United Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. United Bancorp is an Ohio-based community banking holding company operating Unified Bank, primarily in eastern and southeastern Ohio and nearby West Virginia. Financial figures below are in millions of dollars unless stated otherwise; interim statements are unaudited.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net interest income | $6.369 | Up 13.6% from $5.605 in Q3 2021 |
| Net income | $2.303; diluted EPS $0.40 | Down from $2.902 and $0.50 in Q3 2021 |
| Net interest margin | 3.60% | Up 6 basis points from 3.54% in the prior quarter |
| Total assets | $760.9 | Up $36.4 from December 31, 2021; management reported 4.2% year-over-year growth |
| Gross loans | $468.4 | Up $14.0 from year-end 2021 |
| Available-for-sale securities | $211.8 fair value | Up $65.5 from year-end 2021; amortized cost was $228.0 |
| Deposits | $650.1 | Up $45.0 from year-end 2021 |
| Borrowings and subordinated debt | $28.1 repurchase agreements; $23.7 subordinated debentures | Repurchase agreements increased $12.4 from year-end 2021 |
| Stockholders’ equity | $53.1; 6.99% of assets | Down $18.6 from year-end 2021 |
- Nine-month results: Net income was $6.351 and diluted EPS was $1.11, versus $6.995 and $1.21 in 2021. Net interest income was $17.847 versus $16.475 in the statements; the MD&A also says it decreased 8.3%, which conflicts with the statement amounts showing an increase.
- Revenue and expenses: Q3 interest and dividend income rose 17.1% to $7.297, while interest expense increased $0.299 to $0.928. Q3 noninterest income fell to $1.043 from $2.287, chiefly because the prior-year quarter included a $1.250 securities-sale gain. Nine-month noninterest expense increased 6.4% to $14.838, largely from personnel costs.
- Cash flow: For the nine months, operating activities provided $5.362; investing activities used $106.060, principally reflecting $98.634 of securities purchases; financing activities provided $52.996. Cash and cash equivalents declined $47.702 to $35.297.
- Credit quality: The allowance for loan losses was $2.619, or 0.56% of gross loans, down from $3.673, or 0.81%, at year-end. Nonaccrual loans were $4.018, or 0.86% of gross loans; management said about $3.8 million related to one commercial real estate borrower. The nine-month provision was a $0.970 credit, compared with a $0.855 credit in 2021; Q3 had a $0.015 provision.
- Capital and securities: Accumulated other comprehensive loss was $14.480 at quarter-end, driven primarily by unrealized losses on available-for-sale securities as rates rose. Management considers the declines temporary and says it has the ability and intent to hold the bonds to maturity. Regulatory capital ratios were 13.57% common equity Tier 1, 14.38% Tier 1, 19.24% total capital, and 10.09% leverage.
Material changes and management outlook
- Management attributed the year-over-year earnings decline to the absence of the prior-year $1.250 securities gain and smaller credit-reserve releases, partly offset by improved interest income as the balance sheet shifted from cash into loans and higher-yielding securities.
- Management expects interest income to continue improving and believes it may outpace rising funding costs in coming quarters. It cited early-quarter term deposits secured at comparatively favorable rates and expects tax-exempt municipal securities to improve tax efficiency. These are expectations, not formal earnings guidance.
- The stated short- to intermediate-term growth goal is total assets of $1.0 billion or more. Management cautioned that rapid rate increases, inflation, possible recession, higher operating costs, and the cost of growth may impede that goal.
- Risks discussed include monetary-policy and interest-rate changes, inflation and unemployment, economic and market volatility, credit quality, COVID-19 uncertainty, competition, regulation, and possible recession. Commercial real estate is a significant portion of the loan book, and the disclosed nonaccrual concentration warrants attention.
- The company reported no material litigation beyond routine matters, no material change in internal control over financial reporting, and effective disclosure controls. It is preparing for the expected-credit-loss accounting standard (CECL), effective for the company after December 15, 2022; management anticipates possible allowance changes but could not quantify the impact.
Key facts for investors to verify
- Reconcile the MD&A claim that nine-month net interest income decreased 8.3% with the income statement, which shows $17.847 versus $16.475, an increase.
- Track deposit pricing and mix, net interest margin, and whether asset yields continue to outpace funding costs as rates change.
- Monitor the $3.8 million commercial real estate nonaccrual relationship, total nonaccrual loans, allowance coverage, and any subsequent charge-offs or reserve changes.
- Assess the securities portfolio’s unrealized losses, potential liquidity or capital effects if securities must be sold, and the difference between reported GAAP equity and regulatory capital.
- Evaluate cash and liquidity trends alongside the large securities investment outflows, deposit growth, and increased repurchase-agreement funding.
- Confirm the expected CECL adoption date and its eventual impact on the allowance and reported results.