United Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. United Bancorp is an Ohio community bank holding company operating through Unified Bank, primarily in Ohio. Interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 period |
|---|---|---|---|
| Net interest income | $4.400 million | $8.502 million | $3.852 million; $7.598 million |
| Provision for loan losses | $72,000 | $129,000 | $25,000; $50,000 |
| Noninterest income | $888,000 | $1.768 million | $869,000; $1.701 million |
| Noninterest expense | $3.754 million | $7.333 million | $3.365 million; $6.699 million |
| Net income | $1.212 million | $2.360 million | $916,000; $1.766 million |
| Diluted EPS | $0.22 | $0.44 | $0.18; $0.35 |
Q2 net income increased 32% year over year; six-month net income rose 34%. Management attributed the improvement to higher loan and securities income, operational improvements, and the lower federal corporate tax rate following the Tax Act. For the six months, pretax income increased 10.1%; the effective tax rate fell to 16.0% from 30.7%. Dividends were $0.13 per share for Q2 and $0.26 for the half year, versus $0.11 and $0.22, respectively, in 2017.
- Interest and margins: Q2 net interest income increased 14.3%; the six-month increase was 11.9%. Management reported net interest margin of 3.90%, up 7 basis points year over year. Interest expense increased as funding costs and interest rates rose.
- Balance sheet at June 30: Assets were $514.8 million, loans net of allowance $377.4 million, available-for-sale securities $86.2 million, and deposits $415.6 million. Compared with December 31, 2017, loans increased $10.9 million, securities $41.3 million, and deposits $29.7 million; total assets rose $55.5 million.
- Funding, debt, and liquidity: FHLB advances were $33.8 million, up from $10.0 million at year-end; repurchase-agreement borrowings were $12.3 million, and subordinated debentures were $4.1 million. Cash and cash equivalents were $16.3 million. Six-month operating cash flow was $2.0 million; investing used $53.2 million, largely reflecting $41.4 million of securities purchases and loan growth, while financing provided $53.2 million, including deposit growth and increased FHLB overnight borrowings. Management said it expects liquidity sources and borrowing capacity to meet projected needs.
- Capital: Stockholders’ equity was $45.0 million; equity to assets was 8.74%. Reported regulatory ratios were 10.82% common equity Tier 1, 11.79% Tier 1, 12.30% total capital, and 10.18% leverage. The Company said it remained well-capitalized.
Material changes, outlook, and risks
- Gross loans were $379.5 million, up $10.9 million from year-end and 6.1% year over year according to management. Commercial and commercial real estate loans made up 76.8% of the portfolio.
- Credit indicators were mixed: nonaccrual loans were $1.2 million, down from $1.6 million year over year, while total past-due and nonaccrual loans were $2.935 million, or 0.77% of gross loans. The allowance was $2.080 million, 0.55% of gross loans, versus 0.58% at year-end. Management considered it adequate.
- Management expects continued loan and earning-asset growth and further income contribution from its larger securities portfolio. It described a longer-term ambition to grow assets beyond $1 billion and develop “hybrid or omnichannel” banking. These are management objectives, not quantified earnings guidance.
- On June 14, 2018, United agreed to acquire Powhatan Community Bancshares in a stock-and-cash transaction. Powhatan reported $62.8 million of assets and $57.6 million of deposits at June 30. The announced expected closing was Q4 2018, subject to shareholder and regulatory approvals and other conditions. The stated transaction value was approximately $6.836 million, based on the specified pre-announcement share price and subject to adjustment. United incurred $123,000 of merger-related expenses in the first half and anticipated additional costs in Q3 and Q4.
- Investment securities had $675,000 of gross unrealized losses at June 30, which management attributed primarily to interest-rate movements and regarded as temporary. The filing identifies rising rates, local economic conditions, loan demand, competition, and regulatory changes as risks. No material change in previously disclosed risk factors was reported; legal proceedings were described as ordinary routine matters.
- The Company was evaluating the expected-credit-loss standard (CECL), effective for it in 2020, and stated adoption could increase the allowance; the impact was not yet quantifiable. Management expected the 2019 lease standard to have no material effect.
Important facts for investors to verify
- Track Powhatan acquisition approvals, closing timing, final consideration, integration costs, and resulting capital and goodwill.
- Monitor deposit pricing, FHLB borrowing dependence, net interest margin, and securities exposure as rates change.
- Review credit quality and reconcile the filing’s differing charge-off disclosures: MD&A cites $121,000 of six-month net charge-offs excluding overdrafts in one discussion, but elsewhere reports $171,000 of net charge-offs; another comparison gives $54,000 for 2017.
- Assess CECL implementation and any resulting allowance or capital effects, as well as whether reported loan growth and margin gains persist.