United Bancshares Inc 10-Q for FY2021 Q2
United Bancshares Inc (UBOH)
About this 10-Q
United Bancshares Inc filed this 10-Q on August 3, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $2.66M
- down 53.2% from net income of $5.67M a year earlier
- Diluted EPS
- $0.80
- down 53.8% from $1.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
OR
Commission file number
UNITED BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices)
(I.R.S. Employer Identification Number)
(Zip Code)
(
(Registrant’s telephone number, including area code)
| Securities registered or to be registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Trading Symbol(s) | Name of Each Exchange |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller Reporting Company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2021:
This document contains 40 pages. The Exhibit Index is on page 39 immediately preceding the filed exhibits.
UNITED BANCSHARES, INC.
Table of Contents
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| Part I – Financial Information |
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Item 1 – Financial Statements |
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3 – Quantitative and Qualitative Disclosures about Market Risk |
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Item 4 – Controls and Procedures |
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| Part II – Other Information |
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Item 1 – Legal Proceedings |
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Item 1A – Risk Factors |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3 – Defaults Upon Senior Securities |
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Item 4 – Mine Safety Disclosures |
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Item 5 – Other Information |
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Item 6 – Exhibits |
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
United Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2021 (unaudited) and December 31, 2020
| (in thousands except share data) | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CASH AND CASH EQUIVALENTS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| SECURITIES, available-for-sale | ||||||||
| FEDERAL HOME LOAN BANK STOCK, at cost | ||||||||
| LOANS HELD FOR SALE | ||||||||
| LOANS AND LEASES | ||||||||
| Less allowance for loan and lease losses | ||||||||
| Net loans and leases | ||||||||
| PREMISES AND EQUIPMENT, net | ||||||||
| GOODWILL | ||||||||
| CORE DEPOSIT INTANGIBLE ASSETS, net | ||||||||
| CASH SURRENDER VALUE OF LIFE INSURANCE | ||||||||
| OTHER ASSETS, including accrued interest receivable | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Other borrowings | ||||||||
| Junior subordinated deferrable interest debentures | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, stated value , authorized shares; issued shares | ||||||||
| Surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Treasury stock, at cost, shares at June 30, 2021 and shares at December 31, 2020 | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
United Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three and six months ended June 30, 2021 and 2020 (unaudited)
| (in thousands except share data) | ||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| INTEREST INCOME | ||||||||||||||||
| Loans and leases, including fees | $ | | $ | $ | $ | |||||||||||
| Securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Other | ||||||||||||||||
| Total interest income | ||||||||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Deposits | ||||||||||||||||
| Other borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| PROVISION FOR LOAN AND LEASE LOSSES | ||||||||||||||||
| Net interest income after provision for loan and lease losses | ||||||||||||||||
| NON-INTEREST INCOME | ||||||||||||||||
| Gain on sale of loans | ||||||||||||||||
| Net securities gains (losses) | ( | ) | ||||||||||||||
| Other non-interest income | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| NON-INTEREST EXPENSES | ||||||||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding (basic) | ||||||||||||||||
| Weighted average common shares outstanding (diluted) | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
United Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2021 and 2020 (unaudited)
| (in thousands) | ||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Unrealized gain on securities: | ||||||||||||||||
| Unrealized holding gains (losses) during period | ( | ) | ||||||||||||||
| Reclassification adjustments for losses (gains) included in net income | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive income (loss), before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) related to items of other comprehensive income | ( | ) | ||||||||||||||
| Other comprehensive income (loss) | ( | ) | ||||||||||||||
| COMPREHENSIVE INCOME | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
United Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(in thousands except share data)
Six months ended June 30, 2021 and 2020 (unaudited)
| Common stock | Surplus | Retained earnings | Accumulated other comprehensive income (loss) | Treasury stock | Total | |||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||||||
| shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan | ||||||||||||||||||||||||
| Stock option expense | ||||||||||||||||||||||||
| Stock option exercise, net of shares repurchased and retired | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared, per share | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE AT JUNE 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan | ||||||||||||||||||||||||
| Stock option expense | ||||||||||||||||||||||||
| Cash dividends declared, per share | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Three Months Ended June 30, 2021 and 2020 (unaudited)
| Common stock | Surplus | Retained earnings | Accumulated other comprehensive income | Treasury stock | Total | |||||||||||||||||||
| BALANCE AT MARCH 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan | ||||||||||||||||||||||||
| Stock option expense | ||||||||||||||||||||||||
| Stock option exercise, net of shares repurchased and retired | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared, per share | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE AT JUNE 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| BALANCE AT MARCH 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan | ||||||||||||||||||||||||
| Stock option expense | ||||||||||||||||||||||||
| Cash dividends declared, per share | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
United Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 2021 and 2020 (unaudited)
| (in thousands) | ||||||||
| Six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | $ | $ | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sales, calls and maturities of available-for-sale securities | ||||||||
| Purchases of available-for-sale securities | ( | ) | ( | ) | ||||
| Purchases of FHLB stock | ( | ) | ||||||
| Proceeds from FHLB stock redemption | ||||||||
| Net increase in loans and leases | ( | ) | ||||||
| Purchases of premises and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net increase in deposits | ||||||||
| Repayments of other borrowings | ( | ) | ( | ) | ||||
| Proceeds from sale of treasury shares | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS | ||||||||
| At beginning of period | ||||||||
| At end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Federal income taxes | $ | $ | ||||||
| Non-cash investing activities: | ||||||||
| Change in net unrealized gain or loss on available-for-sale securities | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of the consolidated financial statements.
United Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2021
NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of United Bancshares, Inc. and subsidiaries (the “Corporation”) have been prepared without audit and in the opinion of management reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated. Since the unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q, they do not contain all information and footnotes typically included in financial statements prepared in conformity with generally accepted accounting principles. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet as of December 31, 2020 is derived from completed audited consolidated financial statements with footnotes, which are included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The Union Bank Company (the “Bank”). The Bank has formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”), to hold and manage its securities portfolio. The operations of UBC are located in Wilmington, Delaware. The Bank has also formed a wholly-owned subsidiary, UBC Property, Inc. (“UBC Property”), to hold and manage certain property. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Corporation conform to generally accepted practices within the banking industry. The Corporation considers all of its principal activities to be banking related.
NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Management has developed four different models for calculating the allowance for loan losses under the requirements of ASU 2016-13 and has been running them parallel to the Bank’s existing methodology. Management has not yet determined the expected impact the adoption of ASU 2016-13 will have on the consolidated financial statements. For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2019. On July 17, 2019, the FASB voted to issue a proposal for public comment that would potentially result in a postponement of the required implementation date for ASU 2016-13. On October 16, 2019, the FASB extended the implementation deadline until the fiscal year and interim periods beginning after December 15, 2022.
In December, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. Adoption of this guidance did not have a material impact on its consolidated financial statements.
In January, 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. The amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for which financial statements have not yet been issued. This update did not have a significant impact on the Corporation's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation does not expect this guidance to have a material impact on its consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which is in response to stakeholder concerns related to reference rate reform. The amendments in this Update are elective and apply to all entities that have derivative instruments that use an interest rate for managing, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in this Update are effective immediately for all entities. The Corporation is currently reviewing the amendments in this Update, but does not expect this guidance to have a material impact on its consolidated financial statements.
NOTE 3 - SECURITIES
The amortized cost, unrealized gains and losses, and fair value of available-for-sale securities as of June 30, 2021 and December 31, 2020 are as follows:
| (in thousands) | ||||||||||||||||
| June 30, 2021 | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| Available-for-sale: | ||||||||||||||||
| Agency | $ | $ | $ | $ | ||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||
| Mortgage-backed | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (in thousands) | ||||||||||||||||
| December 31, 2020 | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| Available-for-sale: | ||||||||||||||||
| Obligations of states and political subdivisions | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
NOTE 4 – LOANS AND LEASES
The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the six month periods ended June 30, 2021 and 2020:
| (in thousands) | ||||||||||||||||||||
| Residential 1 – 4 family real estate | Commercial and multi-family real estate | Commercial | Consumer | Total | ||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Provision (credited) charged to expenses | ( | ) | ( | ) | ||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | |||||||||||||||
| Provision charged to expenses | ||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Recoveries | ||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment and based on impairment method as of June 30, 2021 and December 31, 2020:
| (in thousands) | ||||||||||||||||||||
| June 30, 2021 | Residential 1 – 4 family real estate | Commercial and multi-family real estate | Commercial | Consumer | Total | |||||||||||||||
| Allowance for loan and lease losses: | ||||||||||||||||||||
| Attributable to loans and leases individually evaluated for impairment | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated for impairment | | |||||||||||||||||||
| Total allowance for loan and lease losses | $ | $ | $ | $ | $ | |||||||||||||||
| Loans and leases: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | |||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||
| Total ending loans and leases balance | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2020 | Residential 1 – 4 family real estate | Commercial and multi-family real estate | Commercial | Consumer | Total | |||||||||||||||
| Allowance for loan and lease losses: | ||||||||||||||||||||
| Attributable to loans and leases individually evaluated for impairment | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||
| Total allowance for loan and lease losses | $ | $ | $ | $ | $ | |||||||||||||||
| Loans and leases: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | |||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||
| Total ending loans and leases balance | $ | $ | $ | $ | $ | |||||||||||||||
The average recorded investment in impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) for the six month period ended June 30, 2021 was $
The following table presents the recorded investment in nonaccrual loans and leases, loans and leases past due over 90 days still on accrual and troubled debt restructurings by class of loans as of June 30, 2021 and December 31, 2020. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.
| (in thousands) | ||||||||||||
| June 30, 2021 | Nonaccrual | Loans and leases past due over 90 days still accruing | Accruing Troubled Debt Restructurings | |||||||||
| Residential 1-4 family real estate | $ | $ | $ | |||||||||
| Commercial and multi-family real estate | ||||||||||||
| Agricultural real estate | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2020 | ||||||||||||
| Residential 1-4 family real estate | $ | $ | $ | |||||||||
| Commercial and multi-family real estate | ||||||||||||
| Agricultural real estate | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following table presents the aging of the recorded investment in past due loans and leases as of June 30, 2021 and December 31, 2020 by class of loans and leases:
| (in thousands) | ||||||||||||||||||||||||
| June 30, 2021 | 30 – 59 days past due | 60 – 89 days past due | Greater than 90 days past due | Total past due | Loans and leases not past due | Total | ||||||||||||||||||
| Residential 1-4 family real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial and multi-family real estate | ||||||||||||||||||||||||
| Agricultural real estate | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Residential 1-4 family real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial and multi-family real estate | ||||||||||||||||||||||||
| Agricultural real estate | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Credit Quality Indicators:
The Corporation categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans and leases individually by classifying the loans and leases as to the credit risk. This analysis generally includes non-homogenous loans and leases, such as commercial and commercial real estate loans and leases. The Corporation uses the following definitions for risk ratings:
| ● | Pass: Loans and leases not meeting the previous criteria that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. |
| ● | Special Mention: Loans and leases which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans and leases pose unwarranted financial risk that, if not corrected, could weaken the loan or lease and increase risk in the future. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered "potential", versus "defined", impairments to the primary source of loan repayment. |
| ● | Substandard: These loans and leases are inadequately protected by the current sound net worth and paying ability of the borrower. Loans and leases of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow. These loans and leases may also have historic and/or severe delinquency problems, and Corporation management may depend on secondary repayment sources to liquidate these loans and leases. The Corporation could sustain some degree of loss in these loans and leases if the weaknesses remain uncorrected. |
| ● | Doubtful: Loans and leases in this category display a high degree of loss, although the amount of actual loss at the time of classification is undeterminable. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. |
The following table provides a summary of the loan portfolio risk grades, as applicable, based on the most recent analysis performed, as of June 30, 2021 and December 31, 2020. The Corporation risk rates all commercial and commercial real estate loans.
| (in thousands) | ||||||||||||||||||||
| June 30, 2021 | Pass | Special Mention | Substandard | Doubtful | Not rated | |||||||||||||||
| Residential 1 - 4 family | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial and multi-family real estate | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Residential 1 - 4 family | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial and multi-family real estate | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The Corporation considers the performance of the loan and lease portfolio and its impact on the allowance for loan and lease losses. For all loan classes that are not rated, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Generally, all loans and leases not rated that are 90 days past due or are classified as nonaccrual and collectively evaluated for impairment, are considered nonperforming. The following table presents the recorded investment in all loans and leases that are not risk rated, based on payment activity as of June 30, 2021 and December 31, 2020:
| (in thousands) | ||||||||||||||||||||
| June 30, 2021 | Residential 1-4 family | Commercial and multi-family real estate | Commercial | Consumer | Total | |||||||||||||||
| Performing | $ | $ | $ | $ | $ | |||||||||||||||
| Nonperforming | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | |||||||||||||||
| Nonperforming | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Modifications:
The Corporation’s loan and lease portfolio also includes certain loans and leases that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. All TDRs are also classified as impaired loans and leases.
When the Corporation modifies a loan or lease, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, except when the sole (remaining) source of repayment for the loan or lease is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan or lease is less than the recorded investment in the loan or lease (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down of the loan or lease balance if collection is not expected.
There were
The Corporation acquired The Ohio State Bank (“OSB”) in November 2014 and Benchmark Bank in September 2017. As a result of these acquisitions, the Corporation has loans and leases, for which there was at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition, that all contractually required payments would not be collected.
The following is information related to loans and leases acquired in these transactions, including purchased impaired loans:
| The Ohio State Bank | ||||||||||||
| (in thousands) | ||||||||||||
| Contractual | ||||||||||||
| Principal | Accretable | Carrying | ||||||||||
| Receivable | Difference | Amount | ||||||||||
| Purchased Performing Loans and Leases | ||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| Change due to payments received | ( | ) | ( | ) | ||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
| Purchased Impaired Loans and Leases | ||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| Change due to payments received | ( | ) | ||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
| Benchmark Bank | ||||||||||||
| (in thousands) | ||||||||||||
| Contractual | ||||||||||||
| Principal | Accretable | Carrying | ||||||||||
| Receivable | Difference | Amount | ||||||||||
| Purchased Performing Loans and Leases | ||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| Change due to payments received | ( | ) | ( | ) | ||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
| Purchased Impaired Loans and Leases | ||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| Change due to payments received | ( | ) | ( | ) | ||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
There was
NOTE 5 – OTHER BORROWINGS
Other borrowings consists of the following at June 30, 2021 and December 31, 2020:
| (in thousands) | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| United Bankers Bank | ||||||||
| Note payable, with interest at and principal payments payable quarterly with any remaining unpaid principal, due . All Bank stock is held as collateral. | $ | $ | ||||||
| Total other borrowings | $ | $ | ||||||
Future maturities of other borrowings are as follows: 2021, and 2022, $
The Corporation had $
NOTE 6 – JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Corporation has formed and invested $
The Corporation assumed $
Each issue of the trust preferred securities carries an interest rate identical to that of the related debenture. The securities have been structured to qualify as Tier I capital for regulatory purposes and the dividends paid on such are tax deductible. However, under Federal Reserve Board guidelines, the securities cannot be used to constitute more than 25% of the Corporation’s core Tier I capital inclusive of these securities.
Interest expense on the debentures amounted to 000 and $
NOTE 7 - FAIR VALUE MEASUREMENTS
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.
ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
Financial assets (there were
There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during the period ended June 30, 2021, due to the lack of observable quotes in inactive markets for those instruments at June 30, 2021.
The tables below present a reconciliation and income statement classification of gains and losses for mortgage servicing rights, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month period ended June 30, 2021 and for the year ended December 31, 2020:
| (in thousands) | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Mortgage Servicing Rights | ||||||||
| Balance at beginning of period | $ | $ | ||||||
| Gains or losses, including realized and unrealized: | ||||||||
| Purchases, issuances, and settlements | ||||||||
| Disposals - amortization based on loan payments and payoffs | ( | ) | ( | ) | ||||
| Changes in fair value | ( | ) | ||||||
| Balance at end of period | $ | $ | ||||||
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, and disclosure of unobservable inputs follows.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available-for-Sale
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government and agencies securities, municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Impaired Loans
The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral less estimated cost to sell, if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs, including recent appraisals or evaluations as well as Level 3 inputs based on customized discounting criteria such as additional appraisal adjustments to consider deterioration of value subsequent to appraisal date and estimated cost to sell. Additional appraisal adjustments range between
Mortgage Servicing Rights
The Corporation records mortgage servicing rights at estimated fair value based on a discounted cash flow model which includes discount rates between
Certain other financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. Financial assets and financial liabilities, excluding impaired loans and other real estate owned, measured at fair value on a nonrecurring basis were not significant at June 30, 2021 and December 31, 2020.
NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of recognized financial instruments at June 30, 2021 and December 31, 2020 were as follows:
| (in thousands) | ||||||||||||||||||||
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Carrying amount | Estimated value | Carrying amount | Estimated value | Input Level | ||||||||||||||||
| FINANCIAL ASSETS | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | 1 | |||||||||||||||
| Securities, including FHLB stock | 2,3 | |||||||||||||||||||
| Loans held for sale | 3 | |||||||||||||||||||
| Net loans and leases | 3 | |||||||||||||||||||
| Mortgage servicing rights | 3 | |||||||||||||||||||
| Derivative assets | 3 | |||||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||||||
| FINANCIAL LIABILITIES | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Maturity | $ | $ | $ | $ | 3 | |||||||||||||||
| Non-maturity | 1 | |||||||||||||||||||
| Other borrowings | 3 | |||||||||||||||||||
| Junior subordinated deferrable interest debentures | 3 | |||||||||||||||||||
| Derivative liabilities | 3 | |||||||||||||||||||
| Total Financial Liabilities | $ | $ | $ | $ | ||||||||||||||||
The above summary does not include accrued interest receivable or cash surrender value of life insurance, which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amounts.
There are also unrecognized financial instruments at June 30, 2021 and December 31, 2020 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounted to $
The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.
Securities:
The fair value of securities is determined based on quoted market prices of the individual securities; if not available, estimated fair value is obtained by comparison to other known securities with similar risk and maturity characteristics. Such value does not consider possible tax ramifications or estimated transaction costs.
Loans held for sale:
The fair value of loans held for sale is determined based on the sales price of similar loans. Loan held for sale are typically held for 60 days or less.
Loans and leases:
Fair value for loans and leases was estimated for portfolios of loans and leases with similar financial characteristics. For adjustable rate loans, which re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For fixed rate loans, the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows. The fair value disclosures for both fixed and adjustable rate loans were adjusted to reflect the exit price amount anticipated to be received from the sale of the loans in an open market transaction.
Mortgage servicing rights:
The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.
Derivative assets and liabilities:
The fair value of derivative assets and liabilities are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at quarter end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace. The fair value disclosures for all of the deposits were adjusted to reflect the exit price amount anticipated to be received from sale of the deposits in an open market transaction.
Other borrowings and junior subordinated deferrable interest debentures:
The fair value of other borrowings and junior subordinated deferrable interest debentures are determined using the net present value of discounted cash flows based on current borrowing rates for similar types of borrowing arrangements, and are obtained from an independent third party.
Other financial instruments:
The fair value of commitments to extend credit and letters of credit is determined to be the contract amount, since these financial instruments generally represent commitments at existing rates. The fair value of other borrowings is determined based on a discounted cash flow analysis using current interest rates. The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement. The fair value of the contract is determined based on a discounted cash flow analysis using a current interest rate for a similar instrument.
The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
NOTE 9 – STOCK OPTIONS
The United Bancshares, Inc. 2016 Stock Option Plan (the “Plan”) permits the Corporation to award non-qualified stock options to eligible participants. A total of
The Corporation issued
| June 30, | June 30, | |||||||
| 2021 | 2020 | |||||||
| Outstanding, beginning of period | ||||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, end of period | ||||||||
| Weighted average exercise price at end of quarter | $ | $ | ||||||
Options vest over a three-year period on the anniversary of the date of grant. At June 30, 2021,
The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. Following are assumptions used in calculating the fair value of the options granted that are still vesting:
| 2020 | 2019 | 2018 | ||||||||||
| Weighted-average fair value of options granted | $ | $ | $ | |||||||||
| Average dividend yield | % | % | % | |||||||||
| Expected volatility | % | % | % | |||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Expected term (years) | ||||||||||||
Total compensation expense related to the stock options granted in 2020, net of forfeitures, is expected to be $
NOTE 10 – NON-INTEREST INCOME
The Corporation’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income. The material groups of non-interest income are defined as follows:
Service charges on deposit accounts:
Service charges on deposit accounts primarily consist of account analysis fees, monthly maintenance fees, overdraft fees, and other deposit account related fees. Overdraft fees and certain service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction. The consideration for analysis fees and monthly maintenance fees are variable as the fee can be reduced if the customer meets certain qualifying metrics. The Corporation’s performance obligations are satisfied at the time of the transaction or over the course of a month.
Interchange fee income:
The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrently with the transaction processing services provided to the cardholder.
Wealth management income:
The Corporation earns wealth management and investment brokerage fees from its services with customers to manage assets for investment, to provide advisory services, and for account transactions. Fees are based on the market value of the assets under management and are recognized monthly as the Corporation’s performance obligations are met. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Other related services are based on a fixed fee schedule and the revenue is recognized when the services are rendered, which is when the Corporation has satisfied its performance obligation.
The following table presents the Corporation’s non-interest income for the six months ended June 30, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.
| Six Months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Service charges on deposit accounts | $ | $ | ||||||
| Gain on sale of loans (1) | ||||||||
| Net securities losses (1) | ( | ) | ||||||
| Change in fair value of mortgage servicing rights (1) | ( | ) | ||||||
| Increase in cash surrender value of life insurance (1) | ||||||||
| Other | ||||||||
| Credit and debit card interchange fees | ||||||||
| Wealth management | ||||||||
| Net loan servicing fees (1) | ||||||||
| Other non-interest income | ( | ) | ||||||
| Total non-interest income | $ | $ | ||||||
| (1) Not within the scope of ASC 606 |
NOTE 11 – SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after June 30, 2021 but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at June 30, 2021 have been recognized in the consolidated financial statements for the period ended June 30, 2021. Events or transactions that provided evidence about conditions that did not exist at June 30, 2021 but arose before the financial statements were issued have not been recognized in the consolidated financial statements for the period ended June 30, 2021.
On July 20, 2021, the Corporation's Board of Directors approved a cash dividend of $
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated financial statements and management’s discussion and analysis that follows:
| As of or for the three months ended June 30, |
As of or for the six months ended June 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| SIGNIFICANT RATIOS (Unaudited) |
||||||||||||||||
| Net income to: |
||||||||||||||||
| Average assets (a) |
1.01 | % | 2.30 | % | 1.32 | % | 1.44 | % | ||||||||
| Average tangible shareholders’ equity (non-GAAP) (a) |
12.58 | % | 32.00 | % | 16.21 | % | 19.47 | % | ||||||||
| Net interest margin (a) |
3.53 | % | 3.87 | % | 3.69 | % | 3.74 | % | ||||||||
| Efficiency ratio (a) |
73.19 | % | 51.82 | % | 67.42 | % | 63.14 | % | ||||||||
| Average shareholders’ equity to average assets |
10.77 | % | 10.16 | % | 11.00 | % | 10.55 | % | ||||||||
| Loans to deposits (end of period) (b) |
67.27 | % | 84.02 | % | 67.27 | % | 84.02 | % | ||||||||
| Allowance for loan losses to loans (end of period) |
1.69 | % | 0.83 | % | 1.69 | % | 0.83 | % | ||||||||
| Book value per share |
$ | 35.29 | $ | 32.04 | $ | 35.29 | $ | 32.04 | ||||||||
| (a) |
Some of the financial measures included in this table are not measures of financial performance recognized by U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures include tangible book value, return on average tangible equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy. Reconciliations of non-GAAP disclosures used in this table to the comparable GAAP measures are provided in the accompanying table. Management, as well as regulators, financial analysts and other investors may use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. These non-GAAP financial measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names. |
| (b) |
Includes loans held for sale |
| Reconciliation of common shareholders' equity to tangible common equity |
June 30, 2021 |
June 30, 2020 |
||||||
| Shareholders' equity |
$ | 115,716 | $ | 104,794 | ||||
| Less goodwill and other intangibles |
29,187 | 29,334 | ||||||
| Tangible common equity |
$ | 86,529 | $ | 75,460 | ||||
| Average shareholders' equity |
$ | 112,750 | $ | 98,766 | ||||
| Less average goodwill and other intangibles |
29,217 | 29,367 | ||||||
| Average tangible common equity |
$ | 83,533 | $ | 69,399 | ||||
| Tangible Book Value per Common Share |
||||||||
| Tangible common equity (a) |
$ | 86,529 | $ | 75,460 | ||||
| Total common shares issued and outstanding (b) |
3,279,076 | 3,270,814 | ||||||
| Tangible book value per common share (a)/(b) |
$ | 26.39 | $ | 23.07 | ||||
| Return on Average Tangible Equity |
||||||||
| Net income, annualized ( c ) |
$ | 13,544 | $ | 13,512 | ||||
| Average tangible common equity (d) |
$ | 83,533 | $ | 69,399 | ||||
| Return on average tangible common equity (c/d) |
16.21 | % | 19.47 | % | ||||
| Net Interest Margin, Tax- Equivalent |
||||||||
| Net interest income, annualized |
$ | 34,180 | $ | 31,420 | ||||
| Tax-equivalent adjustment |
710 | 568 | ||||||
| Tax-equivalent net interest income, annualized (e) |
$ | 34,890 | $ | 31,988 | ||||
| Average earning assets (f) |
$ | 946,361 | $ | 855,581 | ||||
| Net interest margin, tax equivalent (e)/(f) |
3.69 | % | 3.74 | % | ||||
| Efficiency Ratio, Tax-Equivalent |
||||||||
| Non-interest expense, annualized (g) |
$ | 36,358 | $ | 34,030 | ||||
| Tax-equivalent net interest income, annualized |
34,890 | 31,988 | ||||||
| Non-interest income, annualized |
19,036 | 21,910 | ||||||
| Total revenue, annualized (h) |
$ | 53,926 | $ | 53,898 | ||||
| Efficiency ratio (g)/(h) |
67.42 | % | 63.14 | % | ||||
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, which statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure and the impact of the COVID-19 pandemic. Significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as of June 30, 2021, if there is a resurgence in the virus, United Bancshares, Inc. (the "Corporation") could experience further adverse effects on its business, financial condition, results of operations and cash flows.
The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Corporation does not undertake, and specifically disclaims and obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Introduction
The Corporation is a registered bank holding company incorporated under Ohio law and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation was incorporated and organized in 1985. The executive offices of the Corporation are located at 105 Progressive Drive, Columbus Grove, Ohio 45830. The Corporation is a one-bank holding company, as that term is defined by the Federal Reserve Board.
The Union Bank Company (the “Bank”), a wholly-owned subsidiary of the Corporation, is a full service community bank offering a full range of commercial and consumer banking services. The Bank is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Paulding, Putnam, Sandusky, Van Wert and Wood counties in Ohio, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Paulding, Pemberville, Plymouth, Westerville and Worthington, Ohio.
Deposit services include checking accounts, savings and money market accounts; certificates of deposit and individual retirement accounts. Additional supportive services include online banking, bill pay, mobile banking, Zelle payment service, ATM’s and safe deposit box rentals. Treasury management and remote deposit capture products are also available to commercial deposit customers. Deposits of Union Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.
Loan products offered include commercial and residential real estate loans, agricultural loans, commercial and industrial loans, home equity loans, various types of consumer loans and small business administration loans. Union Bank’s residential loan activities consist primarily of loans for purchasing or refinancing personal residences. The majority of these loans are sold to the secondary market.
Wealth management services are offered by Union Bank through an arrangement with LPL Financial LLC, a registered broker/dealer. Licensed representatives offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities and life insurance.
Union Bank has two subsidiaries: UBC Investments, Inc. (“UBC”), an entity formed to hold its securities portfolio, and UBC Property, Inc. (“UBC Property”), an entity formed to hold and manage certain property that is acquired in lieu of foreclosure.
The Corporation is registered as a Securities Exchange Act of 1934 reporting company.
The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of the financial results.
Recent Developments
The progression of the COVID-19 pandemic in the United States began to have an adverse impact on the local and national economy during the latter part of the first quarter of 2020 and may still have a complex and potentially adverse impact on the economy, the banking industry and our Corporation in future fiscal periods, all subject to a high degree of uncertainty.
Like most states, Ohio experienced a dramatic and sudden increase in unemployment levels as a result of the curtailment of business activities in mid-March 2020, with unemployment rising from an average of 4.1% in January 2020 to an average of 17.6 % in April 2020, before gradually dropping back down to 5.2% in June 2021, according to the U.S. Bureau of Labor Statistics. While unemployment rates have returned to lower levels in recent months, it is very possible a repeat of the high unemployment rates could be experienced especially if there is another shutdown similar to what was experienced in March and April of 2020.
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
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The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%. |
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On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program, or PPP program. Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders who enrolled in the program, subject to limitations and eligibility criteria. The Bank participated as a lender in the PPP program, originating $125.7 million in loans to over 1,600 borrowers during 2020. In addition, the CARES Act provided financial institutions the option to suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. |
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On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. |
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On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP can exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility makes short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope of its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. |
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On December 27, 2020, President Trump signed into law the 2021 Consolidated Appropriations Act, which represents the latest round of COVID-19 relief, authorizing more than $900 billion in economic aid to small businesses and consumers—the second largest stimulus in history, behind only the CARES (Coronavirus Aid Relief and Economic Security) Act that Congress enacted in March. The bill also includes appropriations provisions to keep the government funded through September 30, 2021, as well as a host of miscellaneous items. The aspects of the legislation most applicable to the banking industry include the following: |
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An additional $284.6 billion in Paycheck Protection Program (PPP) funding for loans to small businesses, including for borrowers who have previously received a PPP loan. |
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A one-page simplified forgiveness process for PPP loans $150,000 and under. |
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Clarification to various CARES Act provisions, the tax treatment of PPP expenses, lender responsibilities for agent fees, and lender “hold harmless” protections under the PPP and other laws. |
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A further delay in Troubled Debt Restructuring (TDR) accounting until 60 days after the termination of the national emergency, or January 1, 2022. |
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A further optional delay in Current Expected Credit Loss (CECL) accounting until January 1, 2022. |
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A new round of Economic Impact Payments (EIPs) for consumers, with aggressive distribution timelines and new exemptions from garnishments. |
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Significant added support for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs). |
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Funding for agricultural support programs and for renter assistance programs. |
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Termination of existing Federal Reserve emergency lending authority under the CARES Act, while preserving the Fed’s general 13(3) emergency authority existing prior to that Act. |
It is possible that the COVID-19 pandemic and the specific developments referred to above could have a significant adverse impact on our business. In particular, the Bank’s borrowers in the retail, restaurants, and hospitality industries may have endured significant economic distress, causing them to draw on their existing lines of credit, adversely affecting their ability and willingness to repay existing indebtedness, and adversely impacting the value of collateral. These developments, together with general economic conditions may also impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. It is possible that our financial condition, capital levels and results of operations could be adversely affected. The Corporation's results havebeen bolstered by the aforementioned PPP loan origination activity, which includes amortization of loan origination fees into interest income.
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
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We offered 90 day payment deferrals and interest only payment options for consumer, small business, and commercial customers. We also offered payment extensions of up to 90 days for mortgage customers. As of June 30, 2021, we have modified or extended 131 loans, approximating $48.7 million through these programs. |
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We formed a Business Continuity Planning COVID-19 Response team which meets regularly to manage the Corporation’s response to the pandemic and the effect on our business. In addition, cross functional task force teams met as needed to address specific issues such as employee and client communications, facilities and branch services, and to discuss the effect on our business. |
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We participated in the SBA’s Paycheck Protection Program. In the first round of PPP loans, we originated $125.7 million in loans to over 1,600 borrowers. In the second round of PPP loans beginning January 19, 2021, we have originated $57.7 million in loans to over 1,500 borrowers. |
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In response to the outbreak and business disruption, first and foremost, we have prioritized the safety, health and well-being of our employees, customers, and communities. We have implemented protective measures for customers who choose branch access and we continue to serve customers through our drive-up locations and digital platforms. |
The broader U.S. and global economies slowly began reopening during the first quarter 2021 as highly effective vaccines against COVID-19 became widely available. However, labor and supply disruptions resulting from the global pandemic continue, and the emergence of a new and more infectious variant of COVID-19 is creating ongoing health and safety concerns that may lead to further disruptions in local, national and global economies.
While significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions were trending in a positive direction as of June 30, 2021, if there is any further significant resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows.
RESULTS OF OPERATIONS
Overview of the Income Statement
For the quarter ended June 30, 2021, the Corporation reported net income of $2,655,000, or $0.81 basic earnings per share. This compares to the second quarter of 2020 net income of $5,668,000, or $1.73 basic earnings per share. The decrease in operating results for the first quarter of 2021 as compared to the same period in 2020 was primarily attributable to a decrease in net interest income of $151,000, a decrease in non-interest income of $4,344,000, and an increase in non-interest expenses of $268,000, offset by a decrease in the provision for loan losses of $900,000, and a decrease in the provision for income taxes of $850,000.
Net income for the six months ended June 30, 2021 totaled $6,772,000, or $2.07 basic earnings per share, compared to $6,756,000, or $2.07 basic earnings per share for the same period in 2020, an increase of $16,000. The increase in operating results for the six month period ended June 30, 2021 as compared to the six month period ended June 30, 2020 was primarily attributable to an increase in net interest income of $1,380,000, and decreases in the provision for loan losses of $1,150,000 and the provision for income taxes of $87,000, offset by a decrease in non-interest income of $1,437,000 and an increase in non-interest expenses of $1,164,000.
Net Interest Income
Net interest income is the amount by which income from interest-earning assets exceeds interest incurred on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities while interest-bearing liabilities include interest-bearing deposit accounts and borrowed funds. Net interest income remains the primary source of revenue for the Corporation. Changes in market interest rates, as well as changes in the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income. Net interest income was $8,435,000 for the second quarter of 2021, compared to $8,586,000 for the same period of 2020, a decrease of $151,000 (1.8%). Net interest income was $17,090,000 for the six months ended June 30,2021 compared to $15,710,000 for the same period of 2020, an increase of $1,380,000 (8.8%).
In response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds rate by a total of 150 basis points (1.5%) in March 2020. This decrease impacts the comparability of net interest income between the year to date periods of 2020 and 2021.
The decrease of $151,000 in net interest income for the three months ended June 30, 2021 is attributable to a decrease in interest income of $830,000 offset by a $679,000 decrease in interest expense. The increase in net interest income for the six months ended June 30, 2021 was due to a decrease in interest expense of $1,952,000, offset by a decrease of interest income of $572,000.
Interest income decreased due to declining portfolio rates, despite recognizing loan fee income generated through PPP loan originations of $1,689,000 for the six months ended June 30, 2021 compared to $337,000 for the same period of 2020. There are $3.2 million of fees received from the SBA remaining that have been deferred and are being amortized into interest income over the life of the loans. The bulk of the income resulting from PPP loans is from the SBA fees payable in connection with the origination of the loans, and not from interest to be paid on such loans from the borrower, as management expects most of its PPP loan portfolio to be forgiven. The average loan balance was $650.5 million for the six months ended June 30, 2021 compared to $631.2 million for the same period of 2020. The yield on average earning assets was 4.04% for the six months ended June 30, 2021 compared to 4.61% for the same period of 2020.
The decline in interest expense is due to the prepayment of $50.0 million of Federal Home Loan Bank advances in the second, third, and fourth quarters of 2020 as well as a declining cost of funds. The decrease in interest rates by the Federal Reserve resulted in a decrease in the cost of average interest bearing liabilities to 0.46% for the six months ended June 30, 2021 compared to 1.03% for the same period of 2020. This decrease more than offset the $66.3 million increase in average interest bearing deposits for the six month period ended June 30, 2021.
Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the quarter and six months ended June 30, 2021 the net interest margin (on a taxable equivalent basis) was 3.53% and 3.69% compared with 3.87% and 3.74% for the same period in 2020. Loans and leases comprised 64.2% of interest-earning assets at June 30, 2021 compared to 73.8% of interest-earning assets at June 30, 2020. Interest-bearing deposits comprised 97.2% of average interest-bearing liabilities at June 30, 2021, compared to 90.3% for the same period in 2020.
As a result of the recent reductions in the target federal funds interest rate, as well as the impact of the COVID-19 pandemic and related future loan charge-offs and increases in non-accrual loans which may occur, we expect that our net interest income and net interest margin will decrease in future periods. These decreases will be offset to some degree through recognition of deferred loan fees received from the SBA for PPP loan financing, but we cannot determine at this time what the scope of such losses or offsets might be. The SBA loan fees are deferred and being recognized as an adjustment to interest income over the life of the loans. The timing of such will be impacted by the timing and level of loan forgiveness granted by the SBA.
Provision for Loan and Lease Losses
The Corporation’s provision for loan and lease losses is determined based upon management’s calculation of the allowance for loan and lease losses and is reflective of management’s assessment of the quality of the portfolio and overall management of the inherent credit risk of the loan and lease portfolio. Changes in the provision for loan and lease losses are dependent, among other things, on loan and lease delinquencies, collateral position, portfolio risks and general economic conditions in the Corporation’s lending markets. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.
A provision for loan and lease losses of $300,000 was recognized during the six month period ended June 30, 2021, none of which is attributable to the current quarter, compared to provisions of $900,000 and $1,450,000 for the respective three and six month periods ended June 30, 2020. The allowance for loan and lease losses at June 30, 2021 is 1.69% of total loans compared to 0.83% of total loans at June 30, 2020. The significant reduction in provision expense in 2021 is to offset provision expenses taken in 2020 as a result of the COVID-19 pandemic given the general stabilization in the regional and broader U.S. economy, as well as the current status of the Bank's loan portfolio.
There is a possibility that the provision for loan losses could further increase in future periods based on the significant potential for the credit quality of our loan portfolio to decline and loan defaults to increase as a result of economic conditions created by the COVID-19 pandemic. See “Allowance for Loan and Lease Losses” under Financial Condition for further discussion relating to the provision for loan and lease losses.
Non-Interest Income
The Corporation’s non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgage loans; customer deposit account fees; earnings on life insurance policies; income arising from sales of investment products to customers; and occasional security sale transactions. Income related to customer deposit accounts and life insurance policies provides a relatively steady flow of income while the other sources are more volume or transaction related and consequently can vary from quarter to quarter.
For the quarter ended June 30, 2021, non-interest income was $3,777,000, compared to $8,121,000 for the second quarter of 2020, a $4,344,000 (53.5%) decrease, which was attributable to decreases in gain on sales of loans of $3,082,000 (51.7%), other non-interest income of $977,000 (52.2%), and net securities gains of $285,000.
Non-interest income for the six months ended June 30, 2021 totaled $9,518,000, compared to $10,955,000 for the same period in 2020, a decrease of $1,437,000 (13.1%). The decrease in non-interest income was primarily attributable to decreases in gain on sales of loans of $1,090,000 (12.8%), net securities gains of $290,000, and other non-interest income of $57,000.
The decrease in gain on sale of loans was attributable to a decrease of loan origination and sales activities within the residential mortgage operations along with a decrease in the average gain on sale per loan. Loan sales for the second quarter of 2021 were 310 loans sold totaling $78.9 million compared to 516 loans sold totaling $138.0 million for the second quarter of 2020, resulting in gains on sale of loans of $2,883,000 for the quarter ended June 30, 2021 compared to $5,965,000 for the quarter ended June 30, 2020. The average loan sale gain approximated $9,300 per loan during the second quarter of 2021 compared to approximately $11,600 for the same period of 2020. Loan sales year to date in 2021 were 770 loans sold totaling $196.5 million compared to 784 loans closed totaling $201.2 million for the same period in 2020, resulting in gains on sale of loans of $7,458,000 for the six months ended June 30, 2021 compared to $8,548,000 for the six months ended June 30, 2020. The average loan sale gain approximated $9,700 per loan during the first six months of 2021 compared to approximately $10,900 for the same period of 2020.
The high levels of mortgage originations and sale activity in 2020 and early 2021 were attributable to the extremely low mortgage rate interest environment created by the Federal Reserve's lowering of Federal funds target rates in March 2020. Those levels of mortgage banking activity or profitability are not sustainable in the long-term and results in the second quarter of 2021 reflect a slowdown of this activity. We anticipate that our non-interest income may be adversely affected in future periods.
Other non-interest income was $892,000 for the quarter ended June 30, 2021 compared to $1,869,000 for the comparable period in 2020, a decrease of $977,000. The decrease in other non-interest income was primarily related to a $1,227,000 decrease in income from the Corporation’s loan hedging program. For the six months ended June 30, 2021, other non-interest income was $2,063,000 compared to $2,120,000 for the six months ended June 30, 2020.
The sale of securities resulted in a gain of $2,000 and a loss of $3,000 for the quarter and six month period ended June 30, 2021, respectively, compared to a gain of $287,000 for both the quarter and six month period ended June 30. 2020. In response to possible liquidity concerns at the time, the Corporation sold certain investment securities during the second quarter of 2020.
Non-Interest Expenses
For the quarter ended June 30, 2021 non-interest expenses were $9,073,000, compared to $8,805,000 for the second quarter of 2020, a $268,000 (3.0%) increase. The significant quarter-over-quarter increases include data processing expense of $159,000 (33.6%), advertising and promotional expenses of $127,000 (27.9%), and equipment service expense of $81,000 (47.9%), offset by decreases in salaries and benefits of $100,000 (1.9%), loan fees of $159,000 (28.9%), and consultant fees of $86,000 (45.6%).
Non-interest expenses for the six months ended June 30, 2021 totaled $18,179,000, compared to $17,015,000 for the same period in 2020, a decrease of $1,164,000 (6.8%). The increase in non-interest expenses was primarily attributable to increases in salaries and benefits of $284,000 (2.9%), data processing of $248,000 (28.4%), depreciation expense of $128,000 (26.5%), equipment service expense of $204,000 (60.5%), and advertising and promotional expense of $116,000 (12.0%), offset by a decrease in legal fees of $107,000 (48.9%).
Maintaining acceptable levels of non-interest expenses and operating efficiency are key performance indicators for the Corporation in its strategic initiatives. The financial services industry uses the efficiency ratio (total non-interest expense as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance. For the quarter ended June 30, 2021, the Corporation’s efficiency ratio was 73.19%, compared to 51.82% for the same period of 2020. For the six months ended June 30, 2021 the Corporation's efficiency ratio was 67.42% compared to 63.14% for the same period of 2020. A lower efficiency ratio generally indicates that a bank is spending less to generate every dollar of income.
Provision for Income Taxes
The provision for income taxes for the quarter ended June 30, 2021 was $484,000 (effective rate of 15.4%), compared to $1,334,000 (effective rate of 19.1%) for the comparable 2020 period. The provision for the six month period ended June 30, 2021 was $1,357,000 (effective rate of 16.7%) compared to $1,444,000 (effective rate of 17.6%) for the comparable 2020 period.
FINANCIAL CONDITION
Overview of Balance Sheet
Total assets amounted to $1.0 billion at June 30, 2021, compared to $978.5 million at December 31, 2020, an increase of $70.8 million (7.2%). The increase in total assets was primarily the result of increases of $62.5 million (109.6%) in cash and cash equivalents, and $34.1 million (17.5%) in securities available-for-sale, offset by a $24.1 million (3.9%) decrease in net loans. Deposits during this same period increased $68.9 million (8.2%). Deposit balances have been positively impacted by the Corporation’s participation in the Paycheck Protection Loan Program.
Shareholders’ equity increased from $111.6 million at December 31, 2020 to $115.7 million at June 30, 2021. This increase was primarily the result of net income during the six month period ended June 30, 2021 of $6,772,000, offset by a decrease in unrealized securities gains, net of tax of $1,564,000, and dividends paid of $1,082,000. The decrease in unrealized securities gains during the six month period ended June 30, 2021 was attributable to increasing long term treasury yields. Net unrealized gains and losses on securities are reported as accumulated other comprehensive income in the consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents totaled $119.6 million at June 30, 2021 and $57.0 million at December 31, 2020, including interest-bearing deposits in other banks of $106.6 million at June 30, 2021 and $46.6 million at December 31, 2020. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation’s present liquidity and performance needs especially considering the availability of other funding sources, as described below. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and corresponding liquidity sources and uses. Management believes the Corporation’s liquidity needs in the near term will be satisfied by the current level of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that will mature within one year. These sources of funds should enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.
Securities
Management monitors the earnings performance and liquidity of the securities portfolio on a regular basis through Asset/Liability Committee (ALCO) meetings. As a result, all securities, except FHLB stock, have been designated as available-for-sale and may be sold if needed for liquidity, asset-liability management or other reasons. Such securities are reported at fair value, with any net unrealized gains or losses reported as a separate component of shareholders’ equity, net of related incomes taxes.
The amortized cost and fair value of available-for-sale securities as of June 30, 2021 totaled $221.3 million and $228.6 million, respectively, resulting in net unrealized gain before tax of $7.3 million and a corresponding after-tax increase in shareholders’ equity of $5.8 million.
Loans and Leases
The Corporation’s primary lending areas are Northwestern, West Central, and Central Ohio. Gross loans and leases totaled $610.3 million at June 30, 2021, compared to $634.1 million at December 31, 2020, a decrease of $23.8 million (3.8%). As compared to December 31, 2020, commercial loans decreased $17.8 million due to PPP loan forgiveness, commercial and multi-family real estate loans decreased $781,000, residential 1-4 family real estate loans decreased $4.5 million and consumer loans decreased $672,000. Loans originated through the PPP program are included in the Commercial segment and had an outstanding balance of $60.8 million as of June 30, 2021 and $76.8 million at December 31, 2020. Excluding the impact of PPP loans forgiven, loans and leases decreased $7.8 million at June 30, 2021 as compared to December 31, 2020.
There are also unrecognized financial instruments at June 30, 2021 and December 31, 2020 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments approximated $191.6 million at June 30, 2021 and $156.4 million at December 31, 2020.
Excluding PPP loans, loan demand was relatively soft throughout the majority of 2020 and the first six months of 2021, primarily as a result of the overall economic impact from the COVID-19 pandemic. Resulting uncertainties in economic conditions in our market areas may lead to reductions in the growth of our commercial and industrial loan, commercial real estate loan, residential real estate loan and consumer loan portfolios. PPP loan balances will likely decrease significantly over the next six months to a year as the forgiveness process continues.
Allowance for Loan and Lease Losses
The following table presents a summary of activity in the allowance for loan and lease losses for the six month periods ended June 30, 2021 and 2020:
| (in thousands) |
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| Six months ended June 30, |
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| 2021 |
2020 |
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| Balance, beginning of period |
$ | 9,994 | $ | 4,131 | ||||
| Provision for loan and lease losses |
300 | 1,450 | ||||||
| Charge offs |
(5 | ) | (22 | ) | ||||
| Recoveries |
22 | 30 | ||||||
| Net recoveries |
17 | 8 | ||||||
| Balance, end of period |
$ | 10,311 | $ | 5,589 | ||||
The allowance for loan and lease losses as a percentage of gross loans and leases was 1.69% at June 30, 2021, 1.58% at December 31, 2020, and 0.83% at June 30, 2020. Excluding PPP loans and the related allocation of allowance, the allowance for loan losses as a percentage of gross loans and leases was 1.88% at June 30, 2021, 1.79% at December 31, 2020, and 0.99% at June 30, 2020. Based on current economic indicators, the Corporation increased the economic factors within the allowance for loan losses evaluation.
Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan and lease losses at a level considered by management to be adequate for losses within the portfolio. Even though management uses all available information to assess possible loan and lease losses, future additions or reductions to the allowance may be required as changes occur in economic conditions and specific borrower circumstances. The regulatory agencies that periodically review the Corporation’s allowance for loan and lease losses may also require additions to the allowance or the charge-off of specific loans and leases based upon the information available to them at the time of their examinations.
Loans and leases on non-accrual status amounted to $760,000 at June 30, 2021 and $950,000 at December 31, 2020. Non-accrual loans and leases as a percentage of outstanding loans amounted to 0.13% at June 30, 2021 and 0.15% at December 31, 2020.
The Corporation considers a loan or lease to be impaired when it becomes probable that the Corporation will be unable to collect under the contractual terms of the loan or lease, as the case may be, based on current information and events. The Corporation had impaired loans totaling $1.5 million with $151,000 of specific reserves at June 30, 2021 and impaired loans of $1.7 million with $255,000 of specific reserves as of December 31, 2020. The Corporation had $1.3 million of impaired loans without specific reserves at June 30, 2021 and $1.3 million of impaired loans without specific reserve at December 31, 2020.
The Corporation had other potential problem credits, consisting of loans graded substandard or special mention, as well as loans over 90 days past due, loans on non-accrual, and TDR loans, amounting to $18.2 million at June 30, 2021 and $19.4 million at December 31, 2020. The Corporation’s credit administration department continues to closely monitor these credits. As of June 30, 2021 the Corporation has also modified or extended 131 loans, approximating $48.7 million in response to the COVID-19 pandemic. As indicated above, the CARES Act and guidance issued by the Federal Bank Regulatory agencies provides relief from classifying COVID-19 related loan modifications as TDR loans.
The Corporation provides pooled reserves for potential problem loans and leases using loss rates calculated considering historic net loan charge-off experience, as well as other environmental and qualitative factors. The Corporation experienced $5,000 of loan charge-offs during the first six months of 2021 compared to $22,000 during the first six months of 2020 with the charge-offs coming primarily from the consumer loan portfolio. The Corporation also provides pooled general reserves for the remaining portion of its loan portfolio not considered to be problem or potential problem loans. These general reserves are also calculated considering, among other things, the historic net charge-off experience for the related loan type.
Funding Sources
The Corporation considers a number of alternatives, including but not limited to, deposits, as well as short-term and long-term borrowings when evaluating funding sources. Deposits, including customer deposits, brokered certificates of deposit, and public funds deposits continue to be the most significant source of funds for the Corporation, totaling $907.2 million, or 97.2% of the Corporation’s outstanding funding sources at June 30, 2021, compared to $838.4 million at December 31, 2020. The significant increase in deposits during the six month period is somewhat attributable to customer deposits from economic stimulus payments and PPP loan proceeds.
Non-interest bearing deposits comprised 20.9% of total deposits at June 30, 2021 and 22.2% at December 31, 2020. We expect that deposit levels may decrease in future periods if the conditions in our market areas become distressed relating to the COVID-19 pandemic.
In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. Other borrowings consisted of $7,250,000 and $7,750,000 of term borrowings from the United Bankers’ Bank (UBB) at June 30, 2021 and December 31, 2020, respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of $12,959,000 and $12,942,000 at June 30, 2021 and December 31, 2020, respectively. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.
Regulatory Capital
The Corporation and Bank met all regulatory capital requirements as of June 30, 2021, and the Bank is considered “well capitalized” under regulatory and industry standards of risk-based capital.
Cash Flow from Operations
As part of the Bank's hedging program, loans held for sale are accumulated into larger blocks before being sold. Depending on the timing of the sales of these blocks, there could be a positive or negative impact to net income and cash flow from operations. As of June 30, 2021, loans held for sale amounted to $18,024,000 compared to $18,427,000 as of December 31, 2020 resulting in a positive impact to cash flow from operations for the six month period ended June 30, 2021 of $403,000. There was a negative impact on cash flow from operations for the six month period ended June 30, 2020 of $8,516,000 from an increase in loans held for sale. Excluding these changes in loans held for sale, cash flow from operations for the six months ended June 30, 2021 and 2020 would have been a positive $7,981,000 and $6,845,000, respectively.
Liquidity and Interest Rate Sensitivity
The objective of the Corporation’s asset/liability management function is to maintain consistent growth in net interest income through management of the Corporation’s balance sheet liquidity and interest rate exposure based on changes in economic conditions, interest rate levels, and customer preferences.
The Corporation manages interest rate risk to minimize the impact of fluctuating interest rates on earnings. The Corporation uses simulation techniques that attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns. The primary method of measuring the sensitivity of earnings of changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit re-pricing to more accurately reflect anticipated pricing behavior. These simulations include adjustments for the lag in prime loan re-pricing and the spread and volume elasticity of interest-bearing deposit accounts, regular savings and money market deposit accounts.
The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The Corporation closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or re-price within a designated time frame.
Management believes the Corporation’s current mix of assets and liabilities provides a reasonable level of risk related to significant fluctuations in net interest income and the resulting volatility of the Corporation’s earning base. The Corporation’s management reviews interest rate risk in relation to its effect on net interest income, net interest margin, and the volatility of the earnings base of the Corporation.
Effects of Inflation on Financial Statements
All of the Corporation’s assets relate to commercial banking operations and are generally monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss of purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the commercial banking industry, monetary assets typically exceed monetary liabilities. The Corporation has not experienced a significant level of inflation or deflation during the six month period ended June 30, 2021. Management continues to closely monitor interest rate sensitivity trends through the Corporation's asset liability management program and in calculating the allowance for loan and lease losses.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to Smaller Reporting Companies.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures.
With the participation of our management, including our chief executive officer, who is also serving as our interim chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on that evaluation, the Corporation's management, including the Chief Executive Officer, who is also serving as our Chief Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting.
There were no significant changes during the period covered by this Quarterly Report on Form 10-Q in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – Other Information
There are no pending legal proceedings to which the Corporation or its subsidiaries are a party or to which any of their property is subject except routine legal proceedings to which the Corporation or its subsidiaries are a party incident to the banking business. None of such proceedings are considered by the Corporation to be material.
The significant factors known that could materially adversely affect the business, financial condition or operating results of the Corporation are described in Part I, Item 1A “Risk Factors” in the Form 10-K for the fiscal year ended December 31, 2020.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.
The Corporation has not sold any of its securities which were not registered under the Securities Act during the period covered by this report. The table below includes certain information regarding the Corporation’s purchase of United Bancshares, Inc. common stock during the quarterly period ended June 30, 2021:
| Period |
Total number of shares purchased |
Weighted Average price paid per share |
Total number of shares purchased as part of a publicly announced plan or program (a) |
Maximum number of shares that may yet be purchased under the plan or program (a) |
||||||||||||
| 04/01/21 - 04/30/21 |
- | $ | - | 401,979 | 198,021 | |||||||||||
| 05/01/21 - 05/31/21 |
5,922 | $ | 31.59 | 407,901 | 192,099 | |||||||||||
| 06/01/21 - 06/30/21 |
- | $ | - | 407,901 | 192,099 | |||||||||||
(a) A stock repurchase program (“Plan”) was adopted by the Corporation’s Board of Directors and originally announced on July 29, 2005. The Plan, which was subsequently amended on December 23, 2005, March 20, 2007 and December 17, 2013, authorizes the Corporation to repurchase up to 600,000 of the Corporation’s common shares from time to time in a program of market purchases or in privately negotiated transactions as the securities laws and market conditions permit.
Item 3: Defaults upon Senior Securities.
None
Item 4: Mine Safety Disclosures
Not applicable
None
| Exhibit Number |
Description |
Exhibit Location |
| 3.1 |
Incorporated herein by reference to the Corporation's Form 10Q for the quarter ended June 30, 2006. |
|
| 3.2 |
Incorporated herein by reference to the Corporation’s Form 10Q for the quarter ended June 30, 2007. |
|
| 4 | Description of Registrant's Common Stock | Incorporated herein by reference to the Corporation's Form 10K for the year ended December 31, 2020 |
| 31.1 |
Filed herewith |
|
| 32.1 |
Filed herewith |
|
| 99.1 |
Safe Harbor under the Private Securities Litigation Reform Act of 1995 |
Filed herewith |
| 101.INS |
Inline XBRL Instance Document |
Filed herewith |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
Filed herewith |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation |
Filed herewith |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition |
Filed herewith |
| 101.LAB |
Inline XBRL Taxonomy Extension Label |
Filed herewith |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation |
Filed herewith |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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UNITED BANCSHARES, INC. |
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|
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| Date: August 3, 2021 |
By: /s/ Brian D. Young |
|
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Brian D. Young |
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Chief Executive Officer and Interim Chief Financial Officer |
Exhibit 31.1
Rule 13a–14(a)/15d–14(a) CERTIFICATION
I, Brian D. Young, President and Chief Executive Officer of United Bancshares, Inc., certify, that:
(1) I have reviewed this Quarterly Report on Form 10-Q of United Bancshares, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Brian D. Young
Brian D. Young
Chief Executive Officer and Interim Chief Financial Officer
August 3, 2021
Exhibit 32.1
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of United Bancshares, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Brian D. Young
Brian D. Young
Chief Executive Officer and Interim Chief Financial Officer
Date: August 3, 2021
*This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
Exhibit 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. United Bancshares, Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, is forward-looking. In some cases, information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appears together with such statement. In addition, forward-looking statements are subject to other risks and uncertainties affecting the financial institutions industry, including, but not limited to, the following:
Interest Rate Risk
The Corporation’s operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The interest income and interest expense of the Corporation changes as the interest rates on interest-earning assets and interest-bearing liabilities change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond the Corporation's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect the Corporation's income.
Possible Inadequacy of the Allowance for Loan and Lease Losses
The Corporation maintains an allowance for loan and lease losses based upon a number of relevant factors, including, but not limited to, trends in the level of non-performing assets and classified loans and leases, current economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans and leases and changes in the composition of the loan and lease portfolio. While the Board of Directors of the Corporation believe that it uses the best information available to determine the allowance for loan and lease losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final determination.
Loans and leases not secured by one to four family residential real estate are generally considered to involve greater risk of loss than loans secured by one to four family residential real estate due, in part, to the effects of general economic conditions. The repayment of multifamily residential, nonresidential real estate and commercial loans generally depends upon the cash flow from the operation of the property or business, which may be negatively affected by national and local economic conditions. Construction loans may also be negatively affected by such economic conditions, particularly loans made to developers who do not have a buyer for a property before the loan is made. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more likely to pay mortgage loans than consumer loans. In addition, the collateral securing such loans and leases, if any, may decrease in value more rapidly than the outstanding balance of the loan or lease.
Competition
The Corporation competes for deposits with other savings associations, commercial banks and credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The size of financial institutions competing with the Corporation is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Corporation.
Legislation and Regulation that may Adversely Affect the Corporation's Earnings
The Corporation is subject to extensive regulation by the State of Ohio, Division of Financial Institutions (the “ODFI”), the Federal Reserve Bank (the “FED”), and the Federal Deposit Insurance Corporation (the "FDIC") and is periodically examined by such regulatory agencies to test compliance with various regulatory requirements. Such supervision and regulation of the Corporation and the bank are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of the Corporation to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on the Corporation's net earnings.