United Bancorp, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
United Bancorp is an Ohio community bank holding company operating through The Citizens Savings Bank, with 20 branches in Ohio. The filing covers the quarter and six months ended June 30, 2011; income and cash-flow comparisons are against the corresponding 2010 periods. Balance-sheet comparisons are against December 31, 2010. Financial statement amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $3.992 | $3.798 | $7.774 | $7.524 |
| Provision for loan losses | $0.494 | $0.370 | $1.142 | $0.730 |
| Net income | $0.752 | $0.701 | $1.490 | $1.384 |
| Diluted EPS | $0.15 | $0.14 | $0.30 | $0.28 |
| Dividends per share | $0.14 | $0.14 | $0.28 | $0.28 |
For the first six months, net income rose 7.7%, while net interest income increased 3.3%. The annualized net interest margin was 4.23%, up 31 basis points from 3.92%; annualized return on assets was 0.70% versus 0.61%, and return on equity was 8.20% versus 7.62%. Six-month noninterest income grew 19.8% to $1.959 million, including a $0.370 million securities gain and a $0.100 million bank-owned life insurance (BOLI) benefit. Noninterest expense declined 1.1% to $6.767 million. The six-month effective tax rate increased to 18.3% from 12.8%.
Financial position, cash flow and liquidity
- Total assets were $419.1 million at June 30, down from $423.4 million at year-end. Gross loans were $277.3 million, compared with $278.8 million; commercial and commercial real estate loans increased while residential and installment loans declined.
- Deposits were $325.3 million, essentially unchanged from $325.4 million. Cash and cash equivalents rose to $12.9 million from $10.9 million. Available-for-sale securities were $94.5 million, down from $96.2 million.
- Total liabilities were $382.7 million and stockholders’ equity was $36.4 million. Short-term borrowings were $12.3 million; FHLB advances were $38.2 million, down from $43.5 million; subordinated debentures remained $4.0 million. Equity equaled 8.7% of assets, versus 8.4% at year-end.
- For the six months, operating cash flow was $2.4 million, investing cash flow was $5.7 million, and financing cash flow was negative $6.1 million; cash increased $2.0 million. Dividends paid were $1.491 million.
- At June 30, reported capital ratios were 14.19% total risk-based capital, 13.25% Tier 1 risk-based capital, and 9.16% Tier 1 capital to average assets. Management described the Company as well-capitalized and said it had resources to meet current and projected customer liquidity needs.
Material changes, outlook and risks
- Loan-loss provision increased to $1.142 million from $0.730 million for the first half, and net charge-offs were approximately $1.1 million. The allowance was $2.783 million, or 1.0% of gross loans. Management considered it adequate, but emphasized that estimates depend on economic and borrower conditions.
- Nonaccrual loans were 1.52% of loans at June 30, compared with 2.01% at year-end, which management attributed partly to moving charged-off credits into foreclosed real estate. Foreclosed assets increased to $2.175 million from $1.912 million; the Company recorded a $49,000 impairment on foreclosed property.
- Management sold its government-sponsored mortgage-backed securities portfolio to take advantage of the rate environment, provide liquidity and redirect the balance sheet toward higher-yielding loan relationships. It also reported a $370,000 realized securities gain; a held-to-maturity municipal security was sold following a credit-rating downgrade.
- Management cited lower deposit service charges, partly related to changes and anticipated regulation of the courtesy overdraft program. It also noted cost savings from staff reductions following a 2010 core-system implementation, alongside increased professional and occupancy costs.
- The filing provides no quantified earnings or loan-growth guidance. Management identified economic conditions, real-estate collateral values, interest rates, regulation, loan demand and competition as factors that could affect results, liquidity, asset values and capital. It reported no material change in market-risk disclosures or risk factors from the prior annual filing.
- Commitments included $13.950 million to extend credit, $10.165 million to originate loans, $26.901 million of overdraft and ready-reserve lines, and $0.962 million of standby letters of credit. The Company stated that material losses on these commitments were not anticipated.
Important facts for investors to verify
- Whether credit quality and charge-offs continue to improve, and whether the $2.783 million allowance remains adequate as economic conditions and foreclosed-property values change.
- Whether the securities sale and shift toward higher-yielding loans support net interest margin without increasing credit or interest-rate risk.
- How overdraft-related regulation affects fee income, and whether the one-time securities gain and BOLI benefit make reported earnings less representative of recurring performance.
- Whether deposit stability, borrowing levels and capital ratios remain sufficient to support liquidity needs and regulatory requirements.