United Bancorp, Inc. — Q2 2020 Form 10-Q
Business context and reporting period: United Bancorp is an Ohio-based community bank holding company operating through Unified Bank, primarily in eastern and southeastern Ohio. This unaudited report covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019. Amounts are in millions unless stated otherwise.
Financial performance and position
- Earnings: Q2 net income was $1.675 million, versus $1.646 million a year earlier; diluted EPS was $0.29 in both periods. Six-month net income was $3.254 million versus $3.260 million, with diluted EPS of $0.57 in both periods.
- Interest income and margin: Q2 interest and dividend income was $6.949 million, up from $6.648 million; net interest income was $5.522 million, up 6.6%. For the first half, net interest income rose 8.4% to $11.156 million. Management reported a 3.52% net interest margin at June 30; the filing does not provide a comparable prior-period margin in the cited discussion.
- Credit costs: Q2 provision for loan losses was $1.408 million versus $0.120 million; first-half provision was $1.971 million versus $0.210 million. The allowance was $4.015 million, or 0.90% of gross loans, compared with $2.231 million, or 0.50%, at year-end. First-half net charge-offs, excluding overdrafts, were $162,000.
- Noninterest income and expense: Q2 noninterest income was $2.156 million versus $0.947 million, principally reflecting a $1.181 million gain on securities sales. First-half noninterest income increased 69.1% to $3.200 million, including $1.250 million in securities-sale gains. Q2 noninterest expense increased to $4.579 million from $4.172 million; first-half expense rose 7.6% to $8.989 million.
- Cash flow: For the six months, operating activities provided $2.696 million, investing activities used $2.265 million, and financing activities provided $6.231 million. Cash and cash equivalents increased $6.662 million to $21.647 million.
- Balance sheet and liquidity: Total assets were $701.328 million, up from $685.706 million at year-end. Deposits rose $45.658 million to $593.727 million, led by demand deposits; gross loans were $445.901 million, up $4.353 million. Available-for-sale securities were $191.520 million. Management cited deposits, loan payments, maturing or saleable securities, and borrowing facilities as liquidity sources.
- Debt and capital: FHLB advances fell to zero from $39.800 million; repurchase-agreement borrowings increased to $9.494 million from $6.915 million. Subordinated debentures were $23.574 million. Stockholders’ equity was $65.985 million, or 9.40% of assets, versus $59.922 million, or 8.70%, at year-end. At June 30, the Bank’s total risk-based capital ratio was 15.4%, above the 10.0% well-capitalized threshold shown in the filing.
Material changes versus comparable periods
- Higher loan-loss provisions substantially offset growth in net interest income and the gain on securities sales; first-half net income was nearly unchanged year over year.
- Management attributed stronger net interest income to growth in loans and securities and its management of interest-rate sensitivity. First-half interest expense nevertheless increased by $436,000.
- Gross loans increased $4.4 million from year-end, while deposits increased $45.7 million. The allowance for loan losses increased 80 basis points from year-end.
- Unrealized gains on available-for-sale securities lifted accumulated other comprehensive income to $10.334 million from $5.536 million at year-end.
Outlook, risks, and unusual items
- COVID-19 and credit: The company reported payment-deferral requests on 156 loans totaling approximately $64.1 million on the commercial side, plus $2.2 million of consumer and residential requests. Deferrals generally ranged from 90 to 180 days. Management said some customers had resumed contractual payments, but warned that credit metrics could worsen as relief and government support expire or if economic conditions fail to normalize. Additional provisions may be required.
- The company did not participate in the Paycheck Protection Program. Branch lobbies reopened to normal hours on June 17, 2020, with health precautions in place.
- Management said the pandemic’s duration and financial impact remain uncertain. Risks include weaker loan demand, increased delinquencies and foreclosures, lower collateral values, higher credit costs, pressure on dividends, and disruptions to third-party services.
- Management described the company as adequately capitalized and able to manage liquidity needs, but provided no quantified earnings guidance. The quarterly dividend was $0.1425 per share, up from $0.135 a year earlier; the filing cautions that future dividends are not guaranteed.
- Management sold securities to realize gains and strengthen the loan-loss allowance. It considered goodwill impairment indicators in light of COVID-19 and concluded that fair value exceeded carrying value at June 30, while stating it would continue monitoring conditions.
- The filing reports no material change in market-risk disclosures or risk factors, and no material legal proceedings other than routine litigation. It states disclosure controls were effective, but gives the evaluation date as June 30, 2019; investors may wish to verify this apparent date inconsistency.
Important facts for investors to verify
- Whether deferred borrowers resume payments and how the $66.3 million of reported commercial, consumer, and residential deferral requests affect future delinquencies, nonaccrual loans, and credit provisions.
- Whether the $4.015 million allowance remains adequate as pandemic-related relief expires, particularly given management’s warning that risks may be masked by payment relief and stimulus support.
- How much recurring earnings depend on securities-sale gains: $1.250 million was recorded in the first half, including $1.181 million in Q2.
- The sustainability of net interest margin, deposit growth, and liquidity, including the composition and stability of elevated demand deposits.
- The apparent disclosure-controls evaluation-date typo and the exact scope of the reported loan-deferral balances.