United Bancorp, Inc. (NASDAQ:UBCP) reported diluted earnings per share of $0.35 and net income of $1,993,000 for the three months ended March 31, 2023. This compares to diluted earnings per share of $0.33 and net income of $1,888,000 reported in the first quarter of the previous year.

For the full year 2023, the company reported annual net income of $8,950,000 and annual revenue of $40,903,000. The company also generated annual operating cash flow of $9,434,000 and annual free cash flow of $8,353,000.

As the current year started, the interest rate forecast by most economists and the financial markets indicated that seven rate cuts could be expected this year, which, overall, was projected to be favorable for the industry. However, as the first quarter progressed and ended, it became apparent that interest rates will be higher for longer, with potentially only two rate cuts this year now forecast to occur much later in the year than originally anticipated. This higher for longer posturing of the Federal Open Market Committee of the Federal Reserve (FOMC) is creating different challenges for the industry and putting pressure on the net interest margins and bottom-line performances of most financial institutions.

Unified Bank is not immune from these same challenges and, even though its performance improved in the first quarter of 2023 over the previous year, it is currently feeling this aforementioned pressure. Regardless of this challenge, the company's present performance is positive. In addition, the company continues to focus on growing and leveraging its foundation, which should be of benefit and lead to higher performance in future periods.

At March 31, 2023, United Bancorp, Inc. (UBCP) did achieve a higher level of bottom-line earnings on a year-over-year basis. But, like most other financial institutions in the current "higher for longer" interest rate environment, the company did also experience a decline in the level of net interest income that it achieved. Even though the total interest income realized on a year-over-year basis was higher by $1.4 million, or 17.2%, the total interest expense increased by $1.7 million, or 96.4%, during the same time period. Accordingly, the level of net interest income achieved declined by ($308,000), or (4.8%), to a level of $6.1 million. In addition, UBCP's net interest margin declined by twenty-nine basis points (-29 bps) over the previous year, to a level of 3.46%, as of the most recently ended quarter.

Even though the company's total assets declined from last year by $13.5 million, or 1.6%, to a level of $834.0 million due to a runoff in retail deposit funding and cash balances, it was able to generate a higher level of total interest income due to loans outstanding continuing to reprice in a higher interest rate environment along with gross loans increasing $16.6 million, or 3.6%, to a level of $480.3 million as of this year's quarter-end. In addition, investment securities balances increased by $17.8 million, or 7.5%, year-over-year to a level of $255.8 million. But, as mentioned, this increase in total interest income was more than offset by the increase in total interest expense experienced by UBCP.

The company's total interest expense increased even though total deposits decreased by $27.6 million year-over-year. The increase in the company's total interest expense can be attributed to both the change in the mix of retail depository funding from lower cost demand and savings balances to higher cost term funding, along with having a previously disclosed $75.0 million Federal Home Loan Bank (FHLB) Advance which was originated in mid-March of 2023 for the entirety of this year's first quarter. Relating to the change in the mix of retail funding, 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%. Of importance, the company does not have any brokered deposits and total uninsured deposits as of March 31, 2023 totaled 18.2%, which is very low compared to industry standards.

Even with a compressing net interest margin and declining net interest income, United Bancorp, Inc. (UBCP) was able to achieve a higher level of earnings year-over-year as of March 31, 2023 due to a few strategies that started to gain traction in or were successfully implemented and carried out during the first quarter. As previously mentioned, the company started Unified Mortgage in the fourth quarter of last year, a mortgage products and services division with a more dedicated focus on mortgage production for the company. Some positive results are starting to show as a result of this effort, with a net realized gain on the sale of loans of $77,000 during the quarter. It is believed that the revenue production from this enhanced new focus on mortgage production will continue to increase in future quarters as it is further scaled out.

In addition, the company executed on a securities portfolio rebalancing initiative early in the first quarter of the current year by selling a portion of its lower-yielding investment securities and reinvesting those balances into higher yielding investment securities, which improved the company's overall portfolio yield and better positioned the portfolio for the projected downward change in rates. Specifically, $25.0 million in municipal and agency securities were sold and a like amount was reinvested in new municipal security offerings that yielded an additional 1.23% on a taxable equivalent basis. Although this strategy did lead to a loss on sale of ($194,000) which negatively impacted the company's noninterest income during the most recently ended quarter it did add to the interest income stream and has a break-even of approximately eight months. Most importantly, this securities portfolio rebalance strategy will be accretive to bottom-line earnings in the current year. In addition, if interest rates do drop as anticipated, it will give the company valuable call protection in a falling rate environment.

Relating to the noninterest expense of UBCP, even though Unified Bank has taken on some additional expenses relating to revenue enhancement and growth initiatives such as the recently implemented Unified Mortgage focus and the announcement of the new Wheeling Banking Center (which is soon to begin construction), the company was able to successfully apply and be approved for an Employee Retention Credit (ERC) in the first quarter. This tax credit helped offset the expenses associated with these new initiatives along with other expenses including the one-time expenses attributed to the securities portfolio rebalancing strategy and benefits payouts recognized during the first quarter and led to the year-over-year reduction in UBCP's noninterest expense of ($600,000). In the quarter-ended March 31, 2023, the net result of the realization of these aforementioned nonrecurring expense items and the tax credit led to an increase in the company's net income of approximately $271,000 and diluted earnings per share of $0.05.

Even with the company's higher investment securities balances as of March 31, 2023 and the increase in market rates over the course of the first quarter of this year, the company's accumulated other comprehensive loss, net of taxes (AOCI) remained relatively stable at $7.8 million, an increase of $77,000 year-over-year. With this year-over-year stability in AOCI and an increase in retained earnings, shareholders equity improved to a level of $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%. Overall, the company continues to be considered well-capitalized from a regulatory perspective with equity to assets of 7.6%, which is up from 7.0% from the same period last year.

With the overall quality of the investment portfolio, the well capitalized position, the solid liquidity position and the low level of uninsured deposits, it is believed that any issues which could potentially create a risk to capital and capital position are very minimal. Even with the continued heightened inflation levels and related increases in interest rates that may be impacting some borrowers with higher operating costs and rate resets to higher interest rate levels on their loans, the company has successfully maintained credit-related strength and stability within its loan portfolio. As of March 31, 2023, the company's total nonaccrual loans and loans past due 30 plus days were $1.43 million, or 0.30% of gross loans, which is up from last year by $901,000. Also, as of the most recently ended quarter, United Bancorp, Inc.'s (UBCP) nonperforming assets to total assets was a very respectable 0.51%, a seven-basis point increase over the previous year. Further highlighting the overall strength of the loan portfolio, the company had net loans charged off of (-$28,000), which is (-0.01%) of average loans. With the enhanced loan credit reserve build-up under CECL over the course of the past year and the company's stable and solid credit quality metrics, there was no provision for credit losses in the most recently ended quarter, which matched last year. The company was able to forgo, once again, a credit provision in the current year due to its 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%. Overall, it is believed that the company is presently well reserved with very strong coverage.

United Bancorp, Inc. (UBCP), like most banking organizations, is currently feeling the pressure of operating in an environment wherein monetary policy has driven interest rates higher for a longer duration than many anticipated which is creating different challenges for the company and all banks. But, overall, the solid financial performance achieved during the first quarter of 2023 is positive. As previously mentioned, both net income and diluted earnings per share are higher than the levels produced in the first quarter of the previous year. But, as might be expected in this higher-for-longer interest rate environment, the company did experience a decline in the level of net interest income realized and compression of its net interest margin in the most recently ended quarter for the first time in quite a while. Even though UBCP experienced year-over-year, double-digit percentage growth in the level of total interest income generated this past quarter, the company experienced a greater increase in the total interest expense incurred, which caused the aforementioned decline in net interest income. Fortunately for the company, taking the $75.0 million advance from the Federal Home Loan Bank (FHLB) toward the end of the first quarter of last year (at terms which are now considered very competitive) has helped to somewhat mitigate this decline in net interest income by affording the ability to be more selective in the pricing of offering rates on interest-bearing depository products. Although the interest levels being paid on depository products have increased in the current environment, this wholesale funding from the FHLB has helped to somewhat control interest expense levels while maintaining very adequate liquidity levels. With a present net interest margin of 3.46% as of March 31, 2023, it is believed that this performance metric compares favorably to that of the peer group and industry at present.

With the current pressure on net interest margin and net interest income, United Bancorp, Inc. (UBCP) is focused on controlling its net noninterest margin. Regarding the noninterest income-side of the noninterest margin, 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 that the company is able to realize. Accordingly, UBCP is looking to find new alternatives to generating additional levels of both noninterest income and other sources of revenue. One of these new alternatives is the focus on enhancing the mortgage origination function with the development of Unified Mortgage, which is beginning to help the company generate higher levels of fee income with the heightened production and sale of secondary market mortgage products, along with the enhancement of interest income levels through the origination of higher levels of portfolio-type mortgage products. Another alternative is a stronger commitment to developing the Treasury Management function, which offers fee-based services to commercial customers in the areas of cash management and payments that produces noninterest income in addition to helping to control interest expense by generating a higher level of low or no-cost depository balances for the company. Lastly, another alternative to enhancing the overall performance of UBCP (and, one that should strongly contribute to the company attaining its goal growing its total assets to a level of $1.0 billion or greater) is the development of the newest banking center, which is soon to be constructed in the highly favorable market of Wheeling, West Virginia. The company already has many solid customer relationships in this coveted marketplace and it is believed that by finally having a "brick-and-mortar" location therein, it will be able to more fully leverage these already existing relationships, while having the opportunity to build many new relationships within this prime market.

The primary focus is protecting the investment of shareholders in the company and rewarding them in a balanced fashion by growing their value and paying an attractive cash dividend. In these areas, shareholders have been nicely rewarded. In the first quarter of this year, the company, once again paid both the regular cash dividend, which increased by $0.0025 to a level of $0.1725, and a special cash dividend of $0.15 for a total payout of $0.3225 for the quarter. This is a 3.2% increase over the total cash dividend paid in the first quarter of the previous year and produces a near-industry leading total dividend yield of 5.81%. This total dividend yield is based on the first quarter cash dividend on a forward basis, plus the special dividend (which combined total $0.84) and the quarter-end fair market value of $14.47. On a year-over-year basis as of March 31, 2023, the fair market value of the company's stock remained relatively stable in comparison to the prior year and the company's market price to book value was 136%, which compares favorably to current industry standards.

Considering that the company continues to operate in a challenging economic and concerning industry-related environment, the current performance and future prospects are positive. Even with the present threats with which the overall industry is exposed, there is optimism about the future growth and earnings potential for United Bancorp, Inc. (UBCP). It is believed that with the challenges that the industry has experienced over the course of the past few years, the 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. The company has and continues to invest in areas that will lead to continued and future relevancy within the industry. Although such initiatives can stress the short-term performance of the company, it is believed that they will help fulfil the intermediate and longer-term goals and produce above industry earnings and overall performance. As previously mentioned, there is still a vision of growing UBCP to an asset threshold of $1.0 billion or greater in the near term in a prudent and profitable fashion. The company's direction and the potential that it brings is exciting. With a keen focus on continual process improvement, product development and delivery, it is firmly believed the future for the company is very bright.