United Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and period. United Bancorp is an Ohio community bank holding company operating through Unified Bank, primarily in Ohio and West Virginia. This unaudited filing covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 / September 30, 2020 | Comparable / prior period |
|---|---|---|
| Net interest income | Q3 $5.744; nine months $16.900 | Q3 2019 $5.195; nine months 2019 $15.482 |
| Provision for loan losses | Q3 $1.333; nine months $3.304 | Q3 2019 $0.120; nine months 2019 $0.330 |
| Net income | Q3 $2.059; nine months $5.313 | Q3 2019 $1.781; nine months 2019 $5.041 |
| Diluted earnings per share | Q3 $0.36; nine months $0.93 | Q3 2019 $0.31; nine months 2019 $0.88 |
| Net interest margin | 3.58% at quarter end, up six basis points sequentially | Not stated for the comparable quarter |
| Total assets | $693.5 | $685.7 at December 31, 2019 |
| Gross loans / allowance | $443.3 / $5.2; allowance equals 1.18% of loans | $441.5 / $2.2; allowance equaled 0.50% at December 31, 2019 |
| Deposits | $576.9 | $548.1 at December 31, 2019 |
| Cash and cash equivalents | $50.9 | $15.0 at December 31, 2019 |
| Shareholders’ equity | $66.7; 9.63% of assets | $59.9; 8.74% of assets at December 31, 2019 |
For the first nine months, operating cash flow was $6.5 million. Investing activities provided $33.4 million, largely reflecting securities transactions, while financing activities used $3.9 million. Cash increased $36.0 million from the start of the year. At September 30, the Company had $17.0 million of overnight repurchase-agreement borrowings, $23.6 million of subordinated debentures, and no FHLB advances; it had $39.8 million of FHLB advances at year-end 2019.
The Bank’s reported regulatory capital ratios were above the stated “well capitalized” thresholds: total capital 16.2% versus 10.0%, common equity Tier 1 15.2% versus 6.5%, Tier 1 risk-based capital 15.2% versus 8.0%, and Tier 1 leverage 10.5% versus 5.0%.
Changes versus comparable periods
- Q3 net income rose about 15.6% and diluted EPS rose 16.1% year over year. Nine-month net income increased about 5.4% and diluted EPS 5.7%.
- Net interest income increased 10.6% in Q3 and 9.2% year to date. Management attributed the improvement in part to lower funding costs; Q3 interest expense fell $0.778 million year over year.
- Credit provisioning increased sharply amid COVID-19 uncertainty: $1.333 million in Q3 versus $0.120 million, and $3.304 million year to date versus $0.330 million.
- Noninterest income rose to $2.340 million in Q3 from $1.003 million, and to $5.540 million year to date from $2.895 million. The increase was principally driven by realized securities gains of $1.344 million in Q3 and $2.594 million year to date; no such gains were reported in the 2019 periods.
- Noninterest expense increased 7.9% year over year in both Q3 and the nine-month period. Management cited personnel-related costs, marketing and customer-experience initiatives, and the opening of a Moundsville, West Virginia banking center in August.
- Gross loans were up $1.7 million from year-end, with residential real estate loans increasing $11.4 million and commercial and commercial real estate loans decreasing $8.8 million. Deposits increased $28.8 million; demand and savings balances grew while time deposits declined.
Outlook, management commentary and risks
- Management gave no specific earnings or financial guidance and cautioned that interim results are not necessarily indicative of full-year results. It expects a prolonged low-rate environment could challenge maintenance of the current net interest margin.
- Management said most customers previously receiving payment relief had begun resuming contractual or interest-only payments, but warned that credit quality could worsen if economic conditions fail to normalize and after relief or government stimulus ends.
- The Bank reported requests for COVID-related payment deferrals on 146 commercial loans totaling approximately $37.2 million, plus $0.48 million of consumer and residential loans. Requests generally covered 90 to 180 days. These were described as requests, not necessarily completed deferrals.
- The Company did not participate in the Paycheck Protection Program. It reported that branch lobbies returned to normal hours on June 17, 2020, after temporary restrictions.
- Management said it sold securities and recognized gains in order to partially monetize portfolio appreciation and further build the loan-loss allowance. It considered the allowance adequate, but acknowledged estimates may change as economic conditions and borrower performance evolve.
- Key risks include pandemic-related deterioration in borrower repayment capacity and collateral values, increased delinquencies and credit losses, interest-rate and margin pressure, and possible effects on liquidity, earnings, capital and dividends. The filing states that the pandemic’s duration and financial effects remained difficult to predict.
- The Company was evaluating the impact of CECL, with adoption for small reporting companies expected after December 15, 2022. Management noted adoption could increase the allowance, but said the impact could not yet be reasonably quantified.
- The filing reports no material change in internal control over financial reporting and no material legal proceedings beyond ordinary routine litigation.
Key facts for investors to verify
- Whether the enlarged allowance adequately reflects expected credit losses, particularly as borrower relief and stimulus programs expire.
- Subsequent payment performance, delinquency and nonaccrual trends, and the status of the reported COVID-related deferral requests.
- How much of reported earnings growth depends on securities gains, and whether net interest margin can be sustained in a low-rate environment.
- Deposit composition, liquidity needs, and the extent to which repurchase-agreement funding or other borrowings change after quarter-end.
- Regulatory capital ratios and the eventual financial and operational impact of CECL adoption.