8-K: United Bancorp, Inc. Reports Solid First Quarter Earnings Despite Interest Rate Pressures

United Bancorp, Inc. announced a 5.6% increase in net income and a 6.1% increase in diluted earnings per share for the first quarter of 2024, despite facing challenges from a higher interest rate environment.

Summary

• United Bancorp, Inc. reported a net income of $1.993 million and diluted earnings per share of $0.35 for the first quarter of 2024.
• This represents an increase of $105,000 or 5.6% in net income and $0.02 or 6.1% in diluted earnings per share compared to the same period last year.
• The company experienced a decline in net interest income by $308,000 or 4.8% due to increased interest expenses.
• Total interest income increased by $1.4 million or 17.2%, but total interest expense rose by $1.7 million or 96.4%.
• The net interest margin decreased by 29 basis points to 3.46%.
• Total assets decreased by $13.5 million or 1.6% to $834.0 million, while gross loans increased by $16.6 million or 3.6% to $480.3 million.
• Investment securities balances increased by $17.8 million or 7.5% to $255.8 million.
• The company's total deposits decreased by $27.6 million year-over-year.
• Lower cost demand and savings balances decreased by $66.8 million or 12.6%, while higher cost time balances increased by $39.2 million or 31.6%.
• The company realized a net gain on the sale of loans of $77,000 due to the new Unified Mortgage division.
• A securities portfolio rebalancing initiative resulted in a loss on sale of $194,000 but is expected to be accretive to earnings.
• The company received an Employee Retention Credit (ERC) which helped reduce noninterest expenses by $600,000.
• Shareholders' equity improved to $63.2 million, an increase of $4.2 million or 7.1%, and book value improved to $10.62, an increase of $0.56 or 5.6%.
• The company's equity to assets ratio is 7.6%, up from 7.0% last year.
• Nonaccrual loans and loans past due 30 plus days were $1.43 million, or 0.30% of gross loans.
• Nonperforming assets to total assets was 0.51%, a seven-basis point increase over the previous year.
• Net loans charged off were $28,000, or 0.01% of average loans.
• The company did not have a provision for credit losses in the quarter.
• The company paid a total cash dividend of $0.3225 per share, including a special dividend of $0.15, representing a 3.2% increase over the previous year.
• The total dividend yield is 5.81% based on the first quarter cash dividend on a forward basis, plus the special dividend and the quarter-end fair market value of $14.47.

Sentiment

Score: 7

Explanation: The sentiment is positive overall, with the company reporting increased earnings and dividends, but there are concerns about the impact of the higher interest rate environment on net interest margins. The company is taking steps to mitigate these challenges and is optimistic about future growth.

Positives

• Net income and diluted earnings per share increased compared to the first quarter of the previous year.
• The Unified Mortgage division is showing positive results with a net gain on the sale of loans.
• The securities portfolio rebalancing is expected to improve earnings.
• The Employee Retention Credit helped reduce noninterest expenses.
• Shareholders' equity and book value have increased.
• The company maintains a well-capitalized position with a solid liquidity position and low level of uninsured deposits.
• The company has maintained credit-related strength and stability within its loan portfolio.
• The company paid a higher cash dividend compared to the first quarter of the previous year.
• The company's market price to book value was 136%, which compares favorably to current industry standards.

Negatives

• Net interest income declined due to increased interest expenses.
• The net interest margin decreased by 29 basis points.
• Total assets decreased by 1.6% due to a runoff in retail deposit funding and cash balances.
• Total deposits decreased by $27.6 million year-over-year.
• Lower cost demand and savings balances decreased while higher cost time balances increased.
• The company experienced a loss on sale of securities due to the portfolio rebalancing initiative.
• Nonaccrual loans and loans past due 30 plus days increased.
• Nonperforming assets to total assets increased by seven basis points.

Risks

• The higher for longer interest rate environment is putting pressure on net interest margins and bottom-line performances.
• The company is experiencing a decline in net interest income due to increased interest expenses.
• The company is facing challenges in generating noninterest income due to regulatory and political pressures.
• The company's total assets have decreased due to a runoff in retail deposit funding and cash balances.
• The company's total deposits have decreased year-over-year.
• There is a risk that the new initiatives, such as the Unified Mortgage division and the new banking center, may lead to additional expenses.
• There is a risk that the company's borrowers may be impacted by higher operating costs and rate resets on their loans due to continued heightened inflation levels and related increases in interest rates.

Future Outlook

The company is focused on growing and leveraging its foundation, enhancing its mortgage origination function, developing its Treasury Management function, and expanding its presence with a new banking center in Wheeling, West Virginia. The company aims to grow its total assets to $1.0 billion or greater in the near term.

Management Comments

• Randall M. Greenwood, Senior Vice President, CFO and Treasurer, stated that the company achieved solid net income and diluted earnings per share results for the first quarter.
• Greenwood noted that the higher for longer interest rate environment is creating challenges for the industry.
• Greenwood mentioned that the company was able to achieve a higher level of earnings due to strategies that started to gain traction.
• Scott A. Everson, President and CEO, stated that the company is feeling the pressure of operating in a higher interest rate environment.
• Everson mentioned that the company is focused on controlling its net noninterest margin and finding new alternatives to generating additional levels of both noninterest income and other sources of revenue.
• Everson stated that the company is focused on protecting the investment of its shareholders and rewarding them in a balanced fashion.
• Everson concluded that the company is optimistic about the future growth and earnings potential.

Industry Context

The report highlights the challenges faced by the banking industry due to the current higher interest rate environment, which is impacting net interest margins and profitability. The company's strategies to enhance revenue and control expenses are in line with industry trends to adapt to these challenges. The company's focus on growing its asset base to $1 billion is a common goal for many regional banks.

Comparison to Industry Standards

• The company's net interest margin of 3.46% is considered favorable compared to its peer group and industry at present.
• The company's total uninsured deposits of 18.2% is very low compared to industry standards.
• The company's market price to book value of 136% compares favorably to current industry standards.
• The company's total dividend yield of 5.81% is near-industry leading.
• The company's nonperforming assets to total assets of 0.51% is considered respectable.
• The company's equity to assets ratio of 7.6% is up from 7.0% from the same period last year, indicating a well-capitalized position.

Stakeholder Impact

• Shareholders will benefit from increased earnings and dividends.
• Employees may benefit from the company's growth initiatives.
• Customers may benefit from new products and services, such as the Unified Mortgage division and the new banking center.
• The company's solid financial position and low level of uninsured deposits provide stability for creditors.

Next Steps

• The company will continue to focus on growing and leveraging its foundation.
• The company will continue to enhance its mortgage origination function with the development of Unified Mortgage.
• The company will continue to develop its Treasury Management function.
• The company will construct a new banking center in Wheeling, West Virginia.
• The company aims to grow its total assets to $1.0 billion or greater in the near term.

Key Dates

Keywords

earnings, net income, interest rates, net interest margin, loans, deposits, mortgage, securities, dividends, banking