United Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless otherwise stated. The unaudited consolidated results cover the company and its wholly owned bank subsidiary. Amounts below are in millions unless stated otherwise.
Business context and financial performance
United Bancorp is a community banking company serving markets in Ohio and nearby West Virginia. Its lending includes commercial, commercial real estate, residential real estate and installment loans. Management attributes revenue growth primarily to loan interest income.
- Net income: $0.850 million, versus $0.845 million in Q1 2016. Diluted EPS was $0.17 in both periods; dividends per share were $0.11 versus $0.10.
- Interest income and net interest income: Total interest and dividend income was $4.184 million, up from $4.038 million. Net interest income was $3.746 million, up 5.1% from $3.563 million. The filing does not provide a clear net interest margin value.
- Credit costs: Provision for loan losses was $25,000, versus $71,000. Net charge-offs, excluding overdrafts, were approximately $12,000; management said credit quality improved.
- Other income and expenses: Noninterest income was $832,000, down from $867,000, mainly because deposit service charges fell. Noninterest expense rose 6.1% to $3.334 million, including higher personnel and occupancy costs. The effective tax rate was approximately 30.3%, compared with 30.6%.
- Assets, loans and deposits: Total assets were $440.848 million, up from $438.018 million at year-end. Gross loans were $354.755 million, down from $356.721 million; the allowance was $2.333 million, or 0.66% of loans. Deposits were $359.811 million, up from $338.803 million, including increases in demand, savings and time deposits.
- Cash flow and liquidity: Operating cash flow was $118,000, compared with $129,000. Cash and cash equivalents ended at $16.383 million, versus $11.541 million at year-end and $18.242 million a year earlier. Financing cash flow included $21.008 million of deposit growth, a $24.538 million repayment of FHLB advances, and $6.175 million of additional repurchase-agreement funding.
- Borrowings and capital: FHLB advances fell to $15.317 million from $39.855 million; overnight repurchase agreements rose to $15.567 million from $9.393 million. Stockholders’ equity was $43.119 million. Reported regulatory ratios were 13.06% common equity tier 1, 11.88% Tier 1, 13.72% total capital and 10.65% leverage.
Changes versus comparable periods
- Year over year, net interest income increased $183,000, with loan interest income up $177,000. Management cited a $23.0 million increase in average loans, or 7.0%, over the year.
- Net income increased only $5,000, as expense growth largely offset higher net interest income and lower loan-loss provision. Noninterest expense increased $193,000 year over year.
- Management reported total past-due and nonaccrual loans of $2.68 million, or 0.76% of gross loans, versus $3.26 million, or 0.97%, a year earlier. The filing’s period-end loan table shows $2.68 million past due and nonaccrual, compared with $3.071 million at December 31, 2016.
- Available-for-sale securities were $39.001 million at March 31, compared with $39.766 million at year-end. The company reported $249,000 of unrealized losses on these securities and considered the declines temporary, primarily due to interest-rate changes.
Outlook, risks and notable items
- Management’s “Mission 2020” targets profitable asset growth to at least $1.0 billion by the end of 2020, through organic and acquisition-related growth. Management acknowledged that achieving the target requires approximately 23% compounded annual growth from the beginning of 2017 and described it as ambitious.
- Management expects approximately $15 million of fixed-rate FHLB advances, currently costing 3.79%, to reprice to floating rates or be repaid by year-end, potentially lowering funding costs. It also expects recent staffing and infrastructure investments to support future revenue and operating leverage; these are forward-looking expectations, not guarantees.
- Key stated risks include local economic conditions, regulatory policy, interest-rate movements, loan demand and competition. Loan-loss allowance estimates are judgmental and could change. Management considers the $2.333 million allowance adequate.
- The company is evaluating the expected-credit-loss standard, ASU 2016-13, which replaces the incurred-loss model. It cannot yet quantify the effect and anticipates possible allowance increases and significant process changes. Other accounting updates were adopted or under evaluation; management reported no material impact from adoption of ASU 2017-08 or ASU 2016-09.
- Off-balance-sheet commitments included $22.731 million of unused commercial lines, $13.391 million of loan-origination commitments and $36.439 million of consumer open-end lines. Management did not anticipate material losses on these commitments.
- The company reported no material change in market-risk disclosures, no material change in risk factors, and no legal proceedings beyond routine litigation. Management concluded disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Track loan growth, deposit funding costs and the timing and cost of FHLB repricing or repayment against management’s expectations.
- Monitor operating expenses, service-charge income, credit quality and allowance adequacy as growth investments develop.
- Assess progress toward the Mission 2020 asset target, including the pace and economics of any acquisition-related growth.
- Follow the company’s implementation work and eventual quantified impact from ASU 2016-13 on credit-loss reserves and capital.
- Review the filing’s apparent MD&A typo stating that diluted EPS for the quarter ended March 31, 2016 was compared with that same quarter; the financial statements and other MD&A passages compare Q1 2017 with Q1 2016.