Condition and Results of Operations
The following discusses the consolidated financial condition of the Company as
of March 31, 2022, as compared to December 31, 2021, and the results of
consolidated operations for the three months ended March 31, 2022, compared to
the same period in 2021. This discussion should be read in conjunction with the
interim condensed consolidated financial statements and related footnotes
included herein.
Introduction
United Bancorp, Inc. (NASDAQ: UBCP) reported diluted earnings per share of $0.31
and net income of $1,751,000 for the three months ended March 31, 2022. This
compares to the record diluted earnings per share of $0.33 and net income of
$1,908,000 that were reported in the first quarter of the previous year.
We are pleased to report on the earnings performance of our Company for the
first quarter ended March 31, 2022. For the quarter, our Company achieved solid
net income and diluted earnings per share results of $1,751,000 and $0.31, which
compares favorably to the record levels of earnings that we achieved in the
first quarter of last year. As our economy is normalizing and, actually,
heating-up with inflation being at nearly forty-year highs--- we are starting to
have some opportunities that we have not had in the past couple of years to
change the mix of assets on our balance sheet; especially, as the most recently
ended quarter progressed. With the increasing tightening bias of the Federal
Open Market Committee (FOMC) with monetary policy that began developing in the
first quarter of this year, we have experienced a prime opportunity to invest,
once again, in both municipal and agency securities as both intermediate and
longer-term yields have risen to levels that we have not seen for a couple of
years. Having remained patient and not invested in any municipal or agency
securities since the first quarter of 2020, we are presently pleased with this
opportunity that we have. Even though our total assets remained relatively
unchanged year-over-year in the first quarter of this year compared to the same
period last year at $733.4 million, we have seen both our gross loans and
securities and other restricted stock increase. As of March 31, 2022, gross
loans increased by $12.3 million, or 2.7%, over the previous year to a level of
$462.3 million. Regarding securities and other restricted stock, we saw our
balances increase year-over-year by $12.8 million, or 8.5%, to a level of $163.2
million. Of significance is the quarter-ending balances for both gross loans and
securities and other restricted stock are at higher levels than their respective
quarterly averages by $8.8 million and $20.7 million. With the changing mix and
added horsepower to our balance sheet in this most recently ended quarter, we
are highly optimistic that we will see improvement in the level of interest
income that we will generate in the coming quarters and our bottom line as the
year progresses.
Even though we did see a decline in the level of interest income that we
generated in the first quarter, we experienced a year-over-year increase in our
level of net interest income of $198,000, an increase of 3.7%. We were able to
achieve this increase in our net interest income because we continued to have
success in the current year in lowering our overall interest expense. As of
March 31, 2022, our interest expense decreased by $289,000, or 37.3%, from the
previous year. Even though our ability to lower the interest expense of our
Company will diminish as the monetary policy of the FOMC tightens, we firmly
believe that the increase in the level of the interest income that we realize
will outpace the degree to which interest expense increases in the current year;
thus, producing a better bottom-line result for us. Interestingly, we reduced
our interest expense levels even though our total deposits increased by $4.4
million, to a level of $612.5 million. We achieved this by continuing to attract
lower-cost funding, consisting of demand and savings balances, and reducing our
higher-cost time balances. As of March 31, 2022, our lower-costing demand and
savings balances increased on a year-over-year basis by $29.0 million, or 5.4%,
to a level of $562.6 million. During this same timeframe, our higher-costing
time balances decreased by $24.5 million, or 33.0%, to a level of $49.9 million.
Even though our net interest margin declined in the first quarter of 2022 by
four basis points (4 bps) to a level of 3.45%, we expect this to increase in the
coming quarters with the aforementioned change in the mix of our balance sheet
with our lower-yielding overnight investments being replaced with
higher-yielding, intermediate and longer-term assets.
Our first quarter bottom line net income was impacted by the inflationary
environment in which we are presently operating. Even though we saw an increase
in the level of non-interest income that our Company generated, our non-interest
expense levels increased to a greater degree. Even with a decline in fee income
related to secondary market mortgage production, we were able to increase our
total noninterest income to a level of $987,000 for the quarter, which is a
year-over-year increase of $61,000 or 6.5%. Total noninterest expense increased
year-over-year by $661,000, or 14.9%. This increase in the current year is
linked to a higher level of employee related expenses tied to more optimum
staffing levels throughout our company, higher wage levels attributed to the
tight labor market and non-recurring incentive payouts. We firmly believe that
we have a high degree of positive operating leverage which will improve
efficiencies and our net-noninterest margin in the coming quarters.
We have successfully maintained credit-related strength and stability within our
loan portfolio over the course of the past two years during the economic
downturn and this trend continued for our Company into the new year. As of March
31, 2022, our total nonaccrual loans and loans past due 30 plus days were $4.2
million or 0.9% of gross loans. Even though this total has increased
year-over-year, it
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United Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
is down on a linked-quarter basis by $400,000. In general, the underlying trend
of solid credit quality within our overall loan portfolio has remained stable. A
majority of the total for nonaccrual loans, $3.8 million or 92%, is related to
one commercial lending relationship for which we allocated a portion of specific
reserves. Regarding net loans charged off in the first quarter of 2022, our
Company actually realized a net-recovery of $29,000. Considering our overall
sound credit quality and the improving economy, our Company had credit reserve
releases of $500,000 during the most recently ended quarter. Barring any
unforeseen events, we anticipate being able to release additional reserves in
the current year. As of the end of the first quarter in 2022, our Company
continues to be very well capitalized with equity to assets of 8.7% and total
shareholders' equity of $63.9 million. As with most financial institutions in
this time of rising rates from an exceedingly low-rate environment, our Company
did see a reduction in accumulated other comprehensive income. This was
primarily due to the decreased value of our investment portfolio which had an
impact on our capital-related metrics. Accordingly, we saw our book value
decline from $11.18 to $10.79, a decrease of 3.5% period-over-period.
As our country is getting back to a regular rhythm and our economy operating at
more normalized, pre-pandemic levels, we are starting to see promising
opportunities to more fully leverage our capital by changing the mix of our
balance sheet into longer-term, higher-yielding assets and, once again, grow our
Company. We are optimistic that this positive trend will continue, assuming that
the Federal Open Market Committee (FOMC) of the Federal Reserve is able to
achieve a soft-landing. Assuming that the FOMC is able to achieve this as they
aggressively combat the real threat of inflation to our economy and avoid a
hard-landing which could potentially lead to a recession--- we believe that
rising rates should benefit the bottom-line of our Company as the current year
progresses. This past quarter, we saw an increase in the level of net interest
income that our Company generated for the first time in several quarters. With
the change in the mix of our balance sheet into more rewarding investments, we
firmly believe that we will see our net interest margin also increase in a
positive fashion in the coming quarters. In addition, by investing in municipal
securities and having higher balances in this tax-exempt investment for the
first time since the beginning of the pandemic, we believe that our Company will
see greater tax efficiency going forward which should provide additional benefit
to our bottom-line. Our growth goal for our Company remains to increase our
total assets to a level of $1.0 billion or greater in the short to intermediate
term. We are optimistic that we will see better opportunities to achieve the
growth that we seek as our economy more fully recovers and gets back to more
normalized performance. We have seen some increase in our overhead expense level
as we set-the stage for growth. But, we firmly believe that we have positive
operating leverage that will help us achieve greater efficiencies and better
returns as we execute on our strategy for growth.
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. In these areas, our shareholders have been
nicely rewarded with a year-over-year increase in cash dividends paid of $0.06,
or 24.7%, (inclusive of a special cash dividend of $0.15 paid in the first
quarter), and a market value increase of $3.57, or 24.9%, to a level of $17.89
as of March 31, 2022. Even though these past couple of years have been very
challenging ones for both our Company and industry, we are optimistic that those
challenges are now behind us and we can, once again, focus on growing and
building a better, more profitable company. In the short-term, there is clearly
a threat that the FOMC could overcorrect by raising rates too quickly and
highly; thus, having a negative impact on our economy by pushing it into a
recessionary state. We are hopeful that this does not occur and get in the way
of our vision for growth. As previously stated, with the many challenges that we
have faced over the course of the past couple of years, our Company today is
more fundamentally sound with a focus on the potential of the future. We will
continue to build upon our solid foundation and have a longer-term vision. With
a keen focus on continual process improvement, product development and delivery,
we firmly believe the future for our Company is very bright.
As of March 31, 2022, United Bancorp, Inc. has total assets of $733.4 million
and total shareholders' equity of $63.9 million. Through its single bank
charter, Unified Bank, the Company currently has nineteen banking centers that
serve the Ohio Counties of Athens, Belmont, Carroll, Fairfield, Harrison,
Jefferson and Tuscarawas and Marshall County in West Virginia. United Bancorp,
Inc. trades on the NASDAQ Capital Market tier of the NASDAQ Stock Market under
the symbol UBCP, Cusip #909911109.
Forward-Looking Statements
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Bank's market areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Bank's market areas and competition, that could affect the Company's financial
performance and cause actual results to differ materially from historical
earnings and those presently anticipated or projected with respect to future
periods. These risks and uncertainties should be
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United Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
considered in evaluating forward looking statements, and undue reliance should
not be placed on such statements. Additional information concerning the Company
and its business, including other factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The Company is not aware of any trends, events or uncertainties that will have
or are reasonably likely to have a material effect on its financial condition,
results of operations, liquidity or capital resources except as discussed
herein. The Company is not aware of any current recommendation by regulatory
authorities that would have such effect if implemented except as discussed
herein.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date such statements were made or to reflect the
occurrence of anticipated or unanticipated events.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
Management makes certain judgments that affect the amounts reported in the
financial statements and footnotes. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements,
and as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments.
Based on its consideration of accounting policies that involve the most complex
and subjective decisions and assessments, management has identified its most
critical accounting policies to be those which are related to the allowance for
loan losses. The procedures for assessing the adequacy of the allowance for loan
losses reflect our evaluation of credit risk after careful consideration of all
information available to management. In developing this assessment, management
must rely on estimates and exercise subjective judgment regarding matters where
the ultimate outcome is unknown such as economic factors, developments affecting
companies in specific industries and issues with respect to single borrowers.
Depending on changes in circumstances, future assessments of credit risk may
yield materially different results, which may require an increase or a decrease
in the allowance for loan losses.
The allowance is regularly reviewed by management and the board to determine
whether the amount is considered adequate to absorb probable losses. This
evaluation includes specific loss estimates on certain individually reviewed
loans, statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based on the size, quality
and concentration characteristics of the various loan portfolios, adverse
situations that may affect a borrower's ability to repay and current economic
and industry conditions. Also considered as part of that judgment is a review of
the Bank's trend in delinquencies and loan losses, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable loan losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate based on
management's current judgment about the credit quality of the loan portfolio.
While the Company strives to reflect all known risk factors in its evaluation,
judgment errors may occur.
This discussion of the Company's critical accounting policies should be read in
conjunction with the Company's consolidated financial statements and the
accompanying notes presented elsewhere herein, as well as other relevant
portions of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Analysis of Financial Condition
Earning Assets - Loans
The Company's focus as a community bank is to meet the credit needs of the
markets it serves. At March 31, 2022, gross loans were $462.3 million, compared
to $454.4 million at December 31, 2021, an increase of $7.9 million after
offsetting repayments for the period. The overall increase in the loan portfolio
was comprised of a $5.4 million increase in commercial and commercial real
estate loans and a $2.6 million increase in real estate lending and a $140,000
decrease in installment loans since December 31, 2021.
Commercial and commercial real estate loans comprised 78.5% of total loans at
March 31, 2022, compared to 78.7% at December 31, 2021. Commercial and
commercial real estate loans have increased $5.4 million, or 1.5% since December
31, 2021. This segment of
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United Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
the loan portfolio includes originated loans in its market areas and purchased
participations in loans from other banks for out-of-area commercial and
commercial real estate loans to benefit from consistent economic growth outside
the Company's primary market area.
Installment loans represented 1.4% of total loans at March 31, 2022 and 1.5% at
December 31, 2021. Some of the installment loans carry somewhat more risk than
real estate lending; however, it also provides for higher yields. Installment
loans have decreased $140,000, or 2.1%, since December 31, 2021. The targeted
lending areas encompass four separate metropolitan areas, minimizing the risk to
changes in economic conditions in the communities housing the Company's banking
locations.
Residential real estate loans were 20.1% of total loans at March 31, 2022 and
19.8% at December 31, 2021, representing an increase of $2.6 million, or 2.9%
since December 31, 2021. At March 31, 2022, the Company did not hold any loans
for sale.
The allowance for loan losses totaled $3.2 million at March 31, 2022, which
represented 0.69% of total loans, and $3.7 million at December 31, 2021, or
0.81% of total loans. The allowance represents the amount which management and
the Board of Directors estimates is adequate to provide for probable losses
inherent in the loan portfolio. The allowance balance and the provision charged
to expense are reviewed by management and the Board of Directors monthly using a
risk evaluation model that considers borrowers' past due experience, economic
conditions and various other circumstances that are subject to change over time.
Management believes the current balance of the allowance for loan losses is
adequate to absorb probable incurred credit losses associated with the loan
portfolio. Net loan (recoveries) charge-offs (exclusive of overdrafts net
charge-offs of $31,000) for the three months ended March 31, 2022 were
approximately ($2,000) . Net loans charged off (exclusive of overdrafts net
charge-offs $9,000) was $91,000 for the three months ended March 31, 2021.
Earning Assets - Securities
The securities portfolio is comprised of U.S. Government agency-backed
securities, tax-exempt obligations of state and political subdivisions and
certain other investments. Securities available for sale at March 31, 2022
increased approximately $13.2 million from December 31, 2021 totals.
Sources of Funds - Deposits
The Company's primary source of funds is core deposits from retail and business
customers. These core deposits include all categories of interest-bearing and
noninterest-bearing deposits, excluding certificates of deposit greater than
$250,000. For the period ended March 31, 2022, total core deposits (interest and
non interest bearing accounts and savings) increased approximately $9.2 million,
or 1.5% from December 31, 2021 totals. The Company's savings accounts increased
$5.1 million or 3.7% from December 31, 2021 totals. The Company's
interest-bearing and non-interest bearing demand deposits increased $8.6 million
while certificates of deposit under $250,000 decreased by $4.5 million.
The Company has a strong deposit base from public agencies, including local
school districts, city and township municipalities, public works facilities and
others that may tend to be more seasonal in nature resulting from the receipt
and disbursement of state and federal grants. These entities have maintained
fairly static balances with the Company due to various funding and disbursement
timeframes.
Certificates of deposit greater than $250,000 are not considered part of core
deposits, and as such, are used to balance rate sensitivity as a tool of funds
management. At March 31, 2022, certificates of deposit greater than $250,000
decreased $1.9 million or 41.7%, from December 31, 2021 totals.
Sources of Funds - Securities Sold under Agreements to Repurchase and Other
Borrowings
Other interest-bearing liabilities include securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") advances. The majority of the
Company's repurchase agreements are with local school districts and city and
county governments. The Company's repurchase agreements increased approximately
$15,000 from December 31, 2021 totals.
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United Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Net Income
The reported diluted earnings per share was $0.31 for the quarter ended March
31, 2022 compared to $0.33 for the quarter ended March 31, 2021.
Net Interest Income
Net interest income increased $197,000 or 3.7% for the three months ended March
31, 2022 compared to the same period in 2021. With overall interest rates
increasing the Company's net interest should increase during 2022 from its
current level.
Provision for Loan Losses
The provision for loan losses was a credit to expense of $500,000 and $205,000
for the three months ended March 31, 2022, and March 31, 2021. With the overall
concerns with the COVID-19 pandemic decreasing in its local markets due to
vaccine availability, decreased hospitalizations, and employment metrics gaining
momentum, the Company released a portion of its reserve related to COVID-19
during the three months ended March 31, 2022 and 2021.
Noninterest Income
Noninterest income of the Company increased $61,000 year-over-year. This
increase was in part due to the increase in service charge income by $89,000.
Noninterest Expense
The Company saw its noninterest expense Increased by $661,000 or 14.9%
year-over-year. Salary and employee benefits increased $700,000 year over year.
This majority of this increase was due to the one time vesting of certain stock
awards.
Federal Income Taxes
The provision for federal income taxes was $136,000 for the three months ended
March 31, 2022, an increase of $49,000 compared to the same period in 2021. The
effective tax rate was approximately 7.24% and 4.4% for the three months ended
March 31, 2022 and 2021, respectively.
COVID-19: Update on Company Action and Ongoing Risks
The U.S. economy continued its recovery during the first quarter of 2022 despite
pressures from higher inflation and rising energy prices as well as concerns
over the Russia-Ukraine war and the continued economic uncertainty caused by the
COVID-19 pandemic. As previously discussed, the COVID-19 pandemic has resulted
in disruption to business and economic activity. While the Omicron variant took
COVID-19 infection rates to a new high in January 2022, COVID-19 cases declined
by the end of the first quarter. However, the duration of the pandemic,
including the emergence of new variants, and the ultimate repercussions continue
to remain unclear.
Capital Resources
Internal capital growth, through the retention of earnings, is the primary means
of maintaining capital adequacy for the Company. Stockholders' equity totaled
$63.9 million at March 31, 2022, compared to $71.7 million at December 31, 2021,
a $7.8 million decrease related to the accumulated other comprehensive loss
driven by higher interest rates relative to the Company's available-for-sale
securities portfolio. Total average stockholders' equity in relation to total
assets was 8.71% at March 31, 2022 and 9.90% at December 31, 2021. The Company's
Articles of Incorporation allows for a class of preferred shares with 2,000,000
authorized shares. This enables the Company, at the option of the Board of
Directors, to issue series of preferred shares in a manner calculated to take
advantage of financing techniques which may provide a lower effective cost of
capital to the Company. The amendment also provides greater flexibility to the
Board of Directors in structuring the terms of equity securities that may be
issued by the Company. Although this preferred stock is a financial tool, it has
not been utilized to date.
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United Bancorp, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company has offered for many years a Dividend Reinvestment Plan ("The Plan")
for shareholders under which the Company's common stock will be purchased by the
Plan for participants with automatically reinvested dividends. The Plan does not
represent a change in the Company's dividend policy or a guarantee of future
dividends.
The Company is subject to the regulatory requirements of The Federal Reserve
System as a bank holding company. The Bank is subject to regulations of the FDIC
and the State of Ohio, Division of Financial Institutions. The most important of
these various regulations address capital adequacy.
On January 1, 2015, the final rules of the Federal Reserve Board went into
effect implementing in the United States the Basel III regulatory capital
reforms from the Basel Committee on Banking Supervision and certain changes
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the final rule, minimum requirements increased for both the quality and
quantity of capital held by banking organizations. The rule requires a new
minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5
percent and a common equity tier 1 capital conservation buffer of 2.5 percent of
risk-weighted assets that will apply to all supervised financial institutions.
The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets
from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent
for all banking organizations.
The Company continues to be well-capitalized in accordance with Federal
regulatory capital requirements as the capital ratios below show:
Common equity tier 1 capital ratio 11.40 %
Tier 1 capital ratio 12.13 %
Total capital ratio 16.34 %
Leverage ratio 9.28 %
Liquidity
Management's objective in managing liquidity is maintaining the ability to
continue meeting the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with its liquid assets, the Company has additional sources of
liquidity available to ensure that adequate funds are available as needed. These
include, but are not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks, a
borrowing agreement with the Federal Home Loan Bank of Cincinnati and the
adjustment of interest rates to obtain depositors. Management feels that it has
the capital adequacy and profitability to meet the current and projected
liquidity needs of its customers.
Inflation
Substantially all of the Company's assets and liabilities relate to banking
activities and are monetary in nature. The consolidated financial statements and
related financial data are presented in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"). U.S. GAAP
currently requires the Company to measure the financial position and results of
operations in terms of historical dollars, with the exception of securities
available for sale, certain impaired loans and certain other real estate and
loans that may be measured at fair value. Changes in the value of money due to
rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial
condition and results of operations to a greater degree than changes in the rate
of inflation. It should be noted that interest rates and inflation do affect
each other, but do not always move in correlation with each other. The Company's
ability to match the interest sensitivity of its financial assets to the
interest sensitivity of its liabilities in its asset/liability management may
tend to minimize the effect of changes in interest rates on the Company's
performance.
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Management's Discussion and Analysis of Financial
Condition and Results of Operations© Edgar Online, source Glimpses
UNITED BANCORP, INC. 
