United Bancshares, Inc.

What they do

UBOH is a financial holding company whose primary asset is The Union Bank Company, an Ohio state-chartered commercial bank supervised by the ODFI and FDIC. Union Bank takes deposits (checking, savings, money market, CDs, IRAs) and makes commercial and residential real estate, agricultural, commercial and industrial, home equity, consumer, and SBA loans, selling most residential originations into the secondary market. It also offers treasury management, remote deposit capture, mobile/online banking and Zelle, plus wealth management through LPL Financial as a registered broker/dealer. A Las Vegas captive insurance subsidiary, UBC Risk Management, insures liability and property damage policies for the corporation, and two bank subsidiaries hold the securities portfolio and certain foreclosed property.

Revenue drivers

• Net interest income — The largest revenue source: $35.7 million in 2022, essentially flat versus $35.7 million in 2021. Interest income was $38.9 million against $3.3 million of interest expense, so the bank earns the spread between its loan and securities yields and its deposit and borrowing costs.
• Non-interest income — $9.95 million in 2022, down sharply from $17.3 million in 2021. This includes deposit account service charges, mortgage banking activity (residential loans sold to the secondary market), wealth management through LPL Financial, and other fee services.
• Loan portfolio — Gross loans were $683.6 million at December 31, 2022, up from $609.6 million a year earlier. The loan mix includes commercial and residential real estate, agricultural, commercial and industrial, home equity, consumer, and SBA loans, concentrated in the Ohio counties the bank serves.
• Securities portfolio — Available-for-sale securities supported earning-asset growth, but their market value fell with rising rates. The bank also holds Federal Home Loan Bank stock at cost ($3.9 million at September 30, 2022) to support liquidity and borrowing capacity.

Recent performance

Net income was $11.3 million in 2022, down from $13.6 million in 2021, and diluted EPS was $3.46. Fourth-quarter 2022 EPS was $1.10, or $0.91 excluding the tax-effected positive impact of $606,000 from a negative loan loss provision and an offsetting increase in the unfunded commitment liability. Full-year income before taxes was approximately $12.5 million, with return on average assets of 1.06% and return on average tangible equity of 17.70%. The efficiency ratio weakened to 73.15% from 68.14% in 2021, and non-interest income fell to $9.95 million from $17.35 million. Gross loans grew $74 million and deposits grew $23 million during 2022, while book value per share declined to $26.23 from $36.39.

Strategy

Management's stated objective is to be a high-performing, relationship-focused financial institution serving consumers and small businesses in its communities. During 2022 the company reduced staff, aggressively managed its balance sheet, and controlled interest costs in response to inflation, a decline in mortgage activity, and rising rates. Excluding PPP fees, net interest income increased $4.4 million with a 43 basis point increase in net margin, and non-interest expenses decreased $2.6 million. The board declared a $0.22 per share dividend in the fourth quarter of 2022, a 4.8% increase, marking the 13th dividend increase since 2012, and management says it remains focused on core revenue growth, asset quality, and consistent dividends. The company moved its common stock trading to the OTCQX Market under the symbol UBOH in August 2022.

Risks

• Unrealized securities losses — Rapidly rising interest rates created a $53.6 million decline in the market value of the available-for-sale securities portfolio, reducing tangible book value by $13.43 per share since December 31, 2021, and management links this to the recent share price decrease.
• Net interest margin compression — The bank must manage interest costs as rates rise; net interest margin, tax equivalent, was 3.75% in 2022, slightly below 3.77% in 2021, and the company has no control over the rate environment that drives funding costs.
• Mortgage banking cyclicality — Non-interest income fell from $17.3 million in 2021 to $9.95 million in 2022, reflecting a dramatic decrease in residential mortgage activity amid higher rates, which reduces revenue from loans sold to the secondary market.
• Concentration in Ohio markets — The bank operates 22 offices in specific Ohio counties (Allen, Delaware, Franklin, Hancock, Huron, Marion, Paulding, Putnam, Sandusky, Van Wert, and Wood), so its asset quality and growth depend heavily on local economic conditions.

Outlook

Management cited record inflation, a dramatic decrease in residential mortgage activity, rapidly rising interest rates, and recession fears as 2022 headwinds, and responded by reducing staff, managing the balance sheet, and controlling interest costs. They expect the unrealized securities losses to remain unrealized based on current alternative sources of liquidity, and note the decline has no impact on regulatory capital. The company says it remains focused on core revenue growth, strong asset quality, and consistent dividends, as reflected in the recent 4.8% dividend increase.