10-Q: United Bancorp, Inc. Reports Solid Earnings Despite Net Interest Margin Compression in Q2 2024

United Bancorp, Inc. reported a decrease in net income and diluted earnings per share for the second quarter of 2024 compared to the same period last year, primarily due to net interest margin compression.

Summary

• United Bancorp, Inc. (UBCP) announced net income of $1.739 million and diluted earnings per share of $0.30 for the three months ended June 30, 2024.
• For the first six months of 2024, UBCP reported net income of $3.732 million and diluted earnings per share of $0.64.
• These results represent a decrease compared to the same periods in 2023, with net income down by $540,000 for the quarter and $436,000 for the first six months.
• The company experienced a decline in net interest income due to increased interest expenses, despite a rise in total interest income.
• Total interest income increased by $2.0 million, or 11.5%, while total interest expense increased by $2.5 million, or 52.0%, year-over-year through mid-year.
• Net interest income decreased by $451,000, or 3.5%, to $12.3 million, and the net interest margin declined by 4 basis points to 3.54%.
• Total assets decreased by $8.5 million, or 1.0%, to $821.8 million, due to a runoff of retail deposit funding and cash balances.
• Gross loans increased by $21.6 million, or 4.7%, to $484.5 million, and investment securities increased by $4.1 million, or 1.7%, to $244.2 million.
• Total deposits decreased by $20.4 million, or 3.2%, with a shift from lower-cost demand and savings balances to higher-cost time balances.
• Nonaccrual loans and loans past due 30+ days were $1.15 million, or 0.24% of gross loans, up from last year but down on a linked-quarter basis.
• The company had a provision for credit loss expense of $104,000 for the quarter and year-to-date, compared to a negative provision in the previous year.
• The total allowance for credit losses to total loans was 0.82%, and the total allowance for credit losses to nonaccrual loans was 1102%.
• Tangible shareholders equity increased by $2.3 million, or 4.1%, to $59.7 million, and tangible book value per share increased by $0.24, or 2.5%, to $10.03.
• The company paid a total dividend of $0.4975 in the current year, including a special dividend of $0.15, resulting in a total dividend yield of 6.8%.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the company acknowledges challenges and reports decreased earnings, it also highlights positive trends, strong capital levels, and future growth initiatives. The management's tone is optimistic despite the current headwinds.

Positives

• The company experienced a linked-quarter improvement in its net interest margin of 8 basis points, increasing from 3.46% in the first quarter of 2024 to 3.54% in the second quarter.
• Gross loans increased by $21.6 million, or 4.7%, to $484.5 million.
• Investment securities balances increased by $4.1 million, or 1.7%, year-over-year to a level of $244.2 million.
• The company's nonperforming assets to total assets was a very respectable 0.46%, a 1 basis point decline from last year and a 5 basis point decline from the first quarter of 2024.
• The company remains very well capitalized by industry standards seeing its tangible shareholders equity increase year-over-year by $2.3 million, or 4.1%, to a level of $59.7 million.
• The company's tangible book value per share increased by $0.24, or 2.5%, to a level of $10.03.
• The company paid a total dividend of $0.4975 in the current year, producing a near-industry leading total dividend yield of 6.8%.

Negatives

• Net income and diluted earnings per share decreased compared to the same periods in 2023.
• The company experienced a decline in net interest income due to increased interest expenses.
• Total assets decreased by $8.5 million, or 1.0%, to $821.8 million.
• Total deposits decreased by $20.4 million, or 3.2%, with a shift towards higher-cost time deposits.
• The company had a provision for credit loss expense of $104,000 for the quarter and year-to-date, compared to a negative provision in the previous year.

Risks

• The company is facing challenges due to the higher for longer interest rate environment, which is putting pressure on net interest margins.
• Economic activity has been relatively stagnant, impacting the company's ability to grow its balance sheet.
• Continued heightened inflation levels and related increases in interest rates may impact some borrowers.
• The company may be required to make additional credit loss provisions as warranted by the extremely fluid economic condition.
• Some fee generating services and lines of business continue to be under attack by both regulatory and political authorities, which has ultimately put pressure on the level of noninterest income.

Future Outlook

The company is optimistic about future growth and earnings potential, with a focus on enhancing and expanding existing lines of business and growing new lines of business. They aim to grow to an asset threshold of $1.0 billion or greater in the near term.

Management Comments

• We are happy to report on the solid earnings and, overall, stable performance of United Bancorp, Inc. (UBCP) for the second quarter ended June 30, 2024 and year to date.
• We firmly believe that these challenges will be short-lived and will be overcome as we execute on some of our strategic objectives and get a return on current capital investments over the course of the next twelve to twenty-four months, which should lead to higher levels of growth and improved performance in future periods.
• Ultimately, we are happy with this present trend, which has led to a linked-quarter improvement in our Companys net interest margin of 8 basis points, increasing from 3.46% in the first quarter of 2024 to 3.54% in the second quarter.
• Our primary focus is protecting the investment of our shareholders in our Company and rewarding them in a balanced fashion by growing their value and paying an attractive cash dividend.
• We firmly believe that with the challenges that our industry has experienced over the course of the past few years, our Company has evolved into a more fundamentally sound organization with a focus on evolving and growing in order to achieve greater efficiencies and scales and generate higher levels of revenue--while prudently managing expenses and controlling overall costs.

Industry Context

The report highlights the challenges faced by many financial institutions due to the current higher for longer interest rate environment, including net interest margin compression and limited growth. The company's focus on new revenue streams and cost control reflects a broader trend in the industry to adapt to these conditions.

Comparison to Industry Standards

• The company's net interest margin of 3.54% is considered favorable compared to its peer group and the industry at present.
• The company's total uninsured deposits as of June 30, 2024 totaled 17.2% of total deposits, which is very low compared to industry standards.
• The company's nonperforming assets to total assets was a very respectable 0.46%, a 1 basis point decline from last year and a 5 basis point decline from the first quarter of 2024.
• The company's market price to tangible book value was 125%, which compares favorably to its peer group.
• The company's total dividend yield of 6.8% is considered near-industry leading.

Stakeholder Impact

• Shareholders are being rewarded with a high dividend yield, but may be concerned about the decrease in earnings.
• Employees may be impacted by the company's focus on cost control and efficiency.
• Customers may benefit from the company's new initiatives and expanded services.
• Creditors may be reassured by the company's strong capital levels.

Next Steps

• The company is focused on enhancing its mortgage origination function with the development of Unified Mortgage.
• The company is committed to developing its Treasury Management function.
• The company is developing a new banking center in Wheeling, West Virginia, expected to be completed by mid-2025.

Key Dates

Keywords

net interest margin, earnings, loans, deposits, interest rates, credit losses, dividends, financial performance, banking, capital