United Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The interim financial statements are unaudited. United Bancorp is an Ohio-based bank holding company operating through Unified Bank, primarily in Ohio.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.148 million | $0.850 million in Q1 2017 |
| Diluted earnings per share | $0.22 | $0.17 in Q1 2017 |
| Net interest income | $4.102 million | $3.746 million in Q1 2017 |
| Net interest margin | 3.86% | Up 9 basis points year over year, per management |
| Total assets | $488.4 million | $459.3 million at December 31, 2017; management reported 10.8% year-over-year growth |
| Gross loans | $370.5 million | $368.6 million at December 31, 2017 |
| Total deposits | $404.1 million | $386.0 million at December 31, 2017 |
| Cash and cash equivalents | $14.8 million | $14.3 million at December 31, 2017 |
| Stockholders’ equity | $44.3 million | $43.9 million at December 31, 2017 |
Interest and dividend income was $4.625 million, up from $4.184 million; interest expense rose to $0.523 million from $0.438 million. Provision for loan losses was $57,000 versus $25,000. Noninterest income increased to $880,000 from $832,000, while noninterest expense increased to $3.579 million from $3.334 million. Pretax income rose 10.4% to $1.346 million. The effective federal tax rate fell to approximately 14.7% from 30.3%, and the tax provision declined to $198,000 from $369,000.
Operating cash flow was $864,000, compared with $118,000 in Q1 2017. Investing activities used $20.456 million, principally reflecting $18.107 million of securities purchases. Financing activities provided $20.048 million, including deposit growth and increased repurchase-agreement funding. Cash increased $456,000 during the quarter.
At quarter-end, liabilities included $15.583 million of overnight repurchase agreements, $8.195 million of Federal Home Loan Bank advances, and $4.124 million of subordinated debentures. Regulatory capital ratios were 10.97% common equity Tier 1, 11.97% Tier 1, 12.50% total capital, and 10.41% leverage; management said the Company remained well-capitalized.
Material changes and management commentary
- Net income increased about 35% year over year. Management attributed 57% of the improvement to the lower corporate tax rate under the Tax Act and 43% to improved pretax operating performance.
- Management cited loan growth and securities investment as drivers of higher net interest income. Commercial and commercial real estate loans increased $3.5 million from year-end; residential and installment balances declined.
- Available-for-sale securities increased to $71.1 million from $45.0 million at year-end. Management described the investment strategy as taking advantage of improved yields in a rising-rate environment, with additional securities-based leverage anticipated.
- Management said deposits were being used to support growth and that retail core funding helped replace higher-cost wholesale advances. It expects stronger loan growth and higher interest income, and aims to exceed $500 million in assets during 2018. Its longer-term stated ambition is to build an omnichannel bank and grow assets above $1 billion; these are goals, not assured outcomes.
- Noninterest expense rose 7.3%, largely due to personnel and infrastructure investment. Management expects operating leverage if revenue grows without comparable near-term expense increases.
Risks, contingencies, and unusual items
- Net charge-offs, excluding overdrafts, were approximately $32,000; annualized net charge-offs to average loans were 0.06%, versus 0.04% in Q1 2017. Nonaccrual loans were $1.395 million at March 31, 2018. The allowance was $2.125 million, or 0.57% of gross loans.
- Unrealized losses on available-for-sale securities totaled $555,000. Management considered the declines temporary and primarily related to interest-rate changes; it said it did not intend, and was not more likely than not to be required, to sell the securities before recovery. A finding of other-than-temporary impairment could reduce earnings.
- The Company identified interest-rate changes, local economic conditions, loan demand, competition, and regulation as risks to forward-looking expectations. Commercial real estate exposure is concentrated largely in the Company’s market area.
- The Company adopted several accounting standards in 2018, including revenue recognition guidance, with no identified change in revenue timing. It is evaluating the expected-credit-loss standard (CECL), effective for it after December 15, 2019; management noted possible allowance increases and significant implementation work. It expected the new lease standard to have no material effect.
- Off-balance-sheet commitments included $26.792 million of commercial unused credit lines, $15.499 million of loan origination commitments, and $37.074 million of consumer open-end lines. Management did not anticipate material losses on these commitments.
- No material changes to previously disclosed risk factors or market-risk disclosures were reported. Legal proceedings were limited to ordinary routine litigation. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile management’s deposit discussion: MD&A cites $394.1 million of deposits and $44.3 million year-over-year growth, while the balance sheet reports $404.1 million at March 31, 2018, versus $386.0 million at December 31, 2017.
- Review the sustainability of earnings growth, distinguishing the one-time year-over-year tax-rate benefit from pretax operating improvement and recurring revenue gains.
- Monitor deposit costs, funding mix, securities leverage, and net interest margin under changing interest rates; repurchase agreements are overnight and secured by pledged securities.
- Assess loan quality and allowance adequacy, particularly commercial real estate exposures, nonaccrual loans, and the planned transition to CECL.
- Track execution and costs of management’s growth and omnichannel plans, which are forward-looking ambitions rather than formal financial guidance.