United Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. The company is an Ohio community bank holding company operating through Unified Bank. Unless otherwise noted, amounts below are in millions; the filing reports most financial statements in thousands. Interim statements are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Interest and dividend income | $7.319 | $6.315; up 15.9% |
| Net interest income | $5.634 | $5.108; up 10.3% |
| Net interest margin | 3.76% | Management described it as relatively stable year over year |
| Provision for loan losses | $0.563 | $0.090 |
| Noninterest income | $1.044 | $0.945 |
| Noninterest expense | $4.410 | $4.162; up 6.0% |
| Net income | $1.579 | $1.614; down about 2.2% |
| Diluted EPS | $0.28 | $0.28 |
| Dividend per share | $0.1425 | $0.13 |
Income before taxes was $1.705 million versus $1.801 million. The effective tax rate fell to 7.4% from 10.4%. Interest expense rose to $1.685 million from $1.207 million, largely reflecting higher borrowing costs; management said asset growth and interest-rate positioning supported net interest income.
Financial position, cash flow and liquidity
- Total assets were $715.3 million, up from $685.7 million at December 31, 2019. Gross loans were $448.3 million, up $6.8 million from year-end; available-for-sale securities were $197.4 million, up $8.6 million.
- Deposits totaled $555.5 million, up from $548.1 million at year-end. Repurchase agreements increased to $14.6 million from $6.9 million, and FHLB advances increased to $51.0 million from $39.8 million. Subordinated debentures were $23.6 million.
- Cash and cash equivalents rose to $28.0 million from $15.0 million. Q1 operating cash flow was $1.951 million, investing cash flow was negative $13.849 million, and financing cash flow was positive $24.955 million.
- Stockholders’ equity was $62.9 million versus $59.9 million at year-end. Management reported regulatory capital ratios of 11.48% common equity Tier 1, 12.27% Tier 1, 16.81% total capital, and 8.93% leverage, and stated the company remained well-capitalized.
- Net loans charged off, excluding overdrafts, were approximately $63,000, or 0.06% annualized. The allowance for loan losses was $2.708 million, equal to 0.60% of loans, versus $2.231 million and 0.51% at year-end.
Material changes and unusual items
- Management attributed the higher $563,000 loan-loss provision, including approximately $473,000 of additional provision versus the prior-year quarter, to heightened COVID-19 economic and credit uncertainty. Net income remained broadly comparable with Q1 2019 despite this increase.
- Q1 included a $69,000 gain from selling $8.0 million of U.S. government agency securities; there were no securities sales in Q1 2019. Unrealized gains on available-for-sale securities contributed $2.661 million of other comprehensive income, net of tax.
- Loan growth was 8.3% year over year, and securities and other restricted stock increased 39.8% year over year, according to management. The filing also reports loan fees increased $322,000 quarter over quarter.
- Management reported $2.6 million of nonaccrual loans and loans past due 30 days or more, 0.58% of total loans, compared with $3.5 million and 0.85% a year earlier. At March 31, $3.75 million of loans were rated special mention and $1.80 million substandard.
COVID-19, outlook and risks
- The Bank temporarily closed branch lobbies to walk-in business beginning March 19, 2020, while maintaining drive-through, ATM, appointment and digital services; some employees worked remotely.
- The company reported payment-deferral requests from 161 customers covering 630 loans with balances of approximately $167 million, described as 35.3% of the commercial loan portfolio, plus 56 consumer-loan deferral requests. Most requests were for 90 days. The filing does not state how many requests had been approved or quantify their subsequent performance.
- Management said the full effect of the pandemic could not be reliably predicted and that additional loan-loss provisions might be needed. Risks identified include worsening delinquencies and foreclosures, falling collateral values, reduced demand, pressure on earnings and dividends, vendor disruption, and higher FDIC costs.
- The company stated it expected to manage pandemic-related uncertainty and remain adequately capitalized, while emphasizing that this assessment was subject to significant uncertainty. It provided no specific earnings or full-year financial guidance.
- The company was evaluating the expected-credit-loss standard (CECL), with adoption for this smaller reporting company delayed to periods beginning after December 15, 2022. Management could not quantify the adoption impact and noted the allowance could increase.
- Management assessed goodwill amid COVID-19 uncertainty and concluded that, as of March 31, 2020, it was more likely than not that reporting-unit fair value exceeded carrying value. It said it would continue monitoring for impairment indicators.
Most important facts for investors to verify
- Approval, duration and repayment outcomes of the reported loan deferrals, especially the concentration in commercial borrowers.
- Subsequent trends in delinquencies, nonaccrual loans, criticized loan grades, charge-offs and the adequacy of the allowance as economic conditions evolve.
- Whether deposit growth and available borrowing capacity remain sufficient if customer withdrawals or credit-line usage increase; borrowings and repurchase agreements rose during the quarter.
- Exposure to commercial real estate and local economic conditions, and the potential effect on collateral values and loan losses.
- Whether earnings, capital and the quarterly dividend are affected by further credit provisions, lower rates, CECL adoption or prolonged pandemic disruption.