United Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. United Bancorp is an Ohio bank holding company operating primarily through Unified Bank in Ohio and nearby markets. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest and dividend income | $6.648 | $5.107 | $12.963 | $9.732 |
| Net interest income | $5.179 | $4.400 | $10.287 | $8.502 |
| Provision for loan losses | $0.120 | $0.072 | $0.210 | $0.129 |
| Noninterest income | $0.947 | $0.888 | $1.892 | $1.768 |
| Noninterest expense | $4.172 | $3.754 | $8.334 | $7.333 |
| Net income | $1.646 | $1.212 | $3.260 | $2.360 |
| Diluted EPS | $0.29 | $0.23 | $0.57 | $0.46 |
- Management reported net interest margin of 3.73% at quarter-end. Six-month return on equity was 11.4% and return on assets was 1.04%.
- Six-month operating cash flow was $4.654 million, versus $2.010 million a year earlier. Investing cash outflow was $42.321 million and financing cash inflow was $37.706 million. Cash and cash equivalents ended at $25.292 million, essentially unchanged from year-end 2018.
Financial position and material changes
- Total assets were $648.627 million, up from $593.213 million at December 31, 2018. Net loans were $423.291 million, compared with $407.640 million; available-for-sale securities were $161.605 million, compared with $123.991 million.
- Deposits increased to $546.247 million from $525.443 million. Stockholders’ equity was $56.980 million, up from $50.643 million. The filing reports consolidated total capital to risk-weighted assets of 16.1% and common equity tier 1 of 10.5% at June 30, 2019.
- On May 14, the company issued $20 million of unsecured subordinated debentures, bearing 6.0% fixed interest through May 2024 and then a floating rate through 2029. Total subordinated debentures were $23.520 million at quarter-end. The company transferred $16 million of issuance proceeds to the bank to support growth and retained $4 million for corporate purposes.
- Gross loans grew $15.7 million from year-end, led by commercial and commercial real estate lending; residential and installment balances declined. Q2 earnings growth also reflects the Powhatan Point acquisition completed in October 2018.
- Unrealized gains on available-for-sale securities contributed $4.815 million of six-month other comprehensive income; accumulated other comprehensive income was $4.805 million at quarter-end.
Credit, outlook, risks and notable items
- Management reported past-due and nonaccrual loans of $3.345 million, or 0.79% of gross loans, at June 30, versus $3.634 million, or 0.89%, at year-end. The allowance for loan losses was $2.142 million, or 0.50% of loans. Management considered it adequate.
- Management expects double-digit earnings growth to continue through 2019, assuming continued earning-asset growth and stable credit quality. Its stated priorities include acquisitions, organic growth, new banking centers, technology investment and an omnichannel banking platform; a new Moundsville, West Virginia banking center was planned.
- Interest expense rose substantially year over year, alongside growth in deposits and borrowings. Management cited personnel-related costs and Powhatan-related expenses as drivers of higher noninterest expense. The lower effective tax rate—10.1% for the first half versus 16.0% a year earlier—was attributed to increased tax-exempt securities income.
- Key risks identified include local economic conditions, interest-rate changes, loan demand, competition, regulation and credit losses. The company was evaluating the expected-credit-loss accounting standard (CECL), effective for it after December 15, 2019, and noted adoption could increase the allowance; impact was not yet quantifiable.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting. No material change in risk factors or significant market-risk disclosure was reported. Routine litigation was the only legal-proceedings disclosure.
Important facts for investors to verify
- Reconcile the filing’s net-charge-off figures: MD&A cites $56,000 excluding overdrafts, while the allowance rollforward shows $140,000 of charge-offs less $29,000 of recoveries, or $111,000 net.
- Review the $20 million debt terms, use of proceeds and effect on bank versus holding-company capital, as well as the later floating-rate exposure.
- Assess whether reported loan growth, credit quality and the 0.50% allowance remain appropriate, particularly for commercial real estate and the locally concentrated portfolio.
- Evaluate the assumptions behind management’s 2019 double-digit earnings-growth outlook, including funding costs, expense growth, planned expansion and CECL adoption.
- Note an apparent MD&A comparison typo in its six-month net-income discussion; the financial statements report 2019 net income of $3.260 million and 2018 net income of $2.360 million.