United Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results include United Bancorp and its wholly owned Unified Bank subsidiary. The company operates as a community bank in eastern and southeastern Ohio and West Virginia.
Financial performance and position
- Q3 earnings: Net income was $2.392 million, up 3.9% year over year; diluted EPS was $0.42, versus $0.40.
- Nine-month earnings: Net income was $6.560 million, up 3.3%; diluted EPS was $1.15, versus $1.10.
- Net interest income: Q3 was $6.566 million, up 3.1%; nine-month NII was $19.334 million, up 8.3%. Management reported a 3.63% net interest margin, 3 basis points above the prior year and 5 basis points higher sequentially.
- Interest and expenses: Nine-month interest income increased to $27.145 million from $19.739 million, while interest expense rose to $7.811 million from $1.892 million. Noninterest expense increased 6.2% for the nine-month period and 7.3% in Q3. Nine-month noninterest income was essentially unchanged.
- Credit costs: The company recorded a $154,000 Q3 provision reversal and a $300,000 reversal for the first nine months, compared with a $970,000 reversal in the prior-year nine-month period. The loan allowance was $4.112 million at quarter-end; management reported coverage of 0.88% of loans. The effective tax rate was 4.9% for the nine months, versus 9.2%.
- Assets and loans: Total assets were $814.3 million at September 30, versus $757.4 million at year-end 2022. Gross loans were $466.8 million, up $6.0 million from year-end. Commercial and commercial real estate represented 78.7% of loans.
- Deposits and borrowings: Deposits totaled $628.0 million, down $21.9 million from year-end, with a shift toward certificates of deposit. The company had $75.0 million of FHLB advances, $28.6 million in repurchase agreements, and $23.8 million of subordinated debentures. FHLB advances mature in 2026–2028 and carry fixed rates of 4.11%–4.39%.
- Liquidity and cash flow: Cash and cash equivalents were $70.9 million, up from $30.1 million at year-end. For the first nine months, operating cash flow was $6.7 million, investing cash outflow was $25.0 million, and financing cash inflow was $59.1 million. Management cited additional borrowing capacity and other liquidity sources.
- Capital and securities: Stockholders’ equity was $52.6 million, compared with $59.7 million at year-end; the reported decrease includes the $2.088 million after-tax opening retained-earnings adjustment from CECL adoption and accumulated other comprehensive losses. AFS securities had $245.4 million amortized cost and $224.7 million fair value, a $20.7 million pretax unrealized loss. Bank regulatory capital ratios were 14.18% CET1 and Tier 1, 14.93% total capital, and 9.47% leverage; the Bank was classified as well-capitalized.
Material changes versus comparable periods
- Higher loan and securities income and increased yields on liquid funds supported NII growth, while deposit and borrowing costs rose sharply.
- Q3 and nine-month net income and diluted EPS exceeded 2022 levels. The larger year-to-date credit-loss reversal in 2022 means the 2023 reversal was $670,000 smaller year over year.
- Unrealized securities losses increased: AOCI was a $17.0 million loss at September 30, versus a $9.3 million loss at December 31, 2022. Management attributed the losses primarily to higher market interest rates and said it did not expect to need to sell the securities before recovery.
- Deposits declined from year-end while repurchase funding and FHLB borrowing increased. The company reported uninsured deposits of 17.7% of total deposits.
- CECL adoption on January 1, 2023 reduced retained earnings by $2.088 million after tax and increased the opening loan allowance by $2.419 million.
Outlook, commentary, and risks
Management expressed optimism about earnings and growth, with a stated goal of reaching $1.0 billion or more in assets in the near term. It announced plans for a regional banking center in Wheeling, West Virginia, and described efforts to improve scale, efficiency, revenue generation, and cost control. No quantified earnings or margin guidance was provided. The company paid a Q3 dividend of $0.1675 per share; nine-month dividends were $0.6450 per share, including a $0.15 special dividend.
Management said the $75 million FHLB advance strengthened liquidity and locked in funding at an approximately 4.24% blended rate for about four years, while initially diluting some returns and margins. Risks discussed include changes in interest rates and monetary policy, inflation and borrower rate resets, local economic conditions, loan demand, competition, and regulatory changes. Commercial real estate repayment depends in part on property and business cash flows. The allowance estimate depends on economic forecasts and management judgment. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Reconcile the $4.112 million loan allowance in the financial statements with MD&A’s reference to an allowance of approximately $4.5 million; confirm the intended balance and coverage calculation.
- Assess deposit stability, deposit mix and pricing, uninsured deposit levels, and reliance on FHLB advances and repurchase funding.
- Review securities duration, unrealized losses, and liquidity implications if securities were sold before recovery.
- Track credit quality, including $216,000 of nonaccrual loans, commercial real estate exposures, and the assumptions supporting the CECL allowance.
- Evaluate the costs, timing, and expected returns of the planned Wheeling banking center and the stated asset-growth goal; the filing provides no quantified forecast.