United Bancorp, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
United Bancorp is an Ohio community bank holding company operating through The Citizens Savings Bank. Its banking activities are concentrated in northeastern, east-central and southeastern Ohio. This unaudited report covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Unless otherwise noted, financial amounts below are in thousands of dollars.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $4,038 | $3,859 in Q1 2015 |
| Net interest income | $3,563 | $3,278 in Q1 2015 |
| Net interest margin | 3.80% | 3.71% in Q1 2015 |
| Provision for loan losses | $71 | $116 in Q1 2015 |
| Noninterest income | $867 | $942 in Q1 2015 |
| Noninterest expense | $3,141 | $3,134 in Q1 2015 |
| Net income | $845; diluted EPS $0.17 | $694; diluted EPS $0.14 in Q1 2015 |
| Cash and cash equivalents | $18,242 | $12,701 at December 31, 2015 |
| Total assets | $412,461 | $405,124 at December 31, 2015 |
| Gross loans | $335,464 | $329,663 at December 31, 2015 |
| Total deposits | $324,632 | $323,622 at December 31, 2015 |
| Short-term borrowings | $12,157 | $5,691 at December 31, 2015 |
| FHLB advances / subordinated debentures | $26,490 / $4,124 | $26,530 / $4,124 at December 31, 2015 |
| Stockholders’ equity | $41,922 | $41,496 at December 31, 2015 |
- Operating cash flow was $129, compared with $463 in Q1 2015. Investing activities used $1,486, versus $15,208 used in Q1 2015; financing activities provided $6,898, versus $14,811. Cash increased $5,541 during the quarter.
- Management reported regulatory capital ratios of 13.82% common equity tier 1, 12.59% tier 1, 14.55% total capital and 11.12% leverage. It described the company as well-capitalized; equity to assets was 10.16% at quarter-end.
- The allowance for loan losses was $2,375, or 0.71% of gross loans. Nonaccrual loans were approximately $1.3 million; net charge-offs were $110, or 0.16% of average loans. The allowance covered nonperforming loans by 184.00%, per management.
Material changes versus comparable periods
- Net income increased 21.8% year over year and diluted EPS rose from $0.14 to $0.17. Management attributed earnings growth principally to an $285,000 increase in net interest income, driven by loan growth and a higher net interest margin.
- Gross loans were up $23.0 million, or 7.35%, year over year and $5.8 million since year-end. Commercial and commercial real estate lending drove much of the growth. The quarter-end loan portfolio was 71.2% commercial and commercial real estate.
- Interest expense declined $106,000, or 18.3%, year over year, reflecting lower-cost funding and reduced time deposits. Noninterest expense was nearly flat; noninterest income declined, partly reflecting a debit-card/ATM processor signing bonus received in Q1 2015. Excluding that one-time fee, management said deposit service charges increased $27,000, or 6.32%.
- Short-term borrowings rose $6.5 million from year-end as the company used wholesale funding to support loan growth. Available-for-sale securities fell approximately $5.0 million from year-end. The company said previously held excess reserves had been exhausted.
- Net charge-offs were $110,000 versus a net recovery of $22,000 in Q1 2015. Other real estate and repossessions declined to $326,000, down $814,000 year over year, according to management.
Outlook, commentary and risks
- The filing provides no formal earnings or revenue guidance. Management expects loan growth and stabilized loan yields to support higher interest income, and expects lower funding costs as fixed-rate FHLB advances mature or reprice.
- Management estimated annual interest savings of approximately $167,000 from replacing a $6.0 million FHLB advance maturing in May 2016, and approximately $177,000 from the subordinated debenture’s repricing effective January 1, 2016. These are forward-looking estimates, not guaranteed results.
- Management’s “Mission 2020” plan targets assets of $1.0 billion or more by the end of 2020 through profitable organic growth and potential acquisitions. The plan may require higher noninterest expense to expand loan origination capacity.
- Key disclosed risks include local economic conditions, interest-rate movements, loan demand, competition, regulation and credit quality. The allowance estimate is inherently judgmental and may change. Commercial real estate concentrations and collateral values merit monitoring. Loan commitments and unused credit lines create off-balance-sheet credit exposure, although management did not anticipate material losses.
- Management said market-risk disclosures had not significantly changed from the 2015 Form 10-K, and reported no material changes to risk factors. Routine litigation was the only legal proceeding noted. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the allowance for loan losses at December 31, 2015: the balance sheet reports $2.437 million, while a loan-note table appears to show $2.347 million.
- Review loan-quality trends, particularly nonaccrual balances, charge-offs, delinquency levels and commercial real estate exposure, and assess whether the allowance remains adequate.
- Confirm actual funding costs and loan growth as the company replaces maturing FHLB advances and increases wholesale borrowing.
- Track execution and costs of Mission 2020, including the feasibility of the asset-growth target and any acquisitions.
- Assess whether the projected interest savings, margin improvement and dividend capacity are realized; the filing cautions that interim results are not necessarily indicative of full-year performance.