potential problem loans as of December 31, 2017 which have not been disclosed in Table C 1., but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans into one of the problem loan categories.

 

IVSummary of Loan Loss Experience

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The Company accounts for impaired loans in accordance with ASC 310-10-35-16, “Accounting by Creditors for Impairment of a Loan.” ASC 310-10-35-16 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral. A loan is defined under ASC 310-10-35-16 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of ASC 310-10-35-16, the Company considers its investment in one-to-four family residential loans and consumer installment loans to be homogenous and therefore excluded from separate identification for evaluation of impairment. With respect to the Company’s investment in nonresidential and multi-family residential real estate loans, and its evaluation of impairment thereof, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the fair value of the collateral.

 

Collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under ASC 310-10-35-16 at that time.

 

For additional explanation of factors which influence management’s judgment in determining amounts charged to expense, refer to pages 13-15 of the “Management’s Discussion and Analysis” and Notes to Consolidated Financial Statements set forth in our 2017 Annual Report, which is incorporated herein by reference.

 

AAnalysis of the Allowance for Loan Losses

 

The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:

 

   2017   2016   2015   2014   2013 
   (In thousands) 
Loans                         
Gross loans outstanding  $368,589   $356,721   $329,663   $315,754   $309,502 
Average loans outstanding  $356,224   $343,243   $318,337   $313,691   $297,821 
                          
Allowance for Loan Losses                         
Balance at beginning of year  $2,341   $2,437   $2,400   $2,894   $2,708 
Loan charge-offs:                         
Commercial   49    2    117    337    645 
Commercial real estate   81    108    152    555    130 
Residential real estate   78    143    42    235    59 
Installment   230    417    400    388    399 
Total loan charge-offs   438    670    711    1,515    1,233 
                          
Loan recoveries                         
Commercial   52    78    27    4    2 
Commercial real estate   2    102    15    35    14 
Residential real estate   20    22    42    8    5 
Installment   45    71    111    86    157 
Total loan recoveries   119    273    195    133    178 
                          
Net loan charge-offs   319    397    516    1,382    1,055 
                          
Provision for loan losses   100    301    553    888    1,241 
                          
Balance at end of year  $2,122   $2,341   $2,437   $2,400   $2,894 
                          
Ratio of net charge-offs to average loans outstanding for the year   0.09%   0.12%   0.16%   0.44%   0.35%

 

 

 

 

BAllocation of the Allowance for Loan Losses

 

The following table allocates the allowance for loan losses at December 31, 2017, 2016, 2015, 2014 and 2013. Management adjusts the allowance periodically to account for changes in national trends and economic conditions in the Bank’s service areas. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probability of losses being incurred within the following categories of loans at the dates indicated:

 

   2017   2016   2015   2014   2013 
   Allowance
Amount
   % of Loans
 to Total
Loans
   Allowance
Amount
   % of Loans
to Total
Loans
   Allowance
Amount
   % of Loans
to Total
Loans
   Allowance
Amount
   % of Loans
to Total
Loans
   Allowance
Amount
   % of Loans
to Total
Loans
 
   (In thousands) 
Loan type                                                  
Commercial  $537    22.06%  $495    20.89%  $184    20.40%  $254    16.56%  $412    17.82%
Commercial real estate   843    53.97%   804    53.73%   597    49.58%   1,116    50.14%   1,609    46.84%
Residential real estate   436    20.58%   591    21.35%   170    24.72%   92    26.56%   90    26.76%
Installment   218    3.39%   107    4.03%   113    5.30%   147    6.74%   141    8.58%
General   88    N/A    344    N/A    1,373    N/A    791    N/A    642    N/A 
                                                   
Total  $2,122    100.00%  $2,431    100.00%  $2,437    100.00%  $2,400    100.00%  $2,894    100.00%

 

VDeposits

 

ASchedule of Average Deposit Amounts and Rates

 

Refer to Section I of this “Statistical Disclosures by Bank Holding Companies” section and to Management’s Discussion and Analysis “Average Balances, Net Interest Income and Yields Earned and Rates Paid” on page 19 of our 2017 Annual Report filed herewith as Exhibit 13, which is incorporated by reference.

 

BMaturity analysis of time deposits greater than $250,000.

 

At December 31, 2017, the time to remaining maturity for time deposits in excess of $250,000 was:

 

   2017 
   (In thousands) 
     
Three months or less  $252 
Over three through six months   798 
Over six through twelve months   252 
Over twelve months   3,772 
      
Total  $5,074 

 

 

 

 

VIReturn on Equity and Assets

 

Our dividend payout ratio and equity to assets ratio were as follows:

 

   December 31, 
   2017   2016   2015 
             
Dividend Payout Ratio   63.89%   58.33%   56.92%
Equity to Assets   9.56%   9.73%   10.31%
Return on Average Assets   0.79%   0.86%   0.79%
Return on Average Equity   8.03%   8.40%   7.73%

 

VIIShort-Term Borrowings

 

Information concerning securities sold under agreements to repurchase is summarized as follows:

 

   2017   2016   2015 
   (Dollars in thousands) 
             
Balance at December 31,  $10,022   $9,393   $5,691 
Weighted average interest rate at December 31   0.28%   0.12%   0.12%
Average daily balance during the year  $13,578   $11,058   $9,769 
Average interest rate during the year   0.28%   0.12%   0.12%
Maximum month-end balance during the year  $17,033   $14,200   $12,934 

 

Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices.

 

No other individual component of borrowed funds with the exception of borrowings from the Federal Home Loan Bank comprised more than 30% of shareholders’ equity and accordingly is not disclosed in detail.

 

Supplemental Item - Executive Officers of the Registrant

 

Pursuant to General Instruction G(3) of Form 10-K, the following information on the executive officers of the Company is included as an additional item in Part I:

 

        Executive Officers Positions held with Company;
Name   Age   Business Experience
         
Scott Everson   50   President and Chief Executive Officer
         
Matthew F. Branstetter   50   Senior Vice President – Chief Operating Officer
         
Randall M. Greenwood   54   Senior Vice President, Chief Financial Officer & Treasurer
         
Lisa A. Basinger   57   Corporate Secretary

 

Each individual has held the position noted during the past five years, except for the following:

 

Effective April 17, 2013, Scott Everson was appointed to the position of President of the Company, and Effective April 16, 2014 Mr. Everson was also appointed the Chief Executive Officer of the Company. Prior to his 2013 appointment as the Company’s President, Mr. Everson served as the Company’s Executive Vice President and Chief Operating Officer.

  

 

 

 

Effective May 13, 2014, Matthew F. Branstetter was promoted to Senior Vice President and Chief Operating Officer of the Company. Prior to his promotion, Mr. Branstetter served as the Company’s Vice President and Chief Lending Officer.

 

Each of these Executive Officers is appointed annually by the Company’s board of directors and is serving at-will in their current positions.

 

Item 1A.Risk Factors

 

Smaller Reporting Companies are not required to provide this disclosure.

 

Item 1B.Unresolved Staff Comments

 

None.

 

Item 2Properties

 

The Company owns and operates its Main Office and stand alone operations center in Martins Ferry, Ohio and the following offices:

 

Branch Office Location   Owned or Leased   Location   Owned or Leased
             
Bridgeport, Ohio   Owned   Sherrodsville, Ohio   Owned
Colerain, Ohio   Owned   Glouster, Ohio   Owned
Jewett, Ohio   Owned   Amesville, Ohio   Owned
St. Clairsville, Ohio   Owned   Nelsonville, Ohio   Owned
Dover, Ohio   Owned   Lancaster, Ohio   Owned
Dellroy, Ohio   Owned   Lancaster, Ohio   Owned
New Philadelphia, Ohio   Owned        
Strasburg, Ohio   Owned        
Tiltonsville, Ohio   Owned        
Dillonvale, Ohio   Leased        
St. Clairsville, Ohio   Owned        

 

Loan Production Office
Location
  Owned or Leased
Wheeling, West Virginia   Leased

  

Management believes the properties described above to be in good operating condition for the purpose for which they are used. The properties are unencumbered by any mortgage or security interest and are, in management’s opinion, adequately insured.

 

Item 3Legal Proceedings

 

There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiary is a party or to which any of its property is subject.

 

Item 4Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Refer to Page 9, “Shareholder Information” of the 2017 Annual Report To Shareholders filed herewith as Exhibit 13 and refer to Page 31, Note 1 of the Notes to the Consolidated Financial Statements of the Company in the 2017 Annual Report To Shareholders for common stock trading ranges, cash dividends declared and information relating to dividend restrictions, which information is incorporated herein by reference. Additional disclosure regarding dividend restrictions is also included under Part I, Item 1 of this 10-K in the section captioned “Supervision and Regulation.”

 

 

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period  (a) 
Total Number of 
Shares (or Units) 
Purchased
   (b) 
Average Price Paid
per Share (or Unit)
   (c) 
Total Number of 
Shares (or Units) 
Purchased as Part 
of Publicly 
Announced Plans 
or Programs
   (d) 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
 
Month #l
10/1/201 to
10/31/2017
   -    -    -    - 
Month #2
11/1/2017 to
11/30/2017
   -    -    -    - 
Month #3
12/1/2017 to
12/31/2017
   735(1)  $12.76    -    - 
Total   735   $12.76    -    - 

 

(1)All of these shares were purchased by the Company on the open market.

 

The Company adopted the United Bancorp, Inc. Affiliate Banks Directors and Officers Deferred Compensation Plan (the “Plan”), which is an unfunded deferred compensation plan. Amounts deferred pursuant to the Plan remain unrestricted assets of the Company, and the right to participate in the Plan is limited to members of the Board of Directors and Company officers. Under the Plan, directors or other eligible participants may defer fees and up to 50% of their annual cash incentive award payable to them by the Company, which are used to acquire common shares which are credited to a participant’s respective account. Except in the event of certain emergencies, no distributions are to be made from any account as long as the participant continues to be an employee or member of the Board of Directors. Upon termination of service, the aggregate number of shares credited to the participant’s account are distributed to him or her along with any cash proceeds credited to the account which have not yet been invested in the Company’s stock. On May 11, 2017, the Plan purchased a total of 3,626 common shares for participant accounts. All purchases under this deferred compensation plan are funded with either earned director fees or officer incentive award payments. No underwriting fees, discounts, or commissions are paid in connection with the Plan. The shares allocated to participant accounts under the Plan have not been registered under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(a)(2) thereof.

 

Item 6Selected Consolidated Financial Data

 

Refer to inside front cover, “Decade of Progress” of the 2017 Annual Report To Shareholders filed herewith as Exhibit 13, which financial information is incorporated herein by reference.

 

Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Refer to Pages 10-22, “Management’s Discussion and Analysis” of the 2017 Annual Report To Shareholders filed herewith as Exhibit 13, which section is incorporated herein by reference.

 

 

 

 

Critical Accounting Policy

 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. The application of these principles requires management to make certain estimates, assumptions and judgements that affect the amounts reported in the financial statements and footnotes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements, and as this information changes, the financial statements could reflect different estimates, assumptions, and judgements.

 

The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluations of credit risk after careful consideration of all information available to management. In developing this assessment, management must rely on estimates and exercise judgement regarding matters where the ultimate outcome is unknown such as economic factors, development affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

 

The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical losses, estimates for loan pools that are based on historical loss experience, and general loss estimates that are based on the size, quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions. Also considered as part of that judgement is a review of the Bank’s trends in delinquencies and loan losses, and economic factors.

 

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on management’s current judgement about the credit quality of the loan portfolio. While the Company strives to reflect all known risk factors in its evaluation, judgement errors may occur.

 

Item 7AQuantitative and Qualitative Disclosures About Market Risk

 

Refer to Page 16-17 “Asset/Liability Management and Sensitivity to Market Risks” of the 2017 Annual Report to Shareholders filed herewith as Exhibit 13, which section is incorporated herein by reference

 

Item 8Financial Statements and Supplementary Data

 

Refer to the Report of the Company’s Independent Registered Public Accounting Firm and the related audited financial statements and notes thereto contained in the 2017 Annual Report To Shareholders filed herewith as Exhibit 13, which items are incorporated herein by reference.

 

Item 9Changes In and Disagreements with Accountants

 

Not applicable.

 

Item 9AControls and Procedures

 

The Company, under the supervision, and with the participation, of its management and its outsourced internal audit firm Greenestock Consulting LLC, including the Company's principal executive and principal financial officers, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2017, pursuant to the requirements of Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision and with the participation of management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, as required by paragraph (c) of Exchange Act Rule13a-15. Based on the evaluation under Internal Control – Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31,2017. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.

 

 

 

 

There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

Item 9BOther Information

 

None.

 

PART III

 

Item 10Directors and Executive Officers of the Registrant

 

Information concerning executive officers of the Company is set forth in Part I, “Supplemental Item – Executive Officers of Registrant.” Other information responding to this Item 10 is included in the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated by reference under the captions “Proposal 1 – Election of Directors,” “Corporate Governance and Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Information concerning the designation of the Audit Committee and the Audit Committee Financial Expert is included in the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders under the caption “Corporate Governance and Committees of the Board – Audit Committee”, and is incorporated herein by reference.

 

The Company's Board of Directors has adopted a Code of Ethics that applies to its Principal Executive, Principal Financial, and Principal Accounting Officers. A copy of the Company's Code of Ethics is posted and can be viewed on the Company's internet web site at http://www.unitedbancorp.com. In the event the Company amends or waives any provision of its Code of Ethics which applies to its Principal Executive, Principal Financial, or Principal Accounting Officers, and which relates to any element of the code of ethics definition set forth in Item 406(b) of Regulation S-K, the Company shall post a description of the nature of such amendment or waiver on its internet web site. With respect to a waiver of any relevant provision of the code of ethics, the Company shall also post the name of the person to whom the waiver was granted and the date of the waiver grant.

 

Item 11Executive Compensation

 

The information required by this item is incorporated by reference from the section of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders captioned “Executive Compensation and Other Information”.

 

Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters

 

The information contained in the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders under the caption “Ownership of Voting Shares” is incorporated herein by reference.

 

The following table is a disclosure of securities authorized for issuance under equity compensation plans:

 

Equity Compensation Plan Information December 31, 2017
   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 security holders   175,000   $8.95    255,000 
Equity compensation plans not approved by security holders               
                
Total   175,000   $8.95    255,000 

 

 

 

 

Item 13Certain Relationships and Related Transactions

 

The information required by this item is incorporated herein by reference to the sections in the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders captioned “Director Independence and Related Party Transactions.”

 

Item 14Principal Accountant Fees and Services

 

The information required by this item is incorporated by reference from the section under the caption “Principal Accounting Firm Fees” of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders.

 

 

 

 

PART IV

 

Item 15Exhibits and Financial Statement/Schedules

 

Financial Statements

 

The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the report of the Independent Registered Public Accounting Firm, appear on pages 25 through 85 of the United Bancorp, Inc. 2017 Annual Report and are incorporated herein by reference.

 

Consolidated Balance Sheets

December 31, 2017 and 2016

 

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

 

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017 and 2016

 

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

 

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Report of Independent Registered Public Accounting Firm

 

Exhibits

 

Exhibit Number   Exhibit Description
     
3.1   Amended Articles of Incorporation (1)
     
3.2   Amended and Restated Code of Regulations (2)
     
4.0   Instruments Defining the Rights of Security Holders (See Exhibits 3.1 and 3.2)
     
10.1   Randall M. Greenwood Change in Control agreement (3)
     
10.2   Scott A. Everson Change in Control Agreement (3)
     
10.3   Matthew F. Branstetter Change in Control Agreement (10)
     
10.4   United Bancorp, Inc. Stock Option Plan (4)
     
10.5   United Bancorp, Inc. and Subsidiaries Director Supplemental Life Insurance Plan, covering Messrs. Glessner, Hoopingarner, Jones, McGehee, and Riesbeck. (5)
     
10.6   United Bancorp, Inc. and Subsidiaries Senior Executive Supplemental Life Insurance Plan, covering, Scott A. Everson, Matthew Branstetter and Randall M. Greenwood. (11)
     
10.7   Amended and Restated United Bancorp, Inc. and United Bancorp, Inc. Affiliate Banks Directors and Officers Deferred Compensation Plan.  (9)
     
10.8   Amended and Restated Trust Agreement among United Bancorp, Inc. as Depository, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees, dated as of November 17, 2005. (6)

 

 

 

 

10.9   Junior Subordinated Indenture between United Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 17, 2005. (6)
     
10.10   Guaranty Agreement between United Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, dated as of November 17, 2005. (6)
     
10.11   United Bancorp, Inc. 2008 Stock Incentive Plan (8)
     
13   2016 Annual Report
     
21   Subsidiaries of the Registrant (5)
     
23   Consent of BKD, LLP
     
31.1   Rule 13a-14(a) Certification – CEO
     
31.2   Rule 13a-14(a) Certification – CFO
     
32.1   Section 1350 Certification – CEO
     
32.2   Section 1350 Certification – CFO
     
101   The following materials from United Bancorp, Inc. on Form 10-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and Comprehensive Income; (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

(1)   Incorporated by reference to Appendix B to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 14, 2001.
     
(2)   Incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2016.
     
(3)   Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 27, 2003.
     
(4)   Incorporated by reference to Exhibit A to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 11, 1996.
     
(5)   Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 29, 2004.
     
(6)   Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchanges Commission on March 30, 2006.
     
(7)   Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on September 24, 2008.
     
(8)   Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on April 22, 2008.
     
(9)   Incorporated by reference to Exhibit 10.10 to the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2014 .
     
(10)   Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2014. 
     
(11)   Incorporated by reference to Exhibit 10.9 to the registrant’s 10-K filed with the Securities and Exchange Commission on March 29, 2004.

 

 

 

 

United Bancorp Inc.

Signatures

  

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant) United Bancorp, Inc.

 

By: /s/Scott A. Everson   March 20, 2018
  Scott A. Everson, President & Chief Executive Officer    

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/Scott A. Everson   March 20, 2018
  Scott A. Everson, President & Chief Executive Officer    
       
By: /s/Randall M. Greenwood   March 20, 2018
  Randall M. Greenwood, Senior Vice President & CFO    
       
By: /s/Gary W. Glessner   March 20, 2018
  Gary W. Glessner, Director    
       
By: /s/John M. Hoopingarner   March 20, 2018
  John M. Hoopingarner, Director    
       
By: /s/Richard L. Riesbeck   March 20, 2018
  Richard L. Riesbeck, Director    

 

 

 

 

Exhibit Number   Exhibit Description
     
13   2017 Annual Report
     
23   Consent of BKD, LLP
     
31.1   Rule 13a-14(a) Certification – CEO
     
31.2   Rule 13a-14(a) Certification – CFO
     
32.1   Section 1350 Certification – CEO
     
32.2   Section 1350 Certification – CFO
     
101   The following materials from United Bancorp, Inc. on Form 10-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and Comprehensive Income; (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

 

 

(Back To Top)

Section 2: EX-13 (EXHIBIT 13)

 

Exhibit 13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A Letter from the President and CEO

  

 

 

To the shareholders of United Bancorp, Inc….

 

I am extremely pleased to report about the record level of earnings that our company achieved in 2017 on an operating basis (exclusive of the deferred tax asset revaluation that took place in the fourth quarter). This past year United Bancorp, Inc. (UBCP) reported diluted earnings per share of $0.71 and net income of $3.546 million. In the fourth quarter and for the year ended December 31, 2017, UBCP recorded a $216 thousand, or $0.04 per share, one-time write down or revaluation of its net deferred tax asset as a result of the Tax Cuts and Jobs Act of 2017 (“tax act”) enacted on December 22, 2017. Without this charge relating to the implementation of the tax act, our company’s diluted earnings per share would have been $0.75 versus $0.71 for the prior year end, an increase of 5.6%, and our net income would have been $3.762 million, which represents record earnings for our company. Our company’s previous best year in net income performance was 2008, which was prior to our industry being negatively impacted by the effects of the Great Recession.

 

This past year, we continued to focus on growing our company and saw growth in the three primary balance sheet areas on which we keenly focus: assets, loans and deposits. We seek to have growth in these key areas of the balance sheet if we can do so in a profitable fashion in order to support our growth strategy. In addition, we continued to build and solidify the infrastructure, or base, that will firmly support our envisioned growth in the coming years. Building our infrastructure during the course of 2017 had the impact of driving our non-interest expense levels up to some degree; but, we firmly anticipate a nice payback on this investment in future periods.

 

As always— and of utmost importance to our company— this past year we continued to focus on rewarding our valued shareholders by increasing our dividend payout, while maintaining our market value position. For the year, we paid total cash dividends of $0.51 (including a special cash dividend of $0.05 paid, once again, in the fourth quarter). This is an increase of $0.04, or 8.5%, over the cash dividend paid in the previous year and puts our cash dividend yield at a level that is nearly twice that currently seen within our industry! The market value of our company’s stock at year-end was $13.25, which is in-line with where it finished at the previous year-end. At this market valuation, our company’s stock is trading above eighteen times (18x’s) earnings, which is very respectable in the current market. With the present confidence that we have in improving our earnings further in the coming year, we are very optimistic that the market will further reward us with an increase in our market valuation in 2018. Overall, we are extremely pleased with the performance of our company in 2017 and the direction that we are going!

 

The following is a more detailed picture of how we achieved the record performance at United Bancorp, Inc. in 2017:

 

Continuing to Increase Net Interest Income: Once again this past year, we were able to achieve positive growth in our primary revenue area— net interest income. We achieved this by growing our balance sheet while maintaining our margins. In 2017, we saw our total assets grow to $459.3 million at year-end, which is an increase of $21.3 million or 4.9% over the previous year. Contributing to this growth in total assets this past year was the growth that we experienced in our loan portfolio. At year-end, gross loans totaled $368.6 million, which was an increase of $11.9 million, or 3.3%, over 2016 totals. Also contributing to the increase in total assets in 2017 was the growth seen in our securities portfolio. This past year, securities and other restricted stock was at a level of $49.1 million at year-end, which was an increase over the previous year of $5.2 million, or 11.8%. With an increasing target for the Federal Funds Rate (FFR) this past year and an increasing level of earning-assets, our company was able to realize an increase in the total interest income that it produced. In 2017, we generated $17.7 million in total interest income, which is an increase of $1.02 million, or 6.1%, year-over-year.

 

   1

 

 

A Letter from the President and CEO - Continued

 

The other component of net interest income is interest expense. Once again, as we have experienced in recent years, our company was able to lower its total interest expense. This is quite remarkable considering that we grew our total deposits by $47.2 million, or 14.0%, during the course of this past year! Overall, total interest expense for 2017 was $1.76 million, a decrease of 1.1% from the previous year. As mentioned, we were able to contain total interest expense even while growing total deposits. This was accomplished through our strategy of building relationships with our depositors and, thereby, attracting lower-cost retail funding. Overall, we saw lower-cost retail funding (consisting of non interest and interest bearing demand and savings deposits) comprise $34.6 million of this growth in core funding. Time deposits grew by $12.6 million or 23.6%. This lower-cost and time retail funding that we were able to attract this past year was utilized to replace higher-cost wholesale funding alternatives. Our company had $20.0 million in fixed rate advances from the Federal Home Loan Bank (FHLB) mature over the course of 2017. By exchanging this higher-cost wholesale funding with lower-cost retail funding, we experienced a decline in our overall interest expense to average assets, which decreased on a year-over-year basis from 0.43% to 0.39%. This occurrence fully explains our company’s ability to fund its growth while lowering overall funding costs in 2017!

 

By increasing the level of interest income that we realized this past year through positive asset-related growth and controlling the level of interest expense, we saw our net interest margin improve by two basis points to a level of 3.85% at year-end. In 2017, this led to our company realizing net interest income of $15.9 million, an increase of $1.04 million or 7.0%.

 

Increasing Noninterest Expense to Support Future Growth while Maintaining Noninterest Income Levels: Focusing on the growth of our company, this past year we continued building the base upon which we will grow in future periods. In addition, we absorbed expenses related to several initiatives that were implemented the previous year, which led to our company realizing this cost for the entire year in 2017. With our focus on the future, we saw our non-interest expense levels increase this past year (after seeing decline or relative containment thereof in recent years). For the year, noninterest expense increased by $578 thousand or 4.4%. Most of the increase in noninterest expense was related to either infrastructure or personnel enhancement in the following areas: hiring additional loan origination personnel to drive the revenue of our company; completing the renovation of our Main Office to support an enhanced loan origination and product/ service delivery platform; reorganizing and enhancing our Information Technology function to better manage risk and serve our valued customers; opening a new Loan Production Office in the Wheeling, West Virginia market to increase overall loan production and to introduce our brand to a new, highly appealing market; marketing expense related to supporting our strategy of attracting low-cost retail funding; and, lastly, legal and other expenses associated with the renaming of our company’s single bank charter. Considering that most of the aforementioned noninterest expenses are fixed or nonrecurring, we firmly believe that we should be able to drive higher levels of revenue without significantly adding to our overall noninterest expense levels in the short-term; thereby, enhancing our earnings and returns in the near term!

 

Looking at the income-side of the net noninterest margin, the noninterest income realized by our company in 2017 was down $229 thousand year-over-year. The majority of this decrease related to a $162 thousand non-recurring gain that we realized when we sold our Bankers Bancshares, Inc. stock in 2016. Netting out the effect of this one-time event, the noninterest income realized by our company this past year remained relatively stable and was driven primarily by service charges on deposit accounts. Going forward, we seek to focus on payments and other services that will enhance the level of income generated by deposit or cash management-based services.

 

Protecting the Bottom-Line by Maintaining Solid Credit Quality Metrics— Even while growing our loan portfolio, we were able to preserve and improve our overall stability relating to credit quality. Year-over-year, we continued to have very solid credit quality-related metrics supported by nonaccrual loans and loans past due thirty (30) plus days decreasing from a level of $3.1 million to $2.7 million, a decline of $392 thousand or 12.6%. Further— net loans charged off, excluding overdrafts, was $235 thousand for 2017, which is a decrease of $46 thousand, or 16.4%, from the previous year. As of year-end, total past dues and nonaccrual loans to gross loans was a very solid 0.73%, versus 0.86% the prior year. In addition, net charge offs to average loans was a very respectable 0.07% for 2017. With these improving credit quality metrics, it is anticipated that our Company will be able to keep contributions to its loan loss reserve at relatively low levels in the coming year, which should help preserve and contribute to the enhancement of bottom-line earnings.

 

2 

 

 

Each of these aforementioned items led to the positive improvement in the earnings of our company in 2017. By keeping a steady focus on and maintaining or improving our performance in these key operational areas, we strongly believe that our company will continue to produce increasing levels of earnings and profitability in future periods!

 

There were several events that occurred and enhancements made over the course of this past year that will either help us achieve the level of growth that we envision or lead to higher levels of performance for our company. These events and/or enhancements are:

 

Renaming our bank charter to more effectively build our brand and gain recognition. Effective on October 10, 2017, The Citizens Savings Bank and its two divisions— The Citizens Bank and The Community Bank— were renamed Unified Bank. Renaming our bank-level charter, Unified Bank, will allow us to establish a more effective brand and better support our envisioned growth objective. Considering that there are roughly 5,700 bank charters in the United States and that ten (10) percent have a charter with the name of either “Citizens” or “Community,” it was extremely difficult to differentiate our banks in the markets that we serve and leverage those names as we seek to grow. Our Unified Bank name (and, charter) is the only one for a commercial banking entity in our country at this time. We have registered this name in the three primary states in which we presently seek to operate and grow— Ohio, West Virginia and Pennsylvania— and believe that we now truly have a brand that can be effectively promoted and leveraged. In addition, operating as a “single” brand allows our company to reduce costs and gain efficiencies! No longer do we have to maintain multiple platforms to effectively promote two brand names. This should lead to lower operating costs on a going forward basis. Lastly, our team members are proud to be on and have a “common” platform and name. At Unified, we now truly have one bank and one vision. together, we will accomplish more!

 

Restructuring our Information Technology Platform to more effectively manage the risks with which we are confronted as a financial services organization, while delivering our services on an evolutionary platform that is progressive for a community- banking organization. At mid-year in 2017, our company implemented a plan that it developed in conjunction with a leading technology consulting partner to ensure that we are effectively managing the risks with which banking organizations are more routinely confronted in this “Age of Technology!” By developing more effective risk management practices, we will mitigate potential risks to our customers and be able to more effectively (and, confidently) expand our digital delivery services. Over the course of the next three years, our company seeks to develop a true “Hybrid or Omni-Channel” structure that will allow us to adapt and compete more effectively in today’s virtual banking environment. But, with that said, we will never forget our community-banking roots! Quite simply, we want to maximize our potential by serving our present and future customers on “their” terms. Our hope and goal is to ensure our overall relevance within our industry by having both a stellar “brick-and-mortar” delivery system to consult with our valued customers “in-person” or “virtually” interacting with them by offering a digital delivery solution; whereby, they will never have to set foot in one of our physical locations to conduct any of their business!

 

Benefitting from the projected positive impact of the Tax Cuts and Jobs Act of 2017 (Tax Reform). Although our earnings were negatively impacted in the fourth quarter of 2017 with the implementation of this act in the amount of $216 thousand, or $0.04 per share, it is anticipated that we will benefit in the coming year with the reduction of our marginal tax rate from 35% to 21%. From the information that we are gathering, financial industry observers and insiders believe that this could lead to improved earnings for financial services organizations in the coming year in the range of 16% to 20%. On the basis of our internal projections, we believe that we will also be within this range. With this enhanced level of earnings, we have rewarded our employees with higher merit-level increases in salaries in the current year (which is a recurring benefit). In addition, we have recently announced our intention to reward our valued shareholders with a higher cash dividend payout in 2018! With ambitious goals for growth, we will also reinvest some of this anticipated windfall within our company to produce the higher-level results that we all anticipate and demand for our company!

 

   3

 

 

A Letter from the President and CEO - Continued

 

As you can see, our company had a very solid year of performance and, we firmly believe, has outstanding future potential. Throughout a large portion of our geographic footprint, we stand to benefit from the “oil and gas” play that has been underway for several years and is becoming more developed. As a company, we are cautiously optimistic that positive news will be announced by mid-year 2018 in our Eastern Region regarding the much anticipated ethane cracker plant that is being considered for construction in Dilles Bottom, Ohio. As we are told, such a venture will create thousands of construction-related jobs over the course of several years and hundreds of high-paying jobs thereafter. Quite frankly, the announcement of the building of this ethane cracker will be a game changer for our Valley! It will reverse decades of economic decline and lead to economic recovery for our long stagnant area. With such a facility located within our Valley, it is anticipated that there will be a tremendous “multiplier effect” with many other entities within the polymer industry building plants and creating jobs. What a blessing this will be for our local populace and communities and, also, a great opportunity for our company!

 

As always, we are truly blessed to have a “United and Unified” team, management, board of directors and shareholder group. Ultimately, our utmost goal is to continue increasing the value of your ownership in our company through market value appreciation and increasing dividends. Being supportive of one another... we firmly believe that we will accomplish this and greater things!

 

 
Scott A. Everson  
President and Chief Executive Officer  
ceo@unitedbancorp.com  
February 19, 2017  

 

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

 

4 

 

 

DIVIDEND AND STOCK HISTORY

 

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

5¢ Per Share Special Dividend

  December 29, 2015
2016  $0.42   5¢ Per Share Special Dividend  December 29, 2016
2017  $0.46   5¢ Per Share Special Dividend  December 29, 2017

 

2018 ANTICIPATED DIVIDEND PAYABLE DATES

 

t First Quarter
March 20, 2018
t Second Quarter*
June 20, 2018
t Third Quarter*
September 20, 2018
t Fourth Quarter*
December 20, 2018

 

*Subject to action by Board of Directors

 

(1)Adjusted for stock dividends and exchanges. Does not include dividends from Southern Ohio Community Bancorporation, Inc. prior to the merger.
(2)Formation of United Bancorp, Inc. (UBCP). Unified Bank (formerly The Citizen's Saving Bank) shareholders received 4 shares of UBCP stock in exchange for 1 share of bank stock.

 

TOTAL RETURN PERFORMANCE

 

 

Index  12/31/12   12/31/13   12/31/14   12/31/15   12/31/16   12/31/17 
United Bancorp, Inc.   100.00    133.66    139.85    174.40    256.37    262.38 
NASDAQ Composite   100.00    140.12    160.78    171.97    187.22    242.71 
SNL Bank Index   100.00    137.30    153.48    156.10    197.23    232.91 
SNL Bank $250M-$500M   100.00    135.79    154.94    177.27    222.44    271.83 
SNL Midwest Bank   100.00    136.91    148.84    151.10    201.89    216.95 
Dow Jones   100.00    129.65    142.67    142.98    166.56    213.38 

 

   5

 

 

Directors

 

 

 

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

 

6 

 

 

Directors and Officers

 

DIRECTORS OF UNITED BANCORP, INC.

 

Scott A. Everson1 President & Chief Executive Officer, United Bancorp, Inc. Chairman, President & Chief Executive Officer, Unified Bank, Martins Ferry, Ohio
Gary W. Glessner2 Certified Public Accountant, Managing Member of Glessner & Associates, PLLC; Managing Member of Glessner Wharton & Andrews Insurance Group, LLC; Managing Member of Wheeling Coin, LLC; Vice President of Windmill Truckers Center, Inc.; Vice President of Glessner Enterprises, Inc.; Managing Member of GW Rentals, LLC
John M. Hoopingarner1,2,3,4 Executive Director & Secretary, Muskingum Watershed Conservancy District, New Philadelphia, Ohio
Richard L. Riesbeck1,2,3,4 Chairman, United Bancorp, Inc.; President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio
James W. Everson Chairman Emeritus 1969 - 2014

 

OFFICERS OF UNITED BANCORP, INC.

 

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

 

DIRECTORS OF UNIFIED BANK

 

Jonathan C. Clark, Esq. Attorney at Law, Lancaster, Ohio
Scott A. Everson1 President & Chief Executive Officer, United Bancorp, Inc. Chairman, President & Chief Executive Officer, Unified Bank, Martins Ferry, Ohio
Gary W. Glessner1,2 Certified Public Accountant, Managing Member of Glessner & Associates, PLLC; Managing Member of Glessner Wharton & Andrews Insurance Group, LLC; Managing Member of Wheeling Coin, LLC; Vice President of Windmill Truckers Center, Inc.; Vice President of Glessner Enterprises, Inc.; Managing Member of GW Rentals, LLC
John R. Herzig President, Toland-Herzig Funeral Homes & Crematory, Strasburg, Ohio
John M. Hoopingarner1,2 Executive Director & Secretary, Muskingum Watershed Conservancy District, New Philadelphia, Ohio
Richard L. Riesbeck1,2, ª Chairman, United Bancorp, Inc.; President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio
James W. Everson Chairman Emeritus 1969 – 2014

 

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

4 = Nominating and Governance Committee ª = Lead Director

 

   7

 

 

Bank Past Presidents & Directors

 

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

 

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

 

PAST PRESIDENTS

Edward E. McCombs, 1902-1936

John E. Reynolds, 1936 – 1940

Harold H. Riethmiller, 1940 – 1973

James W. Everson, 1973 – 2002

 

Past Board of Directors

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

 

* Past Chairman

 

8 

 

 

Shareholder Information

 

United Bancorp, Inc.'s (the Company) common stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol UBCP, CUSIP #909911109. At year-end 2017, there were 5,435,304 shares issued, held among approximately 2,000 shareholders of record and in street name. The following table sets forth the quarterly high and low closing prices of the Company's common stock from January 1, 2017 to December 31, 2017 compared to the same periods in 2016 as reported by the NASDAQ.

 

   2017   2016 
   31-Mar   30-Jun   30-Sep   31-Dec   31-Mar   30-Jun   30-Sep   31-Dec 
Market Price Range                                        
High ($)  $13.44    12.25    12.20    13.60   $9.55    10.00    11.30    13.50 
Low ($)  $11.74    11.35    11.55    12.00   $8.80    9.02    9.77    10.45 
                                         
Cash Dividends                                        
Quarter ($)  $0.11    0.11    0.12    0.12   $0.10    0.10    0.11    0.11 
Cumulative ($)  $0.11    0.22    0.34    0.46   $0.10    0.20    0.31    0.42 
Special Cash Dividends  $-    -    -    0.05   $-    -    -    0.05 

 

Investor Relations:

 

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

 

Randall M. Greenwood, CFO

United Bancorp, Inc.

201 South 4th Street
PO Box 10

Martins Ferry, OH 43935
or

cfo@unitedbancorp.com

 

Dividend Reinvestment and Stock Purchase Plan:

 

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

 

American Stock Transfer
and Trust Company
Attn: Dividend Reinvestment
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
1-800-278-4353

 

Annual Meeting:

 

The Annual Meeting of Shareholders will be held at 2:00 p.m., April 18, 2018 at the Corporate Offices in Martins Ferry, Ohio.

 

Internet:

 

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

 

Independent Auditors:

 

BKD LLP

312 Walnut Street, Suite 3000

Cincinnati, Ohio 45202

(513) 621-8300

 

Corporate Offices:

 

Unified Bank Building

201 South 4th Street, Martins Ferry, Ohio 43935

Lisa A. Basinger

Corporate Secretary

(888) 275-5566 (EXT 6113)

(740) 633-0445 (EXT 6113)

(740) 633-1448 (FAX)

 

Transfer Agent and Registrar:

 

For transfers and general correspondence, please contact:

American Stock Transfer and Trust Company

6201 15th Avenue, 3rd Floor

Brooklyn, NY 11219

1-800-937-5449

 

Stock Trading:

 

Raymond James

222 South Riverside Plaza

7th Floor

Chicago, Illinois 60606

Anthony LanFranco

800-800-4693

 

Stifel, Nicolaus & Company Inc.

655 Metro Place South

Dublin, Ohio 43017

Steven Jefferis

877-875-9352

 

   9

 

 

Management’s Discussion and Analysis

 

In the following pages, management presents an analysis of United Bancorp, Inc.'s financial condition and results of operations as of and for the year ended December 31,2017 as compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the Consolidated Financial Statements and related footnotes and the selected financial data included elsewhere in this report.

 

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

 

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

 

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

 

Financial Condition

 

Overview

The Company reported diluted earnings per share of $0.71 and net income of $3,546,000 for the year ended December 31, 2017. In the fourth quarter and for the year ended December 31, 2017, the Company recorded a $216,000, or $0.04 per share, one-time write down or revaluation of its net deferred tax asset as a result of the Tax Cuts and Jobs Act ("Tax Act") enacted on December 22, 2017. The tax act lowers the base corporate tax rate from 35% to 21%. Without this charge, the Company's diluted earnings per share would be $0.75 compared to $0.71 for the year ended December 31, 2016, an increase of 5.63%, and $0.20 versus $0.18 in the fourth quarter, an increase of 11.1%. Lastly, exclusive of the net deferred tax asset revaluation taken in 2017, the Company had net income of $3,762,000, which represents record earnings for the Company.

 

We are happy to report that our Company had another solid year of performance this past year. While the tax act negatively impacted net income for 2017, the long term benefit of lower corporate tax rates outweighs this one- time write off. The Company had a solid increase in net income before taxes for the year ended December 31, 2017. During this period, the Company's net income before taxes increased by $429,000, or 8.3%, from the previous year. The primary driver of this increase of the Company's net income

 

 

 

before taxes was the increase in interest income on loans, which was up by $785,000, or 4.9%, year-over-year. For the year, the Company had an increase in its average loans of $13.0 million or 3.8%. While growing its loan portfolio, the Company was able to maintain its overall stability in credit quality. Year-over-year, the Company continued to have very solid credit quality-related metrics supported by nonaccrual loans and loans past due 30+ days decreasing from a level of $3.1 million to $2.7 million, a decline of $392,000 or 12.6%. Further— net loans charged off, excluding overdrafts, was $235,000 for 2017, which is a decrease of $46,000, or 16.4%, from the previous year. At this present level, total past due and nonaccrual loans to gross loans is a very solid 0.73%, versus 0.86% the prior year.

 

10 

 

 

In addition, net charge offs to average loans was a very respectable 0.07% for 2017. The net interest income for our Company increased year-over-year by $1.04 million, or 7.0%, even as we focused on growing retail core deposits to fund our growth. Total deposits increased by $47.2 million, or 13.9%, to a level of $386.0 million as of December 31, 2017. The Company was able to control its overall interest expense levels by attracting lower-cost retail funding to replace higher-cost wholesale funding advances that matured throughout this past year. Overall, the Company saw low- cost retail funding (consisting of non-interest and interest bearing demand and savings deposits) comprise $34.6 million of its growth in retail deposits year-over-year. In addition, the Company's time deposits, which consist of certificate of deposit or term funding, increased by $12.6 million, or 23.6%, for the same period. Even with the abovepeer growth in retail core deposit funding, the Company experienced a decline in its overall interest expense to average assets, which decreased on a year-over-year basis from 0.43% to 0.39%. This decrease in the overall cost of funding is directly attributed to the repricing of $20.0 million of the Company's fixed rate advances from the Federal Home Loan Bank (FHLB) during the course of this past year. Not having these higher-costing wholesale advances on its balance sheet should continue to provide benefit to the company in 2018.

 

The noninterest income of the Company was down by $229,000 year-over-year. The majority of this decrease in noninterest income is related to a $162,000 non-recurring gain that the Company realized on the sale of Bankers Bancshares, Inc. stock during 2016. On the noninterest expense-side of the net noninterest margin (and, as budgeted), the Company saw an increase in its overall noninterest expense levels after several years of decline. The Company saw its noninterest expense increase by $579,000 or 4.4%. Most of the increase in noninterest expense was related to infrastructure enhancement and personnel-related expenses as we prepare for the future growth that we envision and expenses related to our expansion into the Wheeling, West Virginia market with our new Loan Production Office, which should lead to our Company realizing higher levels of revenue as we saw this past year. Also adding to noninterest expense was the renaming of our single bank charter, The Citizens Savings Bank and its two divisions— The Citizens Bank and The Community Bank— to Unified Bank, which became effective on October 10, 2017. While we will not have the rebranding- related expenses in 2018, the Company will most likely dedicate to marketing-related expense a comparable amount of funding to better establish our new Unified Bank brand identity. Considering that most of the aforementioned expenses are "fixed," we firmly believe that we should be

 

 

 

able to drive higher levels of revenue without significantly adding to our overall noninterest expense levels in the short-term; therefore, enhancing our Company's earnings and returns.

 

We are pleased to report the record level on net income realized by our Company in 2017 (exclusive of the deferred tax write off), which came in at $3,762,000. Our previous best year was 2008, which was prior to our industry being negatively impacted by the effects of the Great Recession. In addition, we are also pleased to report that we are executing upon our growth strategy, Mission 2020, which calls for our Company to grow its assets (in a profitable fashion) to a level of $1.0 billion or greater by the end of 2020. This past year, a lot of our focus was on solidifying the base that will firmly support our envisioned growth in the coming years. Even though we realize that we have an extremely long way to go in order to achieve our ambitious growth goal, it is gratifying to see the progress that we made toward supporting this goal and the organic growth that we achieved year-over-year. Although we will need to have a compounded annual growth rate of approximately thirty percent from the beginning of 2018 to achieve the level of growth envisioned under Mission 2020, we firmly believe that it is achievable with the infrastructure that we continue to build and the present vision that we have (which includes both organic and acquisition-related growth). From an organic perspective this past year, our Company grew its assets $21.3 million, or 4.9%, to an overall level of $459.3 million as of December 31, 2017. Most of this growth in assets occurred in our Company's higher-yielding loan portfolio, which enhanced the overall interest income that we realized. In addition, the overall level of net interest income realized by our Company increased year-over-year. Our Company was able to achieve this increase in net interest income by growing both its loans outstanding and lower-cost core deposit funding. We saw marginal growth in the net income that our Company produced in the first two quarters of this year and are extremely pleased to see

 

   11

 

 

 

 

that our earnings growth level is back to double digits on a percentage basis in the third and fourth quarters of 2017 (exclusive of the deferred tax write off in the fourth quarter of 2017). After several years of containment, our Company saw its overall noninterest expense levels increase this past year as we continue to build for the future and support our overall mission for growth. Most of the increase in our noninterest expense levels occurred in the following areas: hiring additional loan origination personnel to drive the revenue of our Company; completing the renovation of our Main Office to support an enhanced loan origination platform; reorganizing and enhancing our Information Technology function to better manage risk and serve our valued customers; opening a new Loan Production Office in the Wheeling, West Virginia market to increase overall loan production and to introduce our Company to a new, highly desirable market; marketing expense relating to the prime retail deposit pricing that we have been successfully promoting; and, lastly, legal and other expenses related to the renaming of our Company's single bank charter. Renaming our bank-level charter, Unified Bank, will allow us to establish a more effective brand and better support our envisioned growth objective. We firmly believe with our positioning over the course of the past year, our Company has high operating leverage which should allow us to enhance our revenue, while controlling our noninterest expense levels— thus, leading to higher earnings and returns over the course of the next twelve to eighteen months. We continue to have extremely sound credit quality metrics, which should have a positive impact on our earnings for the foreseeable future. In addition, we continue to have a robust capital level, as evidenced by our overall equity to asset ratio of 9.56%, which will support our vision for growth in the intermediate term. Our Company continues to pay a generous cash dividend, which totals $0.51 on a trailing twelve month (TTM) basis (including the $0.05 special dividend paid this past December), which produces at TTM Yield of 3.9% as of year-end. At this level, our Company's cash dividend yield is significantly higher than that of the average bank in our country. With our recent focus of increasing the operating leverage and revenue of our Company, we firmly believe that we will continue to generate higher levels of net income and reward our shareholders by paying higher dividends and having further appreciation in our market value. Our number one focus continues to be growing our shareholders' investment in our Company through profitable operations and strategic growth. In addition to driving the market value appreciation of our shareholders' ownership, we will continue striving to reward our owners by paying a solid cash dividend. Overall, we are pleased with the performance that our Company had in 2017 and the direction that we are going. We are extremely optimistic about our future potential and look forward to realizing this upside potential in future periods!

 

Earning Assets - Loans

 

The Company's gross loans totaled $368.6 million at December 31, 2017, representing a 3.3% increase over the $356.7 million at December 31, 2016. Average loans totaled $343.2 million for 2016, representing a 3.8% increase compared to average loans of $356.2 million for 2017.

 

The increase in gross loans from December 31, 2016 to December 31, 2017 was primarily an increase in commercial and commercial real estate loans by $14.1 million which was offset by a decrease of $1.9 million in installment loans and a decrease of $301,000 in residential real estate.

 

The Company's commercial and commercial real estate loan portfolio represents 76.0% of the total portfolio at December 31, 2017, compared to 74.6% at December 31, 2016. During this past year, we found many new customers within our lending areas and our focus continues on our small business customers that operate in our defined market area. We utilize all the SBA, Ohio Department of Development and State of Ohio loan programs as well as local revolving loan funds to best fit the needs of our customers.

 

The Company's installment lending portfolio represented 3.4% of the total portfolio at December 31, 2017, compared to 4.0% at December 31, 2016. Competition for installment loans principally comes from the captive finance companies offering low to zero percent financing for extended terms.

 

The Company's residential real estate portfolio represents 20.6% of the total portfolio at December 31, 2017, compared to 21.4% at December 31, 2016. Residential real estate loans

 

12 

 

 

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

 

In 2017, the interest rate environment continued to be favorable to the secondary market fixed-rate mortgage loan product. However, the secondary market origination volume was impacted by an issue that has developed in the overall industry related to higher risk sub-prime loans. While the Company did not participate in sub-prime lending, the additional regulations and unstable appraisal market have made it more difficult to obtain a loan that is saleable in the secondary market. With these conditions, the Company did recognize a gain on the sale of secondary market loans of $98,000 in 2017 and a gain of $97,000 in 2016.

 

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

 

 

 

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

 

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

 

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

 

Earning Assets - Securities and Federal Funds Sold

The securities portfolio is comprised of U.S. Government and agency obligations. The Company does not hold any derivative securities.

 

Securities available for sale at December 31, 2017 increased $5.2 million, or 13.1%, from 2016. The Company's U.S. Government agency portfolio is subject to increased levels of redemptions due to the call features in this type of investment security. However, given the recent increases in overall interest rates the extent of bonds called in 2018 should be minimal. Overall, the effective duration of the bond portfolio is less than two years from December 31, 2017.

 

Sources of Funds - Deposits

The Company's primary source of funds is retail core deposits from individuals and business customers. These core deposits include all categories of time deposits, excluding certificates of deposit greater than $250,000. Total deposits increased $47.2 million or 13.9% from $338.8 million at December 31, 2016 to $386.0 million at December 31, 2017. Overall total deposit growth was mainly focused on interest bearing money market accounts and certificate of deposit accounts.

 

The Company has a strong deposit base from public agencies, including local school districts, city and township municipalities, public works facilities and others, which may

 

   13

 

 

tend to be more seasonal in nature resulting from the receipt and disbursement of state and federal grants. These entities have maintained relatively stable balances with the Company due to various funding and disbursement timeframes.

 

Certificates of deposit greater than $250,000 are not considered part of core deposits and as such are used to balance rate sensitivity as a tool of funds management. At December 31, 2017, certificates of deposit greater than $250,000 increased $4.0 million, from December 31, 2016 totals.

 

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

 

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

Other interest-bearing liabilities include securities sold under agreements to repurchase, and Federal Home Loan Bank ("FHLB") advances. Securities sold under agreements to repurchase increased approximately $1.7 million from December 31, 2016 to December 31, 2017.

 

Advances from the Federal Home Loan Bank (FHLB) decreased $29.8 million from December 31, 2016 to December 31, 2017. During 2017, the Company repaid $20.0 million of fixed rate advances from the Federal Home Bank.

 

Performance Overview 2017 to 2016

 

Net Income

The Company reported diluted earnings per share of $0.71 and net income of $3,546,000 for the year ended December 31, 2017. In the fourth quarter and for the year ended December 31, 2017, the Company recorded a $216,000, or $0.04 per share, one-time write down or revaluation of its net deferred tax asset as a result of the Tax Cuts and Jobs Act ("tax act") enacted on December 22, 2017. The tax act lowers the base corporate tax rate from 35% to 21%. Without this charge, the Company's diluted earnings per share would be $0.75 compared to $0.71 for the year ended December 31, 2016, an increase of 5.63%, and $0.20 versus $0.18 in the fourth quarter, an increase of 11.1%. Lastly, exclusive of the net deferred tax asset revaluation taken in 2017, the Company had net income of $3,762,000, which represents record earnings for the Company.

 

Net Interest Income

Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Comparing the year ended December 31, 2017 to 2016, the Company's net interest margin was 3.85% compared to 3.83%, an increase of 2 basis points.

 

Average interest-earning assets increased $24.0 million in 2017 as compared to 2016 while the associated weighted- average yield on these interest-earning assets decreased from 4.29% in 2016 to 4.28% for 2017. Average interest- bearing liabilities increased $28.3 million in 2017 as compared to 2016, while the associated weighted-average costs on these interest-bearing liabilities decreased from 0.59% in 2016 to 0.53% in 2017.

 

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

 

Provision For Loan Losses

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

 

Gross loans were up $11.9 million year-over-year to a level of $368.6 million as of December 31, 2017. During this same period, the Company's credit quality remained relatively constant as non-accrual loans were up $34,000, or 2.5%, to a level of $1.4 million and net loans charged off were down by $46,000, or 16.3%, to a level of $235,000 (exclusive of overdraft charge off). With this overall improvement in

 

 

 

14 

 

 

credit quality, the Company decreased the provision for loan losses which was $100,000 for the year ended December 31, 2017 compared to $301,000 for the year ended December 31, 2016, a decrease of $201,000 year- over-year. Overall, the decreased loan loss provision net of loans charged off resulted in a total allowance for loan losses to total loans of 0.58% and a total allowance for loan losses to nonperforming loans of 152.10% at year end 2017, compared to 0.66% and 171.99% at year end 2016.

 

Noninterest Income

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

 

Noninterest income for the year ended December 31, 2017 was $3.5 million, a decrease of $229,000, or 6.2%, compared to $3.7 million for the year ended December 31, 2016. The majority of this decrease in noninterest income is related to a $162,000 non-recurring gain that the Company realized on the sale of Bankers Bancshares, Inc. stock during 2016. The Company's service charges on deposit accounts decreased by $92,000 for 2017 as compared to 2016.

 

Noninterest Expense

After several years of containment, our Company saw its overall noninterest expense levels increase this past year as we continue to build for the future and support our overall mission for growth. Most of the increase in our noninterest expense levels occurred in the following areas: hiring additional loan origination personnel to drive the revenue of our Company; completing the renovation of our Main Office to support an enhanced loan origination platform; reorganizing and enhancing our Information Technology function to better manage risk and serve our valued customers; opening a new Loan Production Office in the Wheeling, West Virginia market to increase overall loan production and to introduce our Company to a new, highly desirable market; marketing expense relating to the prime retail deposit pricing that we have been successfully promoting; and, lastly, legal and other expenses related to the renaming of our Company's single bank charter. Renaming our bank-level charter, Unified Bank, will allow us to establish a more effective brand and better support our envisioned growth objective. Overall noninterest expense for 2017 increased $579,000, or 4.4%, as compared to 2016. Specific areas of increase include the following.

 

Salaries and employee benefits increased $189,000, or 2.7%, from 2016 to 2017. As described above additional loan origination personnel were hired in 2017.

 

Occupancy and equipment expense increased $174,000, or 9.2%. The market expansion into Wheeling, West Virginia is the main driver for the increase.

 

Professional fees increased $105,000, or 14.6%, for 2017 as compared to 2016. This increase is due to increased regulatory costs and legal expenses to open the Loan Production Office ("LPO") in Wheeling West Virginia.

 

Marketing expense increased $102,000, or 31.5%, for 2017 as compared to 2016. The renaming process in 2017 to Unified Bank was the primarily reason for this increase

 

(In thousands)  2017   2016 
Noninterest income          
Customer service fee  $2,502   $2,594 
Gains on sales of loans   98    97 
Other income   852    990 
Total noninterest income  $3,452   $3,681 
           
Noninterest expense          
Salaries and employee benefits  $7,210   $7,021 
Occupancy and equipment   2,071    1 ,897 
Provision for losses on foreclosed real estate   20    6 
Professional services   825    720 
Insurance   346    225 
Deposit insurance premiums   1 85    1 98 
Franchise and other taxes   347    325 
Marketing expense   426    324 
Printing and office supplies   112    117 
Other expenses   2,107    2,238 
Total noninterest expense  $13,649   $13,071 

 

   15

 

 

Other expenses decreased $131,000, or 5.9%. As reported in 2016, the Company incurred fraud losses and card-related reissuance costs of approximately $208,000 ($138,000 after tax or approximately $0.025 per share dilution) were realized during the second quarter of 2016. During the three-months ended September 30, 2016, the Company received an insurance refund on this fraud of $50,000. Under consumer regulation, the Company bears the financial loss relating to debit card fraud and its customers are made whole on the loss. During the third quarter of 2016, the Company implemented newer fraud prevention technology relating to its debit cards that included a chip-enabled debit card and a smart phone app, "My Mobile Money," that allows our customers to monitor and control their debit card usage by sending transaction alerts.

 

Income tax expense for 2017 was $2.0 million compared to $1.6 million in 2016, an increase of $464,000. The Company's effective income tax rate was 36.6% in 2017 and 30.6% in 2016. In 2016, the Company's effective tax rate is less than the 34% statutory rate due primarily to the effects of nontaxable interest income and earnings on bank owned life insurance policies. For 2017, the Company recorded a $216,000, or $0.04 per share, one-time write down or revaluation of its net deferred tax asset as a result of the Tax Act enacted on December 22, 2017. Without this write-down the Company's effective tax rate would have been 32.7%.

 

Asset/Liability

 

Management and Sensitivity to Market Risks

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Management of the income statement is called spread management and is defined as managing investments, loans, and liabilities to achieve an acceptable spread between the Company's return on its earning assets and its cost of funds. Gap management without consideration of interest spread can cause unacceptable low profit margins

 

16 

 

 

while assuring that the level of profits is steady. Spread management without consideration of gap positions can cause acceptable profits in some interest rate environments and unacceptable profits in others. A sound asset/liability management program combines gap and spread management into a single cohesive system.

 

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

 

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

 

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

 

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

 

The projected volatility of the net present value at both December 31, 2017 and 2016 fall within the general guidelines established by the Board of Directors. The 2017 NPV table shows that in a falling interest rate environment, in the event of a 100 basis point change, the NPV would

 

(Dollars in Thousands)
Net Portfolio Value - December 31, 2017
 
Change in Rates  $ Amount   $ Change   % Change 
+200   71,517    456    1%
+100   71,915    854    1%
Base   71,061           
-100   64,069    (6,992)   -10%
-200   53,477    (17,584)   -24%

 

(Dollars in Thousands)
Net Portfolio Value - December 31, 2016
 
Change in Rates  $ Amount   $ Change   % Change 
+200   70,162    3,255    5%
+100   69,310    2,403    4%
Base   66,907           
-100   59,081    (7,826)   -12%
-200   48,596    (18,311)   -27%

 

decrease 10%, and with a 200 basis point change the NPV would decrease 24%. This decrease is the result of fixed rate certificates of deposit and Federal Home Loan Bank advances not repricing in lock step with an immediate downward rate adjustment of 100 and 200 basis points. The other component is that once rates decrease 100 or 200 basis points from current levels we tend to reach a floor on how low depository rates can adjust downward.

 

In an upward change in interest rates, the Company's NPV would increase 1% with a 100 basis point interest rate increase. In a 200 basis point rate increase, the Company's NPV would increase 1%. This increase is attributable to a portion of the Company's loan portfolios that have variable rates but is somewhat offset by deposit pricing based on short term interest rates.

 

   17

 

 

The following table is a summary of selected quarterly results of operations for the years ended December 31, 2017 and 2016. 

 

   Three Months Ended 
   March 31   June 30   September 30   December 31 
   (In thousands, except per share data)
2017
 
                 
Total interest income  $4,184    4,290    4,586    4,591 
Total interest expense   438    438    449    439 
                     
Net interest income   3,746    3,852    4,137    4,152 
                     
Provision for losses on loans   25    25    25    25 
Other income   832    869    892    859 
General, administrative and other expense   3,334    3,365    3,456    3,494 
                     
Income before income taxes   1,219    1,331    1,548    1,492 
Federal income taxes   369    415    548    712 
                     
Net income   850    916    1,000    780 
                     
Earnings per share                    
Basic   0.17    0.18    0.20    0.17 
Diluted   0.17    0.18    0.20    0.16 

 

   Three Months Ended 
   March 31   June 30   September 30   December 31 
   (In thousands, except per share data) 
   2016 
     
Total interest income  $4,038   $4,187   $4,166   $4,244 
Total interest expense   475    437    432    440 
                     
Net interest income   3,563    3,750    3,734    3,804 
                     
Provision for losses on loans   71    105    131    (6)
Other income   867    902    1,056    856 
General, administrative and other expense   3,141    3,251    3,345    3,333 
                     
Income before income taxes   1,218    1,296    1,314    1,333 
Federal income taxes   373    389    386    432 
                     
Net income  $845   $907   $928   $901 
                     
Earnings per share                    
Basic  $0.18   $0.18   $0.18   $0.18 
Diluted  $0.17   $0.18   $0.18   $0.18 

 

18 

 

 

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

 

The following table provides average balance sheet information and reflects the taxable equivalent average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2017 and 2016. The yields and costs are calculated by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities.

 

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

 

   2017   2016 
       Interest           Interest     
   Average   Income/   Yield/   Average   Income/   Yield/ 
(Dollars In thousands)  Balance   Expense   Rate   Balance   Expense   Rate 
Assets                              
Interest-earning assets                              
Loans  $356,224    16,827    4.72%  $343,243    16,041    4.67%
Taxable securities - AFS   39,586    481    1.22    31,292    325    1.04 
Tax-exempt securities - AFS   178    11    6.18    2,003    123    6.13 
Federal funds sold   13,109    151    1.15    8,547    36    0.42 
FHLB stock and other   4,165    209    5.02    4,169    175    4.20 
Total interest-earning assets   413,262    17,679    4.28    389,254    16,700    4.29 
                               
Noninterest-earning assets                              
Cash and due from banks   6,880              4,972           
Premises and equipment (net)   11,849              11,340           
Other nonearning assets   18,688              13,955           
Less: allowance for loan losses   (2,282)             (752)          
Total noninterest-earning assets   35,135              29,515           
Total assets   448,397              418,769           
                               
Liabilities & stockholders’ equity                              
Interest-bearing liabilities                              
Demand deposits  $154,661    495    0.32%  $123,051    136    0.11%
Savings deposits   81,874    38    0.05    78,811    36    0.05 
Time deposits   62,744    686    1.09    54,954    593    1.08 
FHLB advances   9,911    364    3.67    30,885    924    2.99 
Federal funds purchased   4,296    37    0.86    -    -    - 
Trust preferred debentures   4,124    104    2.52    4,124    82    1.99 
Repurchase agreements   13,578    40    0.29    11,094    13    0.12 
Total interest-bearing liabilities   331,218    1,764    0.53    302,919    1,784    0.59 
                               
Noninterest-bearing liabilities                              
Demand deposits   70,272              70,723           
Other liabilities   2,446              2,493           
Total noninterest-bearing liabilities   72,718              73,216           
Total liabilities                  376,135           
Total stockholders’ equity   44,461              42,634           
Total liabilities & stockholders’ equity   448,397             $418,769           
Net interest income       $15,915             $14,916      
Net interest spread             3.75%             3.70%
                               
Net yield on interest-earning assets             3.85%             3.83%

 

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

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

 

   19

 

 

Rate/Volume Analysis

The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected interest income and expense during 2017. For purposes of this table, changes in interest due to volume and rate were determined using the following methods:

 

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

 

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

 

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

 

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

 

 

 

Capital Resources

Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Bank. The Company's stockholders' equity was $43.9 million and $42.6 million at December 31, 2017 and 2016, respectively. Total stockholders' equity in relation to total assets was 9.56% at December 31, 2017 and 9.74% at December 31, 2016.

 

   2017 Compared to 2016 
   Increase/(Decrease) 
       Change   Change 
   Total   Due To   Due To 
(In thousands)  Change   Volume   Rate 
Interest and dividend income               
Loans  $786    612    174 
Taxable securities available for sale   156    95    61 
Tax-exempt securities available for sale   (112)   (113)   1 
Federal funds sold   115    27    88 
FHLB stock and other   34        34 
Total interest and dividend income   979    621    358 
                
Interest expense               
Demand deposits   359    48    311 
Savings deposits   2    1    1 
Time deposits   93    64    29 
FHLB advances   (513)   (467)   (46)
Federal funds purchased   (10)   (28)   18 
Trust Preferred debentures   22        22 
Repurchase agreements   27    3    24 
Total interest expense   (20)   (379)   359 
                
Net interest income  $999    1,000    (1)

 

20 

 

 

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

 

The Company's Articles of Incorporation permits the creation of a class of preferred shares with 2,000,000 authorized shares. If, utilized, this will enable the Company, at the option of the Board of Directors, to issue series of preferred shares in a manner calculated to take advantage of financing techniques which may provide a lower effective cost of capital to the Company. The class of preferred shares provides greater flexibility to the Board of Directors in structuring the terms of equity securities that may be issued by the Company. As of December 31, 2017 the Company has not issued any preferred shares.

 

In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I ("Trust I" or the "Trust"), issued $4.1 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.1 million of the Company's subordinated debentures. The Company's subordinated debentures are the sole asset of Trust I. The Company's investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.1 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company's Tier 1 Capital. The interest rate is a variable rate per annum, reset quarterly, equal to three month LIBOR plus 1.35% and is payable quarterly.

 

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

 

 

 

 

 

turn utilized the note proceeds to purchase $3.4 million of the Company's treasury stock.

 

Liquidity

Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold and securities available-for-sale. These assets are commonly referred to as liquid assets. Liquid assets were $59.3 million at December 31, 2017, compared to $51.3 million at December 31, 2016. Management recognizes securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 2017, $45.0 million of the securities portfolio was classified as available for sale. The Company's residential real estate portfolio can and has been readily used to collateralize borrowings as an additional source of liquidity. Management believes its current liquidity level is sufficient to meet cash requirements.

 

The Cash Flow Statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2017 and 2016 follows.

 

Net cash provided by operating activities totaled $4.6 million and $4.2 million for the years ended December 31, 2017 and 2016, respectively. The adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and intangibles, gain on sales of loans, securities and other assets, the provision for loan losses, Federal Home Loan Bank stock dividends, net amortization of securities and net changes in other assets and liabilities.

 

Net cash used in investing activities totaled $18.0 million for the year ended December 31, 2017. For year ended

 

   21

 

 

December 31, 2016 net cash used by investing activities totaled $35.0 million. The changes in net cash from investing activities include loan growth, as well as normal maturities, security calls and reinvestments of securities and premises and equipment expenditures. Proceeds from securities, which matured or were called totaled $7.2 million and $36.4 million in 2017 and 2016, respectively.

 

Net cash provided by financing activities totaled $16.3 million and $29.7 for the years ended December 31, 2017 and 2016, respectively. The net cash provided by financing activities in 2017 was primarily attributable to an increase in deposits net of repayments in borrowings from the Federal Home Loan Bank. The net cash provided by financing activities in 2016 was primarily attributable to an increase in total deposits and FHLB advances.

 

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

 

Inflation

The majority of assets and liabilities of the Company are monetary in nature and therefore the Company differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important

 

 

 

impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity.

 

22 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

To the Shareholders, Board of Directors and Audit Committee

United Bancorp, Inc.

Martins Ferry, Ohio

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

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

 

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

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

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

 

Cincinnati, Ohio  
March 20, 2018

 

 

 

 

 

United Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2017 and 2016

(In thousands, except share data)

  

   2017   2016 
Assets          
Cash and due from banks  $4,662   $4,233 
Interest-bearing demand deposits   9,653    7,308 
Cash and cash equivalents   14,315    11,541 
           
Available-for-sale securities   44,959    39,766 
Loans, net of allowance for loan losses of $2,122 and $2,341 at December 31, 2017 and 2016, respectively   366,467    354,380 
Premises and equipment   11,740    11,884 
Federal Home Loan Bank stock   4,164    4,164 
Foreclosed assets held for sale, net   397    335 
Accrued interest receivable   993    840 
Deferred federal income taxes   349    850 
Bank-owned life insurance   12,114    11,822 
Other assets   3,834    2,436 
Total assets  $459,332   $438,018 
           
Liabilities and Stockholders’ Equity          
Liabilities          
Deposits          
Demand  $237,980   $203,745 
Savings   82,169    81,825 
Time   65,817    53,233 
Total deposits   385,966    338,803 
Securities sold under repurchase agreements   11,085    9,393 
Federal Home Loan Bank advances   10,022    39,855 
Subordinated debentures   4,124    4,124 
Interest payable and other liabilities   4,240    3,202 
Total liabilities   415,437    395,377 
Stockholders’ Equity          
Preferred stock, no par value, authorized 2,000,000 shares; no shares issued   ––    –– 
Common stock, $1 par value; authorized 10,000,000 shares; issued  2017 – 5,435,304 shares, 2016 - 5,425,304 shares; outstanding 2017 – 5,244,105, 2016 – 5,208,015   5,435    5,425 
Additional paid-in capital   18,020    18,024 
Retained earnings   23,260    22,483 
Stock held by deferred compensation plan; 2017 – 185,355 shares, 2016 – 211,509 shares   (1,671)   (1,880)
Unearned ESOP compensation   (683)   (911)
Accumulated other comprehensive income loss   (420)   (454)
Treasury stock, at cost          
2017 – 5,744 shares, 2016 – 5,744 shares   (46)   (46)
Total stockholders’ equity   43,895    42,641 
Total liabilities and stockholders’ equity  $459,332   $438,018 

 

See Notes to Consolidated Financial Statements

 

24 

 

 

United Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

(In thousands except per share data)

 

   2017   2016 
Interest and Dividend Income          
Loans  $16,803   $16,018 
Securities          
Taxable   481    325 
Tax-exempt   7    81 
Federal funds sold   151    36 
Dividends on Federal Home Loan Bank and other stock   209    175 
Total interest and dividend income   17,651    16,635 
           
Interest Expense          
Deposits   1,219    765 
Borrowings   545    1,019 
Total interest expense   1,764    1,784 
Net Interest Income   15,887    14,851 
Provision for Loan Losses   100    301 
Net Interest Income After Provision for Loan Losses   15,787    14,550 
Noninterest Income          
Customer service fees   2,502    2,594 
Net gains on loan sales   98    97 
Earnings on bank-owned life insurance   471    463 
Other   381    527 
Total noninterest income   3,452    3,681 
Noninterest Expense          
Salaries and employee benefits   7,210    7,021 
Net occupancy and equipment expense   2,071    1,897 
Provision for losses on foreclosed real estate   20    6 
Professional fees   825    720 
Insurance   346    225 
Deposit insurance premiums   185    198 
Franchise and other taxes   347    325 
Marketing expense   426    324 
Printing and office supplies   112    117 
Other   2,107    2,238 
Total noninterest expense   13,649    13,071 
           
Income Before Federal Income Taxes   5,590    5,160 
Provision for Federal Income Taxes   2,044    1,580 
Net Income  $3,546   $3,580 
Basic Earnings Per Share  $0.72   $0.72 
Diluted Earnings Per Share  $0.71   $0.71 

 

See Notes to Consolidated Financial Statements

 

 25

 

 

United Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017 and 2016

(In thousands)

 

   2017   2016 
         
Net income  $3,546   $3,580 
Other comprehensive income (loss), net of tax          
Unrealized holding gains (losses) on available-for-sale securities during the period, net of taxes (benefits) of $24 and $(159) for each respective period   89    (310)
Change in funded status of defined benefit plan, net of (benefits) $(20) and taxes of $22 for each respective period   (40)   42 
Amortization of prior service included in net periodic pension expense, (benefits) of $(30) and $(30) for each respective period   (59)   (59)
Amortization of net loss included in net periodic pension cost, net of tax of $21 and $27 for each respective period   44    54 
           
Comprehensive income  $3,580   $3,307 

 

See Notes to Consolidated Financial Statements

 

26 

 

 

United Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

(In thousands except per share data)

 

           Treasury   Shares       Accumulated     
       Additional   Stock and   Acquired       Other     
   Common   Paid-in   Deferred   By   Retained   Comprehensive     
   Stock   Capital   Compensation   ESOP   Earnings   Loss   Total 
Balance, January 1, 2016  $5,385   $18,245   $(2,125)  $(1,271)  $21,443   $(181)  $41,496 
                                    
Net income   ––    ––    ––    ––    3,580    ––    3,580 
Other comprehensive loss   ––    ––    ––    ––    ––    (273)   (273)
Cash dividends - $0.47 per share   ––    ––    ––    ––    (2,540)   ––    (2,540)
Shares purchased for deferred compensation plan   ––    (199)   199    ––    ––    ––    –– 
Expense related to share-based compensation plans   ––    147    ––    ––    ––    ––    147 
Restricted stock activity   40    (40)   ––    ––    ––    ––     
Amortization of ESOP   ––    (129)   ––    360    ––    ––    231 
Balance, December 31, 2016   5,425    18,024    (1,926)   (911)   22,483    (454)   42,641 
                                    
Net income   ––    ––    ––    ––    3,546    ––    3,546 
Other comprehensive income   ––    ––    ––    ––    ––    34    34 
Cash dividends - $0.51 per share   ––    ––    ––    ––    (2,769)   ––    (2,769)
Shares purchased for deferred compensation plan   ––    (209)   209    ––    ––    ––    –– 
Expense related to share-based compensation plans   ––    163    ––    ––    ––    ––    163 
Restricted stock activity   10    (10)   ––    ––    ––    ––    –– 
Amortization of ESOP   ––    52    ––    228    ––    ––    280 
Balance, December 31, 2017  $5,435   $18,020   $(1,717)  $(683)  $23,260   $(420)  $43,895 

 

See Notes to Consolidated Financial Statements

 

 27

 

 

United Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

(In thousands)

 

   2017   2016 
Operating Activities          
Net income  $3,546   $3,580 
Items not requiring (providing) cash          
Depreciation and amortization   918    819 
Provision for loan losses   100    301 
Provision for losses on foreclosed real estate   20    6 
Amortization of premiums and discounts on securities-net   (1)   (1)
Realized gains on sale of Great Lake Bankers Bank stock       (162)
Amortization of mortgage servicing rights   6    12 
Deferred income taxes   545    82 
Originations of loans held for sale   (4,424)   (4,451)
Proceeds from sale of loans held for sale   4,522    4,548 
Net gains on sales of loans   (98)   (97)
Amortization of ESOP   280    231 
Expense related to share-based compensation plans   163    147 
Loss on sale of real estate and other repossessed assets   24    4 
Increase in cash surrender value of bank-owned life insurance   (292)   (313)
           
Changes in          
Accrued interest receivable   (153)   (37)
Other assets   (1,627)   (34)
Interest payable and other liabilities   1,038    (458)
           
Net cash provided by operating activities   4,567    4,177 
           
Investing Activities          
Purchases of available-for-sale securities   (12,248)   (42,000)
Proceeds from maturities of available-for-sale securities   7,249    36,389 
Net change in loans   (12,336)   (27,468)
Proceeds from sale of Great Lake Bankers Bank stock       208 
Purchases of premises and equipment   (782)   (2,257)
Proceeds from sales of foreclosed assets   71    124 
           
Net cash used in investing activities   (18,046)   (35,004)

 

See Notes to Consolidated Financial Statements

 

28 

 

 

United Bancorp, Inc.

Consolidated Statements of Cash Flows (continued)

December 31, 2017 and 2016

(In thousands)

 

   2017   2016 
Financing Activities          
Net increase in deposits  $47,163   $15,181 
Proceeds of Federal Home Loan Bank advances   11,000    19,500 
Repayments of Federal Home Loan Bank advances   (40,833)   (6,175)
Net change in securities sold under repurchase agreements   1,692    3,701 
Cash dividends paid   (2,769)   (2,540)
           
Net cash provided by (used in) financing activities   16,253    29,667 
           
Increase (decrease) in Cash and Cash Equivalents   2,774    (1,160)
           
Cash and Cash Equivalents, Beginning of Year   11,541    12,701 
           
Cash and Cash Equivalents, End of Year  $14,315   $11,541 
           
Supplemental Cash Flows Information          
Interest paid on deposits and borrowings  $1,807   $1,796 
           
Federal income taxes paid  $1,575   $1,133 
           
Supplemental Disclosure of Non-Cash Investing Activities          
Transfers from loans to foreclosed assets held for sale  $149   $111 

 

See Notes to Consolidated Financial Statements

 

 29

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Note 1:Nature of Operations and Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Nature of Operations

 

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

 

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

 

Use of Estimates

 

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

 

30 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

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

 

Cash Equivalents

 

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2017 and 2016, cash equivalents consisted primarily of due from accounts with the Federal Reserve and other correspondent Banks.

 

Currently, the FDIC’s insurance limits are $250,000. At December 31, 2017 and 2016, none of the Company’s cash accounts exceeded the federally insured limit of $250,000.

 

Securities

 

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

 

For debt securities with fair value below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

 

Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. At December 31, 2017 and 2016, the Company did not have any loans held for sale.

 

 31

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in

 

32 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

 33

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

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

 

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

 

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

 

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

 

34 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

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

 

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

 

Premises and Equipment

 

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

 

Federal Home Loan Bank Stock

 

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

 

Foreclosed Assets Held for Sale

 

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

 

Bank-Owned Life Insurance

 

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

 

Treasury Stock

 

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

 

Restricted Stock Awards

 

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

 

 35

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Income Taxes

 

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

 

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

 

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. At December 31, 2017, the Company had no uncertain tax positions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Company’s impact of this Tax Act resulted in a charge against net income of approximately $216,000. This is primarily due to the write down of its deferred tax assets as a result of the Tax Act’s reduction in the base corporate tax rate from 35% to 21%.

 

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

 

The Company files consolidated income tax returns with its subsidiary. With a few exceptions, the Company is no longer subject to the examination by tax authorities for years before 2014.

 

Deferred Compensation Plan

 

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

 

36 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Company’s stock are not recognized. The deferred compensation obligation is also classified as an equity instrument and changes in the fair value of the amount owed to the participant are not recognized.

 

Stockholders’ Equity and Dividend Restrictions

 

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

 

Earnings Per Share

 

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method.

 

Treasury stock shares, deferred compensation shares and unearned ESOP shares are not deemed outstanding for earnings per share calculations.

 

Comprehensive Income

 

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

 

Advertising

 

Advertising costs are expensed as incurred.

 

Note 2:Restriction on Cash and Due From Banks

 

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2017 and 2016, was $3.5 million and $2.8 million, respectively.

 

 37

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Note 3:Securities

 

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

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Approximate
Fair Value
 
   (In thousands) 
Available-for-sale Securities:                    
December 31, 2017:                    
U.S. government agencies  $45,249   $   $(290)  $44,959 
                     
   $45,249   $   $(290)  $44,959 
                     
Available-for-sale Securities:                    
December 31, 2016:                    
U.S. government agencies  $39,000   $   $(486)  $38,514 
State and political subdivisions   1,249    3        1,252 
                     
   $40,249   $3   $(486)  $39,766 

 

The amortized cost and fair value of available-for-sale securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities for mortgage-backed securities are presented in the table below based on their projected maturities.

 

   Available-for-sale 
   Amortized
Cost
   Fair
Value
 
   (In thousands) 
         
One to five years  $45,249   $44,959 
           
Totals  $45,249   $44,959 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $41.5 million and $27.9 million at December 31, 2017 and 2016, respectively.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at December 31, 2017 and 2016, was $44.9 million and $38.5 million, which represented approximately 100% and 96.8%, respectively, of the Company’s available-for-sale investment portfolio.

 

38 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

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

 

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016:

 

   December 31, 2017     
   Less than 12 Months   12 Months or More   Total 
Description of
Securities
  Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (In thousands) 
                         
US Government agencies  $12,190   $(59)  $32,769   $(231)  $44,959   $(290)
                               
Total temporarily impaired securities  $12,190   $(59)  $32,769   $(231)  $44,959   $(290)

 

   December 31, 2016     
   Less than 12 Months   12 Months or More   Total 
Description of
Securities
  Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (In thousands) 
                         
US Government agencies  $38,514   $(486)  $   $   $38,514   $(486)
                               
Total temporarily impaired securities  $38,514   $(486)  $   $   $38,514   $(486)

 

U. S. Government Agencies

 

The unrealized losses on the Company’s investments in direct obligations of U. S. Government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

 

 39

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Note 4:Loans and Allowance for Loan Losses

 

Categories of loans at December 31, include:

 

   2017   2016 
   (In thousands) 
         
Commercial loans  $81,327   $74,514 
Commercial real estate   198,936    191,686 
Residential real estate   75,853    76,154 
Installment loans   12,473    14,367 
           
Total gross loans   368,589    356,721 
           
Less allowance for loan losses   (2,122)   (2,341)
           
Total loans  $366,467   $354,380 

 

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

 

Commercial

 

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

 

Commercial Real Estate

 

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

 

40 

 

 

United Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Residential and Consumer

 

Residential and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and