United Bancorp (NASDAQ:UBCP) is a community bank that has only ever had one article written about them on Seeking Alpha and to my knowledge, nothing ever written on them anywhere else. Despite the fact that the bank is thinly covered, there is a lot to like about the company…
UBCP continues to outperform their relative peers on a wide variety of profitability metrics and their cost structure continues to decrease. Furthermore, the bank will experience a wide-tail of cash inflows in the forward looking year from interest expense cost containment and a growing capital base. The bank is also located in Ohio-a battleground for M&A activity-and has expressed intents on performing an acquisition in the near-term. Finally, the company has no hidden preferred stock, a viable growth plan to hit $1.0 billion in assets and strong management team at the hull.
United Bancorp is the holding company for the Citizens Savings Bank; an eighteen branch bank located in Ohio. In 1902, the bank was established near the Ohio River. Today the bank performs your typical personal banking needs with a mix of commercial banking offerings.
Margin Expansion through Cost Containment
The long-end of the yield curve continues to remain at historical lows, pressurizing many banks loan portfolios; on a downward reprice trend-including United Bancorp. Although, there have been some positive implications for United Bancorp due to the fact that they have successfully stabilized the overall yield on their loan portfolio-hats off to you guys. Furthermore, the company continues to grow their loan portfolio (7.35% increase YOY in mrq), combined with the stabilization of the yield on the company's loans, will lead to much a much higher interest income generation in the coming quarters.
Management has also been successful in attracting customers to lower-cost funding, while at the same time, allowing their higher-cost funding to roll-off. For an example, in the mrq, lower-cost funding (demand and savings deposits) increased by $3.1 million; as higher-cost time deposits decreased by a nice $9.5 million. On a percentage basis, the interest expense decreased $106,000 or 18.3% YOY.
The low increase in noninterest expense, of ~1.0%, also shows that management is focused on cost containment, while at the same time, building a large corporation in the heart of Ohio. Moreover, the company's office consolidation in its Glouster, Ohio marketplace was finished in the 1Q16; giving the bank a valuable method of noninterest expense containment.
In the most recent quarter, there were a few near-term actions the bank did, in order to realize a brighter future tomorrow, over today. First, the repricing and maturation of $26 million in fixed-rate advances from the FHLB, in the next 24 months, will help cut interest expenses. For an example, the average cost of an FHLB advance is 3.66%. Moreover, $6.0 million in FHLB advances, matured in May of 2016, saving the company $167,000 annually. Thus, the bank plans to replace these advances with short-term borrowings at and around 50 bps.
Secondly, $4.1 million in subordinated debentures were repriced on January 1st, 2015-a fixed rate of 6.25% to a variable rate of 1.97%; based on a three-month LIBOR plus a margin of 1.35%. Based upon the current interest rate, the company expects to save an additional $177,000 in interest expense annually.
Finally, the company has experienced a continual decrease in their efficiency ratio, Texas ratio and OREO. As the company continues to transition into a more profitable enterprise, there will be a continual decrease in the former two ratios. In regards to the OREO, the balance decreased 71.4% to $326,000 from $814,000 YOY. Overall, in the past two quarters, net income increased 17% and 21%, respectively-pretty good for a small unheard of community bank.
Mission 2020-A Laudatory and Achievable Goal
In the second quarter of 2015, management initiated the 'Mission 2020' goal of hitting $1.0 billion in assets by the end of 2020. Currently the company has assets of $412,461,000; just $587,539,000 shy of their goal.
To reach their goal, management plans to be operationally efficient-which they have been working on, given the recent cost containments-and by taking on higher levels of noninterest expense in order to support a stronger loan origination platform. In short, the company plans on driving organic growth through a higher quality of loans on a larger scale.
Higher quality loans can be seen in the recent loans they have made and through the absolute low percentage of noncurrent loans to loans-0.42% of noncurrent loans to loans in the mrq compared to 0.92% in 1Q14. Even better, the company has had tremendous success originating and underwriting loans given the noncurrent loans to loans was a low 2.92% in the heart of the Great Recession. Moreover, they should do well with their organic growth strategy.
We will see noninterest expense increasing as the assets grow-mostly seen in G&A. Offsetting the decrease is the expected $450,000 annual savings in interest expenses; aggregated. M&A will also increase the noninterest expense momentarily.
In the most recent quarter, the company stated that they may acquire local community banks to achieve the desirable asset level. Concurrently, if the bank does incremental, small bolt-on acquisitions that are near tangible equity, the bank could do quite well. Likewise, if the bank acquires someone with an attractive loan book and/or one that is overcapitalized, valuation should increase.
High Quality Management Team which Understands the Market
The current Chairman, President and CEO is a young, high quality leader, who understands the Ohio market. Scott Everson, joined United Bancorp fresh out of undergrad; in 1991. As Everson grew, he worked his way-through lending and retail-becoming the Senior Vice President in Retail Banking; eight short years from starting. Then in 2002, he was promoted to President, COO and a Director. Finally, in 2004, Everson became the CEO.
There isn't much public information on Everson, so it's time to speculate. Everson is a young 48, only owning 1.5% of the shares outstanding-a $801,730 position. United Bancorp has further stated that they want to hit over $1.0 billion in assets and be on the acquiring side of the M&A playing field. These two former facts give us notable information into Everson's incentive.
It can be easily be speculated upon that Everson needs and wants the bank to have $1.0 billion in assets. Numerous sources state that banks are more efficient-less regulatory burden constraint-when assets are above $1.0 billion. Furthermore, banks with assets below $1.0 billion, a few years out, will have probably already been acquired. Given Everson's age and the low amount of stock held in the company relative to his salary, it would be more beneficial to grow the bank.
Think of it this way: Everson brought home a salary of $409,422 for 2015-pretty respectable. Additionally, in the past three years, his salary has increased 32%. Moreover, based upon his equity position in the company of $801,730, it is much more beneficial, on a monetary standpoint, to continue working at the bank.
Now think to yourself, is a guy who knows the Ohio market, has been working at the same bank his whole career and is in the midst of an M&A battlefield going to stand around and let his bank get acquired? I'd hope not! I believe Everson and United Bancorp will be one of the major players in the Ohio market by the time 2020 rolls around. In fact, I would bet you that United Bancorp hits their goal and maybe even grows some more.
I am not too worried about asset quality deteriorating either given the historical performance of the company. Remember, the company has done a tremendous job of keeping noncurrent loans to loans at historically low levels, Furthermore, the company hasn't raised any expensive capital-preferred, since at least before 2006. During all of that time, Everson was the CEO, meaning, he has a good understanding of underwriting conservative loans.
What I find most fascinating is the market's valuation of the bank. Currently, United Bancorp has a P/TBV of 1.26x a P/E ratio of 14.90x and a stable dividend yield of 4.01%. Seems to be fairly value, but on a relative basis to expected growth-the price isn't too bad. Moreover, Tangible Shareholder's Equity to Total Assets, equals 0.10x. If and when United Bancorp gets assets of $1.0 billion, based on the multiple of 0.10x, the bank would have Tangible Shareholder's Equity of $100,000,000.
Tangible Shareholder Equity of $100,000,000, by 2020, would give the bank an annualized TBV growth rate (in four years) of 24.27%. Even if we discount the growth by 15%, meaning the bank only grows total assets to $850,000,000 by 2020, we still have a 19.32% annualized growth rate in TBV. Concurrently, if management continues to execute, I see the valuation growing at a nice 15% per year.
United Bancorp may grow at 'too' aggressively, leading to lower quality loans or expensive M&A transactions. The former risk can be somewhat discounted given the historical low noncurrent loans to loans. In regards to M&A, the last time the company did an M&A was in 2008-the only time Everson has done an M&A as a CEO.
More loan run-offs combined with a lower interest rate tomorrow will pinch the margins. However, the FOMC increased the target for the federal funds rate by 25 bps recently, which impacted the company in a positive fashion.
Increased regulatory scrutiny could crunch margins and damper growth targets.
My price target of $15/share is based upon the company growing at a 15% annualized rate in the next three years. At the current price this is an upside of 50%. My thesis is based upon a strong management team, who needs the bank to grow. In addition, the risk profile of the company shouldn't increase due to management's conservative underwriting skill and the battlefield of M&A activity in the marketplace-which management knows like the bank of their hand.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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