United Bancorp, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The interim financial statements are unaudited. United Bancorp is an Ohio community bank holding company operating through The Citizens Savings Bank, with 20 branches in Ohio.
Key financial results
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $3.483 | $3.596 | $10.398 | $10.891 |
| Provision for loan losses | $0.354 | $0.268 | $1.013 | $0.769 |
| Noninterest income | $1.791 | $0.723 | $3.328 | $2.140 |
| Noninterest expense | $3.834 | $3.482 | $10.575 | $9.896 |
| Net income | $1.079 | $0.451 | $2.013 | $1.943 |
| Diluted EPS | $0.22 | $0.09 | $0.41 | $0.39 |
| Dividends per share | $0.07 | $0.07 | $0.21 | $0.35 |
- For the first nine months, net income increased 3.6%; management reported annualized ROA of 0.63% and ROE of 7.23%, compared with 0.61% and 7.10%, respectively, in 2012.
- Year-to-date net interest margin was 3.59%, down from 3.90%. Management attributed the decline to low rates, asset repricing, and holding liquidity in short-term, lower-yielding assets.
- At September 30, total assets were $400.1 million, down from $438.4 million at December 31, 2012. Cash and cash equivalents were $41.2 million, down from $75.1 million.
- Gross loans were $298.1 million, versus $296.5 million at year-end. Total deposits were $317.5 million, down from $350.4 million. Short-term borrowings were $10.5 million, FHLB advances $27.1 million, and subordinated debentures $4.0 million.
- For the nine months, operating cash flow was $3.4 million, investing cash flow $2.3 million, and financing cash flow negative $39.6 million. Cash decreased $33.9 million, primarily reflecting net deposit outflows and debt repayments.
- Stockholders’ equity was $37.1 million, compared with $36.6 million at year-end. Regulatory capital ratios were 15.38% total risk-based, 14.38% Tier 1 risk-based, and 10.06% Tier 1 capital to average assets; the filing classifies the Company as well-capitalized.
Changes, outlook, and risks
- Q3 earnings included a $935,000 bank-owned life insurance (BOLI) benefit in excess of surrender value. The benefit was tax-exempt and materially boosted reported income; the filing does not present a separate adjusted earnings measure excluding it.
- Service-charge income rose $190,000 year over year for the first nine months as the Company attracted transaction accounts. Management said Dodd-Frank-related limits could constrain revenue per account, with account growth expected to help offset that effect.
- Credit indicators improved: management reported nonaccrual loans down $746,000 year over year to $2.8 million, and net charge-offs down approximately $160,000. Past-due loans 30 days or more were down $652,000 year over year. The allowance was $3.0 million, or 0.99% of gross loans.
- Despite improved aggregate credit trends, the loan-loss provision increased because of uncertainty in several commercial relationships and losses associated with the Overdraft Privilege Program. Management projected a lower future provision, but this is forward-looking and subject to credit conditions.
- Noninterest expense rose 6.9% for the first nine months, including higher employee compensation and benefits, costs related to a new banking and training center, and $230,000 of foreclosed-real-estate loss provision versus $78,000 in 2012.
- Management described its short-term, conservative investment positioning as a deliberate trade-off: it avoids extending securities maturities amid rate uncertainty, while seeking loan growth and preserving capital. It projected continued profitability improvement, citing possible lower credit provisions, service-charge growth, and potential reinvestment at higher yields. These expectations are not assurances.
- Available-for-sale securities had $626,000 of gross unrealized losses, attributed primarily to higher longer-term interest rates. Management considered the declines temporary and said it did not intend, and was not more likely than not required, to sell before recovery. A sale or other-than-temporary impairment could result in a recognized loss.
- Other disclosed risks include changes in local economic conditions, interest rates, loan demand, competition, regulation, and the inherently judgmental allowance for loan losses. The filing reported no material change to previously disclosed risk factors, no material change in market-risk disclosures, and no legal proceedings other than routine litigation.
- Liquidity sources include cash, loan repayments, maturing or saleable securities, correspondent-bank lines, and FHLB borrowing. Management said it believed liquidity was adequate; no specific liquidity ratio or quantified forecast is provided.
Important facts for investors to verify
- How much of Q3 and year-to-date earnings growth is sustainable after excluding the one-time $935,000 BOLI benefit and its tax effect.
- Whether the decline in deposits and cash stabilizes, and how the Company plans to fund lending while maintaining liquidity.
- Whether credit quality continues to improve and whether the allowance adequately reflects commercial relationship and overdraft-related risks.
- The sensitivity of net interest income and securities values to interest-rate changes, including the unrealized securities losses.
- The sustainability of service-charge growth, expense trends, and the dividend: year-to-date dividends per share were $0.21 versus $0.35 in the prior-year period.