United Bancorp, Inc. — 2014 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company is an Ohio community bank holding company operating through The Citizens Savings Bank, primarily in Ohio. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and condition
- Third-quarter results: Net interest income was $3.52 million, up 1.1% year over year; net income was $718,000 versus $1.079 million, and diluted EPS was $0.14 versus $0.22. The prior-year quarter included a $935,000 tax-exempt bank-owned life insurance (BOLI) benefit; 2014 Q3 had none.
- Nine-month results: Net interest income was $10.51 million, up 1.0%; net income was $1.92 million versus $2.01 million, and diluted EPS was $0.38 versus $0.41. Management attributed the decline largely to a $900,000 year-over-year reduction in net BOLI benefit. It said core earnings, excluding that effect, increased $805,000.
- Income and costs: Nine-month noninterest income was $2.77 million versus $3.33 million, while noninterest expense declined to $10.04 million from $10.58 million. Deposit service-charge income rose 20.3% to $2.05 million. The effective tax rate was 25.6% versus 5.8%, mainly reflecting the prior-year tax-exempt BOLI benefit.
- Margin and credit: Management reported net interest margin of 3.86%, compared with 3.59% a year earlier. The nine-month loan-loss provision fell to $657,000 from $1.01 million. Nonaccrual loans were about $1.4 million, down roughly 52% year over year; net charge-offs were about $528,000. The allowance was $3.02 million, or 0.97% of gross loans.
- Balance sheet at September 30: Total assets were $402.8 million, up from $389.0 million at December 31, 2013. Gross loans were $312.7 million versus $309.5 million; deposits were $320.5 million versus $310.6 million. Stockholders’ equity was $40.1 million versus $38.9 million.
- Funding, debt and liquidity: Cash and cash equivalents were $37.4 million, up from $23.5 million at year-end. Short-term borrowings were $9.1 million, FHLB advances $26.8 million, and subordinated debentures $4.1 million. Nine-month cash from operations was $2.54 million; investing activities used $0.39 million and financing activities provided $11.74 million. Cash increased $13.89 million. Management said it had adequate liquidity and did not expect core-deposit outflows over the next three to six months to be material.
- Capital and dividends: The filing reported total risk-based capital of 15.57%, Tier 1 risk-based capital of 14.57%, and Tier 1 capital to average assets of 10.90%, describing the company as well-capitalized. Dividends were $0.08 per share in Q3 and $0.24 for the nine months, versus $0.07 and $0.21, respectively, in 2013.
Material changes versus comparable periods
- Quarterly and year-to-date net income and EPS decreased, primarily because the 2013 periods included the $935,000 tax-exempt BOLI benefit. The 2014 nine-month BOLI benefit was $35,000.
- Loan-loss provisions and foreclosed-real-estate loss provisions decreased. Management also cited lower salary and benefit costs and lower franchise taxes as drivers of reduced overhead.
- Lower-cost transaction and demand deposits grew, while time deposits declined. Commercial and commercial real-estate loans increased; installment loans declined.
- Nonaccrual loans and past-due/nonaccrual loans improved versus year-end 2013. Total past-due and nonaccrual loans were $3.22 million at September 30, compared with $3.56 million at year-end.
Outlook, risks and unusual items
- Management expected continued improvement in core earnings, citing loan growth, deposit fee income, cost control and the possibility of lower loan-loss provisions. This is management’s expectation, not formal quantified guidance.
- The company maintained short-term, lower-yielding liquidity rather than extending investment maturities, to limit exposure to rising interest rates. Management noted this strategy constrained current earnings but was intended to protect capital and earnings if rates rise.
- Key disclosed risks include local economic conditions, interest-rate changes, loan demand, competition, regulation, and credit and collateral valuation estimates. Commercial real-estate loans are concentrated largely in the company’s market area.
- Available-for-sale securities had $250,000 of gross unrealized losses at September 30. Management considered the declines temporary, primarily due to interest-rate changes, and said it did not expect to need to sell before recovery; an other-than-temporary impairment could reduce earnings.
- A $153,000 impairment charge was recorded in Q1 for foreclosed real estate rendered condemned after a foundation collapse. Off-balance-sheet commitments included $14.43 million of unused commercial lines, $9.57 million of loan-origination commitments, $35.77 million of consumer open-end lines and $220,000 of standby letters of credit; management did not anticipate material losses.
- No material changes to previously disclosed risk factors or market-risk disclosures were reported. Legal proceedings were limited to routine litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether core earnings gains persist as the prior-year BOLI benefit rolls out of comparisons, and whether reported results reconcile with management’s core-earnings calculation.
- Whether margin improvement, loan growth and low-cost deposit growth continue without increased funding costs or excessive credit risk.
- Whether asset-quality trends and the allowance remain adequate, particularly for commercial real-estate exposures and collateral-dependent impaired loans.
- How interest-rate changes affect securities values, liquidity strategy and future net interest income.
- Whether capital ratios, dividends and liquidity remain resilient as lending and off-balance-sheet commitments change.