United Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2019. United Bancorp is an Ohio community banking company operating through Unified Bank, primarily in eastern, east-central and southeastern Ohio. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial results and position
- Earnings: Net income was $1.614 million, up 40.6% from $1.148 million in Q1 2018. Diluted EPS was $0.28 versus $0.23. Income before taxes rose to $1.801 million from $1.346 million.
- Revenue and margin: Net interest income was $5.108 million, up 24.6%; noninterest income was $0.945 million, up from $0.880 million. Combined net interest and noninterest income was $6.053 million versus $4.982 million. Net interest margin was 3.80%, compared with 3.86%.
- Expenses and credit provision: Noninterest expense increased 16.3% to $4.162 million, including higher personnel and acquisition-related costs. The loan-loss provision was $90,000 versus $57,000. The effective federal tax rate was 10.4%, compared with 14.7%.
- Cash flow: Operating activities provided $843,000; investing activities used $11.190 million; financing activities provided $17.786 million. Cash and cash equivalents ended the quarter at $32.692 million, up from $25.253 million at year-end.
- Balance sheet and liquidity: Total assets were $621.0 million, up from $593.2 million at December 31, 2018. Deposits were $538.9 million, up from $525.4 million. Gross loans were $413.9 million; available-for-sale securities were $139.3 million.
- Credit quality: The allowance for loan losses was $2.083 million, or 0.50% of gross loans, versus $2.043 million and 0.50% at year-end. Nonaccrual loans totaled $1.576 million, or approximately 0.38% of loans. Loans 30 or more days past due or on nonaccrual totaled $3.529 million.
- Debt and capital: At quarter-end, repurchase agreements were $13.441 million, FHLB advances $80,000, and subordinated debentures $4.124 million. Stockholders’ equity was $53.8 million. Reported capital ratios were 10.98% common equity Tier 1, 11.88% Tier 1, 12.34% total capital, and 8.87% leverage.
- Shareholder returns: The quarterly dividend was increased to $0.1325 per share; cash dividends paid were $782,000. The company repurchased $267,000 of stock during the quarter.
Changes versus comparable periods
- Year-over-year growth reflected organic expansion and the October 2018 acquisition of Powhatan Point Community Bancshares. Management reported earning assets up $112.5 million, or 25.2%, and total assets up 27.2% year over year.
- Loan balances increased $4.2 million from December 31, 2018, led by commercial and commercial real estate lending; residential and installment loans declined. Securities increased $15.3 million from year-end.
- Interest and dividend income increased 36.6% year over year, while deposit interest expense rose to $1.126 million from $457,000. Net interest margin edged down despite higher net interest income.
- Other comprehensive income included a $2.470 million after-tax securities holding gain, compared with a $170,000 loss in Q1 2018.
Outlook, commentary, and risks
- Management expected double-digit earnings growth to continue through 2019, citing anticipated earning-asset growth and solid credit quality. It also described a longer-term goal of exceeding $1 billion in assets within a few years. These are forward-looking expectations, not guarantees.
- Management plans continued investment in technology and service infrastructure, with an omnichannel digital offering anticipated within one to two years, alongside potential acquisitions and branch expansion.
- Risks identified include economic conditions in the bank’s markets, interest-rate changes, regulatory policy, loan demand and competition. Management identifies the allowance for loan losses as a critical estimate subject to judgment and revision.
- The company adopted lease accounting on January 1, 2019; the reported right-of-use asset and lease liability were approximately $126,000 each.
- The company was evaluating the expected-credit-loss standard (CECL), effective for it in 2020. Management said adoption could increase the allowance and expected to provide a potential-impact range in Q3 2019.
- Subsequent event: On May 14, 2019, the company issued $20 million of unsecured junior subordinated debentures. They bear fixed interest at 6.0% through May 2024, then float at three-month LIBOR or an equivalent index plus 3.625%, and mature in May 2029. The filing says they count as Tier 2 capital.
- Management said disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors and no material litigation beyond routine matters.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of Q1 net charge-offs: the introduction cites $18,000 excluding overdrafts, while the loan discussion cites approximately $31,000; the allowance table shows $59,000 of charge-offs and $9,000 of recoveries.
- Assess whether deposit-cost increases and the reported margin trend affect future net interest income as assets and funding continue to grow.
- Monitor nonaccrual and criticized loans, allowance adequacy, and the company’s CECL adoption estimate.
- Evaluate the costs, capital treatment and future interest expense associated with the $20 million debt issuance after quarter-end.
- Consider that the filing’s interim financial statements are unaudited and management’s growth and earnings outlook is subject to the risks described above.