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UBOH United Bancshares Inc.

Filed: 4 May 21, 4:36pm
 
 

  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

Commission file number 333-86453

 

UNITED BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

Ohio

(State or other jurisdiction of incorporation or organization)

 

105 Progressive Drive, Columbus Grove, Ohio

(Address of principal executive offices)

 

34-1516518

(I.R.S. Employer Identification Number)

 

45830

(Zip Code)

 

(419) 659-2141

(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

Common Stock, No Par Value

UBOH

NASDAQ Global Market

 

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐Non-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 ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2021: 3,278,789.

 

This document contains 39 pages. The Exhibit Index is on page 38 immediately preceding the filed exhibits.

 

 

1

 

 

 
 
 

UNITED BANCSHARES, INC.

 

Table of Contents

  

 

 

 

 

 

Page

 

 

 

Part I – Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

Item 4 – Controls and Procedures

36

 

 

 

Part II – Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

37

 

 

 

 

Item 1A – Risk Factors

37

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

 

Item 3 – Defaults Upon Senior Securities

37

 

 

 

 

Item 4 – Mine Safety Disclosures

38

 

 

 

 

Item 5 – Other Information

38

 

 

 

 

Item 6 – Exhibits

38

 

 

2

 

  

 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

United Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 March 31, 2021 (unaudited) and December 31, 2020

 

 

  

(in thousands except share data)

 
  

March 31,

  

December 31,

 
  

2021

  

2020

 

ASSETS

        

CASH AND CASH EQUIVALENTS

        

Cash and due from banks

 $10,559  $10,446 

Interest-bearing deposits in other banks

  87,327   46,588 

Total cash and cash equivalents

  97,886   57,034 

SECURITIES, available-for-sale

  200,436   194,580 

FEDERAL HOME LOAN BANK STOCK, at cost

  5,598   5,598 

LOANS HELD FOR SALE

  17,873   18,427 

LOANS AND LEASES

  636,373   634,103 

Less allowance for loan and lease losses

  10,301   9,994 

Net loans and leases

  626,072   624,109 

PREMISES AND EQUIPMENT, net

  19,253   19,341 

GOODWILL

  28,616   28,616 

CORE DEPOSIT INTANGIBLE ASSETS, net

  607   643 

CASH SURRENDER VALUE OF LIFE INSURANCE

  19,099   18,981 

OTHER ASSETS, including accrued interest receivable

  11,534   11,203 

TOTAL ASSETS

 $1,026,974  $978,532 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

LIABILITIES

        

Deposits:

        

Non-interest-bearing

 $187,511  $185,915 

Interest-bearing

  701,050   652,463 

Total deposits

  888,561   838,378 

Other borrowings

  7,500   7,750 

Junior subordinated deferrable interest debentures

  12,950   12,942 

Other liabilities

  5,892   7,863 

Total liabilities

  914,903   866,933 

SHAREHOLDERS’ EQUITY

        

Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares

  3,761   3,761 

Surplus

  15,476   15,438 

Retained earnings

  96,308   92,716 

Accumulated other comprehensive income

  4,090   7,355 

Treasury stock, at cost, 481,768 shares at March 31, 2021 and 488,573 shares at December 31, 2020

  (7,564)  (7,671)

Total shareholders’ equity

  112,071   111,599 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $1,026,974  $978,532 

 

The accompanying notes are an integral part of the consolidated financial statements.

                 

3

 

 

 

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

Three months ended March 31, 2021 and 2020 (unaudited)

 

  

(in thousands except share data)

 
  

Three months ended March 31,

 
  

2021

  

2020

 

INTEREST INCOME

        

Loans and leases, including fees

 $8,407  $7,945 

Securities:

        

Taxable

  414   612 

Tax-exempt

  617   498 

Other

  52   177 

Total interest income

  9,490   9,232 

INTEREST EXPENSE

        

Deposits

  632   1,535 

Other borrowings

  203   573 

Total interest expense

  835   2,108 

Net interest income

  8,655   7,124 

PROVISION FOR LOAN AND LEASE LOSSES

  300   550 

Net interest income after provision for loan and lease losses

  8,355   6,574 

NON-INTEREST INCOME

        

Gain on sale of loans

  4,576   2,583 

Net securities losses

  (5)  - 

Other non-interest income

  1,170   251 

Total non-interest income

  5,741   2,834 

NON-INTEREST EXPENSES

  9,106   8,210 

INCOME BEFORE INCOME TAXES

  4,990   1,198 

PROVISION FOR INCOME TAXES

  873   110 

NET INCOME

 $4,117  $1,088 

NET INCOME PER SHARE

        

Basic

 $1.26  $0.33 

Diluted

 $1.24  $0.33 

Weighted average common shares outstanding (basic)

  3,277,744   3,270,066 

Weighted average common shares outstanding (diluted)

  3,311,260   3,270,066 

 

The accompanying notes are an integral part of the consolidated financial statements.

             

4

 

  

 

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three months ended March 31, 2021 and 2020 (unaudited)

 

  

(in thousands)

 
  

Three months ended March 31,

 
  

2021

  

2020

 
         

NET INCOME

 $4,117  $1,088 
         

OTHER COMPREHENSIVE INCOME

        

Unrealized gain on securities:

        

Unrealized holding gains (losses) during period

  (4,138)  3,733 

Reclassification adjustments for losses included in net income

  5   - 

Other comprehensive income (loss), before income taxes

  (4,133)  3,733 

Income tax expense (benefit) related to items of other comprehensive income

  (868)  784 

Other comprehensive income (loss)

  (3,265)  2,949 

COMPREHENSIVE INCOME

 $852  $4,037 

 

The accompanying notes are an integral part of the consolidated financial statements.

              

5

 

  

 

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands except share data)

 

Three months ended March 31, 2021 and 2020 (unaudited)

 

  

Common stock

  

Surplus

  

Retained earnings

  Accumulated other comprehensive income  

Treasury stock

  

Total

 

BALANCE AT DECEMBER 31, 2020

 $3,761  $15,438  $92,716  $7,355  $(7,671) $111,599 

Comprehensive income:

                        

Net income

  -   -   4,117   -   -   4,117 

Other comprehensive loss

  -   -   -   (3,265)  -   (3,265)
6,805 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan  -   4   -   -   107   111 

Stock option expense

  -   45   -   -   -   45 
Stock option exercise      (11)              (11)

Cash dividends declared, $0.16 per share

  -   -   (525)  -   -   (525)

BALANCE AT MARCH 31, 2021

 $3,761  $15,476  $96,308  $4,090  $(7,564) $112,071 
                         

BALANCE AT DECEMBER 31, 2019

 $3,761  $15,251  $80,629  $2,872  $(7,732) $94,781 

Comprehensive income:

                        

Net income

  -   -   1,088   -   -   1,088 

Other comprehensive income

  -   -   -   2,949   -   2,949 
2,304 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan  -   26   -   -   36   62 

Stock option expense

  -   60   -   -   -   60 

Cash dividends declared, $0.14 per share

  -   -   (458)  -   -   (458)

BALANCE AT MARCH 31, 2020

 $3,761  $15,337  $81,259  $5,821  $(7,696) $98,482 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6

 

 

 

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

Three months ended March 31, 2021 and 2020 (unaudited)

 

  

(in thousands)

 
  Three months ended March 31, 
  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 $3,527  $(1,474)
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Proceeds from sales, calls and maturities of available-for-sale securities

  10,001   6,908 

Purchases of available-for-sale securities

  (20,186)  (7,494)
Purchases of FHLB stock  -   (296)

Net increase in loans and leases

  (1,876)  3,385 

Purchases of premises and equipment

  (125)  (14)

Net cash provided by (used in) investing activities

  (12,186)  2,489 
         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Net increase in deposits

  50,175   17,991 

Repayments of other borrowings

  (250)  (250)

Proceeds from sale of treasury shares

  111   62 

Cash dividends paid

  (525)  (458)

Net cash provided by financing activities

  49,511   17,345 

NET INCREASE IN CASH AND CASH EQUIVALENTS

  40,852   18,360 

CASH AND CASH EQUIVALENTS

        

At beginning of period

  57,034   26,412 

At end of period

 $97,886  $44,772 

SUPPLEMENTAL CASH FLOW DISCLOSURES

        

Cash paid during the period for:

        

Interest

 $875  $2,153 

Federal income taxes

 $-  $- 

Non-cash investing activities:

        

Change in net unrealized gain or loss on available-for-sale securities

 $(4,133) $3,733 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7

 

United Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 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 three months ended March 31, 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 April, 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.  This update is not expected to have a significant impact on the Corporation's consolidated financial statements.

 

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.  The Corporation does not expect adoption of this guidance to 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 is not expected to have a significant impact on the Corporation's consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments.  This update affects a wide variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.  This update is not expected to 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.

 

 
8

 

 

 

NOTE 3 - SECURITIES

 

The amortized cost, unrealized gains and losses, and fair value of available-for-sale securities as of March 31, 2021 and December 31, 2020 are as follows:

 

  

(in thousands)

 

March 31, 2021

 

Amortized cost

  

Gross unrealized gains

  

Gross unrealized losses

  

Fair value

 

Available-for-sale:

                
Agency $2,500  $-  $15  $2,485 
Obligations of states and political subdivisions  97,562   4,675   571   101,666 
Mortgage-backed  94,049   1,942   853   95,138 

Other

  1,147   -   -   1,147 
                 

Total

 $195,258  $6,617  $1,439  $200,436 

 

 

  

(in thousands)

 

December 31, 2020

 

Amortized cost

  

Gross unrealized gains

  

Gross unrealized losses

  

Fair value

 

Available-for-sale:

                

Obligations of states and political subdivisions

 $93,406  $6,400  $1  $99,805 

Mortgage-backed

  90,712   2,904   5   93,611 

Other

  1,151   13   -   1,164 
                 

Total

 $185,269  $9,317  $6  $194,580 

  

9

 

  

 

NOTE 4 – LOANS AND LEASES

 

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the three month periods ended March 31, 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

 $1,683  $6,664  $1,515  $132  $9,994 

Provision charged to expenses

  40   239   26   (5)  300 

Losses charged off

  -   -   -   (2)  (2)

Recoveries

  -   9   -   -   9 

Balance at March 31, 2021

 $1,723  $6,912  $1,541  $125  $10,301 
                     

Balance at December 31, 2019

 $592  $2,536  $939  $64  $4,131 

Provision charged to expenses

  109   422   9   10   550 

Losses charged off

  -   -   (4)  (5)  (9)

Recoveries

  3   3   9   -   15 

Balance at March 31, 2020

 $704  $2,961  $953  $69  $4,687 

  

10

 

 

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 March 31, 2021 and December 31, 2020:

  

  

(in thousands)

 

March 31, 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

 $-  $-  $222  $-  $222 

Collectively evaluated for impairment

  

1,723

   6,912   1,319   125   10,079 

Total allowance for loan and lease losses

 $1,723  $6,912  $1,541  $125  $10,301 
                     

Loans and leases:

                    

Individually evaluated for impairment

 $-  $1,455  $1,416  $-  $2,871 

Acquired with deteriorated credit quality

  67   75   -   -   142 

Collectively evaluated for impairment

  105,134   364,320   157,618   6,288   633,360 

Total ending loans and leases balance

 $105,201  $365,850  $159,034  $6,288  $636,373 

 

 

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

 $-  $6  $249  $-  $255 

Collectively evaluated for impairment

  1,683   6,658   1,266   132   9,739 

Total allowance for loan and lease losses

 $1,683  $6,664  $1,515  $132  $9,994 
                     

Loans and leases:

                    

Individually evaluated for impairment

 $-  $1,047  $1,978  $-  $3,025 

Acquired with deteriorated credit quality

  60   104   -   -   164 

Collectively evaluated for impairment

  111,001   373,681   139,302   6,930   630,914 

Total ending loans and leases balance

 $111,061  $374,832  $141,280  $6,930  $634,103 

 

11

 

  

The average recorded investment in impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) for the three month period ended March 31, 2021 was $2,948,000 compared to $2,847,000 for the three month period ended March 31, 2020. There was $222,000 of allowance for loan and lease losses specifically reserved as of March 31, 2021 for impaired loans compared to $400,000 as of March 31, 2020. Additionally, there was approximately $6,000 in interest income recognized by the Corporation on impaired loans and leases on an accrual or cash basis for the three month period ended March 31, 2021 and $12,000 for the three month period ended March 31, 2020.

 

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 March 31, 2021 and December 31, 2020. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.

 

  

(in thousands)

 

March 31, 2021

 

Nonaccrual

  Loans and leases past due over 90 days still accruing  Accruing Troubled Debt Restructurings 

Residential 1-4 family real estate

 $263  $59  $157 

Commercial and multi-family real estate

  495   -   506 

Agricultural real estate

  6   -   - 
Commercial  -   -   768 
Agriculture  -   -   - 
Consumer  -   -   - 

Total

 $764  $59  $1,431 
             

December 31, 2020

            

Residential 1-4 family real estate

 $363  $60  $175 

Commercial and multi-family real estate

  570   -   546 

Agricultural real estate

  11   -   - 

Commercial

  -   -   769 

Agriculture

  -   -   - 

Consumer

  6   -   - 

Total

 $950  $60  $1,490 

 

12

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of March 31, 2021 and December 31, 2020 by class of loans and leases:

 

  

(in thousands)

 

March 31, 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

 $154  $-  $104  $258  $104,943  $105,201 

Commercial and multi-family real estate

  967   -   212   1,179   318,405   319,584 

Agricultural real estate

  -   -   -   -   46,266   46,266 

Commercial

  -   -   -   -   151,156   151,156 

Agriculture

  -   -   -   -   7,878   7,878 

Consumer

  -   -   -   -   6,288   6,288 

Total

 $1,121  $-  $316  $1,437  $634,936  $636,373 
                         

December 31, 2020

                        

Residential 1-4 family real estate

 $795  $-  $173  $968  $110,093  $111,061 

Commercial and multi-family real estate

  468   181   212   861   330,154   331,015 

Agricultural real estate

  -   -   -   -   43,817   43,817 

Commercial

  676   -   -   676   130,897   131,573 

Agriculture

  -   -   -   -   9,707   9,707 

Consumer

  4   -   6   10   6,920   6,930 

Total

 $1,943  $181  $391  $2,515  $631,588  $634,103 

 

13

 

  

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 March 31, 2021 and December 31, 2020. The Corporation risk rates all commercial and commercial real estate loans.

 

As of March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans and leases is as follows:

 

  

(in thousands)

 

March 31, 2021

 

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Not rated

 

Residential 1 - 4 family

 $3,969  $-  $-  $-  $101,232 

Commercial and multi- family real estate

  347,651   4,501   13,652   -   46 

Commercial

  60,473   472   2,280   -   95,809 

Consumer

  -   -   -   -   6,288 

Total

 $412,093  $4,973  $15,932  $-  $203,375 
                     

December 31, 2020

                    

Residential 1 - 4 family

 $6,767  $-  $-  $-  $104,294 

Commercial and multi- family real estate

  356,163   6,964   11,536   -   169 

Commercial

  64,068   495   2,530   -   74,187 

Consumer

  -   -   -   -   6,930 

Total

 $426,998  $7,459  $14,066  $-  $185,580 

 

14

 

 

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 March 31, 2021 and December 31, 2020:

 

  

(in thousands)

 

March 31, 2021

 

Residential 1-4 family

  

Commercial and multi-family real estate

  

Commercial

  

Consumer

  

Total

 
                     

Performing

 $101,128  $30  $95,809  $6,288  $203,255 

Nonperforming

  104   16   -   -   120 

Total

 $101,232  $46  $95,809  $6,288  $203,375 
                     

December 31, 2020

                    
                     

Performing

 $104,121  $153  $74,187  $6,924  $185,385 

Nonperforming

  173   16   -   6   195 

Total

 $104,294  $169  $74,187  $6,930  $185,580 

  

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 no modifications for TDR loans and leases for which there was a payment default during the three month period ended March 31, 2021.  As a result of the COVID-19 pandemic, payment deferrals and interest only payment options for consumer, small business, and commercial customers for up to 90 days were offered.  Payment extensions of up to 90 days for mortgage customers were also offered. At March 31, 2021, 140 loans were modified or extended, approximating $52.0 million.  These modifications and extensions were made under the CARES act and are not considered TDR's.

 

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.

  

15

 

 

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

 $10,181  $(319) $9,862 

Change due to payments received

  (1,107)  43   (1,064)

Balance at March 31, 2021

 $9,074  $(276) $8,798 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2020

 $109  $(59) $50 

Change due to payments received

  (20)  23   3 

Balance at March 31, 2021

 $89  $(36) $53 

 

 

  

Benchmark Bank

 
  

(in thousands)

 
  Contractual         
  Principal  Accretable  Carrying 
  Receivable  Difference  Amount 

Purchased Performing Loans and Leases

            

Balance at December 31, 2020

 $37,386  $(655) $36,731 

Change due to payments received

  (5,829)  142   (5,687)

Balance at March 31, 2021

 $31,557  $(513) $31,044 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2020

 $287  $(173) $114 

Change due to payments received

  (31)  6   (25)

Balance at March 31, 2021

 $256  $(167) $89 

 

There was no provision for loan and lease losses recognized during the three month periods ended March 31, 2021 and 2020 related to the acquired loans, as there was no significant change to the credit quality of the loans during the period.

 

16

 

 

 

NOTE 5 – OTHER BORROWINGS

 

Other borrowings consists of the following at March 31, 2021 and December 31, 2020

 

  

(in thousands)

 
  

March 31,

  

December 31,

 
  

2021

  

2020

 

United Bankers Bank

        

Note payable, with interest at 4.875% and $250,000 principal payments payable quarterly with any remaining unpaid principal, due September 1, 2022. All Union Bank stock is held as collateral.

 $7,500  $7,750 

Total other borrowings

 $7,500  $7,750 

  

 

Future maturities of other borrowings are as follows: 2021, $750,000; and 2022, $6,750,000.

 

The Corporation had $153,411,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan Bank and other financial institutions at March 31, 2021.

 

17

 

 

 

NOTE 6 – JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

 

The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (“United Trust”) which is not consolidated by the Corporation. United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation. The debentures have a stated maturity date of March 26, 2033. As of March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option. Interest is payable quarterly at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR, amounting to 3.35% aMarch 31, 2021 and 3.40% at December 31, 2020. The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.

 

The Corporation assumed $3,093,000 of trust preferred securities through the OSB acquisition with $3,000,000 of the liability guaranteed by the Corporation and the remaining $93,000 secured by an investment in the trust preferred securities. The trust preferred securities carrying value as of March 31, 2021 and December 31, 2020 was $2,650,000 and $2,642,000, respectively. The difference between the principal owed and the carrying value is due to the below-market interest rate on the debentures. The debentures have a stated maturity date of April 23, 2034. Interest is at a floating rate adjustable quarterly and equal to 285 basis points over the 3-month LIBOR, amounting to 3.07% at March 31, 2021 and 3.06% at December 31, 2020.

 

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 $108,000 and $161,000 for the three month periods ended March 31, 2021 and 2020, respectively, and is included in other borrowings interest expense in the accompanying consolidated statements of income. 

 

 

 

 

18

 

 

 

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 no financial liabilities) measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 include available-for-sale securities, which are valued using Level 1 and Level 2 inputs, as well as mortgage servicing rights, amounting to $1,650,000 at March 31, 2021 and $1,132,000 at December 31, 2020, which are valued using Level 3 inputs. Financial assets measured at fair value on a nonrecurring basis at March 31, 2021 include loans classified as impaired totaling $1,535,000 compared to $1,463,000 at December 31, 2020

 

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during the period ended March 31, 2021, due to the lack of observable quotes in inactive markets for those instruments at March 31, 2021.

 

19

 

  

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 three month period ended March 31, 2021 and for the year ended December 31, 2020:

 

  

(in thousands)

 
  

March 31,

  

December 31,

 
  

2021

  

2020

 

Mortgage Servicing Rights

        

Balance at beginning of period

 $1,132  $1,061 

Gains or losses, including realized and unrealized:

        

Purchases, issuances, and settlements

  229   690 

Disposals - amortization based on loan payments and payoffs

  (51)  (326)

Changes in fair value

  340   (293)

Balance at end of period

 $1,650  $1,132 

  

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.

 

20

 

  

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 15% and 35% of appraised value, and estimated selling cost ranges between 10% and 20% of the adjusted appraised value.  Due to the significance of the Level 3 inputs, impaired loans fair values have been classified as Level 3.

 

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 8% and 10%, in addition to prepayment, internal rate of return, servicing costs, inflation rate of servicing costs and earnings rate assumptions that are considered to be unobservable inputs. Due to the significance of the Level 3 inputs, mortgage servicing rights have been classified as Level 3.

 

Other Real Estate Owned

 

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less appraisal adjustments typically between 10% and 30% of appraised value, and expected selling costs between 10% and 20% of adjusted appraised value. Such values are estimated primarily using appraisals or evaluations utilizing a market value approach. Due to the significance of the Level 3 inputs, other real estate owned is classified as Level 3.

 

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 March 31, 2021 and December 31, 2020.

  

21

 

  

 

NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts and estimated fair values of recognized financial instruments at March 31, 2021 and December 31, 2020 were as follows:

 

  

(in thousands)

     
  

March 31, 2021

  

December 31, 2020

     
  

Carrying amount

  

Estimated value

  

Carrying amount

  

Estimated value

  

Input Level

 
                     

FINANCIAL ASSETS

                    

Cash and cash equivalents

 $97,886  $97,886  $57,034  $57,034   1 

Securities, including FHLB stock

  206,034   206,034   200,178   200,178   2,3 

Loans held for sale

  17,873   17,873   18,427   18,427   3 

Net loans and leases

  626,072   627,218   624,109   625,628   3 

Mortgage servicing rights

  1,650   1,650   1,132   1,132   3 

Hedging assets

  2,156   2,156   3,245   3,245   3 

Total Financial Assets

 $951,671  $952,817  $904,125  $905,644     
                     

FINANCIAL LIABILITIES

                    

Deposits

                    

Maturity

 $153,929  $154,683  $152,331  $153,337   3 

Non-maturity

  734,632   734,632   686,047   686,047   1 

Other borrowings

  7,500   7,500   7,750   7,750   3 

Junior subordinated deferrable interest debentures

  12,950   10,439   12,942   10,300   3 

Hedging liabilities

  -   -   616   616   3 

Total Financial Liabilities

 $909,011  $907,254  $859,686  $858,050     

 

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 March 31, 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 $189,957,000 at March 31, 2021 and $156,385,000 at December 31, 2020. Such amounts are also considered to be the estimated fair values.

 

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.

 

22

 

 

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.

  

23

 

 

 

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 250,000 shares are available for issuance pursuant to the Plan.

 

The Corporation issued 63,858 options during 2020 at an exercise price of $19.83, 33,853 options during 2019 at an average exercise price of $22.97, and 31,267 options during 2018 at an exercise price of $23.30 under the Plan.   Following is a summary of activity for stock options for the three month periods ended March 31, 2021 and March 31, 2020

 

  March 31,  March 31, 
  2021  2020 

Outstanding, beginning of period

  157,817   117,647 

Granted

  -   - 

Exercised

  (2,520)  - 

Forfeited

  -   - 

Outstanding, end of period

  155,297   117,647 

Weighted average exercise price at end of quarter

 $19.80  $21.81 

 

Options vest over a three-year period on the anniversary of the date of grant. At March 31, 2021, 65,749 options were vested compared to 57,033 options vested at March 31, 2020 and outstanding options had a weighted average remaining contractual term of 7.9 years.

 

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

 $4.83  $7.77  $7.87 

Average dividend yield

  2.93

%

  2.26

%

  2.18

%

Expected volatility

  40.00

%

  40.00

%

  40.00

%

Risk-free interest rate

  0.49

%

  1.93

%

  2.81

%

Expected term (years)

  7   7   7 

 

Total compensation expense related to the stock options granted in 2020, net of forfeitures, is expected to be $308,000 and is being recognized ratably over the 36 month period beginning July 1, 2020.  Total compensation expense related to the stock options granted in 2019, net of forfeitures, is expected to be $223,000 and is being recognized ratably over the 36 month period beginning July 1, 2019.  Total compensation expense related to the stock options granted in 2018, net of forfeitures, is expected to be $175,000 and is being recognized ratably over the 36 month period beginning September 1, 2018.  Stock option expense for outstanding awards amounted to $45,000 for the three months ended March 31, 2021 and $60,000 for the three months ended March 31, 2020.  

24

 

   

 

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 three months ended March 31, 2021 and 2020.  Items outside the scope of ASC 606 are noted as such.

 

  

Three Months ended March 31,

 
  

2021

  

2020

 

Service charges on deposit accounts

 $241  $350 

Gain on sale of loans (1)

  4,576   2,583 
Net securities losses (1)  (5)  - 

Change in fair value of mortgage servicing rights (1)

  340   (243)

Increase in cash surrender value of life insurance (1)

  118   96 

Other

        

Credit and debit card interchange fees

  430   332 

Wealth management

  99   85 

Net loan servicing fees (1)

  121   85 

Other non-interest income 

  (179)  (454)

Total non-interest income

 $5,741  $2,834 

 

(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 March 31, 2021 but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at March 31, 2021 have been recognized in the consolidated financial statements for the period ended March 31, 2021. Events or transactions that provided evidence about conditions that did not exist at March 31, 2021 but arose before the financial statements were issued have not been recognized in the consolidated financial statements for the period ended March 31, 2021.

 

On April 20, 2021, the Corporation's Board of Directors approved a cash dividend of $0.17 per common share payable June 15, 2021 to shareholders of record at the close of business on May 28, 2021.

 

  

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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 March 31,

 
  

2021

  

2020

 

SIGNIFICANT RATIOS (Unaudited)

        

Net income to:

        

Average assets (a)

  1.66%  0.49%

Average tangible shareholders’ equity (non-GAAP) (a)

  19.94%  6.40%

Net interest margin (non-GAAP) (a)

  3.85%  3.60%

Efficiency ratio (non-GAAP) (a)

  62.51%  81.30%

Average shareholders’ equity to average assets

  11.25%  10.98%

Loans to deposits (end of period) (b)

  71.62%  81.86%

Allowance for loan losses to loans (end of period)

  1.62%  0.82%
         

Book value per share

 $34.18  $30.11 

 

(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

 

March 31, 2021

  

March 31, 2020

 

Shareholders' equity

 $112,071  $98,482 

Less goodwill and other intangibles

  29,224   29,372 

Tangible common equity

 $82,847  $69,110 

Average shareholders' equity

 $111,839  $97,336 

Less average goodwill and other intangibles

  29,236   29,386 

Average tangible common equity

 $82,603  $67,950 
         

Return on Average Tangible Equity

        

Net income, annualized ( a )

 $16,468  $4,352 

Average tangible common equity (b)

 $82,603  $67,950 

Return on average tangible common equity (a)/(b)

  19.94%  6.40%
         

Net Interest Margin, Tax- Equivalent

        

Net interest income, annualized

 $34,620  $28,496 

Tax-equivalent adjustment

  684   560 

Tax-equivalent net interest income, annualized (c)

 $35,304  $29,056 

Average earning assets (d)

 $916,214  $806,106 

Net interest margin, tax equivalent (c)/(d)

  3.85%  3.60%
         

Efficiency Ratio, Tax-Equivalent

        

Non-interest expense, annualized (e)

 $36,424  $32,840 

Tax-equivalent net interest income, annualized

  35,304   29,056 

Non-interest income, annualized

  22,964   11,336 

Total revenue (f)

 $58,268  $40,392 

Efficiency ratio (e)/(f)

  62.51%  81.30%

 

 

 

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Introduction

 

United Bancshares, Inc. (the “Corporation”), an Ohio corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, 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 FDIC.

 

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.

 

When or if used in the Corporation’s Securities and Exchange Commission filings or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases: “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to the risks and uncertainties that include but are not limited to: changes in regional and national economic conditions, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation’s market area, credit and other risks associated with lending and investing activities and competition. All or some of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

 

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 any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

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.

 

 

27

 

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 will likely 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.

 

Our primary banking market area is Northwestern and Central Ohio.  In Ohio, the Governor ordered individuals to stay at home and non-essential businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 15, 2020, and was effective through May 1, 2020. In response to this order, the Bank continued to serve its customers through its drive-up windows at various branch locations and through online and mobile banking and many of the Corporation's employees continue to work remotely.

 

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 4.7% in March 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. While many of the public health and economic effects of COVID-19 have been concentrated in the largest U.S. cities, there has been a recent rise in COVID-19 cases in many rural areas throughout the Country including some of the Corporation's market area.  It is still not possible to fully determine what effects this will have within the smaller cities and communities where many of our banking operations are focused.

 

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:

 

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%.

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.

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.

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.  

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:

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.

A one-page simplified forgiveness process for PPP loans $150,000 and under.

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.

A further delay in Troubled Debt Restructuring (TDR) accounting until 60 days after the termination of the national emergency, or January 1, 2022.

A further optional delay in Current Expected Credit Loss (CECL) accounting until January 1, 2022.

A new round of Economic Impact Payments (EIPs) for consumers, with aggressive distribution timelines and new exemptions from garnishments.

Significant added support for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs).

Funding for agricultural support programs and for renter assistance programs.

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.

 

28

 

We believe the COVID-19 pandemic and the specific developments referred to above could have a significant adverse impact on our business in the near future.  In particular, we anticipate that a significant portion of the Bank’s borrowers in the retail, restaurants, and hospitality industries may endure 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. We anticipate that our financial condition, capital levels and results of operations could be adversely affected going forward. The low interest rate environment since the second quarter of 2020 has enabled the Corporation to originate a record number of mortgage loans resulting in higher than normal gain on sale of loans through March 31, 2021.  The Corporation's results have also been 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:

 

 

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 March 31, 2021, we have modified or extended 140 loans, approximating $52.0 million through these programs.

 

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.

 

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.  We commenced participating in the second round of PPP loans beginning January 19, 2021 and have originated $53.1 million in loans to over 1,300 borrowers as of April 14, 2021.

 

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 a work from home policy, 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.

 

 

29

 

  

RESULTS OF OPERATIONS

 

Overview of the Income Statement

 

For the quarter ended March 31, 2021, the Corporation reported net income of $4,117,000, or $1.26 basic earnings per share. This compares to the first quarter of 2020 net income of $1,088,000, or $0.33 basic earnings per share. The increase in operating results for the first quarter of 2021 as compared to the same period in 2020 was primarily attributable to an increase in net interest income of $1,531,000, an increase in non-interest income of $2,907,000, and a decrease in the provision for loan losses of $250,000, offset by an increase in non-interest expenses of $896,000, and an increase in the provision for income taxes of $763,000. The increase in net interest income resulted from Paycheck Protection Program (PPP) loans, including fees of $870,000 as well as a decrease in deposit interest expense of $1,273,000 resulting from lower rates on deposits and a decrease of $51.0 million in borrowings year over year.  

 

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 $8,655,000 for the first quarter of 2021, compared to $7,124,000 for the same period of 2020, an increase of $1.5 million (21.5%).   

 

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 first quarter of 2020 and 2021. 

 

The increase in net interest income for the quarter ended March 31, 2021 was due to an increase in interest income of $258,000 and a $1,273,000 decrease in interest expense.  Interest income increased despite declining portfolio rates for the quarter ended March 31, 2021 due to recognizing loan fee income of $870,000 generated through PPP loan originations.  The remaining $3.4 million of fees received from the SBA 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 $652.0 million for the three months ended March 31, 2021 compared to $585.2 million for the same period of 2020. The yield on average earning assets was 4.28% for the three months ended March 31, 2021 compared to 4.66% 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 0.49% for the three months ended March 31, 2021 compared to 1.25% for the same period of 2020.  This decrease more than offset the $71.6 million increase in average interest bearing deposits for the period ended March 31, 2021 compared to the period ended March 31, 2020

 

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 three months ended March 31, 2021 the net interest margin (on a taxable equivalent basis) was 3.85% compared with 3.60% for the same period in 2020. Loans and leases comprised 68.5% of interest-earning assets at March 31, 2021 compared to 72.6% of interest-earning assets at March 31, 2020.  Interest-bearing deposits comprised 97.2% of average interest-bearing liabilities for the three months ended March 31, 2021, compared to 89.4% 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 we believe 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.

 

 

 

 

 

 

30

 

 

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 quarter ended March 31, 2021 compared to a provision of $550,000 during the quarter ended March 31, 2020.   The allowance for loan and lease losses at March 31, 2020 was 1.62% of total loans compared to 0.82% of total loans at March 31, 2020.

 

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 March 31, 2021, non-interest income was $5,741,000, compared to $2,834,000 for the first quarter of 2020, a $2,907,000 (102.6%) increase, which was attributable to increases in gain on sales of loans of $1,993,000 (77.2%), and other non-interest income of $919,000 (366.1%), offset by a loss on securities of $5,000.

 

The increase in gain on sale of loans was attributable to increased loan origination and sales activities within the residential mortgage operations along with an increase in the average gain on sale per loan.  Loan sales for the first quarter of 2021 were 460 loans closed totaling $117.6 million compared to 268 loans closed totaling $63.1 million for the first quarter of 2020, resulting in gains on sale of loans of $4,576,000 for the quarter ended March 31, 2021 compared to $2,583,000 for the quarter ended March 31, 2020.  The average loan sale gain approximated $9,900 per loan during the first three months of 2021 compared to approximately $9,600 for the same period of 2020.  Much of the increases year over year are attributable to the extremely low mortgage rate interest environment created by the Federal Reserve's lowering of Federal funds target rates in March 2020.  As a consequence, this level of mortgage banking activity or profitability is not likely sustainable in the long-term.  We also anticipate that our non-interest income may be adversely affected in future periods as a result of the COVID-19 pandemic.  Increased unemployment and recessionary concerns may adversely affect mortgage originations and mortgage banking revenue in future periods.

 

Other non-interest income was $1,170,000 for the quarter ended March 31, 2021 compared to $251,000 for the comparable period in 2020, an increase of $919,000.  The increase in other non-interest income was primarily related to a $583,000 increase in the fair value of mortgage servicing rights, and fluctuations in income from the Corporation’s loan hedging program of $284,000.  The increase in the fair value of mortgage servicing rights resulted from a decrease in prepayment speeds.

 

Non-Interest Expenses

 

For the quarter ended March 31, 2021 non-interest expenses were $9,106,000, compared to $8,210,000 for the first quarter of 2020, an $896,000 (10.9%) increase.  The significant quarter-over-quarter increases included salaries and benefits expense of $384,000 (8.0%), loan fees of $181,000 (57.6%), equipment service expense of $123,000 (73.3%), depreciation expense of $64,000 (26.8%), and examination and auditing expense of $56,000 (41.2%). 

 

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 March 31, 2021, the Corporation’s efficiency ratio was 62.51%, compared to 81.30% 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 March 31, 2021 was $873,000 (effective rate of 17.5%), compared to $110,000 (effective rate of 9.2%) for the comparable 2020 period.  The increase in the effective tax rate was largely due to tax-exempt securities comprising only 12.4% of pre-tax income for the three month period ended March 31, 2021 compared to 41.6% for the comparable period in 2020. 

 

31

 

 

FINANCIAL CONDITION

 

Overview of Balance Sheet

 

Total assets amounted to $1.0 billion at March 31, 2021, compared to $978.5 million at December 31, 2020, an increase of $48.4 million (4.9%).  The increase in total assets was primarily the result of increases of $40.9 million (71.6%) in cash and cash equivalents, $5.9 million (3.0%) in securities available-for-sale, and $2.0 million in net loans.  Deposits during this same period increased $50.2 million (6.0%).  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 $112.1 million at March 31, 2021. This increase was primarily the result of net income during the quarter ended March 31, 2021 of $4,117,000, offset by a decrease in unrealized securities gains, net of tax of $3,265,000, and dividends paid of $525,000. The decrease in unrealized securities gains during the quarter ended March 31, 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 $97.9 million at March 31, 2021 and $57.0 million at December 31, 2020, including interest-bearing deposits in other banks of $87.3 million at March 31, 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 March 31, 2021 totaled $195.3 million and $200.4 million, respectively, resulting in net unrealized gain before tax of $5.2 million and a corresponding after-tax increase in shareholders’ equity of $4.1 million.

Loans and Leases

 

The Corporation’s primary lending areas are Northwestern, West Central, and Central Ohio. Gross loans and leases totaled $636.4 million at March 31, 2021, compared to $634.1 million at December 31, 2020, an increase of $2.3 million (0.4%). As compared to December 31, 2020, commercial loans increased $17.6 million due to PPP loan originations, commercial and multi-family real estate loans decreased $9.0 million, residential 1-4 family real estate loans decreased $5.9 million and consumer loans decreased $642,000. Loans originated through the PPP program are included in the Commercial segment and had an outstanding balance of $93.8 million as of March 31, 2021 and $76.8 million at December 31, 2020. Excluding the impact of PPP loan originations, loans and leases decreased $14.7 million at March 31, 2021 as compared to December 31, 2020.

There are also unrecognized financial instruments at March 31, 2021 and December 31, 2020 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments approximated $190.0 million at March 31, 2021 and $156.4 million at December 31, 2020.

Excluding PPP loans, loan demand has been relatively soft in the majority of 2020 and the first three months of 2021.  Demand may decline further for the remainder of 2021 as a result of COVID-19.  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. We are also anticipating that we could see increased line of credit utilization and a reduction in our unused commitments.

 

 

 

 

 

 

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Allowance for Loan and Lease Losses

 

The following table presents a summary of activity in the allowance for loan and lease losses for the three month periods ended March 31, 2021 and 2020:

 

  

(in thousands)

 
  

Three months ended March 31,

 
  

2021

  

2020

 

Balance, beginning of period

 $9,994  $4,131 

Provision for loan and lease losses

  300   550 

Charge offs

  (2)  (9)

Recoveries

  9   15 

Net recoveries

  7   6 

Balance, end of period

 $10,301  $4,687 

 

The allowance for loan and lease losses as a percentage of gross loans and leases was 1.62% at March 31, 2021, 1.58% at December 31, 2020, and 0.82% at March 31, 2020. Excluding PPP loans and the related allocation of allowance, the allowance for loan losses as a percentage of gross loans and leases was 1.90% at March 31, 2021. 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 $764,000 at March 31, 2021 and $950,000 at December 31, 2020. Non-accrual loans and leases as a percentage of outstanding loans amounted to 0.12% at March 31, 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 $1.6 million with $222,000 of specific reserves at March 31, 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 both March 31, 2021 and 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 $18.3 million at March 31, 2021 and $19.4 million at December 31, 2020. The Corporation’s credit administration department continues to closely monitor these credits. As of March 31, 2021 the Corporation has also modified or extended 140 loans, approximating $52.0 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 $2,000 of loan charge-offs during the first three months of 2021 compared to $9,000 during the first three months of 2020 with the charge-offs coming from the consumer loan portfolios. 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.

 

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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 $888.6 million, or 97.1% of the Corporation’s outstanding funding sources at March 31, 2021, compared to $838.4 million at December 31, 2020.  The significant increase in deposits during the three month period is somewhat attributable to customer deposits from PPP loan proceeds.


Non-interest bearing deposits comprised 21.1% of total deposits at March 31, 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 $7,500,000 and $7,750,000 of term borrowings from the United Bankers’ Bank (UBB) at March 31, 2021 and December 31, 2020, respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of $12,950,000 and $12,942,000 at March 31, 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 March 31, 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 March 31, 2021, loans held for sale amounted to $17,873,000 compared to $18,427,000 as of December 31, 2020 resulting in a positive impact to cash flow from operations for the three month period ended March 31, 2021 of $554,000.  There was a negative impact on cash flow from operations for the three month period ended March 31, 2020 of $4,312,000 from an increase in loans held for sale. Excluding these changes in loans held for sale, cash flow from operations for the three months ended March 31, 2021 and 2020 would have been a positive $2,973,000 and $2,838,000, 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 three month period ended March 31, 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.

 

34

 

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to Smaller Reporting Companies.

 

 

35

 

  

ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of Controls and Procedures.

 

With the participation of our management, including our chief executive officer and 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 and Chief Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 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.

 

36

 

  

PART II – Other Information

 

Item 1: Legal Proceedings.

 

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.

 

Item 1A: Risk Factors

 

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 March 31, 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)

 

01/01/21 - 01/31/21

  -  $-   401,554   198,446 
                 

02/01/21 - 03/01/21

  -  $-   401,554   198,446 
                 

03/02/21 - 04/01/21

  -  $-   401,554   198,446 

  

(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

 

37

 

  

Item 4: Mine Safety Disclosures

 

Not applicable

 

Item 5: Other Information.

 

None

 

Item 6: Exhibits

 

Exhibit

Number

 

Description

 

Exhibit Location

3.1

Amended and Restated Articles of Incorporation

Incorporated herein by reference to the Corporation's Form 10Q for the quarter ended June 30, 2006.

3.2

Amended and Restated Code of Regulations

Incorporated herein by reference to the Corporation’s Form 10Q for the quarter ended June 30, 2007.

4Description of Registrant's Common StockIncorporated herein by reference to the Corporation's Form 10K for the year ended December 31, 2020

31.1

Rule 13a-14(a)/15d-14(a) Certification of CEO

Filed herewith

32.1

Section 1350 CEO’s Certification

Filed herewith

99.1

Safe Harbor under the Private Securities Litigation Reform Act of 1995

Filed herewith

101.INS

XBRL Instance Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition

Filed herewith

101.LAB

XBRL Taxonomy Extension Label

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation

Filed herewith

 

38

 

 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.

 

 

 

UNITED BANCSHARES, INC.

 

 

 

Date: May 4, 2021

By: /s/ Brian D. Young                          

 

 

Brian D. Young

 

 

Chief Executive Officer and Interim Chief Financial Officer

 

39