Business context and reporting period
United Bancorp, Inc. is an Ohio community bank holding company whose wholly owned subsidiary operates 19 branches in Ohio. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior date |
|---|---|---|
| Net income | $0.716 million for Q2; $1.200 million for six months | $0.469 million for Q2 2013; $0.934 million for six months 2013 |
| Diluted earnings per share | $0.14 for Q2; $0.24 for six months | $0.10 for Q2 2013; $0.19 for six months 2013 |
| Net interest income | $3.514 million for Q2; $6.985 million for six months | $3.427 million for Q2 2013; $6.916 million for six months 2013 |
| Net interest margin | 3.85% | 3.59% a year earlier |
| Total assets | $399.0 million | $389.0 million at December 31, 2013 |
| Gross loans | $315.4 million | $309.5 million at December 31, 2013 |
| Total deposits | $319.6 million | $310.6 million at December 31, 2013 |
| Stockholders’ equity | $39.7 million | $38.9 million at December 31, 2013 |
| Cash and cash equivalents | $31.0 million | $23.5 million at December 31, 2013 |
For the six months, operating cash flow was $1.268 million, investing cash flow was negative $2.471 million, and financing cash flow was positive $8.746 million. Cash increased $7.543 million. Total liabilities were $359.3 million. Borrowings comprised $6.6 million of short-term borrowings, $26.8 million of FHLB advances, and $4.1 million of subordinated debentures.
The allowance for loan losses was $3.132 million, or 0.99% of gross loans, compared with $2.894 million, or 0.94%, at year-end 2013. Management reported a 140.37% allowance-to-nonperforming-loans ratio. Bank capital ratios were 15.10% total risk-based, 14.07% Tier 1 risk-based, and 10.69% Tier 1 capital to average assets.
Material changes versus prior periods
- Q2 net income rose approximately 53% year over year; six-month net income rose approximately 28%. Diluted EPS increased from $0.10 to $0.14 for Q2 and from $0.19 to $0.24 year to date.
- Six-month net interest income increased $69,000, while the provision for loan losses declined $227,000 to $432,000. Deposit service-charge income increased $250,000 year over year for the six-month period.
- Gross loans increased $5.9 million from year-end, led by commercial real estate growth; installment loans declined $2.4 million. Deposits increased $8.9 million, including growth in demand and savings deposits.
- Nonaccrual loans were $2.23 million, down 37.43% year over year according to management. Past-due and nonaccrual loans totaled $4.89 million, versus $3.56 million at December 31, 2013.
- Six-month noninterest expense increased $29,000 year over year. Excluding a $152,720 first-quarter impairment charge on a foreclosed property affected by a landslide, management said expense would have decreased $109,000.
Outlook, commentary, risks and unusual items
Management expects continued improvement in core profitability, citing loan growth, lower-cost transaction deposits, fee income, expense control, and the potential for a lower loan-loss provision. It said it expects a further reduction in the provision, but provided no quantified earnings or financial guidance.
Management described its liquidity and securities strategy as deliberately conservative: it is holding short-term, lower-yielding funds and avoiding longer-duration investments to limit potential losses if interest rates rise. It reported average excess funds of $36.2 million and an average securities portfolio of $30.3 million. Management said this approach restrains current earnings but is intended to protect capital and book value. Interest-rate movements, local economic conditions, loan demand, competition, regulation, and credit quality could cause actual results to differ from expectations.
The $152,720 foreclosed-property impairment resulted from a landslide that left the property condemned. The filing reports two commercial real estate troubled-debt restructurings in the six months, with post-modification recorded investment of $68,000; no material defaults on TDRs modified in the prior 12 months were reported. Management considered securities’ unrealized losses temporary and attributed them primarily to higher interest rates; it said it did not intend, and was not likely to be required, to sell before cost recovery.
Off-balance-sheet commitments at June 30 included $13.632 million of unused commercial lines, $7.788 million of loan-origination commitments, $35.576 million of consumer open-end lines, and $120,000 of standby letters of credit. The company stated that material credit losses on these commitments were not anticipated. It reported no material change in risk factors or market-risk disclosures, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved credit trends persist, particularly given the increase in total past-due and nonaccrual loans from year-end and the concentration of impaired loans in commercial real estate.
- Whether the allowance remains adequate as loan balances and credit conditions change; its level reflects management estimates and judgments.
- Whether deposit growth, fee income, and loan growth can offset the yield cost of the company’s conservative liquidity and securities strategy.
- Whether the foreclosed-property impairment or other property valuations lead to further losses, and whether securities’ unrealized losses remain temporary.
- How interest-rate, regulatory, and local economic changes affect margins, capital, deposit costs, and management’s stated outlook.