United Bancorp, Inc. — Q2 2022 Form 10-Q
Business and period: Regional bank holding company operating Unified Bank, primarily in eastern and southeastern Ohio and nearby West Virginia. This unaudited quarterly report covers the three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 / June 30, 2022 | Comparison |
|---|---|---|
| Net income | $2.297 million; diluted EPS $0.40 | Quarterly income up 5.2% from $2.185 million; EPS was $0.38 |
| Six-month net income and diluted EPS | $4.048 million; $0.70 | Down from $4.093 million and $0.71 in first-half 2021 |
| Net interest income | $5.968 million for Q2; $11.478 million for six months | Q2 up 7.4%; first half up 5.6% from $10.870 million |
| Credit provision | Credit of $0.485 million in Q2; $0.985 million for six months | Reserve releases compared with credits of $0.250 million and $0.455 million in the comparable 2021 periods |
| Noninterest income and expense | Q2: $0.988 million and $4.849 million; six months: $1.975 million and $9.959 million | Q2 income down 13.5% and expense up 6.6%; first-half income down 4.5% and expense up 10.7% |
| Net interest margin | 3.54% at quarter-end | Up 9 basis points from 3.45% in the prior quarter |
| Assets, loans, and securities | Total assets $719.1 million; gross loans $467.4 million; available-for-sale securities $190.2 million | Loans increased $13.0 million from year-end; securities increased $43.9 million. Assets were $724.5 million at year-end |
| Deposits and funding | Deposits $607.3 million; repurchase agreements $24.5 million; subordinated debentures $23.7 million | Deposits up $2.2 million from year-end; repurchase agreements up $8.8 million |
| Equity and capital | Equity $58.3 million; equity/assets 8.11% | Equity was $71.7 million at year-end, with the decline driven mainly by securities-related accumulated other comprehensive loss. Regulatory ratios: CET1 10.31%, Tier 1 11.03%, total capital 15.12%, leverage 8.49% |
| Cash flows, six months | Operating $2.4 million; investing use $76.0 million; financing $7.5 million; ending cash and equivalents $16.8 million | Cash and equivalents decreased $66.2 million, principally reflecting $67.4 million of securities purchases |
Material changes and management commentary
- Management shifted assets from cash toward longer-duration, higher-yielding municipal and agency securities as market rates rose. It attributed higher quarterly interest income and net interest income to securities growth and the changed asset mix, alongside lower funding costs.
- Demand and savings deposits increased year over year by $27.6 million, while time deposits fell by $24.5 million. Management said the lower-cost deposit mix helped reduce interest expense.
- First-half operating expenses rose, including higher staffing and wage costs and a nonrecurring first-quarter incentive payout. Management also cited one-time vesting of certain stock awards as the majority of the year-over-year increase in salary and benefits. Q2 expenses included higher other expenses.
- The company reported a $14.8 million first-half after-tax other comprehensive loss, primarily reflecting falling fair values of available-for-sale securities as rates rose. At June 30, 77% of that portfolio was in an unrealized loss position, with $8.3 million of gross unrealized losses. Management considered the declines temporary and said it had the ability to hold the securities to maturity.
- Credit indicators included $4.0 million of nonaccrual loans, or 0.86% of gross loans; approximately $3.8 million related to one commercial real estate relationship. The company reported first-half net recoveries of about $19,000 and had $2.7 million in allowance for loan losses, down from $3.7 million at year-end.
Outlook, risks, and unusual items
- Management expected net interest income and margin to continue improving during 2022, while acknowledging that expense reductions and an Amesville branch closure and consolidation into Glouster, planned for early Q3, were expected to support lower costs. These are expectations, not guarantees.
- The company’s short-to-intermediate-term growth goal is total assets of at least $1.0 billion. Management said growth and higher rates could benefit results if the economy avoids recession, and cited positive operating leverage and potential tax efficiency from municipal securities.
- Risks include rapid Federal Reserve rate increases, inflation, recession, interest-rate effects on securities values and funding costs, credit concentration in the identified commercial real estate relationship, and uncertainty related to COVID-19 and possible new variants. The filing says actual results may differ materially from forward-looking statements.
- First-half dividends were $0.4575 per share, including a $0.15 special dividend paid in Q1. The company repurchased $0.8 million of common stock during the first half.
- The company was evaluating adoption of the expected-credit-loss standard, effective for it after December 15, 2022, and said the impact could not yet be reasonably quantified; it anticipated changes to its credit-loss estimate and processes.
- Management reported effective disclosure controls as of June 30, 2022, and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Track the large unrealized securities losses, their effect on tangible/book value and capital, and whether securities need to be sold before recovery.
- Monitor the status, collateral, and reserve coverage of the approximately $3.8 million nonaccrual commercial real estate exposure.
- Assess whether loan growth, deposit mix, margin expansion, and lower-cost funding persist as rates and competition change.
- Check whether management achieves anticipated expense savings after the branch consolidation and how nonrecurring compensation costs affect comparisons.
- Verify credit-loss standard adoption effects and compare future reserve releases with underlying portfolio credit performance.
- Reconcile the narrative and financial statements where values differ: the MD&A gives Q2 federal income tax expense as $0.293 million, while the income statement reports $0.295 million; use the filed statement pending clarification.