UNITED BANCORP INC quarterly report, Q3 FY2012

Full document

United Bancorp, Inc. — 2012 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results include United Bancorp and its wholly owned bank subsidiary; the company operates as a community bank primarily in Ohio. Dollar amounts below are in millions unless otherwise noted.

Financial performance and position

  • Q3 earnings: Net income was $0.451 million, down 44% from $0.801 million a year earlier. Diluted EPS was $0.09 versus $0.16.
  • Nine-month earnings: Net income was $1.943 million, down 15% from $2.291 million; diluted EPS was $0.39 versus $0.46. Annualized ROA was 0.61% and ROE was 7.10%, compared with 0.72% and 8.39%, respectively, in 2011.
  • Interest income and margin: Nine-month net interest income fell 6.9% to $10.891 million; Q3 declined 8.5% to $3.596 million. Nine-month net interest margin was 3.90%, down 35 basis points year over year. Lower asset yields and substantial funds held in low-yielding cash weighed on results.
  • Other income and expenses: Nine-month noninterest income fell 23.3% to $2.140 million, while noninterest expense declined 1.7% to $9.896 million. The prior-year period included $0.370 million of securities gains and a $0.100 million BOLI benefit. Q3 noninterest expense increased 5.5% to $3.482 million.
  • Credit costs: Nine-month loan-loss provision decreased to $0.769 million from $1.543 million. Net charge-offs were approximately $0.916 million; one out-of-area relationship accounted for $0.755 million. The allowance was $2.773 million, or 0.97% of gross loans, versus 1.03% at year-end 2011.
  • Assets and lending: Total assets were $460.3 million, up from $415.6 million at December 31, 2011. Gross loans rose 0.7% to $286.3 million. Residential real estate loans increased $9.1 million, while installment loans fell $5.7 million. Nonaccrual loans were 1.24% of loans, compared with 1.53% in the prior-year comparison cited by management.
  • Liquidity and funding: Cash and cash equivalents rose to $102.2 million from $15.7 million at year-end 2011. Deposits increased to $370.0 million from $328.5 million; management attributed unusually strong inflows partly to oil and gas activity in its markets and warned some could leave within three to six months. Available-for-sale and held-to-maturity securities totaled $42.1 million, down from $86.4 million at year-end.
  • Debt and capital: Short-term borrowings were $13.7 million, FHLB advances $32.6 million and subordinated debentures $4.0 million. Stockholders’ equity was $36.5 million. The company reported a 14.63% total risk-based capital ratio, 13.68% Tier 1 risk-based ratio and 9.32% Tier 1 leverage ratio; it classified the bank as well capitalized.
  • Cash flow: Nine-month operating cash flow was $3.405 million; investing activities provided $40.117 million and financing activities provided $43.033 million. Cash increased $86.555 million, chiefly alongside strong deposit growth and securities maturities.
  • Dividends: Q3 dividends were $0.07 per share versus $0.14 a year earlier. Management said it reduced the cash dividend by 50% after concluding low interest rates were likely to persist.

Changes versus comparable periods

  • Profitability weakened year over year as net interest income and noninterest income declined. Lower loan-loss provisions partly offset those declines.
  • Credit indicators improved overall, according to management, although charge-offs included a significant single out-of-area loan loss. Nonaccrual loans declined as a share of loans from the prior-year level cited in the MD&A.
  • Funding shifted toward deposits and cash: total deposits rose $41.4 million from year-end, while securities holdings contracted by about $44.3 million. Management said core deposit growth was concentrated in low-cost funding, but some oil-and-gas-related balances may be temporary.

Outlook, commentary and risks

  • No numerical earnings guidance was provided. Management expected the prolonged low-rate environment to continue pressuring margins as higher-yielding assets mature or are called. It chose to keep liquidity in short-term, low-yielding funds rather than extend investment maturities to pursue yield.
  • Management described selective loan growth as its principal prudent opportunity to improve returns and said a recent marketing effort aimed to attract low-cost deposits while allowing higher-cost term funding to run off.
  • Key risks include weak economic conditions, changing interest rates and regulation, competition and loan demand. Management cautioned that changing economic conditions or collateral values could require material revisions to asset values, loan-loss allowances and capital, potentially affecting liquidity or regulatory capital.
  • Other notable items: Dodd-Frank-related changes to the courtesy overdraft program reduced service-fee income; a tax-contingency resolution provided an approximately $0.110 million tax benefit for the nine months. The company recorded $0.078 million of foreclosed-property impairment during the nine months.
  • Off-balance-sheet commitments included $33.699 million to extend credit, $14.837 million to originate loans, $13.562 million in overdraft and ready-reserve lines, and $0.666 million in standby letters of credit. Management did not anticipate material losses from these commitments.
  • The filing reports no material change in risk factors, no significant change in market-risk disclosures, and no legal proceedings other than routine litigation. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

  1. Whether deposit balances associated with oil and gas activity remain stable or leave as management anticipated could occur over the next three to six months.
  2. Whether margins recover, given the large cash position, low-rate outlook and management’s stated reluctance to extend investment maturities.
  3. Whether credit quality and the loan-loss allowance remain adequate, particularly for commercial real estate and the out-of-area lending exposure.
  4. How much of the reported earnings decline reflects recurring operating pressure versus prior-year securities gains, the BOLI benefit and the current-period tax benefit.
  5. Whether the reduced dividend is sustainable alongside future earnings, capital needs and funding conditions.