United Bancorp, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Community bank holding company operating through The Citizens Savings Bank in Ohio and a loan production office in West Virginia. The unaudited quarter and six-month period ended June 30, 2017 are compared with the same 2016 periods; balance-sheet comparisons are to December 31, 2016. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless stated otherwise.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $3.852m | $3.750m | $7.598m | $7.313m |
| Provision for loan losses | $25,000 | $105,000 | $50,000 | $176,000 |
| Noninterest income | $869,000 | $902,000 | $1.701m | $1.769m |
| Noninterest expense | $3.365m | $3.251m | $6.699m | $6.393m |
| Net income | $916,000 | $907,000 | $1.766m | $1.751m |
| Diluted earnings per share | $0.18 | $0.18 | $0.35 | $0.35 |
- At June 30, assets were $448.7m, up from $438.0m at year-end 2016. Net loans were $355.3m; deposits were $373.9m; stockholders’ equity was $43.7m.
- Cash and cash equivalents increased to $20.8m from $11.5m at year-end. Six-month operating cash flow was $1.343m; investing activities used $46,000 and financing activities provided $7.946m. Financing cash flow included a $35.1m increase in deposits, partly offset by borrowing repayments and dividends.
- Gross loans were $357.6m, slightly above $356.7m at year-end. Commercial and commercial real estate loans represented 75.3% of the portfolio. The allowance for loan losses was $2.292m, or 0.64% of gross loans, versus $2.341m, or 0.71%, at year-end.
- Total liabilities included $10.3m of FHLB advances, $13.0m of repurchase-agreement borrowings and $4.1m of subordinated debentures. FHLB advances declined from $39.9m at year-end; deposits increased from $338.8m.
- Management reported regulatory capital ratios of 11.99% common equity Tier 1, 13.11% Tier 1, 13.75% total capital and 10.63% leverage. The filing reports the equity-to-assets ratio as 9.73% in its capital discussion.
- The filing does not provide a clear net interest margin figure.
Material changes versus comparable periods
- For the first half, net interest income rose $285,000, or 3.9%; management attributed the increase chiefly to loan growth and higher loan interest income. Net interest income after provision increased 5.8%.
- First-half net income increased $15,000, while diluted EPS was unchanged. Q2 net income rose $9,000, with diluted EPS unchanged.
- First-half provision expense fell $126,000, or 71.6%, as management cited improved credit quality. The filing reports past-due and nonaccrual loans of $2.59m, 0.72% of gross loans, versus $3.071m, 0.86%, at December 2016; it also cites a year-over-year decline to $2.59m from $2.81m.
- First-half noninterest expense increased $306,000, or 4.8%, with higher personnel, occupancy, insurance and marketing expenses. Noninterest income declined $68,000, largely due to lower deposit service charges.
- Management states deposits rose $46.9m, or 14.4%, year over year. On the balance sheet, deposits increased $35.1m from December 31, 2016; the comparison periods differ.
- Cash dividends per share increased to $0.11 for Q2 and $0.22 for the first half, from $0.10 and $0.20, respectively, in 2016.
Outlook, commentary, risks and contingencies
- Management’s Mission 2020 strategy targets assets of $1.0bn or more by year-end 2020, using organic and acquisition-related growth. Management acknowledges this requires approximately 23% annualized growth from the beginning of 2017 and describes the target as ambitious.
- Management expects to repay $10.0m of fixed-rate FHLB advances, currently costing 3.56%, with balance-sheet liquidity by year-end, and anticipates further funding-cost reductions. It expects recent investments in personnel, facilities, a loan production office and marketing to support revenue and operating leverage over the next 12–18 months.
- Management cited interest-rate movements, local economic conditions, regulation, loan demand and competition as risks that could cause actual results to differ from forward-looking statements. It also highlighted uncertainty in estimating the loan-loss allowance. Commercial real estate and commercial lending are exposed to borrower cash-flow, collateral-value and economic risks.
- At June 30, securities had $108,000 in gross unrealized losses, which management attributed primarily to interest rates and considered temporary. The company said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Off-balance-sheet commitments included $25.6m of unused commercial lines, $12.5m of loan-origination commitments and $37.1m of consumer open-end credit lines. Management did not anticipate material losses on these commitments.
- Two commercial real estate loans were restructured in the first half; post-modification recorded investment was $103,000. No material defaults on recently modified troubled debt restructurings were reported. Legal proceedings were limited to ordinary routine litigation; the company reported no material change in previously disclosed risk factors.
- The company is evaluating the upcoming expected-credit-loss accounting standard (ASU 2016-13) and warned that adoption could increase the allowance for credit losses; the effect was not yet quantifiable. Management did not expect a material effect from certain other pending accounting standards discussed in the filing.
Important facts for investors to verify
- Track whether loan and core-deposit growth translates into sustained net interest income and improved earnings, given flat EPS and higher operating costs.
- Review asset quality trends, especially commercial real estate exposures, nonaccrual loans, charge-offs and the adequacy of the allowance.
- Confirm progress toward Mission 2020 and whether planned FHLB debt repayment and lower-cost funding materialize without weakening liquidity.
- Assess the eventual impact of the expected-credit-loss standard on the allowance, capital and reported earnings.
- Reconcile management’s year-over-year deposit-growth statement with the balance-sheet comparison, which shows growth from December 2016.