United Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; interim financial statements are unaudited. United Bancorp is an Ohio community bank holding company whose operations are concentrated in banking across several Ohio markets.
Key financial results
| Metric | Q2 2015 | Six months 2015 | Comparison |
|---|---|---|---|
| Net interest income | $3.458 million | $6.736 million | Q2 down 1.6%; six months down 3.6% year over year |
| Provision for loan losses | $145,000 | $261,000 | Down $71,000 and $171,000, respectively, year over year |
| Noninterest income | $935,000 | $1.877 million | Q2 down $24,000; six months up $80,000 year over year |
| Noninterest expense | $3.112 million | $6.246 million | Q2 down $187,000; six months down $540,000 year over year |
| Net income | $805,000 | $1.499 million | Up 12.4% and 24.9%, respectively |
| Diluted earnings per share | $0.16 | $0.30 | Up from $0.14 and $0.24, respectively |
| Net interest margin | Not stated clearly for the quarter | 3.75% | Down from 3.85% for the first six months of 2014 |
Amounts are in U.S. dollars; figures in the table are rounded. Six-month cash flow from operations was $2.077 million, investing activities used $19.589 million, and financing activities provided $3.639 million. Cash and cash equivalents declined $13.873 million to $25.291 million, principally amid substantial securities purchases.
Financial position and liquidity
- At June 30, total assets were $406.7 million, versus $401.8 million at year-end 2014. Gross loans were $311.9 million, down $3.8 million from year-end; net loans were $309.2 million.
- Available-for-sale securities increased to $39.6 million from $19.3 million at year-end. Management said it favored liquid, shorter-duration assets rather than extending maturities to seek higher yields.
- Deposits were $323.4 million, up slightly from $322.7 million at year-end. Demand and savings deposits totaled $260.9 million; time deposits were $62.6 million.
- Short-term borrowings were $9.0 million, FHLB advances $26.6 million, and subordinated debentures $4.1 million. Combined, these borrowings were approximately $39.8 million, compared with $35.9 million at year-end.
- Stockholders’ equity was $41.1 million, up from $40.4 million. Reported regulatory ratios were 13.50% common equity Tier 1, 14.82% Tier 1, 15.70% total capital, and 10.90% leverage; management stated the Company remained well-capitalized.
- Management said it had additional liquidity sources, including correspondent-bank lines and FHLB borrowing capacity, and considered expected near-term core-deposit outflows immaterial. Repurchase-agreement borrowings were $9.0 million and were collateralized by securities with a reported carrying value of $14.0 million.
Material changes and credit quality
- Management attributed improved earnings to lower loan-loss provisioning, reduced overhead, increased deposit service charges, and lower-cost deposit funding. Low-cost demand and savings deposits increased year over year, while higher-cost time deposits declined.
- Nonaccrual loans were $1.5 million at June 30, down $707,000, or 31.7%, year over year. The company reported a net loan recovery of approximately $36,000 for the first half of 2015, versus net charge-offs of $194,000 in the first half of 2014.
- The allowance for loan losses was $2.697 million, or 0.86% of loans, versus $2.400 million, or 0.76%, at December 31, 2014. Management reported coverage of nonperforming loans of 177% at June 30, 2015, compared with 140.37% at June 30, 2014.
- Gross loans rated special mention or substandard totaled approximately $6.0 million at June 30, compared with $7.2 million at year-end 2014. Commercial real estate remained the largest loan category, at $152.3 million.
- The six-month reduction in noninterest expense includes comparison with a 2014 foreclosed-real-estate impairment charge. The income statement shows a $162,000 charge in the first half of 2014; MD&A also cites $152,720 when discussing the adjustment excluding that charge. This difference in the filing text should be verified.
Management outlook, risks, and contingencies
- Management projected continued earnings improvement in 2015 and 2016, citing a newly initiated loan-growth strategy, continued cost controls, possible further provision reductions, and lower borrowing costs. This is management’s outlook, not a quantified earnings or revenue guidance range.
- Management expected approximately $26 million of fixed-rate FHLB advances, with an average cost of 3.66%, to mature over the next 24 months; it said repayment or refinancing could reduce interest expense. The $4.1 million subordinated debenture was scheduled to reprice on January 1, 2016; management estimated potential annual savings of approximately $190,000 based on then-current rates.
- Management identified economic conditions in its markets, regulatory policy, interest-rate fluctuations, loan demand, and competition as risks that could cause actual results to differ from forward-looking statements. It also cited possible limits on fee income from Dodd-Frank implementation.
- Off-balance-sheet commitments at June 30 included $16.1 million of commercial unused credit lines, $9.2 million of loan-origination commitments, and $36.3 million of consumer open-end lines. Management did not anticipate material losses, but commitments carry potential credit exposure.
- The filing reports no material changes to previously disclosed risk factors, no significant change in market-risk disclosures, and no material legal proceedings beyond routine litigation. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- The board had not used the authorized preferred shares. The company paid dividends of $0.09 per common share in Q2, versus $0.08 a year earlier; first-half dividends were $0.18 per share.
Most important facts for investors to verify
- Whether loan growth from the new origination strategy materializes, and whether loan quality and the allowance remain adequate as lending expands.
- Whether the projected FHLB and subordinated-debt repricing savings occur on management’s assumed timing and terms.
- How the substantial shift into securities and the lower cash balance affect liquidity, interest-rate sensitivity, and net interest margin.
- The reported $162,000 2014 impairment charge versus the $152,720 MD&A reference, and the underlying calculation of expense reductions excluding that charge.
- Whether management’s earnings outlook is achieved despite rate, economic, competitive, regulatory, and credit risks; the filing cautions that interim results are not necessarily indicative of full-year results.