United Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. United Bancorp is a community bank holding company operating primarily in Ohio and West Virginia. Unless otherwise noted, financial amounts below are in U.S. dollars; balance-sheet and income-statement amounts are shown in millions.
Key financial metrics
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net income | $2.280 million; diluted EPS $0.40 | Q2 2022: $2.297 million; diluted EPS $0.40 |
| Six-month net income and diluted EPS | $4.168 million; $0.73 | Six months 2022: $4.048 million; $0.70 |
| Interest and dividend income | Q2: $9.286 million; six months: $17.494 million | Q2 2022: $6.445 million; six months 2022: $12.442 million |
| Net interest income | Q2: $6.345 million; six months: $12.768 million | Q2 2022: $5.968 million; six months 2022: $11.478 million |
| Net interest margin | Management reported 3.58% at June 30; linked-quarter compression of 17 basis points | Comparable prior-year margin not clearly stated in the filing text |
| Noninterest income / expense | Six months: $2.062 million / $10.527 million | Six months 2022: $1.975 million / $9.959 million |
| Operating cash flow | Six months: $3.630 million; cash and cash equivalents ended at $81.763 million | Six months 2022: $2.369 million; ending cash $16.791 million |
| Total assets / shareholders’ equity | $830.284 million / $58.409 million | December 31, 2022: $757.400 million / $59.737 million |
| Loans / deposits | Gross loans $462.871 million; deposits $643.616 million | December 31, 2022: gross loans $460.875 million; deposits $649.913 million |
| Borrowings | $75.000 million FHLB advances; $23.690 million repurchase agreements; $23.756 million subordinated debentures | December 31, 2022: no FHLB advances; $18.106 million repurchase agreements; $23.726 million subordinated debentures |
Performance and changes versus comparable periods
- Second-quarter net income declined approximately 0.7% year over year, while six-month net income rose 3.0% and diluted EPS rose 4.3%.
- Six-month net interest income increased 11.2% year over year. Management attributed the increase to higher yields on repricing loans, a larger securities portfolio, and interest earned on cash and overnight investments amid rising rates.
- Interest expense rose substantially: $2.941 million in Q2 versus $0.477 million a year earlier, and $4.726 million for the first half versus $0.964 million. Higher deposit and borrowing costs partly offset higher interest income.
- Six-month noninterest expense increased 5.7%, which management primarily attributed to inflation. Noninterest income increased 4.4%, led by deposit service charges.
- Deposits fell $6.3 million, or 1.0%, from year-end 2022, with a shift from demand and savings balances toward time deposits. Repurchase agreements increased $5.6 million. The company added $75 million of fixed-rate FHLB funding during the first half.
- Available-for-sale securities increased to $236.1 million fair value from $217.6 million at year-end. Fair value was $11.5 million below amortized cost; gross unrealized losses were $12.1 million. Management attributed the loss position mainly to higher market interest rates and said it did not intend, and was not likely required, to sell before recovery.
- Stockholders’ equity declined $1.3 million from year-end, reflecting the $2.088 million after-tax CECL adoption adjustment to retained earnings, dividends, share repurchases, and other comprehensive loss, partly offset by earnings and other equity activity.
Credit, liquidity, capital and other developments
- The allowance for credit losses on loans was $4.281 million, or 0.92% of gross loans, at June 30. It was $2.052 million at year-end 2022 before adoption of CECL; adoption increased the reserve by $2.419 million and reduced retained earnings by $2.088 million net of tax.
- The company recorded a $146,000 reversal of loan credit-loss expense in both the second quarter and first half of 2023. Nonperforming loans were $398,000; management reported nonaccrual loans and loans 30 or more days past due of $685,000, or 0.15% of gross loans. Year-to-date net charge-offs were $44,000 including overdrafts; excluding overdrafts, the company reported net recoveries of $10,000.
- FHLB advances carry fixed rates of 4.39%, 4.24%, and 4.11%, with scheduled maturities in 2026, 2027, and 2028, respectively. Securities pledged as collateral for public deposits and other purposes had a $71.0 million carrying value. Repurchase agreements were collateralized by securities with a $39.1 million carrying value.
- Management reported bank regulatory capital ratios of 13.65% common equity Tier 1, 13.65% Tier 1, 14.40% total capital, and 9.39% leverage. Equity was approximately 7.0% of assets. Management described the company as well capitalized and reported uninsured deposits at approximately 16.5% of total deposits.
- Cash increased $51.7 million in the first half, mainly reflecting $75 million of FHLB advances, partly offset by $22.7 million of investing cash outflows, including securities purchases. Financing activities provided $70.8 million; investing activities used $22.7 million.
- Off-balance-sheet commitments included $94.1 million of unused commercial lines, $91.6 million of commitments to originate loans, $38.3 million of consumer open-end lines, and $0.3 million of standby lines. Management stated that material losses were not anticipated.
Outlook, commentary and risks
- No specific earnings or margin guidance was provided. Management expressed optimism about future growth and earnings, and described a goal of reaching $1.0 billion or more in assets in the near term through prudent, profitable growth.
- Management said the FHLB borrowing was a defensive liquidity measure following industry stress in March 2023 and also a hedge against further rate increases. It acknowledged short-term dilution to margin and return on assets, while saying the funds invested overnight at a positive spread benefited bottom-line earnings.
- Management plans to focus on growth, efficiency, cost control, process and product improvements, and consolidating delivery channels in markets with lower-performing or overlapping banking centers. The company paid a Q2 dividend of $0.165 per share and reported $0.4775 per share of first-half dividends, including a $0.15 special dividend in Q1. Future dividends are not guaranteed.
- Key stated risks include economic conditions in the company’s markets, regulatory policy changes, interest-rate fluctuations, loan demand, competition, borrowers’ ability to repay, and commercial real estate and collateral values. Rising rates may also pressure funding costs and the market value of securities. The filing says interim results are not necessarily indicative of full-year results.
- Legal proceedings were limited to ordinary routine litigation incidental to the business. Management concluded disclosure controls and procedures were effective as of June 30, 2023.
Important facts for investors to verify
- Deposit stability and pricing: confirm subsequent trends in demand, savings, and time deposits, uninsured balances, and funding costs.
- Liquidity and funding: assess use and cost of the $75 million FHLB advances, their collateral and maturities, and the company’s available borrowing capacity.
- Interest-rate exposure: monitor net interest margin, asset and deposit repricing, and the potential effect of securities losses or sales on earnings and capital.
- Credit quality and reserve adequacy: track commercial real estate exposures, nonperforming loans, charge-offs, and the CECL allowance as economic forecasts change.
- Capital and distributions: reconcile equity changes and regulatory capital measures, and assess dividend sustainability alongside the stated growth ambitions.
- Compare management’s reported average deposit growth commentary with the period-end balance-sheet decline; these are different measures and the filing text does not provide a complete reconciliation.