United Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The unaudited consolidated results cover United Bancorp and its wholly owned bank subsidiary; amounts below are in millions unless stated otherwise.
Business context and financial performance
United Bancorp is a community banking company operating primarily in Ohio, with a loan production office in Wheeling, West Virginia. Its principal activities are commercial, commercial real estate, residential mortgage and installment lending, and deposit-taking.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $3.734 | $3.540 | $11.047 | $10.276 |
| Provision for loan losses | $0.131 | $0.126 | $0.307 | $0.387 |
| Noninterest income | $1.056 | $0.987 | $2.825 | $2.862 |
| Noninterest expense | $3.345 | $3.182 | $9.738 | $9.426 |
| Net income | $0.928 | $0.859 | $2.679 | $2.358 |
| Diluted earnings per share | $0.18 | $0.17 | $0.53 | $0.47 |
| Dividends per common share | $0.11 | $0.09 | $0.31 | $0.27 |
Management reported a nine-month net interest margin of 3.87%, compared with 3.68% in 2015. For Q3, net interest income rose 5.5% year over year. The filing does not provide a clear Q3 net interest margin value.
Financial position, cash flow and credit quality
- Assets and lending: Total assets were $425.5 million at September 30, up from $405.1 million at December 31, 2015. Gross loans were $350.6 million, up $20.9 million from year-end; commercial and commercial real estate loans grew $27.6 million, while residential and installment balances declined. Deposits were $328.1 million, compared with $323.6 million at year-end.
- Funding and debt: Short-term borrowings rose to $13.6 million from $5.7 million, and FHLB advances rose to $33.6 million from $26.5 million. Subordinated debentures were $4.1 million. Management said loan growth required a shift from excess reserves to wholesale funding. Demand and savings deposits made up 83.58% of deposits, versus 81.13% a year earlier.
- Liquidity and cash flow: Cash and cash equivalents were $13.2 million, versus $12.7 million at year-end. For the nine months, operating activities provided $2.9 million, investing activities used $20.1 million, and financing activities provided $17.8 million. Cash increased $0.5 million. Management cited access to correspondent-bank lines, FHLB borrowing and other funding sources.
- Capital: Stockholders’ equity was $42.8 million, up from $41.5 million at year-end. At September 30, regulatory ratios were 12.17% common equity tier 1, 13.32% tier 1, 14.03% total capital and 11.11% leverage; the company said it was well-capitalized.
- Credit quality: Nonaccrual loans were $1.4 million, down $0.15 million year over year. Nine-month net charge-offs were approximately $0.291 million, or 0.09% of average loans, versus approximately $0.060 million in the prior-year period. The allowance was $2.454 million, about 0.70% of gross loans; management considered it adequate. Past-due and nonaccrual loans totaled $2.748 million at quarter-end, down from $3.164 million at year-end.
Changes, outlook and notable items
- Nine-month net income increased 13.6% and diluted EPS rose from $0.47 to $0.53. Management attributed improvement mainly to loan growth, a higher net interest margin and lower funding costs. Interest expense declined 22.8% for the nine months.
- Noninterest expense rose 3.3% over nine months, including higher salaries and employee benefits associated with lending staff. Deposit service charges fell, partly reflecting a one-time $95,000 debit-card processor payment in the 2015 comparison period.
- The company recorded a $162,000 gain from selling Bankers Bancshares stock in Q3. It also reported $208,000 of debit-card fraud losses and card reissuance costs in Q2, partly offset by a $50,000 insurance refund received in Q3. The filing says the Q2 fraud costs reduced after-tax earnings by about $138,000, or approximately $0.025 per share.
- Management expects loan growth and repricing of $20 million of fixed-rate FHLB advances maturing over the following 15 months to support lower interest expense and higher earnings. It also described “Mission 2020,” a goal to grow assets to at least $1.0 billion by the end of 2020, with possible expansion through acquisitions. These are forward-looking plans, not guarantees.
- Management cited risks including local economic conditions, interest-rate fluctuations, loan demand, competition and regulatory changes. It said there were no material changes to previously disclosed risk factors, no material legal proceedings beyond routine litigation, and no significant change in market-risk disclosures. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether loan growth can continue without weakening underwriting or increasing credit losses, particularly as commercial and commercial real estate lending expands.
- Whether wholesale funding growth and upcoming FHLB advance maturities deliver the expected funding-cost savings, and how interest-rate changes affect margins.
- The sustainability of earnings after considering the one-time stock-sale gain, debit-card fraud costs and insurance recovery, and the decline in service-charge income.
- Whether the allowance for loan losses remains adequate given charge-offs, portfolio growth, collateral values and the timing of adoption of the expected-credit-loss standard.
- Progress toward Mission 2020, including the cost and funding implications of organic growth, the Wheeling office and any potential acquisitions; also verify future dividend capacity and capital needs.