UNITED BANCSHARES, INC. 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,
2020 2019
SIGNIFICANT RATIOS (Unaudited)
Net income to:
Average assets (a) 0.49 % 0.87 %
Average tangible shareholders' equity (non-GAAP) (a) 6.41 % 13.86 %
Net interest margin (a) 3.61 % 3.81 %
Efficiency ratio (b) 81.14 % 74.76 %
Average shareholders' equity to average assets 10.98 % 9.83 %
Loans to deposits (end of period) (c) 81.86 % 83.63 %
Allowance for loan losses to loans (end of period) 0.82 % 0.63 %
Book value per share $ 30.11 $ 25.82 (a) Net income to average assets, net income to average tangible shareholders'
equity and net interest margin are presented on an annualized basis. Net
interest margin is calculated using fully-tax equivalent net interest income
as a percentage of average interest earning assets.
(b) Efficiency ratio is a ratio of non-interest expense as a percentage of fully
tax equivalent net interest income plus non-interest income.
(c) Includes loans held for sale
Reconciliation of common shareholders' equity to
tangible common equity
March 31, 2020 March 31, 2019
Shareholders' equity $ 98,482 $ 84,433
Less goodwill and other intangibles 29,372 29,529
Tangible common equity $ 69,110 $ 54,904
Average shareholders' equity $ 97,336 $ 81,900
Less average goodwill and other intangibles 29,386 29,546
Average tangible common equity $ 67,950 $ 52,354
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Introduction
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.
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.
Wealth management services are offered by
When or if used in the Corporation's
The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in the levels of market interest rates, credit and other risks associated with lending and investing activities, and competitive and regulatory factors could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from those anticipated or projected. 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.
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Recent Developments
The progression of the COVID-19 pandemic in
Our primary banking market area is
Like most states,
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:
? TheFederal Reserve decreased the range for the Federal Funds Target Rate by 0.50% onMarch 3, 2020 , and by another 1.0% onMarch 16, 2020 , reaching a current range of 0.0 - 0.25%. ? OnMarch 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 theU.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 may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP program. As of this writing, a second round of funding under the PPP has become available and the Bank is working with small business customers to submit applications. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. ? OnApril 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. ? OnApril 9, 2020 , theFederal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. TheFederal 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 afterApril 8, 2020 , while MSELF loans are provided as upsized tranches of existing loans originated beforeApril 8, 2020 . The combined size of the program will be up to$600 billion . 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. TheFederal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, theFederal Reserve created a Municipal Liquidity Facility to support state and local governments with up to$500 billion in lending, with theTreasury Department backing$35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. TheFederal 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. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded afterMarch 22, 2020
We currently expect that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank's borrowers in the retail, restaurants, and hospitality industries will continue to endure significant economic distress, which will cause them to draw on their existing lines of credit and could adversely affect their ability and willingness to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to 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. In addition, we expect to see a decrease in mortgage loan originations. As a result, we anticipate that our financial condition, capital levels and results of operations will be significantly adversely affected, as described in further detail below.
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
? We are offering payment deferrals and interest only payment options for
consumer, small business, and commercial customers for up to 90 days. We are
offering payment extensions for mortgage customers for up to 90 days.
? The Business Continuity Planning COVID-19 Response team meets regularly to
manage the Corporation's response to the pandemic and the effect on our
business. In addition, cross functional task force teams meet 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 are participating in the SBA's Paycheck Protection Program. As of April
28, 2020 , we have secured funding for over 1,100 customers for approximately
$106 million and have continued participation as a result of additional
funding for the program which was made available April 27, 2020 .
? 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 restricted lobby access at our branches and we continue to serve
clients through our drive-up locations and digital platforms.
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RESULTS OF OPERATIONS
Overview of the Income Statement
For the quarter ended
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
The increase in net interest income for the three months ended
In response to the COVID-19 pandemic, the
The increase in interest expense for the period was attributable to a
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
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 that we expect to incur, we expect that our net interest income and net interest margin will decrease in future periods. These decreases will be offset to some degree by the processing fees received from PPP financing but we cannot determine at this time what the scope of such losses or offsets might be. The processing fees will be deferred and recognized as an adjustment to interest income over the life of the loans.
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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
We are preparing for the possibility that the provision for loan losses will increase in future periods based on our belief that the credit quality of our loan portfolio will decline and loan defaults will 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
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. Loan sales for the first quarter of 2020
approximated
The decrease in other non-interest income resulted from a
We 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.
Non-Interest Expenses
For the quarter ended
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
Provision for Income Taxes
The provision for income taxes for the quarter ended
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FINANCIAL CONDITION Overview of Balance Sheet
Total assets amounted to
Shareholders' equity increased from
Cash and Cash Equivalents
Cash and cash equivalents totaled
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
Loans and Leases
The Corporation's primary lending areas are
There are also unrecognized financial instruments at
It's likely that loan demand will decline for the remainder of the 2020 fiscal year and into 2021 as a result of COVID-19 and the related decline in economic conditions in our market areas, leading to reductions in the growth of for our commercial and industrial loan, commercial real estate loan, residential real estate loan and consumer loan portfolios. 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
(in thousands)
Three months ended March 31,
2020 2019
Balance, beginning of period
550 100
Charge offs (9 ) (28 )
Recoveries 15 45
Net recoveries 6 17
Balance, end of period $ 4,687 $ 3,644 The allowance for loan and lease losses as a percentage of gross loans and
leases was 0.82% at
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
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
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 of
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
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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
Non-interest bearing deposits remain a smaller portion of the funding source for
the Corporation than for most of its peers. Non-interest bearing deposits
comprised 16.6% of total deposits at
In addition to traditional deposits, the Corporation maintains both short-term
and long-term borrowing arrangements. Other borrowings consisted of FHLB
borrowings totaling
Regulatory Capital
Cash Flow from Operations
As part of the Bank's hedging program, loans held for sale are now 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
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
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