United Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited consolidated results cover United Bancorp and its wholly owned bank subsidiary. Financial-statement amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 earnings: Net income was $1.331 million, up 33.1% from $1.000 million in Q3 2017. Diluted EPS was $0.25, compared with $0.20.
- Nine-month earnings: Net income was $3.691 million, up 33.4% from $2.766 million; diluted EPS rose to $0.69 from $0.55.
- Revenue and margin: Q3 net interest income was $4.630 million, up 11.9%; nine-month net interest income was $13.132 million, up 11.9%. Nine-month net interest margin was 3.90%, versus 3.80%. Nine-month noninterest income was $2.665 million, up 2.8%.
- Expenses and taxes: Nine-month noninterest expense rose 10.0% to $11.188 million. The nine-month effective tax rate fell to 16.3% from 32.3%, which management attributed primarily to the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
- Loans and credit: Gross loans were $393.2 million at September 30, up from $368.6 million at December 31, 2017. Commercial and commercial real estate loans totaled $305.6 million. The allowance for loan losses was $2.004 million, or 0.51% of gross loans, versus $2.122 million, or 0.58%, at year-end. Nonaccrual loans were approximately $1.3 million.
- Assets, deposits and capital: Total assets were $525.3 million, compared with $459.3 million at year-end. Deposits were $434.3 million, versus $386.0 million. Stockholders’ equity was $45.1 million; equity was 8.59% of assets, compared with 9.56% at year-end. Regulatory capital ratios were 10.62% common equity tier 1, 11.56% tier 1, 12.03% total capital and 10.05% leverage.
- Funding and liquidity: Cash and cash equivalents were $12.9 million, down from $14.3 million at year-end. Federal Home Loan Bank advances were $22.1 million, up from $10.0 million; repurchase-agreement borrowings were $15.4 million, compared with $11.1 million. For the nine months, operating cash flow was $3.9 million, investing cash flow was negative $68.0 million and financing cash flow was positive $62.6 million.
- Shareholder returns: Dividends were $0.13 per share for Q3 and $0.39 per share for the first nine months, versus $0.12 and $0.34, respectively, in 2017.
Material changes and unusual items
- Management linked earnings growth to loan and securities income, loan growth, operational improvements and lower taxes. Nine-month loan interest and fees increased $1.3 million; management also reported higher securities income.
- Available-for-sale securities increased to $86.5 million from $45.0 million at year-end. The portfolio had $1.227 million of gross unrealized losses; accumulated other comprehensive loss increased to $1.153 million from $0.420 million. Management attributed the securities declines primarily to rising market interest rates and considered them temporary.
- Nine-month merger-related and other one-time expenses were approximately $223,000; management estimated these reduced diluted EPS by $0.04 for the nine-month period and $0.02 in Q3. It expected additional merger expenses in Q4.
- On October 15, 2018, after the reporting date, the company completed its acquisition of Powhatan Point Community Bancshares. The acquired company had approximately $56.4 million in assets, $7.9 million in loans and $51.4 million in deposits at September 30. Consideration included 6.9233 United Bancorp shares and $28.52 cash per Powhatan share; the filing estimated transaction value at approximately $6.2 million. Acquisition-date fair values and resulting goodwill had not yet been determined.
- For the nine-month period, the cash flow statement reports net charge-offs of $319,000, while management separately cites $238,000 excluding overdrafts. The filing’s differing presentations warrant reconciliation.
Outlook, risks and contingencies
- Management expressed optimism about continued loan and securities growth, higher interest income and earnings. It described a longer-term ambition to exceed $1.0 billion in assets and develop an “omnichannel” bank; these are aspirations, not formal earnings guidance.
- Management cited interest-rate changes, local economic conditions, loan demand, competition and regulatory policy as factors that could cause actual results to differ from expectations. It stated that it knew of no other material trends or uncertainties beyond those discussed.
- The company was evaluating the expected-credit-loss standard (CECL), effective for it after December 15, 2019. It could not quantify the effect and noted potential for a higher allowance at adoption. The company also said the upcoming lease standard was not expected to have a material impact.
- Off-balance-sheet commitments included $32.8 million of unused commercial lines, $19.1 million of loan-origination commitments and $36.2 million of consumer open-end lines. Management did not anticipate material losses, but commitments expose the bank to credit risk.
- The filing reported no material change in previously disclosed risk factors and no material legal proceedings other than routine litigation. Management stated disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Reconcile the $238,000 net charge-off figure excluding overdrafts with the $319,000 figure elsewhere in the filing; assess credit trends, nonaccruals and allowance coverage.
- Review deposit and borrowing costs, interest-rate sensitivity and liquidity as loan and securities growth is funded, particularly amid rising rates.
- Confirm the completed acquisition’s final purchase accounting, fair values, goodwill, integration costs and contribution to earnings.
- Track securities’ unrealized losses and whether management’s assumption that declines are temporary remains supportable.
- Assess the eventual CECL allowance and implementation impact, and distinguish management’s growth ambitions from formal guidance.