United Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results include United Bancorp and its wholly owned bank subsidiary, Unified Bank. Amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest and dividend income | $6.921 | $5.523 | $19.884 | $15.255 |
| Net interest income | $5.195 | $4.630 | $15.482 | $13.132 |
| Provision for loan losses | $0.120 | $0.072 | $0.330 | $0.201 |
| Noninterest income | $1.003 | $0.897 | $2.895 | $2.665 |
| Noninterest expense | $4.162 | $3.855 | $12.496 | $11.188 |
| Net income | $1.781 | $1.331 | $5.041 | $3.691 |
| Diluted earnings per share | $0.31 | $0.25 | $0.88 | $0.71 |
- Management reported a 3.67% net interest margin for the most recent quarter. It attributed higher interest income to growth in loans and securities, partly offset by higher deposit and borrowing costs.
- Nine-month net income rose 37% and diluted EPS rose about 24%. Q3 net income increased 34% year over year. The nine-month effective tax rate was 9.2%, versus 16.3% in 2018; management cited increased tax-exempt state and municipal investments.
Financial position, liquidity, and capital
- At September 30, total assets were $675.8 million, up from $593.2 million at December 31, 2018. Gross loans were $421.3 million, up $11.6 million; available-for-sale securities were $200.9 million, up $76.9 million.
- Total deposits were $550.0 million, up $24.6 million from year-end. Stockholders’ equity was $60.1 million, versus $50.6 million; equity was 8.90% of assets.
- Cash and cash equivalents were $13.3 million, down $11.9 million since year-end. Nine-month operating cash flow was $6.2 million; investing cash use was $81.8 million, largely reflecting securities purchases, while financing provided $63.7 million.
- Borrowings included $20.8 million of FHLB advances, $9.9 million in repurchase agreements, and $23.5 million of subordinated debentures. The company issued $20 million of 6.00% fixed-to-floating subordinated notes in May 2019, due 2029. The notes qualify as Tier 2 capital; $16 million of proceeds was contributed to the bank.
- At September 30, the bank’s total risk-based capital ratio was 14.0%, above the 10.0% well-capitalized threshold; its leverage ratio was 10.3%, above the 5.0% threshold.
Changes, outlook, and risks
- Growth reflected organic expansion and the October 2018 acquisition of Powhatan Point Community Bancshares. Management cited higher-yielding earning-asset growth and increased lower-cost retail deposits as drivers of earnings. Noninterest expense increased, particularly from production-related personnel and acquisition-related costs.
- Credit indicators remained relatively low: past-due and nonaccrual loans totaled $3.15 million, or 0.75% of gross loans, at September 30, versus 0.89% at year-end. The allowance was $2.12 million, or 0.50% of loans. Management considered it adequate, while noting the estimate depends on judgments about borrower and economic conditions.
- Management expected double-digit earnings growth to continue through the rest of 2019 and future periods, assuming continued asset growth and solid credit quality. This is management’s outlook, not formal quantified guidance. Plans included a new Moundsville, West Virginia banking center, expected to open toward the end of Q1 2020, and investment in digital banking capabilities.
- Key risks identified include local economic conditions, interest-rate movements, loan demand, competition, regulatory changes, and credit-quality deterioration. Management said market-risk disclosures were not significantly changed from the 2018 Form 10-K. It reported no material changes to previously disclosed risk factors and no material control deficiencies.
- The company was evaluating the expected-credit-loss accounting standard (CECL); it said adoption could increase the allowance and require substantial changes to processes and estimates. The filing cites a delayed effective date for small reporting companies to periods beginning after December 15, 2022.
- Available-for-sale securities had $9.2 million of gross unrealized gains and $0.2 million of gross unrealized losses. Management considered the loss positions temporary, primarily related to interest rates, and said it did not intend or expect to be required to sell affected securities before recovery.
Important facts for investors to verify
- Track whether loan, securities, and deposit growth sustains earnings as funding costs and interest rates change.
- Review credit trends, especially commercial real estate concentrations, nonaccrual loans, and allowance adequacy. The filing reports different net charge-off figures in different MD&A passages, so reconcile the stated $164,000 excluding overdrafts with the separate $252,000 figure.
- Assess the returns and funding effects of the Powhatan acquisition, the subordinated-note proceeds, planned branch construction, and technology investment.
- Monitor securities valuation and CECL implementation, including any effect on capital or the allowance.
- Management’s MD&A contains apparent stale references to June 30 and six-month periods despite this being the September 30 quarter filing; verify relevant period comparisons against the financial statements.