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 As of or for the nine months ended
September 30, September 30,
2021 2020 2021 2020
SIGNIFICANT RATIOS (Unaudited)
Net income to:
Average assets (a) 1.54 % 2.09 % 1.39 % 1.66 %
Average tangible shareholders' equity
(non-GAAP) (a) 18.59 % 26.96 % 17.03 % 22.16 %
Net interest margin (a) 4.12 % 3.65 % 3.84 % 3.72 %
Efficiency ratio (a) 65.33 % 51.39 % 66.68 % 58.10 %
Average shareholders' equity to
average assets 11.05 % 10.65 % 11.02 % 10.58 %
Loans to deposits (end of period) (b) 63.58 % 85.70 % 63.58 % 85.70 %
Allowance for loan losses to loans
(end of period) 1.75 % 1.26 % 1.75 % 1.26 %
Book value per share $ 35.46 $ 33.44 $ 35.46 $ 33.44 (a) Some of the financial measures included in this table are not measures of
financial performance recognized by
Principles, or GAAP. These non-GAAP financial measures include tangible book
value, return on average tangible equity, net interest margin
(tax-equivalent), and the efficiency ratio. Management uses these non-GAAP
financial measures in its analysis of its performance, and believes financial
analysts and investors frequently use these measures, and other similar
measures, to evaluate capital adequacy. Reconciliations of non-GAAP
disclosures used in this table to the comparable GAAP measures are provided
in the accompanying table. Management, as well as regulators, financial
analysts and other investors may use these measures in conjunction with more
traditional bank capital ratios to compare the capital adequacy of banking
organizations with significant amounts of goodwill or other intangible
assets, which typically stem from the use of the purchase accounting method
of accounting for mergers and acquisitions.
These non-GAAP financial measures should not be considered in isolation or as
a substitute for total shareholders' equity, total assets, book value per
share, return on average assets, return on average equity, or any other
measure calculated in accordance with GAAP. Moreover, the manner in which we
calculate these non-GAAP financial measures may differ from that of other
companies reporting measures with similar names.
(b) Includes loans held for sale
Reconciliation of common shareholders' equity to September September tangible common equity 30, 2021 30, 2020 Shareholders' equity$ 116,144 $ 109,409 Less goodwill and other intangibles 29,151 29,296 Tangible common equity$ 86,993 $ 80,113 Average shareholders' equity$ 114,244 $ 101,598 Less average goodwill and other intangibles 29,199
29,347
Average tangible common equity$ 85,045
Tangible Book Value per Common Share Tangible common equity (a)$ 86,993 $ 80,113 Total common shares issued and outstanding (b) 3,275,430
3,271,651
Tangible book value per common share (a)/(b)$ 26.56
Return on Average Tangible Equity Net income, annualized ( c )$ 14,484 $ 16,008 Average tangible common equity (d)$ 85,045 $ 72,251 Return on average tangible common equity (c/d) 17.03 %
22.16 %
Net Interest Margin, Tax- Equivalent Net interest income, annualized$ 35,989 $ 32,144 Tax-equivalent adjustment 745
579
Tax-equivalent net interest income, annualized (e)
$ 957,815 $ 880,496 Net interest margin, tax equivalent (e)/(f) 3.84 %
3.72 %
Efficiency Ratio, Tax-Equivalent Non-interest expense (g)$ 37,145 $ 27,099 Tax-equivalent net interest income 36,734 24,543 Non-interest income 18,973 22,099 Total revenue (h)$ 55,707 $ 46,642 Efficiency ratio (g)/(h) 66.68 % 58.10 % 26
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Forward-Looking Statements When used in this document, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected" or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure and the impact of the COVID-19 pandemic. Significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as ofSeptember 30, 2021 , if there is a resurgence in the virus,United Bancshares, Inc. (the "Corporation") could experience further adverse effects on its business, financial condition, results of operations and cash flows. The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Introduction The Corporation is a registered financial holding company incorporated underOhio law and is subject to regulation by theBoard of Governors of theFederal Reserve System (the "Federal Reserve Board"). The Corporation was incorporated and organized in 1985. The executive offices of the Corporation are located at105 Progressive Drive ,Columbus Grove, Ohio 45830. The Corporation is a one-bank holding company, as that term is defined by theFederal Reserve Board .The Union Bank Company (the "Bank"), a wholly-owned subsidiary of the Corporation, is a full service community bank offering a full range of commercial and consumer banking services. The Bank is anOhio state-chartered bank, which servesAllen ,Delaware ,Franklin ,Hancock ,Huron ,Marion ,Paulding ,Putnam ,Sandusky ,Van Wert andWood counties inOhio , with office locations inBowling Green ,Columbus Grove ,Delaware ,Delphos ,Findlay ,Gahanna ,Gibsonburg ,Kalida ,Leipsic ,Lima ,Marion ,Ottawa ,Paulding ,Pemberville ,Plymouth ,Westerville andWorthington, Ohio . Deposit services include checking accounts, savings and money market accounts; certificates of deposit and individual retirement accounts. Additional supportive services include online banking, bill pay, mobile banking, Zelle payment service, ATM's and safe deposit box rentals.Treasury management and remote deposit capture products are also available to commercial deposit customers. Deposits of Union Bank are insured up to applicable limits by theDeposit Insurance Fund , which is administered by theFederal Deposit Insurance Corporation . Loan products offered include commercial and residential real estate loans, agricultural loans, commercial and industrial loans, home equity loans, various types of consumer loans and small business administration loans. Union Bank's residential loan activities consist primarily of loans for purchasing or refinancing personal residences. The majority of these loans are sold to the secondary market. Wealth management services are offered by Union Bank through an arrangement with LPL Financial LLC, a registered broker/dealer. Licensed representatives offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities and life insurance. Union Bank has two subsidiaries:UBC Investments, Inc. ("UBC"), an entity formed to hold its securities portfolio, andUBC Property, Inc. ("UBC Property"), an entity formed to hold and manage certain property that is acquired in lieu of foreclosure.
The Corporation is registered as a Securities Exchange Act of 1934 reporting company.
The following discussion and analysis of the consolidated financial statements
of the Corporation is presented to provide insight into management's assessment
of the financial results.
27--------------------------------------------------------------------------------
Recent Developments The progression of the COVID-19 pandemic inthe United States began to have an adverse impact on the local and national economy during the latter part of the first quarter of 2020 and may still have a complex and potentially adverse impact on the economy, the banking industry and our Corporation in future fiscal periods, all subject to a high degree of uncertainty. Like most states,Ohio experienced a dramatic and sudden increase in unemployment levels as a result of the curtailment of business activities inmid-March 2020 , with unemployment rising from an average of 4.1% inJanuary 2020 to an average of 17.6 % inApril 2020 , before gradually dropping back down to 5.4% inSeptember 2021 , according to theU.S. Bureau of Labor Statistics . While unemployment rates have returned to lower levels in recent months, it is very possible a repeat of the high unemployment rates could be experienced especially if there is another shutdown similar to what was experienced in March and April of 2020.
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
? The
0.50% on
current range of 0.0 - 0.25%.
? On
and Economic Security Act, or CARES Act, which established a
economic stimulus package, including cash payments to individuals,
supplemental unemployment insurance benefits and a
administered through the
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
during 2020. In addition, the CARES Act provided financial institutions the
option to suspend certain requirements under
limited period of time to account for the effects of COVID-19.
? On
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
supporting small and midsized business, as well as state and local governments
impacted by COVID-19. The
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
2020, while MSELF loans are provided as upsized tranches of existing loans
originated before
up to 10,000 employees or
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
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
to support state and local governments with up to
with the
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
both the size and scope of its Primary and Secondary Market Corporate Credit
Facilities to support up to
? On
Appropriations Act, which represents the latest round of COVID-19 relief,
authorizing more than
consumers-the second largest stimulus in history, behind only the CARES
(Coronavirus Aid Relief and Economic Security) Act that
March. The bill also includes appropriations provisions to keep the government
funded through
The aspects of the legislation most applicable to the banking industry include
the following:
? An additional
for loans to small businesses, including for borrowers who have previously
received a PPP loan.
? A one-page simplified forgiveness process for PPP loans
? 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
? 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, withaggressive 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
the CARES Act, while preserving the Fed's general 13(3) emergency authority
existing prior to that Act.
28-------------------------------------------------------------------------------- It is possible that the COVID-19 pandemic and the specific developments referred to above could have a significant adverse impact on our business. In particular, the Bank's borrowers in the retail, restaurants, and hospitality industries may have endured significant economic distress, causing them to draw on their existing lines of credit, adversely affecting their ability and willingness to repay existing indebtedness, and adversely impacting the value of collateral. These developments, together with general economic conditions may also impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. It is possible that our financial condition, capital levels and results of operations could be adversely affected. The Corporation's results havebeen bolstered by the aforementioned PPP loan origination activity, which includes amortization of loan origination fees into interest income.
We have taken numerous steps in response to the COVID-19 pandemic, including the following:
? We offered 90 day payment deferrals and interest only payment options for
consumer, small business, and commercial customers. We also offered payment
extensions of up to 90 days for mortgage customers. As of
we have 119 loans, approximating $41.0 million that were modified or
extended 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
In the second round of PPP loans beginning
3,173 loans totaling
? In response to the outbreak and business disruption, first and foremost, we
have prioritized the safety, health and well-being of our employees,
customers, and communities. We have implemented protective measures for
customers who choose branch access and we continue to serve customers through
our drive-up locations and digital platforms.
The broader U.S. and global economies slowly began reopening during the first
quarter 2021 as highly effective vaccines against COVID-19 became widely
available. However, labor and supply disruptions resulting from the global
pandemic continue, and the emergence of a new and more infectious variant of
COVID-19 is creating ongoing health and safety concerns that may lead to further
disruptions in local, national and global economies.
While significant progress has been made to combat the outbreak of COVID-19, and
while it appears that the epidemiological and macroeconomic conditions were
trending in a positive direction as of
29
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Overview of the Income Statement
For the quarter endedSeptember 30, 2021 , the Corporation reported net income of$4,092,000 , or$1.25 basic earnings per share. This compares to the third quarter of 2020 net income of$5,250,000 , or$1.61 basic earnings per share. The decrease in operating results for the third quarter of 2021 as compared to the same period in 2020 was primarily attributable to a decrease in non-interest income of$6,432,000 . This was offset by an increase in net interest income of$1,505,000 , a decrease in the provision for loan losses of$3,000,000 , a decrease in non-interest expenses of$404,000 , and a decrease in the provision for income taxes of$365,000 . Net income for the nine months endedSeptember 30, 2021 totaled$10,863,000 , or$3.31 basic earnings per share, compared to$12,006,000 , or$3.67 basic earnings per share for the same period in 2020. The decrease in operating results for the nine month period endedSeptember 30, 2021 as compared to the nine month period endedSeptember 30, 2020 was primarily attributable to a decrease in non-interest income of$7,869,000 and an increase in non-interest expenses of$760,000 . These were offset by an increase in net interest income of$2,884,000 , and decreases in the provision for loan losses of$4,150,000 and the provision for income taxes of$452,000 . Net Interest Income Net interest income is the amount by which income from interest-earning assets exceeds interest incurred on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities while interest-bearing liabilities include interest-bearing deposit accounts and borrowed funds. Net interest income remains the primary source of revenue for the Corporation. Changes in market interest rates, as well as changes in the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income. Net interest income was$9,903,000 for the third quarter of 2021, compared to$8,398,000 for the same period of 2020, an increase of$1,505,000 (17.9%). Net interest income was$26,992,000 for the nine months endedSeptember 30 2021 compared to$24,108,000 for the same period of 2020, an increase of$2,884,000 (12.0%). In response to the COVID-19 pandemic, theFederal Reserve decreased the targeted federal funds rate by a total of 150 basis points (1.5%) inMarch 2020 . This decrease impacts the comparability of net interest income between the year to date periods of 2020 and 2021. The increase of$1,505,000 in net interest income for the three months endedSeptember 30, 2021 is attributable to an increase in interest income of$548,000 and a$957,000 decrease in interest expense. The$2,884,000 increase in net interest income for the nine months endedSeptember 30, 2021 was due to a decrease in interest expense of$2,908,000 , offset by a decrease in interest income of$24,000 . The increase in interest income for the three and nine months endedSeptember 30, 2021 was due to recognizing the loan fee income received from the SBA generated through PPP loans as the forgiveness process accelerated. Interest income increased$2,238,000 and$3,928,000 for the three and nine months endedSeptember 30, 2021 , respectively, due to loan fee income generated through PPP loans forgiven compared to$514,000 and$851,000 for the three and nine months endedSeptember 30, 2020 . Approximately 88% of the loan balances generated through the PPP loan program have been forgiven as ofSeptember 30, 2021 . There are$932,000 of fees received from the SBA remaining that have been deferred and are being amortized into interest income over the life of the loans. The yield on average earning assets was 4.17% for the nine months endedSeptember 30, 2021 compared to 4.53% for the same period of 2020. This is due to the decrease in interest rates and a shifting mix of earnings assets. The average interest-bearing cash, securities, and loan balances were$97.4 million ,$219.8 million and$640.6 million for the nine months endedSeptember 30, 2021 , respectively compared to$39.4 million ,$184.7 million and$656.4 million for the nine months endedSeptember 30, 2020 , respectively. The decline in interest expense is due to the prepayment of$50.0 million ofFederal Home Loan Bank advances in the second, third, and fourth quarters of 2020 as well as a declining cost of funds. The decrease in interest rates by theFederal Reserve resulted in a decrease in the cost of average interest bearing liabilities to 0.44% for the nine months endedSeptember 30, 2021 compared to 1.00% for the same period of 2020. This decrease more than offset the$64.2 million increase in average interest bearing deposits for the six month period endedSeptember 30, 2021 . Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the quarter and nine months endedSeptember 30, 2021 the net interest margin (on a taxable equivalent basis) was 4.12% and 3.83% compared with 3.65% and 3.77% for the same period in 2020. Loans and leases comprised 61.0% of interest-earning assets atSeptember 30, 2021 compared to 76.4% of interest-earning assets atSeptember 30, 2020 . Interest-bearing deposits comprised 97.2% of average interest-bearing liabilities atSeptember 30, 2021 , compared to 90.9% for the same period in 2020. As a result of the reductions in the target federal funds interest rate, the recognition of the majority of deferred loan fees from the SBA for PPP loan financing, as well as the impact of the COVID-19 pandemic and related future loan charge-offs and increases in non-accrual loans which may occur, we expect that our net interest income and net interest margin will decrease in future periods. 30
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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 provision for loan and lease losses of$300,000 was recognized during the nine month period endedSeptember 30, 2021 , none of which is attributable to the current quarter, compared to provisions of$3,000,000 and$4,450,000 for the respective three and six month periods endedSeptember 30, 2020 . The allowance for loan and lease losses atSeptember 30, 2021 is 1.75% of total loans compared to 1.26% of total loans atSeptember 30, 2020 . The significant reduction in provision expense in 2021 is to offset provision expenses taken in 2020 as a result of the COVID-19 pandemic given the general stabilization in the regional and broaderU.S. economy, as well as the current status of the Bank's loan portfolio. There is a possibility that the provision for loan losses could further increase in future periods based on the significant potential for the credit quality of our loan portfolio to decline and loan defaults to increase as a result of economic conditions created by the COVID-19 pandemic. See "Allowance for Loan and Lease Losses" under Financial Condition for further discussion relating to the provision for loan and lease losses. Non-Interest Income The Corporation's non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgage loans; customer deposit account fees; earnings on life insurance policies; income arising from sales of investment products to customers; and occasional security sale transactions. Income related to customer deposit accounts and life insurance policies provides a relatively steady flow of income while the other sources are more volume or transaction related and consequently can vary from quarter to quarter. For the quarter endedSeptember 30, 2021 , non-interest income was$4,712,000 , compared to$11,144,000 for the third quarter of 2020, a$6,432,000 (57.7%) decrease, which was attributable to decreases in gain on sales of loans of$4,685,000 (55.2%), other non-interest income of$1,742,000 (65.5%), and net securities losses of$5,000 . Non-interest income for the nine months endedSeptember 30, 2021 totaled$14,230,000 , compared to$22,099,000 for the same period in 2020, a decrease of$7,869,000 (35.6%). The decrease in non-interest income was primarily attributable to decreases in gain on sales of loans of$5,775,000 (33.9%), a decrease in gain on sale of securities of$295,000 , and a decrease in other non-interest income of$1,799,000 (37.7%). The decrease in gain on sale of loans was attributable to a decrease of loan origination and sales activities within the residential mortgage operations along with a decrease in the average gain on sale per loan. Loan sales for the third quarter of 2021 were 328 loans sold totaling$90.4 million compared to 576 loans sold totaling$153.7 million for the third quarter of 2020, resulting in gains on sale of loans of$3,799,000 for the quarter endedSeptember 30, 2021 compared to$8,484,000 for the quarter endedSeptember 30, 2020 . The average loan sale gain approximated$11,600 per loan during the third quarter of 2021 compared to approximately$14,700 for the same period of 2020. Loan sales year to date in 2021 were 1,098 loans sold totaling$286.9 million compared to 1,360 loans closed totaling$354.9 million for the same period in 2020, resulting in gains on sale of loans of$11,257,000 for the nine months endedSeptember 30, 2021 compared to$17,032,000 for the nine months endedSeptember 30, 2020 . The average loan sale gain approximated$10,300 per loan during the first nine months of 2021 compared to approximately$12,500 for the same period of 2020. The high levels of mortgage originations and sale activity in 2020 and early 2021 were attributable to the extremely low mortgage interest rate environment created by theFederal Reserve's lowering of Federal funds target rates inMarch 2020 . Those levels of mortgage banking activity or profitability are not sustainable in the long-term and results in the second and third quarters of 2021 reflect a slowdown of this activity. We anticipate that our non-interest income may be adversely affected in future periods. Other non-interest income was$917,000 for the quarter endedSeptember 30, 2021 compared to$2,659,000 for the comparable period in 2020, a decrease of$1,742,000 . The decrease in other non-interest income was primarily related to a$2,029,000 decrease in income from the Corporation's loan hedging program. For the nine months endedSeptember 30, 2021 , other non-interest income was$2,979,000 compared to$4,779,000 for the nine months endedSeptember 30, 2020 , a decrease of$1,800,000 . The decrease was due to a$2,900,000 decrease in income from the Corporations loan hedging program offset by an increase in Mortgage Servicing Rights valuation of$725,000 and an increase in debit card fees of$233,000 . The sale of securities resulted in a loss of$4,000 and$7,000 for the quarter and nine month period endedSeptember 30, 2021 , respectively, compared to a gain of$1,000 and$288,000 for the quarter and nine month period endedSeptember 30 . 2020. In response to possible liquidity concerns at the time, the Corporation sold certain investment securities during the second quarter of 2020. 31 --------------------------------------------------------------------------------
Non-Interest Expenses For the quarter endedSeptember 30, 2021 non-interest expenses were$9,680,000 , compared to$10,084,000 for the third quarter of 2020, a$404,000 (4.0%) decrease. The significant quarter-over-quarter decreases include salaries and benefits of$751,000 (12.2%) and loan fees of$158,000 (25.3%), offset by increases in equipment service expense of$146,000 (80.4%), data processing expense of$119,000 (25.4%), and miscellaneous losses of$126,000 . The decrease in salaries and benefits is primarily related to a reduction in commissions paid based on loan activity by the residential mortgage operations. Non-interest expenses for the nine months endedSeptember 30, 2021 totaled$27,859,000 , compared to$27,099,000 for the same period in 2020, an increase of$760,000 (2.8%). The increase in non-interest expenses was primarily attributable to increases in data processing of$367,000 (27.3%), equipment service expense of$350,000 (67.5%), depreciation expense of$180,000 (24.2%), advertising and promotional expense of$134,000 (8.9%), building maintenance projects of$111,000 , and Ohio Financial Institutions Tax of$98,000 , offset by decreases in salaries and benefits of$469,000 (2.9%), and loan fees of$135,000 (9.1%). 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 endedSeptember 30, 2021 , the Corporation's efficiency ratio was 65.33%, compared to 51.39% for the same period of 2020. For the nine months endedSeptember 30, 2021 the Corporation's efficiency ratio was 66.68% compared to 58.10% for the same period of 2020. A lower efficiency ratio generally indicates that a bank is spending less to generate every dollar of income. Provision for Income Taxes The provision for income taxes for the quarter endedSeptember 30, 2021 was$843,000 (effective rate of 17.1%), compared to$1,208,000 (effective rate of 18.7%) for the comparable 2020 period. The provision for the nine month period endedSeptember 30, 2021 was$2,200,000 (effective rate of 16.8%) compared to$2,652,000 (effective rate of 18.1%) for the comparable 2020 period. 32 --------------------------------------------------------------------------------
FINANCIAL CONDITION Overview of Balance Sheet Total assets amounted to$1.1 billion atSeptember 30, 2021 , compared to$978.5 million atDecember 31, 2020 , an increase of$91.7 million (9.4%). The increase in total assets was primarily the result of increases of$64.1 million (112.5%) in cash and cash equivalents, and$75.6 million (38.9%) in securities available-for-sale, offset by a$44.5 million (7.1%) decrease in net loans. Deposits during this same period increased$89.4 million (10.7%). Deposit balances have been positively impacted by economic stimulus payments and the Corporation's participation in the Paycheck Protection Loan Program. Shareholders' equity increased from$111.6 million atDecember 31, 2020 to$116.1 million atSeptember 30, 2021 . This increase was primarily the result of net income during the nine month period endedSeptember 30, 2021 of$10,863,000 , offset by a decrease in unrealized securities gains, net of tax of$4,254,000 , and dividends paid of$1,739,000 . The decrease in unrealized securities gains during the nine month period endedSeptember 30, 2021 was attributable to increasing long term treasury yields. Net unrealized gains and losses on securities are reported as accumulated other comprehensive income in the consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents totaled$121.2 million atSeptember 30, 2021 and$57.0 million atDecember 31, 2020 , including interest-bearing deposits in other banks of$101.9 million atSeptember 30, 2021 and$46.6 million atDecember 31, 2020 . Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation's present liquidity and performance needs especially considering the availability of other funding sources, as described below. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and corresponding liquidity sources and uses. Management believes the Corporation's liquidity needs in the near term will be satisfied by the current level of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that will mature within one year. These sources of funds should enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.
Securities
Management monitors the earnings performance and liquidity of the securities portfolio on a regular basis through Asset/Liability Committee (ALCO) meetings. As a result, all securities, except FHLB stock, have been designated as available-for-sale and may be sold if needed for liquidity, asset-liability management or other reasons. Such securities are reported at fair value, with any net unrealized gains or losses reported as a separate component of shareholders' equity, net of related incomes taxes. The amortized cost and fair value of available-for-sale securities as ofSeptember 30, 2021 totaled$266.3 million and$270.2 million , respectively, resulting in net unrealized gain before tax of$3.9 million and a corresponding after-tax increase in shareholders' equity of$3.1 million .
Loans and Leases
The Corporation's primary lending areas areNorthwestern , West Central, andCentral Ohio . Gross loans and leases totaled$589.9 million atSeptember 30, 2021 , compared to$634.1 million atDecember 31, 2020 , a decrease of$44.2 million (7.0%). As compared toDecember 31, 2020 , commercial loans decreased$53.3 million due to PPP loan forgiveness, and consumer loans decreased$1.0 million . Commercial and multi-family real estate loans increased$10.1 million and residential 1-4 family real estate loans increased$29,000 . Loans originated through the PPP program are included in the Commercial segment and had an outstanding balance of$22.4 million as ofSeptember 30, 2021 and$76.8 million atDecember 31, 2020 . Excluding the impact of PPP loans forgiven, loans and leases increased$10.2 million atSeptember 30, 2021 as compared toDecember 31, 2020 .
There are also unrecognized financial instruments at
Excluding PPP loans, loan demand was relatively soft throughout the majority of
2020 and the first nine months of 2021, primarily as a result of the overall
economic impact from the COVID-19 pandemic. Resulting uncertainties in economic
conditions in our market areas may lead to reductions in the growth of our
commercial and industrial loan, commercial real estate loan, residential real
estate loan and consumer loan portfolios. PPP loan balances will likely
continue to decrease over the next year as the forgiveness process continues.
33--------------------------------------------------------------------------------
Allowance for Loan and Lease Losses
The following table presents a summary of activity in the allowance for loan and
lease losses for the nine month periods ended
(in thousands)
Nine months ended September 30,
2021 2020
Balance, beginning of period $ 9,994 $ 4,131
Provision for loan and lease losses 300 4,450
Charge offs (10 ) (165 )
Recoveries 41 35
Net recoveries 31 (130 )
Balance, end of period $ 10,325 $ 8,451
The allowance for loan and lease losses as a percentage of gross loans and
leases was 1.75% at September 30, 2021 , 1.58% at December 31, 2020 , and 1.26% at
September 30, 2020 . Excluding PPP loans and the related allocation of allowance,
the allowance for loan losses as a percentage of gross loans and leases was
1.82% at September 30, 2021 , 1.79% at December 31, 2020 , and 1.55% at
September 30, 2020 . Based on current economic indicators, the Corporation
increased the economic factors within the allowance for loan losses evaluation.
Regular provisions are made in amounts sufficient to maintain the balance in the
allowance for loan and lease losses at a level considered by management to be
adequate for losses within the portfolio. Even though management uses all
available information to assess possible loan and lease losses, future additions
or reductions to the allowance may be required as changes occur in economic
conditions and specific borrower circumstances. The regulatory agencies that
periodically review the Corporation's allowance for loan and lease losses may
also require additions to the allowance or the charge-off of specific loans and
leases based upon the information available to them at the time of their
examinations.
Loans and leases on non-accrual status amounted to $299,000 at September 30,
2021 and $950,000 at December 31, 2020 . Non-accrual loans and leases as a
percentage of outstanding loans amounted to 0.005% at September 30, 2021 and
0.015% at December 31, 2020 .
The Corporation considers a loan or lease to be impaired when it becomes
probable that the Corporation will be unable to collect under the contractual
terms of the loan or lease, as the case may be, based on current information and
events. The Corporation had no impaired loans with specific reserves
at September 30, 2021 and impaired loans of $1.7 million with $255,000 of
specific reserves as of December 31, 2020 . The Corporation had
$2.6 million of impaired loans without specific reserves at September 30, 2021
and $1.3 million of impaired loans without specific reserve at December 31,
2020 .
The Corporation had other potential problem credits, consisting of loans graded
substandard or special mention, as well as loans over 90 days past due, loans on
non-accrual, and TDR loans, amounting to $20.1 million at September 30, 2021 and
$19.4 million at December 31, 2020 . The Corporation's credit administration
department continues to closely monitor these credits. As of September 30,
2021 the Corporation has 119 loans, approximating $41.0 million that were
modified or extended in response to the COVID-19 pandemic. As indicated above,
the CARES Act and guidance issued by the Federal Bank Regulatory agencies
provides relief from classifying COVID-19 related loan modifications as TDR
loans.
The Corporation provides pooled reserves for potential problem loans and leases
using loss rates calculated considering historic net loan charge-off experience,
as well as other environmental and qualitative factors. The Corporation
experienced $10,000 of loan charge-offs during the first nine months of 2021
compared to $22,000 during the first nine months of 2020 with the charge-offs
coming primarily from the consumer loan portfolio. The Corporation also provides
pooled general reserves for the remaining portion of its loan portfolio not
considered to be problem or potential problem loans. These general reserves are
also calculated considering, among other things, the historic net charge-off
experience for the related loan type.
34
--------------------------------------------------------------------------------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$927.8 million , or 97.2% of the Corporation's outstanding funding sources atSeptember 30, 2021 , compared to$838.4 million atDecember 31, 2020 . The significant increase in deposits during the nine month period is somewhat attributable to customer deposits from economic stimulus payments and PPP loan proceeds.
Non-interest bearing deposits comprised 20.8% of total deposits at
In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. Other borrowings consisted of$7,000,000 and$7,750,000 of term borrowings from theUnited Bankers' Bank (UBB) atSeptember 30, 2021 andDecember 31, 2020 , respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of$12,967,000 and$12,942,000 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.Regulatory Capital The Corporation and Bank met all regulatory capital requirements as ofSeptember 30, 2021 , and the Bank is considered "well capitalized" under regulatory and industry standards of risk-based capital. Cash Flow from Operations As part of the Bank's hedging program, loans held for sale are accumulated into larger blocks before being sold. Depending on the timing of the sales of these blocks, there could be a positive or negative impact to net income and cash flow from operations. As ofSeptember 30, 2021 , loans held for sale amounted to$14,545,000 compared to$18,427,000 as ofDecember 31, 2020 resulting in a positive impact to cash flow from operations for the nine month period endedSeptember 30, 2021 of$3,882,000 . There was a negative impact on cash flow from operations for the nine month period endedSeptember 30, 2020 of$16,816,000 from an increase in loans held for sale. Excluding these changes in loans held for sale, cash flow from operations for the nine months endedSeptember 30, 2021 and 2020 would have been a positive$18,610,000 and$6,154,000 , respectively.
Liquidity and Interest Rate Sensitivity
The objective of the Corporation's asset/liability management function is to maintain consistent growth in net interest income through management of the Corporation's balance sheet liquidity and interest rate exposure based on changes in economic conditions, interest rate levels, and customer preferences.
The Corporation manages interest rate risk to minimize the impact of fluctuating interest rates on earnings. The Corporation uses simulation techniques that attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns. The primary method of measuring the sensitivity of earnings of changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit re-pricing to more accurately reflect anticipated pricing behavior. These simulations include adjustments for the lag in prime loan re-pricing and the spread and volume elasticity of interest-bearing deposit accounts, regular savings and money market deposit accounts. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The Corporation closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or re-price within a designated time frame. Management believes the Corporation's current mix of assets and liabilities provides a reasonable level of risk related to significant fluctuations in net interest income and the resulting volatility of the Corporation's earning base. The Corporation's management reviews interest rate risk in relation to its effect on net interest income, net interest margin, and the volatility of the earnings base of the Corporation.
Effects of Inflation on Financial Statements
All of the Corporation's assets relate to commercial banking operations and are generally monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss of purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the commercial banking industry, monetary assets typically exceed monetary liabilities. The Corporation has not experienced a significant level of inflation or deflation during the nine month period endedSeptember 30, 2021 . Management continues to closely monitor interest rate sensitivity trends through the Corporation's asset liability management program and in calculating the allowance for loan and lease losses. 35
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