10-Q: United Bancorp, Inc. Reports Solid First Quarter Earnings Despite Margin Compression

United Bancorp, Inc. reported increased net income and diluted earnings per share for the first quarter of 2024, despite a decrease in net interest income due to rising interest expenses.

Summary

• United Bancorp, Inc. (UBCP) reported a net income of $1.993 million and diluted earnings per share of $0.35 for the quarter ended March 31, 2024, compared to $1.888 million and $0.33, respectively, for the same period last year.
• The company's net interest income decreased by $308,000, or 4.8%, to $6.1 million due to a significant increase in interest expenses, which rose by $1.7 million, or 96.4%, despite a $1.4 million, or 17.2%, increase in total interest income.
• The net interest margin declined 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, and investment securities increased by $17.8 million, or 7.5%, to $255.8 million.
• Lower-cost demand and savings deposits decreased by $66.8 million, or 12.6%, while higher-cost time deposits increased by $39.2 million, or 31.6%.
• The company realized a net gain on the sale of loans of $77,000 and a loss on the sale of available-for-sale securities of $194,000.
• Noninterest expense decreased by $600,000 due to an Employee Retention Credit (ERC) and other factors.
• The accumulated other comprehensive loss (AOCI) remained relatively stable at $7.8 million, and shareholders' equity increased to $63.2 million, with a book value of $10.62 per share.
• Nonaccrual loans and loans past due 30+ days totaled $1.43 million, or 0.30% of gross loans, and nonperforming assets to total assets was 0.51%.
• Net loans charged off were -$28,000, or -0.01% of average loans, and the allowance for credit losses to total loans was 0.81%.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with solid earnings and strategic initiatives, but acknowledges challenges from the current interest rate environment. The management's tone is optimistic, but the financial results show some pressure on margins.

Positives

• The company achieved higher net income and diluted earnings per share compared to the same quarter last year.
• Total interest income increased significantly year-over-year.
• The company successfully rebalanced its securities portfolio to improve yield.
• Noninterest expenses decreased due to an Employee Retention Credit.
• Shareholders' equity and book value per share increased.
• The company maintains a strong capital position and low level of uninsured deposits.
• The company's nonperforming assets to total assets was a very respectable 0.51%.
• The company has a low level of uninsured deposits at 18.2%.

Negatives

• Net interest income decreased due to a significant increase in interest expenses.
• The net interest margin declined by 29 basis points.
• Total assets decreased due to a runoff in retail deposit funding and cash balances.
• Lower-cost demand and savings deposits decreased while higher-cost time deposits increased.
• The company experienced a loss on the sale of available-for-sale securities.
• Nonaccrual loans and loans past due 30+ days increased by $901,000 year-over-year.

Risks

• The higher-for-longer interest rate environment is putting pressure on net interest margins.
• The company is experiencing a shift in deposit mix from lower-cost to higher-cost funding.
• Increased interest rates may impact borrowers with higher operating costs and rate resets.
• The company may be required to make additional credit loss provisions due to the fluid economic conditions.
• Fee generating services and lines of business continue to be under attack by both regulatory and political authorities.

Future Outlook

The company is focused on controlling its net noninterest margin, 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

• We are pleased to report on the earnings performance of United Bancorp, Inc. (UBCP) for the first quarter ended March 31, 2024.
• Regardless of this challenge, we are very happy with the present performance of our Company.
• We firmly believe that the revenue production from this enhanced new focus on mortgage production will continue to increase in future quarters as we further scale it out.
• Most importantly, this securities portfolio rebalance strategy will be accretive to our bottom-line earnings in the current year.
• We are very happy that we were able to forgo, once again, a credit provision in the current year due to our Companys overall solid credit quality, while maintaining a total allowance for credit losses to total loans of 0.81% and having a total allowance for credit losses to nonperforming loans of 438%.
• With a present net interest margin of 3.46% as of March 31, 2024, we believe that this performance metric compares favorably to that of our peer group and industry at present.
• 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.
• We are truly excited about our Companys direction and the potential that it brings.

Industry Context

The report highlights the challenges faced by the banking industry due to the higher-for-longer interest rate environment, which is compressing net interest margins. The company's strategies to enhance fee income 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 community banks seeking to achieve economies of scale.

Comparison to Industry Standards

• The company's net interest margin of 3.46% is considered favorable compared to its peer group and the industry at present.
• The company's total dividend yield of 5.81% is near-industry leading.
• The company's market price to book value of 136% compares favorably to current industry standards.
• The company's nonperforming assets to total assets of 0.51% is considered respectable.
• The company's uninsured deposits of 18.2% is very low compared to industry standards.

Stakeholder Impact

• Shareholders are positively impacted by increased earnings, book value, and dividends.
• Employees may benefit from the company's growth and strategic initiatives.
• Customers may benefit from enhanced services and new banking locations.
• The company's strong capital 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 scale out its Unified Mortgage division.
• The company will continue to develop its Treasury Management function.
• The company will begin construction of its new banking center in Wheeling, West Virginia.
• The company will continue to monitor the overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Key Dates

Keywords

net interest income, interest expense, net interest margin, loan portfolio, deposit funding, securities portfolio, noninterest income, noninterest expense, credit losses, earnings per share, shareholders equity, mortgage origination, treasury management, capital adequacy, liquidity