Exhibit 13

Table of Contents

 

		Page(s)
	President’s Letter	1
	Description of the Corporation	2
	Five-Year Summary of Selected Financial Data	3
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
	Report of Independent Registered Public Accounting Firm	18
	Financial Statements
	Consolidated Balance Sheets	21
	Consolidated Statements of Income	22
	Consolidated Statements of Comprehensive Income	23
	Consolidated Statements of Shareholders’ Equity	24
	Consolidated Statements of Cash Flows	25
	Notes to Consolidated Financial Statements	27
	Directors and Officers	67

 

 

Shareholders, Clients, and Team Members:

 

 

Despite the unprecedented operating environment, I am pleased to report that as a result of the efforts of our team members your Company had another successful year. In addition to reporting income before taxes of approximately $16.7 million, return on average tangible equity of 18.53% and return on average assets of 1.42%, all noticeable increases from previous years, your Company also repaid $50 million in FHLB advances, allocated a $6.2 million provision to its allowance for loan losses, and provided more than $125 million in funding to over 1,600 organizations through the Paycheck Protection Program.

 

Your Company posted record profits for the second consecutive year.  Improved year over year results in gain on loan sales ($15.1 million), Paycheck Protection Program loan origination fees ($2.4 million) and decreased deposit interest expense ($2.4 million), were more than sufficient to offset the increased costs of FHLB prepayment penalties ($1 million), non-interest expenses ($6.0 million), and provision for loan losses ($5.7 million).  Additionally, the Company maintained better than peer credit quality metrics.

 

We are also very pleased with the results of the Company’s expansion into Paulding County during the third quarter of 2020.  The Company experienced better than expected growth in deposits and loans and we expect to have our permanent location renovated by the end of 2021.  We also implemented a new technology in that market by establishing the Company’s first Interactive Teller Machine (ITM).  The ITM allows clients to connect virtually with tellers from their local retail location to conduct most transactions.  Our future strategic plans will include further deployment of this technology.

 

In 2021, we plan to continue to invest in our most important driver of success, our team members.  In addition to further development paths for our current team members, we are always exploring ways to add team members with the desired expertise as we continue to expand in size and complexity.  We remain unwavering in the promotion of our core values throughout that process.  Those core values are not just a tag line or a feel good cliché, but the driver of our financial successes.

 

The Company also continues to make investments in technology to create internal efficiencies, reduce the risk of fraud, expand market presence and enhance the client’s experience. Such efforts have yielded positive results in our clients’ use of technology-based products, especially during the pandemic. We believe that effectively implementing technology will promote growth and support for our growing footprint, and provide the opportunity to increase the effectiveness of our team members in serving our clients.

 

The continued accomplishments of your Company is the undeniable result of the ongoing efforts of the Company’s dedicated team members and Board of Directors in implementing our Strategic Plan. Their efforts and our strong corporate values of respect for and accountability to our shareholders, clients, colleagues, and communities are the foundation for the continued success of your Company.  Thank you for your ongoing support and the trust you have placed in us.

 

 

Respectfully,

 

 

 

Brian D. Young

President & CEO

 

 

UNITED BANCSHARES, INC.

 

DESCRIPTION OF THE CORPORATION

 

United Bancshares, Inc., an Ohio corporation (the “Corporation”), is a financial 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. Effective February 1, 2007, the Bank 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. Effective, December 4, 2009, the Bank formed a wholly-owned subsidiary UBC Property, Inc. to hold and manage certain property that was acquired in lieu of foreclosure. At this time all other real estate owned property is being held at the Bank. Through its subsidiary, the Bank, the Corporation is engaged in the business of commercial banking and offers a full range of commercial banking services.

 

The Union Bank Company is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Paulding, Putnam, Sandusky, Van Wert, and Wood Counties, 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.

 

United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001. As of December 31, 2020, the common stock was held by 1,064 shareholders of record.

 

 

AVAILABILITY OF MORE INFORMATION

 

To obtain a copy, without charge, of the United Bancshares, Inc.’s annual report (Form 10-K) filed with the Securities and Exchange Commission, please write to:

 

Heather Oatman, Secretary

United Bancshares, Inc.

105 Progressive Drive

Columbus Grove, Ohio 45830

800-837-8111

 

UNITED BANCSHARES, INC.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

		(Dollars in thousands, except per share data)
		Years ended December 31,
		2020				2019				2018				2017				2016
Statements of income:
Total interest income		$	40,030			$	37,819			$	34,365			$	25,772			$	21,627
Total interest expense			6,988				8,924				6,158				3,118				2,231
Net interest income			33,042				28,895				28,207				22,654				19,396
Provision (credit) for loan losses			6,200				550				450				(350	)			(750	)
Net interest income after provision (credit) for loan losses			26,842				28,345				27,757				23,004				20,146
Total non-interest income			27,000				15,048				9,428				6,099				4,832
Total non-interest expenses			37,165				31,117				27,436				22,378				17,713
Income before federal income taxes			16,677				12,276				9,749				6,725				7,265
Federal income taxes			2,922				1,615				1,529				2,879				1,744
Net income		$	13,755			$	10,661			$	8,220			$	3,846			$	5,521
Per share of common stock:
Net income - basic		$	4.21			$	3.26			$	2.51			$	1.18			$	1.68
Dividends			0.51				0.52				0.48				0.48				0.44
Book value		$	34.11			$	29.00			$	24.76			$	23.17			$	22.21
Average shares outstanding - basic			3,270,996				3,270,878				3,268,667				3,267,305				3,289,497
Average shares outstanding - diluted			3,306,503				3,277,198				3,269,834				3,272,310				3,289,497
Year end balances:
Loans (1)		$	652,530			$	591,725			$	569,319			$	508,796			$	377,596
Securities (2)			200,178				188,913				172,656				174,730				195,035
Total assets			978,532				880,014				830,300				780,450				633,119
Deposits			838,378				707,134				666,236				630,548				524,680
Shareholders' equity			111,599				94,781				80,944				75,704				72,558
Average balances:
Loans (1)			663,097				582,377				540,687				421,564				361,437
Securities (2)			185,847				179,075				173,592				189,815				191,813
Total assets			967,828				861,693				802,989				683,164				614,688
Deposits			792,938				694,857				647,987				565,710				519,102
Shareholders' equity			101,631				86,652				76,142				75,597				74,067
Selected ratios:
Net yield on average interest earning assets (3)			3.77	%			3.75	%			3.96	%			3.80	%			3.59	%
Return on average assets			1.42	%			1.24	%			1.02	%			0.56	%			0.90	%
Return on average shareholders' equity			13.53	%			12.30	%			10.80	%			5.09	%			7.45	%
Net loan charge-offs (recoveries) as a percentage of average outstanding net loans			0.05	%			(0.01	)%			(0.04	)%			0.04	%			(0.07	)%
Allowance for loan losses as a percentage of year end loans (4)			1.58	%			0.72	%			0.63	%			0.56	%			0.89	%
Shareholders' equity as a percentage of total assets			11.40	%			10.77	%			9.75	%			9.70	%			11.46	%

 

Notes:

1)     Includes loans held for sale.

2)     Includes restricted bank stock.

3)     Net yield on average interest-earning assets was computed on a tax-equivalent basis. 4)     Does not include loans held for sale

5)     Financial data for 2017 and subsequent years includes the impact of the Benchmark Bancorp acquisition.

 

 

Forward-looking Statements

 

This report includes certain forward-looking statements by the Corporation relating to such matters as anticipated operating results, prospects for new lines of business, technological developments, economic trends (including interest rates), and similar matters. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions. While the Corporation believes that the assumptions underlying the forward looking statements contained herein and in other public documents are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: economic conditions, volatility and direction of market interest rates, governmental legislation and regulation, material unforeseen changes in the financial condition or results of operations of the Corporation’s customers, customer reaction to and unforeseen complications with respect to the integration of acquisition, product design initiative, and other risks identified, from time-to-time in the Corporation’s other public documents on file with the Securities and Exchange Commission.

 

The following discussion provides additional information relating to the financial condition and results of operations of United Bancshares, Inc.  This section should be read in conjunction with the consolidated financial statements and the supplemental data contained elsewhere in the Annual Report on Form 10-K.

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

United Bancshares, Inc. (the “Corporation”) is a financial holding company that conducts business through its wholly-owned subsidiary, The Union Bank Company (the “Bank”). The Bank is an Ohio state-chartered commercial bank that provides financial services to communities based in northwest Ohio and central Ohio, where it operates 18 full-service branches and 2 loan production offices.

 

As a commercial bank, the Bank concentrates its efforts on serving the financial needs of the businesses in and around the counties it serves. The Bank also provides financing to customers seeking to purchase or build their own homes. The Bank provides deposit, treasury management, wealth management, and other traditional banking products through its full-service branch office network and its electronic banking services.

 

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 5.5% in December 2020, 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 under $150,000.

●

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.

 

 

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 during the second and third quarters of 2020 enabled the Corporation to originate a record number of mortgage loans resulting in $24.1 million of gains on sale of loans during the year ended December 31, 2020.  The Corporation's 2020 results were also bolstered by the aforementioned PPP loan origination activity, including amortization into interest income of $2.4 million of PPP loan origination fees.

 

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.  Through December 31, 2020, we have modified or extended 152 loans, approximating $57.7 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.

●

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.

 

 

Financial Condition

 

Consolidated assets for the Corporation and the Bank totaled $978.5 million at December 31, 2020, compared to $880.0 million at December 31, 2019, representing an increase of $98.5 million or 11.2%. The increase in total assets was primarily the result of an increase of $51.8 million (9.1%) in net loans, $30.6 million (115.9%) in cash and cash equivalents, $11.0 million (6.0%) in securities available for sale and $3.1 million (20.4%) in loans held for sale.  Deposits during this same period increased $131.2 million (18.6%), other borrowings decreased $51.0 million (86.8%), and shareholders’ equity increased $16.8 million (17.7%).  The increase in loans included the impact of the Corporation originating $125.7 million of PPP loans during the second and third quarters of 2020. These loans have also had a positive impact on deposit balances. The increase in loans held for sale is a result of the significant increase in mortgage banking activity experienced throughout the majority of 2020.

 

Loans and Leases

 

At December 31, 2020, total loans and leases, including loans and leases held for sale, amounted to $652.5 million compared to $591.7 million at December 31, 2019, an increase of $60.8 million (10.3%). The following categories within the loan and lease portfolio represent the majority of the change during 2020: Commercial loans increased $63.6 million (81.9%), commercial and multi-family real estate increased $7.2 million (2.0%), and loans held for sale increased $3.1 million (20.4%).  This growth was offset by decreases in residential real estate of $11.8 million (9.6%) and consumer loans of $1.3 million (16.0%).

 

Excluding PPP loans, loan demand was relatively soft in 2020 and may decline further in 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. As of December 31, 2020 648 PPP loans with balances of approximately $52.8 million have been forgiven.  The first round of PPP loan balances will most likely decrease significantly over the next six months to a year as the forgiveness process continues. This decrease will be offset by the PPP loans currently being originated.  We are also anticipating that we could see increased line of credit utilization and a reduction in our unused commitments.

 

 

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 Federal Home Loan Bank of Cincinnati (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 income taxes.

                                    

Securities, including FHLB stock, totaled $200.2 million at December 31, 2020 compared to $188.9 million at December 31, 2019, an increase of $11.3 million (6.0%). The portfolio experienced an increase in net unrealized gains on securities of $5.7 million during 2020.

 

The Corporation is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB. FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment. There was $296,000 of FHLB stock purchased during 2020. 

 

At December 31, 2020, the Corporation’s investment securities portfolio included $99.8 million in U.S. states and political subdivisions securities, which is $11.8 million (10.6%) lower than shareholders’ equity as of that date. The largest exposure to any one state is $15.0 million, or 16%, from issuers located within the state of Wisconsin. The Corporation’s procedures for evaluating investments in securities issued by states, municipalities and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.

 

At December 31, 2020 the net unrealized gain on available-for-sale securities amounted to $9.3 million compared to $3.6 million at December 31, 2019.  At December 31, 2020, the Corporation held 4 securities which were in a loss position with the fair value of $2.6 million and gross unrealized losses of $6,000. Management has considered the current interest rate environment, typical volatility in the bond market, and the Corporation’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.

 

Cash and Cash equivalents

 

Cash and cash equivalents at December 31, 2020 were $57.0 million, a $30.6 million (115.9%) increase from $26.4 million at December 31, 2019.  The increase is due to an increase of overnight funds on deposit at the Federal Reserve.

 

Deposits

 

Total deposits at December 31, 2020 were $838.4 million, an increase of $131.2 million (18.6%) compared with total deposits of $707.1 million at December 31, 2019. The increase in deposits consisted of a $61.6 million increase in interest bearing deposits and a $69.6 million increase in non-interest bearing deposits.  The significant increase in deposits during 2020 is somewhat attributable to customer deposits from PPP loan proceeds and we expect that short term deposit levels may increase further due to the second round of PPP loans.  In future periods deposits may decrease if the conditions in our market areas become distressed relating to the COVID-19 pandemic.

 

Other Borrowings

 

In addition to customer deposits, the Corporation utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth. Other borrowings at December 31, 2020 consist of term borrowings from another bank of $7,750,000.  Other borrowings at December 31, 2019, included FHLB secured advances of $50.0 million and $8,750,000 of term borrowings from another bank which were used to facilitate the 2017 Benchmark acquisition and are payable in quarterly installments of $250,000 with any remaining principal due in September 2022.  Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

 

Shareholders’ Equity

 

Total shareholders’ equity increased $16.8 million (17.7%) to $111.6 million at December 31, 2020 compared to $94.8 million at December 31, 2019.  The increase was primarily a result of 2020 net income of $13.8 million and other comprehensive income, net of tax of $4.5 million, offset by the declaration of $1.7 million in common stock dividends.  The increase in unrealized securities gains was largely attributable to the Federal Reserve decreasing the Federal Funds Target Rate by 150 basis points (1.50%) during March 2020, in response to the COVID-19 pandemic.

 

 

Results of Operation – 2020 Compared to 2019

 

Performance Summary

 

Consolidated net income for the Corporation was $13.8 million in 2020 compared to $10.7 million in 2019 and $8.2 million in 2018.

 

Net income in 2020, as compared to 2019 was favorably impacted by increases in net interest income of $4.1 million and non-interest income of $12.0 million, offset by increases in non-interest expenses of $6.0 million and provision for loan losses of $5.7 million.  The increase in net interest income resulted from Paycheck Protection Program (PPP) loans, including fees of $2.4 million, as well as a decrease in deposit interest rates.  Non-interest income increased due to the low mortgage rate interest environment created by the Federal Reserve's lowering of Federal funds target rates and resulted in markedly increased mortgage banking profitability.  The increase in the provision for loan losses was due to an increase in qualitative factors applied to the outstanding loan balances in response to uncertainties related to COVID-19.

 

The Corporation’s return on average assets was 1.42% in 2020, compared to 1.24% in 2019, and 1.02% in 2018. The Corporation’s return on average tangible shareholders’ equity was 18.53% in 2020, 18.49% in 2019, and 16.79% in 2018. Basic net income per share was $4.21 per share in 2020, an increase of $0.95 per share from $3.26 in 2019. Basic net income per share of $3.26 in 2019 represented an increase of $0.75 per share from $2.51 in 2018. Changes in these amounts from year to year were generally reflective of changes in the level of net income.

 

 

Net Interest Income

 

Net interest income, which represents the revenue generated from interest-earning assets in excess of the interest cost of funding those assets, is the Corporation's principal source of income. Net interest income is influenced by market interest rate conditions and the volume and mix of interest-earning assets and interest-bearing liabilities. Many external factors affect net interest income and typically include the strength of client loan demand, client preference for individual deposit account products, competitors’ loan and deposit product offerings, the national and local economic climates, and Federal Reserve monetary policy.

 

Net interest income for 2020 was $33.0 million, an increase of $4.1 million (14.4%) from 2019.  The increase in net interest income in 2020 was attributable to an increase in interest income of $2.2 million and a $1.9 million decrease in interest expense. Interest income increased $2.4 million in 2020 from loan fees generated through PPP loan originations.  The remaining $1.4 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 interest-earning assets increased $110.0 million to $891.9 million in 2020 compared to $781.9 million in 2019. The yield on average earning assets was 4.55% in 2020 compared to 4.89% in 2019.  Total average interest-bearing liabilities increased $40.4 million to $688.2 million in 2020 compared to $647.8 million in 2019, and the cost of interest bearing liabilities decreased 36 basis points to 1.02% in 2020 compared to 1.38% in 2019.  

 

 

Provision for Loan and Lease Losses and the Allowance for Loan and Lease Losses

 

The Corporation’s loan policy provides guidelines for managing both credit risk and asset quality. The policy details acceptable lending practices, establishes loan-grading classifications, and prescribes the use of a loan review process. The Corporation has a credit administration department that performs regular credit file reviews which facilitate the timely identification of problem or potential problem credits, ensure sound credit decisions, and assist in the determination of the allowance for loan losses. The Corporation also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process. The loan policy, loan review process, and credit analysis function facilitate management's evaluation of the credit risk inherent in the lending function.

 

As mentioned, ongoing reviews are performed to identify potential problem and nonperforming loans and also provide in-depth analysis with respect to the quarterly allowance for loan losses calculation. Part of this analysis involves assessing the need for specific reserves relative to impaired loans. This evaluation typically includes a review of the recent performance history of the credit, a comparison of the estimated collateral value in relation to the outstanding loan balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future financial performance. Loans are considered to be impaired when, based upon the most current information available, it appears probable that the borrower will not be able to make payments according to the contractual terms of the loan agreement. Impaired loans are recorded at the observable market price of the loan, the fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan's effective interest rate. Given that the Corporation’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of individual impaired loans is most often based upon the underlying collateral value net of estimated selling costs. Large groups of smaller balance homogenous loans are collectively evaluated for impairment.

 

To determine the allowance for loan and lease losses, the Corporation prepares a detailed analysis that focuses on delinquency trends, the status of nonperforming loans (i.e., impaired, nonaccrual, restructured, and past due 90 days or more), current and historical trends of charged-off loans within each loan category (i.e., commercial, real estate, and consumer), existing local and national economic conditions, and changes within the volume and mix in each loan category. Higher loss rates are applied in calculating the allowance for loan losses relating to potential problem loans. Loss rates are periodically evaluated considering historic loss rates in the respective potential problem loan categories (i.e., special mention, substandard, doubtful) and current trends.

 

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan 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 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 based upon the information available to them at the time of their examinations.

 

The allowance for loan and lease losses at December 31, 2020 was $10.0 million, or 1.58% of total loans, compared to $4.1 million, or 0.72% of total loans at December 31, 2019. The change in the allowance for loan and lease losses during 2020 included a $6.2 million provision for loan losses and net charge-offs of $337,000.

 

The provision for loan and lease losses is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors.  Settlements of impaired or potential problem loans can also result in an increase or reduction in the required allowance for loan and lease losses and a negative provision, or credit, being reflected in current operations. The provision for loan and lease losses of $6.2 million in 2020  was a $5.7 million increase compared to the provision of $550,000 in 2019. This increase was due to an increase in qualitative factors applied to the outstanding loan balances in response to uncertainties related to COVID-19. 

 

Management believes 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.

 

 

Impaired loans, principally consisting of commercial and commercial real estate, amounted to $3,025,000 at December 31, 2020. Impaired loans at December 31, 2020 included $139,000 of loans with no specific reserves included in the allowance for loan losses and $2,886,000 of loans with specific reserves of $255,000 included in the Corporation's December 31, 2020 allowance for loan losses.  Total impaired loans of $2,778,000 at December 31, 2019 included $848,000 of loans with no specific reserves included in the allowance for loan losses and $1,930,000 of loans with specific reserves of $435,000 included in the Corporation's December 31, 2019 allowance for loan losses.

 

In addition to impaired loans, the Corporation had other potential problem credits of $19.4 million at December 31, 2020 compared to $4.9 million at December 31, 2019, an increase of $14.5 million (295.9%).  The Corporation’s credit administration department continues to closely monitor these credits.

 

Non-Interest Income

 

Total non-interest income increased $12.0 million (79.4%) to $27.0 million in 2020 from $15.0 million in 2019, which was primarily attributable to increases in gain on sale of loans of $15.1 million and gain on sales of securities of $285,000, offset by a decrease in other operating income of $3.4 million. 

 

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance. Service charges on deposit accounts was $1.1 million in 2020 compared to $1.5 million in 2019.

 

The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and retains the servicing rights relating to certain of those loans. During 2020, gain on sale of loans was $24.1 million, including $690,000 of capitalized servicing rights. Gain on sale of loans was $9.1 million in 2019, including $192,000 of capitalized servicing rights. The significant increase in gain on sale of loans was attributable to increased loan origination and sales activities within the residential mortgage and governmental lending operations along with an increase in the average gain on sale per loan. During the year ended December 31, 2020 there were 2,557 loans sold totaling $610 million compared to 1,692 loans sold totaling $272 million for the same period in 2019.  The average loan sale gain approximated $9,400 per loan in 2020 compared to approximately $5,400 for the same period of 2019.  The increased loan origination and sales activity is attributable to the extremely low mortgage interest rate 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.

 

The Corporation’s serviced portfolio increased $59.2 million during 2020 to $234.9 million at December 31, 2020. 

 

The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $293,000 decrease in the fair value of mortgage servicing rights during 2020, compared to a $258,000 decrease in the fair value of mortgage servicing rights in 2019. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2020 the PSA factor was 365 compared to 214 at December 31, 2019.

 

Gain on sales of securities were $289,000 in 2020 compared to $4,000 in 2019.  In response to possible liquidity concerns at the time, the Corporation sold certain investment securities during the second quarter of 2020.

 

Other operating income decreased $3.0 million to $1.4 million in 2020 from $4.4 million in 2019.  The decrease in other non-interest income resulted from the Corporation's settlement of claims related to prior year tax adjustments, which resulted in a one-time net income recovery of $1,980,000 during the fourth quarter of 2019.  Income from the Corporation's loan hedging program decreased $1.3 million as there was a loss of $1.5 million in 2020 compared to a loss of $190,000 in 2019.

 

Non-Interest Expenses

 

For the year ended December 31, 2020, non-interest expenses totaled $37.2 million, compared to $31.1 million for the same period of 2019, an increase of $6.1 million (19.4%) which was primarily attributable to increases in salaries and benefits expense of $3.5 million (18.6%), loan fees of $682,000 (50.3%), data processing expenses of $323,000 (21.9%),  equipment service expense of $298,000 (58.8%), advertising and marketing expense of $273,000 (15.3%), and consultant fees of $200,000 (225.3%).

 

The significant components of other operating expenses are summarized in Note 10 to the consolidated financial statements.

 

Provision for Income Taxes

 

The provision for income taxes for 2020 was $2.9 million an effective tax rate of 17.5%, compared to $1.6 million in 2019, an effective rate of 13.2%. The increase in the effective tax rate in 2020 as compared to 2019 resulted from the Corporation's $1,980,000 settlement claim being tax exempt in 2019. 

 

 

 

Results of Operation – 2019 Compared to 2018

 

Consolidated net income for the Corporation was $10.7 million in 2019 compared to $8.2 million in 2018. 

 

Net income in 2019, as compared to 2018 was favorably impacted by increases in net interest income of $688,000 and non-interest income of $5.6 million, offset by increases in non-interest expenses of $3.7 million and provision for loan losses of $100,000.

 

The Corporation’s return on average assets was 1.24% in 2019, compared to 1.02% in 2018. The Corporation’s return on average tangible shareholders’ equity was 18.49% in 2019 and 16.79% in 2018. Basic net income per share was $3.26 per share in 2019, an increase of $0.75 per share from $2.51 in 2018. Basic net income per share of $2.51 in 2018 represented an increase of $1.33 per share from $1.18 in 2017. Changes in these amounts from year to year were generally reflective of changes in the level of net income.

 

In August 2018, the Corporation completed a review of the accounting and tax implications of the 2017 Benchmark acquisition transaction and determined its liability for federal income tax associated with the transaction was approximately $3.2 million greater than estimated at the time of the acquisition.  As a result, consistent with measurement date purchase accounting adjustments for business combinations as required by ASC 805 and ASU No. 2015-16, the Corporation recorded the additional tax liability, as well as certain other measurement date deferred tax adjustments, during the third quarter of 2018 with a corresponding $3,413,000 increase to goodwill.  The Company recorded a settlement of claims arising from these adjustments, which resulted in recording a one-time other non-interest income recovery of $1,980,000 during the fourth quarter of 2019.

 

Net Interest Income

 

Net interest income for 2019 was $28.9 million, an increase of $688,000 (2.4%) from 2018. The increase in net interest income was primarily due to growth in interest earning assets which outpaced the rising cost of interest earning liabilities. Total average interest-earning assets increased $59.0 million to $781.9 million in 2019 from $722.9 in 2018.  The yield on average interest-earning assets, on a tax-equivalent basis, increased 8 basis points in 2019 to 4.89% from 4.81% in 2018.   Total average interest-bearing liabilities increased $33.5 million to $647.8 million in 2019 compared to $614.3 million in 2018, and the cost of interest bearing liabilities increased 38 basis points to 1.38% in 2019 compared to 1.00% in 2018.  

 

Provision for Loan and Lease Losses and the Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses at December 31, 2019 was $4.1 million, or 0.72% of total loans, compared to $3.5 million, or 0.63% of total loans at December 31, 2018.  The change in the allowance for loan and lease losses during 2019 included a $550,000 provision for loan losses and loan recoveries, and net recoveries of $54,000.

The provision for loan and lease losses of $550,000 in 2019  was a $100,000 increase compared to the provision of $450,000 in 2018. The increase was primarily attributable to loan growth of $14.8 million during 2019 and an increase in the specific reserve on impaired loans.

 

 

Impaired loans, principally consisting of commercial and commercial real estate, amounted to $2,778,000 at December 31,2019. Impaired loans at December 31,2019 included $848,000 of loans with no specific reserves included in the allowance for loan losses and $1,930,000 of loans with specific reserves of $435,000 included in the Corporation's December 31, 2019 allowance for loan losses.  Total impaired loans of $1,331,000 at December 31, 2018 included $959,000 of loans with no specific reserves included in the allowance for loan losses and $372,000 of loans with specific reserves of $128,000 included in the Corporation's December 31, 2018 allowance for loan losses.

 

In addition to impaired loans, the Corporation had other potential problem credits of $4.9 million at December 31, 2019 compared to $6.7 million at December 31, 2018, a decrease of $1.8 million (26.9%). The Corporation’s credit administration department continues to closely monitor these credits.

 

Non-Interest Income

 

Total non-interest income increased $5.6 million (59.6%) to $15.0 million in 2019 from $9.4 million in 2018, which was primarily attributable to increases in gain on sale of loans of $4.4 million and other non-interest operating income of $1.6 million. 

 

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance. Service charges on deposit accounts was $1.5 million in 2019 compared to $1.6 million in 2018.

 

During 2019, gain on sale of loans was $9.1 million, including $192,000 of capitalized servicing rights. Gain on sale of loans was $4.7 million in 2018, including $164,000 of capitalized servicing rights. A significant contributing factor to the increase in gain on sale of loans was the favorable rate environment for refinancing existing mortgages and the growth of the residential mortgage and governmental lending operations.   The Corporation’s serviced portfolio increased $2.5 million during 2019 to $175.7 million at December 31, 2019. 

 

The Corporation recognized a $258,000 decrease in the fair value of mortgage servicing rights during 2019, compared to a $26,000 increase in the fair value of mortgage servicing rights in 2018. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2019 the PSA factor was 214 compared to 136 at December 31, 2018.

 

Other operating income increased $1.6 million to $4.4 million in 2019 from $2.7 million in 2018.  The increase in other non-interest income resulted from the Corporation's settlement of claims related to prior year tax adjustments, which resulted in a one-time net income recovery of $1,980,000 during the fourth quarter of 2019.  

 

Non-Interest Expenses

 

For the year ended December 31, 2019, non-interest expenses totaled $31,117,000, compared to $27,436,000 for the same period of 2018, an increase of $3,681,000 (13.4%) which was primarily attributable to increases in salaries and benefits expense of $2,762,000 (17.4%), loan fees of $433,000 (46.9%), legal fees of $77,000 (24.3%), consultant fees of $93,000, ATM processing and other fees of $101,000 (15.2%), and information technology expenses of $105,000 (92.0%), offset by a decrease in the FDIC assessment of $185,000 (69.9%).

 

Provision for Income Taxes

 

The provision for income taxes for 2019 was $1.6 million an effective tax rate of 13.2%, compared to $1.5 million in 2018, an effective rate of 15.7%. The decrease in the effective tax rate in 2019 as compared to 2018 resulted from the Corporation's $1,980,000 settlement in claim in 2019 being tax exempt. 

 

 

Liquidity

 

Liquidity relates primarily to the Corporation’s ability to fund loan demand, meet the withdrawal requirements of deposit customers, and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available-for-sale, and loans held for sale. A large portion of liquidity is provided by the ability to sell or pledge securities. Accordingly, the Corporation has designated all securities other than FHLB stock as available-for-sale. A secondary source of liquidity is provided by various lines of credit facilities available through correspondent banks and the Federal Reserve. Another source of liquidity is represented by loans that are available to be sold. Certain other loans within the Corporation’s loan and lease portfolio are also available to collateralize borrowings.

 

The consolidated statements of cash flows for the years presented provide an indication of the Corporation’s sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of cash flows for 2020, 2019, and 2018 follows.

 

The Corporation generated cash from operating activities of $17.2 million in 2020, $3.6 million in 2019, and $5.1 million in 2018.

 

Net cash flows used in investing activities amounted to $65.1 million in 2020, $26.1 million in 2019, and $58.4 million in 2018. Significant investing cash flow activities in 2020 included $6.0 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $57.3 million of net cash outflow to fund net loan growth. Significant investing cash flow activities in 2019 included $11.3 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $14.1 million of net cash outflow to fund net loan growth.  Significant investing cash flow activities in 2018 included $53.8 million of net cash outflow to fund net loan growth.

 

Net cash flows provided by financing activities amounted to $78.5 million in 2020, $32.4 million in 2019, and $42.5 million in 2018. Net cash provided by financing activities in 2020 primarily resulted from an increase in deposits of $131.3 million offset by payments on other borrowings of $51.0 million, and $1,668,000 in cash dividends paid. Net cash provided by financing activities in 2019 primarily resulted from an increase in deposits of $41.0 million offset by payments on other borrowings of $6.7 million and $1,702,000 in cash dividends paid. Net cash provided by financing activities in 2018 primarily resulted from an increase in deposits of $35.9 million and other borrowings of $8.3 million, offset by $1,568,000 in cash dividends paid.

 

Asset Liability Management

 

Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities. The Corporation manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.

 

The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”. An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”. This generally means that, when interest rates increase, an institution’s net interest income will increase and, when interest rates decrease, the institution’s net interest income will decrease. An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “negative gap”. This generally means that, when interest rates increase, the institution’s net interest income will decrease and, when interest rates decrease, the institution’s net interest income will increase. The Corporation’s one year cumulative gap (ratio of risk-sensitive assets to risk-sensitive liabilities) at December 31, 2020 is approximately 87% which means the Corporation has more liabilities than assets re-pricing within one year. Under the current low interest rate environment, the Corporation’s liabilities do not have the ability to reprice down the full 100 bps which is why the margin decreases in a 100 bps down shock scenario.

 

 

Effects of Inflation

 

The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by fluctuations in interest rates than inflation. Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies. Interest rates and inflation do not necessarily move with the same velocity or within the same period; therefore, a direct relationship to the inflation rate cannot be shown. The financial information presented in the Corporation’s consolidated financial statements has been presented in accordance with accounting principles generally accepted in the United States, which require that the Corporation measure financial position and operating results primarily in terms of historical dollars.

 

Significant Accounting Policies

 

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.

 

The Corporation’s most significant accounting policies are presented in Note 1 to the consolidated financial statements. These policies, along with other disclosures presented in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the determination of the allowance for loan losses, valuation of goodwill and mortgage servicing rights, and fair value of securities and other financial instruments as the areas that require the most subjective and complex estimates, assumptions and judgments and, as such, could be the most subjective to revision as new information becomes available.

 

As previously noted, a detailed analysis to assess the adequacy of the allowance for loan losses is performed. This analysis encompasses a variety of factors including the potential loss exposure for individually reviewed loans, the historical loss experience for each loan category, the volume of non-performing loans, the volume of loans past due 30 days or more, a segmentation of each loan category by internally-assigned risk grades, an evaluation of current local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.

 

Management considers the valuation of goodwill from various past acquisitions through an annual impairment test which considers, among other things, the assets and equity of the Corporation as well as price multiples for sales transactions involving other local financial institutions. Management engaged an independent valuation specialist to perform a goodwill impairment evaluation as of September 30, 2020, which supported management’s assessment that no impairment adjustments to goodwill were warranted. To date, none of the goodwill evaluations have revealed the need for an impairment charge. Management does not believe that any significant conditions have changed relating to the goodwill assessment through December 31, 2020.

 

Mortgage servicing rights are recognized when acquired through sale of mortgage loans and are reported at fair value. Changes in fair value are reported in net income for the period the changes occur. The Corporation generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, earnings rate and discount rates commensurate with the risks involved. The Corporation has engaged an independent consultant to calculate the fair value of mortgage servicing rights on a quarterly basis. Management regularly reviews the calculation, including assumptions used in making the calculation, and discusses with the consultant. Management also reconciles information used by the consultant, with respect to the Corporation’s serviced portfolio, to the Corporation’s accounting records.

 

The Corporation reviews securities prices and fair value estimates of other financial instruments supplied by an independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The Corporation’s securities portfolio primarily consists of U.S. Government agencies, and political subdivision obligations, and mortgage backed securities. Pricing for such instruments is typically based on models with observable inputs. From time to time, the Corporation will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other third-party sources or derived using internal models. The Corporation also considers the reasonableness of inputs for financial instruments that are priced using unobservable inputs.

 

 

Impact of Recent Accounting Pronouncements

 

A summary of new accounting standards adopted or subject to adoption in 2020, as well as newly-issued but not effective accounting standards at December 31, 2020, is presented in Note 2 to the consolidated financial statements.

 

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments

 

The following table summarizes loan commitments, including letters of credit, as of December 31, 2020:

 

		Amount of commitment to expire per period
		Total				Less than				1 - 3				4 - 5				Over
		Amount				1 year				years				years				5 years
		(in thousands)
Type of Commitment
Commercial lines-of-credit		$	57,280			$	55,327			$	1,364			$	92			$	497
Real estate lines-of-credit			98,098				8,977				23,581				8,335				57,205
Consumer lines-of-credit			367				-				-				-				367
Letters of Credit			533				433				100				-				-
Total commitments		$	156,278			$	64,737			$	25,045			$	8,427			$	58,069

 

As indicated in the preceding table, the Corporation had $156.3 million in total loan commitments at December 31, 2020, with $64.8 million of that amount expiring within one year. All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters-of-credit are also included in the amounts noted in the table since the Corporation requires that each letter-of-credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages in residential and nonresidential property. Many of the commercial lines are due on a demand basis, and are established for seasonal operating purposes. It is anticipated that a significant portion of these lines will expire without being drawn upon.

 

 

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments – Continued

 

The following table summarizes the Corporation’s contractual obligations as of December 31, 2020:

		Payments due by period
		Total				Less than				1 - 3				4 - 5				Over
		Amount				1 year				years				Years				5 years
		(in thousands)
Contractual obligations
Long-term debt		$	20,692			$	1,000			$	6,750			$	-			$	12,942
Operating leases			2,360				325				582				562				891
Time deposits			152,331				109,109				39,298				3,833				91
Deposits without stated maturities			682,498				-				-				-				682,498
Future deferred compensation payments, including interest			1,091				116				136				138				701
Total obligations		$	858,972			$	110,550			$	46,766			$	4,533			$	697,123

 

Long-term debt presented in the preceding table consists of a $7,750,000 term loan with a bank, and $12.9 million of junior subordinated deferrable interest debentures, including $10.3 million issued by the Corporation and $2.6 million assumed from the November 2014 OSB acquisition.

 

Time deposits and deposits without stated maturities included in the preceding table are comprised of customer deposit accounts. Management believes that they have the ability to attract and retain deposit balances by adjusting the interest rates offered. 

 

The future deferred compensation payments, including interest, as noted in the preceding table, includes the Corporation’s agreement with its former Chairman of the Board of Directors to provide for retirement compensation benefits. A deferred compensation liability was also assumed with The OSB acquisition for the benefit of its retired president, with payment that began on May 1, 2010. At December 31, 2020, the net present value of future deferred compensation payments amounted to $818,000, which is included in other liabilities in the December 31, 2020 consolidated balance sheet.

 

As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2020. The Corporation also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $1,571,000 at December 31, 2020 for supplemental retirement benefits.

 

Quantitative and Qualitative Disclosures about Market Risk

 

The most significant market risk to which the Corporation is exposed is interest rate risk. The business of the Corporation and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Corporation’s financial instruments are held for trading purposes.

 

The Corporation manages interest rate risk regularly through its Asset Liability Committee. The Committee meets on a regular basis and reviews various asset and liability management information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

 

The Corporation monitors its interest rate risk through a sensitivity analysis, whereby it measures potential changes in its future earnings and the fair values of its financial instruments that may result from one or more hypothetical changes in interest rates. This analysis is performed by estimating the expected cash flows of the Corporation’s financial instruments using interest rates in effect at year-end. For the fair value estimates, the cash flows are then discounted to year-end to arrive at an estimated present value of the Corporation’s financial instruments. Hypothetical changes in interest rates are then applied to the financial instruments, and the cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows. The Corporation applies these interest rate “shocks” to its financial instruments up and down 100, 200 and 300 and up 400 basis points.

 

 

Quantitative and Qualitative Disclosures about Market Risk - Continued

 

The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2020:

 

Change in Interest Rates			Percentage Change in			Percentage Change in
(basis points)			Net Interest Income			Net Income
+100			-0.5%			-1.5%
-100			-1.6%			-1.0%
+200			-1.3%			-3.8%
-200			-2.1%			-0.3%
+300			-2.1%			-5.6%
-300			N/A			N/A
+400			-3.0%			-8.1%

 

Given a linear 100bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 0.5% and net income would decrease by 1.5%. A 100bp decrease in interest rates would decrease net interest income by 1.6% and decrease net income by 1.0%. Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 1.3% and net income would decrease by 3.8%. A 200bp decrease in interest rates would decrease net interest income by 2.1% and decrease net income by 0.3%. Given a linear 300bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 2.1% and net income would decrease by 5.6%. A 300bp decrease in interest rates cannot be simulated at this time due to the historically low interest rate environment and a 400bp increase in interest rates would decrease net interest income by 3.0% and decrease net income by 8.1%. Management does not expect any significant adverse effect to net interest income in 2021 based on the composition of the portfolio and anticipated trends in rates.

 

 

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

December 31, 2020 and 2019

 

 

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

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31, 2020, 2019 and 2018 

 

 

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

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

 

Years Ended December 31, 2020, 2019 and 2018

 

 

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

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

Years Ended December 31, 2020, 2019 and 2018

 

 

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

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2020, 2019 and 2018

 

Continued

 

 

UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

Years Ended December 31, 2020, 2019 and 2018

 

 

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

 

 

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

OFFICERS - UNITED BANCSHARES, INC.
Brian D. Young - President / Chief Executive Officer
Stacy A. Cox - Chief Financial Officer
Heather M. Oatman - Secretary
OFFICERS - THE UNION BANK COMPANY
Brian D. Young - President / CEO / Chairman
Stacy A. Cox - Executive Vice President / CFO
Heather M. Oatman - Senior Vice President / Secretary
Teresa M. Deitering - Senior Vice President
Klint D. Manz - Senior Vice President
Brent D. Nussbaum- Senior Vice President
Norman V. Schnipke - Senior Vice President
Travis E. Vulich - Senior Vice President
Vice President
Janice C. Acerro		John P. Miller
Kathi J. Amstutz		Roger A. Nedolast
Donna J. Brown		Doris A. Neumeier
Joseph M. Campbell		Jason A. Recker
Paul M. Cira		Amy E. Reese
Thomas M. Cox		Rosemarie Roman
Chase H. Doll		Ricardo Rosado
Amy C. Felter		Thomas J. Sansone
Steven L. Floyd		Craig R. Stechschulte
Vicky K. Gilbert		Benjamin K. Stewart
Robert W. Gray		J. Kevin Taylor
Susan A. Hojnacki		Jason R. Thornell
Mark G. Honigford		Dean J. Vande Water
Karen M. Maag		Paul A. Walker
Daron S. McGuire		Lori L. Watson
Assistant Vice President
Walker K. Carr		Machiel K. Hindall
Nancianne Carroll		Abby L. Hornish
David M. Cornwell		Joyce M. Kuhlman
Laura M. Daniel		Zachary P. Nycz
Sony S. Dawson		Peter J. Rafaniello
Elaine E. Evans		Rebecca J. Roberts
Jacqueline Fairbanks		Theresa A. Stein-Moenter
Dian M. Franks		Stacia R. Thompson
Mark A. Gerberick		Amy J. Vasquez
Casey S. Hensley		Kimberly S. Verhoff
Mandy L. Hermiller		Pamela J. Workman
Officer
Mary Jo Horstman
Matthew A. Sargent

 

 

UNITED BANCSHARES, INC.

Columbus Grove, Ohio

 

 

DIRECTORS – UNITED BANCSHARES, INC.

 

NAME	AGE	DIRECTOR  SINCE	NAME	AGE	DIRECTOR SINCE
Robert L. Benroth	58	2003	Daniel W. Schutt	73	2005
Putnam County Auditor			Chairman, Retired Banker
Herbert H. Huffman	70	2018	R. Steven Unverferth	68	2005
Retired - Educator			Chairman, Unverferth Manufacturing Corporation, Inc.
H. Edward Rigel	78	2000	Brian D. Young	54	2012
Farmer, Rigel Farms, Inc.			President/CEO
David P. Roach	70	2001
Vice-President/GM, First Family Broadcasting of Ohio

  

 

DIRECTORS – THE UNION BANK COMPANY

 

NAME	AGE	DIRECTOR SINCE (a)	NAME	AGE	DIRECTOR SINCE (a)
Robert L. Benroth	58	2001	David P. Roach	70	1997
Putnam County Auditor			Vice-President/GM, First Family Broadcasting of Ohio
Anthony M.V. Eramo	55	2016	Carol R. Russell	66	2019
Managing Director, MountainView Financial Solutions			President/CEO, Schulte Group
Herbert H. Huffman	70	1993	Daniel W. Schutt	73	2005
Retired - Educator			Retired Banker
Kevin L. Lammon	66	1996	R. Steven Unverferth	68	1993
Village Administrator, Village of Leipsic			Chairman, Unverferth Manufacturing Corporation, Inc
William R. Perry	62	1990	Brian D. Young	54	2008
Farmer			President/CEO/Chairman
H. Edward Rigel	78	1979
Farmer, Rigel Farms, Inc.

 

 

(a)

Indicates year first elected or appointed to the board of The Union Bank Company or any of the former affiliate banks, Bank of Leipsic or the Citizens Bank of Delphos.