United Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company is a community banking holding company operating primarily in Ohio and West Virginia. Unless otherwise noted, financial amounts below are in millions of dollars; interim financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $4.137 | $3.734 | $11.735 | $11.047 |
| Provision for loan losses | $0.025 | $0.131 | $0.075 | $0.307 |
| Noninterest income | $0.892 | $1.056 | $2.593 | $2.825 |
| Noninterest expense | $3.456 | $3.345 | $10.167 | $9.738 |
| Net income | $1.000 | $0.928 | $2.766 | $2.679 |
| Diluted EPS | $0.20 | $0.18 | $0.55 | $0.53 |
- Quarterly net income rose 7.8%; diluted EPS increased 11.1%. For nine months, net income rose 3.2% and diluted EPS increased from $0.53 to $0.55.
- Interest and dividend income was $4.586 million for Q3 and $13.060 million for nine months. The company attributed higher net interest income chiefly to loan growth. The filing text does not provide a clear net interest margin percentage.
- At September 30, 2017, total assets were $454.5 million, net loans $358.2 million, deposits $380.9 million, and stockholders’ equity $44.1 million. Since December 31, 2016, assets increased $16.5 million, net loans $3.8 million, deposits $42.0 million, and equity $1.5 million.
- Cash and cash equivalents were $23.1 million, versus $11.5 million at year-end 2016. Nine-month operating cash flow was $2.7 million; investing activities used $3.6 million and financing activities provided $12.4 million.
- Borrowings included $16.2 million in repurchase agreements and $5.3 million in FHLB advances, compared with $9.4 million and $39.9 million, respectively, at year-end 2016. Subordinated debentures were $4.1 million.
- Regulatory capital ratios were 11.96% common equity Tier 1, 13.07% Tier 1, 13.67% total capital, and 10.65% leverage. Management reported the company was well-capitalized. Average equity to average assets was 9.71%.
Changes, outlook, and risks
- Deposits grew 12.4% from year-end to $380.9 million, while gross loans increased to $360.4 million. Management said growth in lower-cost retail funding supported lending and helped contain funding costs. It reported a 0.40% interest expense-to-average-assets ratio, down from 0.43% year over year.
- The allowance for loan losses was $2.2 million, or 0.61% of loans, versus $2.3 million, or 0.66%, at year-end 2016. Nonaccrual loans were $1.3 million; total past-due and nonaccrual loans were $2.7 million, or 0.70% of gross loans. Nine-month net charge-offs were $0.221 million. Management considered the allowance adequate, but its estimate depends on credit and economic assumptions.
- Noninterest income declined $0.232 million for nine months, partly because the prior-year period included a $0.162 million gain on sale of Bankers Bancshares stock. Noninterest expense rose $0.429 million, with increased staffing, facilities, technology, marketing, and expansion costs among the cited drivers.
- Management expected to repay the remaining $5.0 million fixed-rate FHLB advance in Q4 2017 using available liquidity, anticipating lower funding costs. It also cited a strategy to grow assets to at least $1.0 billion by year-end 2020, through organic and acquisition-related growth, and expected to pursue revenue growth while controlling expenses. These are forward-looking plans, not guarantees.
- The bank was renamed Unified Bank effective October 10, 2017. Management said the change was intended to support branding and growth.
- Management identified risks including local economic conditions, interest-rate movements, loan demand, competition, regulation, and credit quality. Commercial real estate loans were $195.7 million, a substantial part of the portfolio. Securities had $0.120 million of gross unrealized losses at quarter-end; management considered the declines temporary and said it did not intend or expect to need to sell before recovery.
- Off-balance-sheet commitments included $23.4 million of unused commercial lines, $11.9 million of commitments to originate loans, and $37.6 million of consumer open-end lines. Management did not anticipate material losses on these commitments.
- The company paid $0.12 per common share in Q3 dividends. Management reported a trailing 12-month dividend of $0.50 per share, including a prior special dividend, and expressed an expectation of continued shareholder returns; future dividends are not assured.
- The filing reported no material change in risk factors, no material market-risk change from the 2016 Form 10-K, and no material litigation beyond routine matters. Management said adoption of the expected-loss credit standard could increase the allowance and require significant process changes; the impact was not yet quantifiable. Other accounting updates were generally not expected to have a material effect.
Important facts to verify
- Confirm the expected Q4 repayment of the remaining $5.0 million FHLB advance and the resulting funding-cost impact.
- Track loan growth and asset quality, especially commercial real estate exposure, delinquencies, nonaccruals, and allowance adequacy.
- Assess whether the higher operating costs and expansion investments produce the revenue growth and operating leverage management anticipates.
- Evaluate the impact and implementation progress of the expected-credit-loss accounting standard on reserves, earnings, and capital.
- Check the disclosure-controls statement: it describes controls as effective “as of September 30, 2016,” although this is the September 30, 2017 quarterly filing; confirm whether this is a typographical error.