UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2010 Compared to 2009 (CONTINUED)
Net Interest Income, Continued
Net interest income for 2010 was $21.3 million, an increase of $755,000 (3.7%) from 2009. The increase in net interest income was primarily due to an increase in the Corporation’s net interest margin. The average yield on loans for 2010 increased to 6.09% compared to 6.04% in 2009, and the average rate on interest-bearing liabilities decreased to 1.73% in 2010 from 2.41% in 2009. The effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, increasing in 2010 to 3.85% from 3.75% in 2009.
Provision for Loan Losses and the Allowance for Loan 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 Bank 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 Bank 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 accessing 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 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 Bank’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. Large groups of smaller balance homogenous loans are collectively evaluated for impairment.
To determine the allowance for loan losses, the Bank 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.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2010 Compared to 2009 (CONTINUED)
Provision for Loan Losses and the Allowance for Loan Losses, Continued
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 Bank’s allowance for loan 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 losses at December 31, 2010 was $8.0 million, or 2.09% of total loans, compared to $4.8 million, or 1.18% of total loans at December 31, 2009. The change in the allowance for loan losses during 2010 included a $6.6 million provision for loan losses charged to operations and loan charge-offs, net of recoveries, of $3.3 million.
The provision for loan losses charged to operations 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. The provision for loan losses of $6.6 million in 2010 compares to a provision of $7.5 million in 2009.
The Bank considers a loan to be impaired when it becomes probable that the Bank will be unable to collect under the contractual terms of the loan, based on current information and events. Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $15.7 million at December 31, 2010 compared to $13.2 million at December 31, 2009, an increase of $2.5 million. Impaired loans at December 31, 2010, included $9.6 million of loans with no specific reserves included in the allowance for loan losses and $6.1 million of loans with specific reserves of $692,000 included in the Bank’s December 31, 2010 allowance for loan losses. Impaired loans at December 31, 2010 with no specific reserves include $7.8 million of loans which were charged down during 2010. Impaired loans at December 31, 2009 with no specific reserve, includes $3.5 million of loans which were charged down during 2009. The $13.2 million of impaired loans at December 31, 2009 included $5.0 million of loans with $1.2 million of specific reserves included in the December 31, 2009 allowance for loan losses.
In addition to impaired loans, the Bank had other potential problem credits of $30.4 million at December 31, 2010 compared to $28.0 million at December 31, 2009, an increase of $2.4 million (8.6%). The Bank’s credit administration department continues to closely monitor these credits.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2010 Compared to 2009 (CONTINUED)
Non-Interest Income
Total non-interest income decreased $774,000 (17.2%) to $3.7 million in 2010 from $4.5 million in 2009. With the exception of net securities gains, most of the components of non-interest income are recurring, although certain components are more susceptible to change than others. Net securities gains increased in 2010 to $278,000 compared to $129,000 in 2009.
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 decreased $143,000 (10.7%) to $1,188,000 in 2010 compared to $1,331,000 in 2009. This decrease appears to be largely attributable to changes in customer overdraft behaviors.
The Bank has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and typically retains the servicing rights relating to such loans. During 2010, gain on sale of loans was $867,000, including $315,000 of capitalized servicing rights. Gain on sale of loans was $1,376,000 in 2009, including $612,000 of capitalized servicing rights. The significant decrease in gain on sale of loans was attributable to the dramatic decrease in loan sales activities between the two years with loan sales in 2010 amounting to $35.5 million compared to $65.6 million in 2009. Much of the 2009 activity occurred during the first and second quarters and resulted from the significant decline in long-term mortgage interest rates that occurred during the latter part of the fourth quarter of 2008. The Bank’s serviced portfolio decreased $12.8 million during 2010 to $175.9 million at December 31, 2010.
The Bank reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $142,000 decrease in the fair value of mortgage servicing rights during 2010, compared to a $195,000 increase in the fair value of mortgage servicing rights in 2009, a comparative $337,000 adverse impact on income before income taxes. 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 at December 31, 2010 was 321 compared to 300 at December 31, 2009.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2010 Compared to 2009 (CONTINUED)
Non-Interest Expenses
Total non-interest expenses amounted to $15,522,000 in 2010, compared to $14,479,000 in 2009, an increase of $1,043,000 (7.2%). The Corporation experienced increases in several non-interest expense categories in 2010 as compared to 2009. Salaries, wages, and employee benefits increased $287,000, or 3.9%, primarily due to normal salary increases and increased health care costs. There was essentially no change in the level of FTE’s during the year. Advertising expense increased $207,000, or 61.1%, as the Bank made the decision to participate in the KASASA program. OREO expense, including impairment adjustments and net loss from sales, increased $374,000, primarily due to the significant increase in OREO activity that occurred during the fourth quarter of 2009 and continued throughout much of 2010. See additional explanation in the “Other Assets” discussion under financial condition section. Asset management expenses, primarily relating to legal costs increased $219,000 as the Bank’s volume of criticized assets remained well above traditional levels. Conversely, the Corporation experienced a decrease in FDIC premium assessments of $344,000 and deposit premium amortization of $160,000. The decrease in the FDIC premiums is attributable to the special assessments levied on all commercial banks in 2009.
The significant components of other operating expenses are summarized in Note 12 to the consolidated financial statements.
Provision for Income Taxes
The provision for income taxes for 2010 was $143,000, an effective tax rate of 4.8%, compared to $156,000 in 2009, an effective rate of 5.1%. The Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income (23.6%) and life insurance contracts (5.7%). At December 31, 2010, the Corporation has available alternative minimum tax credits of $268,000 which can be used in the future to the extent regular tax exceeds the alternative minimum tax.
FINANCIAL POSITION – 2010 Compared to 2009
Branch Acquisition
In March 2010, the Bank completed the acquisition of a branch in Findlay, Ohio which is expected to expand the Bank’s market in Findlay and the surrounding area. Through the acquisition, the Bank received $26.6 million of assets, including $22.3 million of cash, $1.8 million of loans, and assumed $26.6 million of deposits. The operations of the branch subsequent to the acquisition are included in the Corporation’s consolidated results. The cash proceeds from the branch acquisition were used to fund the repayment of FHLB advances and maturing brokered certificates of deposit.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION – 2010 Compared to 2009(CONTINUED)
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 $145.3 million at December 31, 2010 compared to $143.5 million at December 31, 2009, an increase of $1.8 million (1.3%). The amortized cost of the securities portfolio increased $2.7 million in 2010. However, the Bank experienced net unrealized losses on securities of $832,000 during 2010.
The Bank 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 were no purchases or sales of FHLB stock during 2010.
At December 31, 2010, net unrealized gains on available-for-sale securities, net of income taxes, amounted to $1.8 million compared to net unrealized gains on available for sale securities, net of income taxes, of $2.4 million at December 31, 2009. At December 31, 2010, the Bank held 39 securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $38.1 million and $783,000, respectively. Management has considered the current interest rate environment, typical volatilities in the bond market, and the Bank’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.
Loans
At December 31, 2010, total loans amounted to $383.9 million compared to $407.8 million at December 31, 2009, a decrease of $23.9 million (5.9%). Most categories within the loan portfolio decreased during 2010, with commercial loans decreasing $17.4 million (8.1%), agriculture loans decreasing $5.2 million (7.3%), and consumer loans decreasing $5.3 million (38.4%). Residential real estate loans increased $4.0 million (3.8%). The overall decrease in the loan portfolio is attributable to continued slow economic conditions experienced throughout the Corporation’s market area. The decrease in consumer loans is partially due to the continued residual effect of the Corporation’s decision to cease indirect automobile lending in June 2008.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION – 2010 Compared to 2009 (CONTINUED)
Other Assets
During 2010, other real estate owned (OREO) decreased $646,000 to $4.5 million at December 31, 2010, compared to $5.2 million at December 31, 2009. During 2010, $2.3 million of loans were transferred to OREO. Throughout 2010, the Bank evaluated its OREO portfolio and made $211,000 of impairment adjustments. The Bank also sold several properties from OREO and received net proceeds of $2.7 million resulting in net loss on sales of $44,000.
Under the requirements of the FDIC’s Notice of Proposed Rulemaking (NPR), the Bank prepaid their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009 and for all of years 2010 through 2012 on December 30, 2009. The assessments were made to address the FDIC’s short-term liquidity needs. Under the NPR, depository institutions record a prepaid asset for the upfront payment and subsequently amortize the asset based on calculated quarterly assessments. As a result, as of December 31, 2010, the Bank had prepaid FDIC assessments of $1.9 million compared with $2.6 million at December 31, 2009.
Deposits
Total deposits at December 31, 2010 amounted to $488.7 million, an increase of $19.0 million (4.0%) compared with total deposits of $469.7 million at December 31, 2009. Of this increase, $4.7 million was related to non-interest bearing deposits. The increase in deposits includes the impact of the $26.6 million of deposits assumed through the Findlay branch acquisition in March 2010, which is summarized in Note 3 to the consolidated financial statements.
Other Borrowings
The Bank also utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth and periodic deposit shrinkage. Other borrowings, consisting of FHLB advances and customer repurchase agreements, amounted to $55.8 million at December 31, 2010, compared to $77.9 million at December 31, 2009, a decrease of $22.1 million (28.4%). The decrease in other borrowings included $21.5 million of repayments of FHLB borrowings, and a $578,000 decrease in customer repurchase agreements.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2009 Compared to 2008
Net interest income for 2009 was $20.6 million, an increase of $1.1 million (5.9%) from 2008. The increase in net interest income was primarily due to an overall increase in the Corporation’s net margin. The average yield on loans for 2009 decreased to 6.04% compared to 7.15% in 2008, and the average rate on interest-bearing liabilities decreased to 2.41% in 2009 from 3.12% in 2008. The net effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, increasing in 2009 to 3.75% from 3.64% in 2008.
The allowance for loan losses at December 31, 2009 was $4.8 million, or 1.18% of total loans, compared to $3.2 million, or 0.76% of total loans at December 31, 2008. The change in the allowance for loan losses during 2009 included a $7.5 million provision for loan losses charged to operations and loan charge-offs, net of recoveries, of $5.9 million. The provision for loan losses of $7.5 million in 2009 compares to a provision of $2.2 million in 2008. The significant increase in the provision for loan losses in 2009, as compared to 2008, resulted from many factors, including an increase in the level of net loan charge-offs ($5.9 million in 2009 compared to $1.2 million in 2008) and an increase in the level of problem and potential problem loans. Net loan charge-offs in 2009 included $3.6 million relating to a commercial credit whose business operations ceased during the fourth quarter of 2009.
Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $13.2 million at December 31, 2009 compared to $5.6 million at December 31, 2008, an increase of $7.6 million. Impaired loans at December 31, 2009, included $8.2 million of loans with no specific reserves included in the allowance for loan losses and $5.0 million of loans with specific reserves of $1.2 million included in the Bank’s December 31, 2009 allowance for loan losses. Impaired loans at December 31, 2009 with no specific reserve, includes $3.5 million of loans which were charged down during 2009. The $5.6 million of impaired loans at December 31, 2008 included $5.4 million of loans with $1.1 million of specific reserves included in the December 31, 2008 allowance for loan losses.
In addition to impaired loans, the Bank had other potential problem credits of $28.0 million at December 31, 2009 compared to $15.7 million at December 31, 2008, an increase of $12.3 million (78.3%). The Bank’s credit administration department continues to closely monitor these credits.
Total non-interest income increased $1.8 million (68.0%) to $4.5 million in 2009 from $2.7 million in 2008. Net securities gains increased slightly in 2009 to $129,000 compared to $49,000 in 2008.
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 decreased $184,000 (12.1%) to $1,331,000 in 2009 compared to $1,515,000 in 2008. This decrease appears to largely be attributable to changes in customer savings patterns.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – 2009 Compared to 2008 (CONTINUED)
Net gain on sale of loans was $1,376,000, including $612,000 of capitalized servicing rights. Net gain on sale of loans was $346,000 in 2008, including $147,000 of capitalized servicing rights. The significant increase in the net gain on sale of loans was attributable to the dramatic increase in loan sales activities between the two years with loan sales in 2009 amounting to $65.6 million compared to $16.0 million in 2008. Much of this activity occurred during the first and second quarters of 2009 and resulted from the significant decline in long-term mortgage interest rates that occurred during the latter part of the fourth quarter of 2008. Despite the significant loan sales activity experienced during 2009, the Bank’s serviced portfolio remained relatively unchanged increasing only $2.6 million to $190.1 million at December 31, 2009, which is evidence of the significant impact borrower refinancing had on the 2009 loan sales activity.
The Corporation recognized a $195,000 increase in the fair value of mortgage servicing rights during 2009, compared to a $649,000 decrease in the fair value of mortgage servicing rights in 2008, a comparative $844,000 positive impact on income before income taxes. Due to declines in the secondary market mortgage rates experienced during the fourth quarter of 2008, the prepayment assumptions used in determining the fair value of servicing at December 31, 2008 was 630 compared to 244 at December 31, 2007 which largely contributed to the significant decline in fair value of servicing experienced in 2008. As long-term mortgage rates stabilized in 2009, the prepayment assumptions returned to a more normal level of 300 at December 31, 2009.
Total non-interest expenses amounted to $14,479,000 in 2009, compared to $14,463,000 in 2008, an increase of $16,000 (0.1%). Non-interest expenses for 2009 included a $1,077,000 increase in the Bank’s Federal Deposit Insurance Corporation (FDIC) expense. The Bank also experienced an increase in professional fees of $134,000 (24.3%) with much of the increase resulting from loan collection costs. Conversely, the Corporation experienced decreases in several non-interest expense categories during 2009 as compared to 2008, including OREO and other asset impairment costs ($340,000); ATM processing and other fees ($223,000); salaries, wages, and employee benefits ($197,000); dealer reserve ($98,000); advertising ($71,000); seminars and training ($66,000); and franchise tax ($48,000).
The significant increase in FDIC premium assessments was due to increased deposit premium rates as well as the FDIC Special Assessment ruling issued on May 22, 2009, which required all insured depository institutions to pay a special assessment equal to the lesser of 5 basis points on total assets less Tier 1 capital, or 10 basis points on total deposits. The decrease in salaries and wages was largely related to decreases in bonuses and other discretionary compensation.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION – 2009 Compared to 2008
Securities, including FHLB stock, totaled $143.5 million at December 31, 2009 compared to $141.4 million at December 31, 2008, an increase of $2.1 million (1.5%). The amortized cost of the securities portfolio actually decreased $2.1 million due to sales and maturities of securities exceeding purchases in 2009. However, the Bank experienced net unrealized gains on securities of $4.2 million during 2009. There were no purchases or sales of FHLB stock during 2009.
At December 31, 2009, net unrealized gains on available-for-sale securities, net of income taxes, amounted to $2.4 million compared to net unrealized losses on available for sale securities, net of income taxes, of $412,000 at December 31, 2008. At December 31, 2009, the Bank held 33 securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $26.9 million and $464,000, respectively. Management has considered the current interest rate environment, typical volatilities in the bond market, and the Bank’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.
At December 31, 2009, total loans amounted to $407.9 million compared to $418.4 million at December 31, 2008, a decrease of $10.5 million (2.5%). Most categories within the loan portfolio decreased during 2009, with residential real estate loans decreasing $22.5 million (17.3%), agriculture loans decreasing $3.6 million (4.9%), and consumer loans decreasing $5.8 million (29.7%). Commercial loans increased $21.7 million (11.2%). The overall decrease in the loan portfolio is attributable to continued slow economic conditions experienced throughout the Corporation’s market area and tightening credit underwriting standards. The decrease in consumer loans is largely due to the residual effect of the Corporation’s decision to cease indirect automobile lending in June 2008.
During 2009, other real estate owned (OREO) increased $4.9 million to $5.2 million at December 31, 2009, compared to $250,000 at December 31, 2008. This increase was primarily attributable to a real estate development loan client who ceased operations during the fourth quarter of 2009. In December 2009, the Bank accepted from the customer deeds in lieu of foreclosure to various residential and non-residential real estate properties resulting in a $3.6 million transfer to OREO. During 2009, the Bank sold various properties from OREO and recognized a write-down on a property held in OREO at December 31, 2009, resulting in an overall loss on sale or write-down of OREO of $30,000.
Total deposits at December 31, 2009 amounted to $469.7 million, an increase of $4.9 million (1.1%) compared with total deposits of $464.8 million at December 31, 2008. Of this increase, $4.0 million was related to non-interest bearing deposits. The change in deposits during 2009 also included a decrease of $20.0 million in brokered deposits. At December 31, 2009, brokered deposits amounted to $15.0 million, or 3.2% of total deposits.
Other borrowings, consisting of FHLB advances and customer repurchase agreements, amounted to $77.9 million at December 31, 2009, compared to $86.3 million at December 31, 2008, a decrease of $8.3 million (10.7%). This decrease in other borrowings included a $9.5 million decrease in FHLB borrowings and the maturity during 2009 of a $5.0 million security sold under agreement to repurchase that was outstanding at December 31, 2008, offset by a $6.2 million increase in customer repurchase agreements.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Bank’s loan 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 2010, 2009, and 2008 follows.
The Corporation generated cash from operating activities of $10.3 million in 2010, $5.6 million in 2009, and $8.3 million in 2008.
Net cash flows from investing activities amounted to $41.9 million in 2010, $1.7 million in 2009, and $(60.9) million in 2008. The only significant investing cash outflow activity in 2010 was $2.8 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities. Significant investing cash inflow activities in 2010 included $22.3 million in proceeds from the branch acquisition, $20.0 million decrease in loans, and $2.7 million in proceeds from the sale of other real estate owned. The only significant investing cash flow activities in 2009 included $2.3 million of net cash inflows from securities proceeds (sales and maturities) net of purchases, and $710,000 to fund net loan growth. Investing cash outflows of $60.4 million in 2008 were used to fund loan growth. Other significant investing cash flow activities in 2008 included $1.7 million of net cash inflows from securities activity, and $2.5 million of premises and equipment purchases. Most of the 2008 premises and equipment additions were related to the re-construction of the Bank’s Ottawa branch office and the purchase and renovation of the Bank’s new Lima Shawnee branch office.
Net cash flows from financing activities amounted to $(31.0) million in 2010, $(5.5) million in 2009, and $63.2 million in 2008. Net cash used in financing activities in 2010 primarily resulted from $21.6 million of repayments on FHLB borrowings, $7.3 million decrease in deposits (excluding the impact of deposits assumed from the Findlay branch acquisition), including $15 million repayment of brokered deposits, and the payment of $1.6 million ($.45 per share) of cash dividends. Net cash used in financing activities in 2009 primarily resulted from an $8.3 million net reduction in other borrowings and the payment of $2.1 million ($.60 per share) of cash dividends, offset by customer deposit growth of $4.9 million. Deposit growth provided a $71.6 million financing funding source in 2008. Cash outflows from financing activities in 2008 included a $5.6 million net reduction in other borrowings, $775,000 for the purchase of 55,000 shares of stock under the Corporation’s stock buyback program, and the payment of $2.1 million ($.60 per share) of cash dividends.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 at December 31, 2010 is approximately 96% which means the Bank has more liabilities than it does assets re-pricing within one year.
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 generally accepted accounting principles, 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, and the valuation of goodwill and mortgage servicing rights 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.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 resulting from the 2003 Gibsonburg and Pemberville and the 2010 Findlay branch 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, 2010 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, 2010.
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 Bank 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, and discount rates commensurate with the risks involved. The Bank 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 Bank’s serviced portfolio, to the Bank’s accounting records.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
A summary of new accounting standards adopted or subject to adoption in 2010, as well as newly-issued but not effective accounting standards at December 31, 2010, is presented in Note 2 to the consolidated financial statements. In addition, the Corporation has provided in Note 5 to the consolidated financial statements, the expanded disclosure requirements about the credit quality of loans and the allowance for loan losses for 2010 as required by Accounting Standards Update 2010-20,Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Loss.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2010:
| | | | | | | | | |
| | Amount of commitment to expire per period |
| | Total Amount | | Less than 1 year | | 1 - 3 years | | 4 - 5 years | | Over 5 years |
| | (Dollars in thousands) |
Type of commitment | | | | | | | | | |
Commercial lines-of-credit | $ 35,635 | | $ 33,928 | | $ 887 | | $ 820 | | $ - |
Real estate lines-of-credit | 31,789 | | 2,207 | | 10,349 | | 5,080 | | 14,153 |
Consumer lines-of-credit | 9 | | 8 | | 1 | | - | | - |
Letters of Credit | 2,602 | | 2,602 | | | | | | |
Guarantees | - | | - | | - | | - | | - |
| | | | | | | | | | |
Total commitments | $ 70,035 | | $ 38,745 | | $11,237 | | $5,900 | | $14,153 |
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS(CONTINUED)
As indicated in the preceding table, the Corporation had $70.0 million in total loan commitments at December 31, 2010, with $38.7 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.
The following table summarizes the Corporation’s contractual obligations as of December 31, 2010:
| | | | | | | | | |
| | Payments due by period |
| | Total Amount | | Less than 1 year | | 1 - 3 years | | 4 - 5 years | | Over 5 years |
| | (Dollars in thousands) |
Contractual obligations | | | | | | | | | |
Long-term debt | $ 54,900 | | $ 17,000 | | $10,100 | | $ - | | $ 27,800 |
Capital leases | - | | - | | - | | - | | - |
Operating leases | - | | - | | - | | - | | - |
Unconditional purchase obligations |
- | |
- | |
- | |
- | |
- |
Other long-term liabilities reflected under GAAP |
305 | |
14 | |
34 | |
43 | |
214 |
| | | | | | | | | | |
Total obligations | $ 55,205 | | $ 17,014 | | $10,134 | | $ 43 | | $ 28,014 |
Long-term debt presented in the preceding table is comprised of $44.6 million in borrowings from the FHLB, and $10.3 million from the issuance of junior subordinated deferrable interest debentures.
FHLB borrowings include notes that require monthly interest payments, with principal on most issues due at maturity. The remaining FHLB issues require monthly principal payments as disclosed in Note 10 to the consolidated financial statements. All outstanding FHLB borrowings at December 31, 2010 consist of advances with fixed interest rates. Certain fixed rate obligations have variable options that stipulate a prepayment penalty if the note’s interest rate exceeds the current market rate for similar borrowings at the time of repayment. As a note matures, the Bank evaluates the liquidity and interest-rate circumstances at that point in time to determine whether to pay-off or renew the note. The evaluation process typically includes the strength of current and projected customer loan demand, the current federal funds sold or purchased position, projected cash flows from maturing securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for deposit product offerings. Fixed rate advances at December 31, 2010 include $22.5 million in advances that can be put back at the option of the FHLB.
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010, 2009 and 2008
| | | |
| | 2010 | 2009 | 2008 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ 2,807,682 | $ 2,882,596 | $ 4,418,597 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
Depreciation and amortization | 647,006 | 984,573 | 1,127,182 |
Credit for accrued compensation – stock options | - | - | (11,286) |
Deferred income taxes | (865,711) | (280,565) | (543,362) |
Provision for loan losses | 6,550,000 | 7,525,000 | 2,195,000 |
Gain on sale of loans | (866,562) | (1,375,729) | (346,267) |
Net securities gains | (278,242) | (129,493) | (49,055) |
Change in fair value of mortgage servicing rights | 141,587 | (195,101) | 649,091 |
Federal Home Loan Bank stock dividends | - | - | (190,700) |
Loss on sale or write-down of other real estate owned | 255,044 | 29,911 | 68,716 |
Increase in cash surrender value of life insurance | (492,687) | (512,152) | (493,051) |
Net amortization (accretion) of security premiums and discounts | 382,312 | (21,986) | (9,578) |
Provision for deferred compensation | 25,085 | 107,371 | 144,988 |
Loss (gain) on disposal or write-down of premises and equipment and other assets | 1,550 | (2,472) | 275,925 |
Proceeds from sale of loans held-for-sale | 36,038,510 | 66,651,013 | 16,300,343 |
Originations of loans held-for-sale | (35,486,987) | (65,645,945) | (15,992,527) |
Decrease (increase) in other assets | 1,846,312 | (3,411,864) | 248,732 |
Increase (decrease) in other liabilities | (361,507) | (1,045,014) | 502,285 |
| | | | |
Net cash provided by operating activities | 10,343,392 | 5,560,143 | 8,295,033 |
| |
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
Proceeds from sales of available-for-sale securities | 9,399,659 | 3,228,921 | 1,565,930 |
Proceeds from maturities of available-for-sale securities, including paydowns on mortgage-backed securities | 41,493,304 | 29,800,007 | 28,149,767 |
Purchases of available-for-sale securities | (53,683,058) | (30,765,319) | (28,002,858) |
Proceeds from branch acquisition | 22,260,144 | - | - |
Net decrease (increase) in loans | 20,017,232 | (710,284) | (60,379,189) |
Purchases of premises and equipment | (313,671) | (371,339) | (2,464,385) |
Proceeds from sale of premises and equipment | - | 39,471 | 15,634 |
Proceeds from sale of other real estate owned | 2,733,862 | 168,650 | 179,299 |
Proceeds from sale of former branch | - | 187,240 | - |
Insurance proceeds from casualty loss | - | 145,000 | - |
| | | | |
Net cash provided by (used in) investing activities | 41,907,472 | 1,722,347 | (60,935,802) |
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010, 2009 and 2008
| | | | | |
| | 2010 | | 2009 | | 2008 |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net increase (decrease) in deposits | $ (7,335,473) | | $ 4,876,840 | | $ 71,588,401 |
Other borrowings: |
|
|
|
|
|
Proceeds | - |
| 5,000,000 |
| 37,000,000 |
Repayments | (21,550,300) |
| (19,513,729) |
| (45,684,111) |
Change in customer repurchase agreements | (578,454) |
| 6,167,934 |
| 3,048,587 |
Purchase of common stock | - |
| - |
| (775,250) |
Proceeds from sale of treasury shares | 17,511 |
| 30,632 |
| 98,709 |
Payments of deferred compensation | (30,303) |
| (20,608) |
| (27,802) |
Cash dividends paid | (1,550,098) | | (2,065,963) | | (2,064,686) |
| | | | | | |
Net cash provided by (used in) financing activities | (31,027,117) | | (5,524,894) | | 63,183,848 |
| | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 21,223,747 |
| 1,757,596 |
| 10,543,079 |
| |
|
|
|
|
|
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
At beginning of year | 27,379,889 | | 25,622,293 | | 15,079,214 |
| | | | | | |
At end of year | $ 48,603,636 | | $ 27,379,889 | | $ 25,622,293 |
| | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURES | | | | | |
Cash paid during the year for: | | | | | |
Interest | $ 9,563,566 | | $ 12,909,515 | | $ 15,678,869 |
| | | | | | |
Federal income taxes | $ 1,075,000 | | $ 1,500,000 | | $ 1,655,000 |
| | | | | | |
Non-cash operating activity: Change in deferred income taxes on net unrealized gain or loss on available- for-sale securities | $ 282,889 | | $ (1,428,065) | | $ (84,362) |
| | | | | | |
Non-cash investing activities: | | | | | |
Transfer of loans to other real | | | | | |
estate owned | $ 2,343,000 | | $ 5,119,196 | | $ 140,740 |
| | | | | | |
Transfer of premises classified as held for sale to other assets | $ - | | $ - | | $ 320,309 |
| | | | | | |
Change in net unrealized gain or loss on available-for-sale securities | $ (832,026) | | $ 4,200,190 | | $ 248,123 |
| | | | | | |
The accompanying notes are an integral part of the financial statements.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United Bancshares, Inc. (the “Corporation”) was incorporated in 1985 in the state of Ohio as a single-bank holding company for The Union Bank Company (the “Bank”). The Corporation subsequently acquired the Bank of Leipsic Company (“Leipsic”) in 2000 and Citizens Bank of Delphos (“Citizens”) in 2001. The Bank acquired the Gibsonburg and Pemberville, Ohio branch offices of RFC Banking Company in 2003. 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 other real estate owned. The Bank acquired the Findlay, Ohio branch of The Home Savings and Loan Company in March 2010, as more fully described in Note 3. The operating results of the branch subsequent to the acquisition are included in the Corporation’s consolidated financial statements.
The Corporation, through its wholly-owned subsidiary, the Bank, operates in one industry segment, the commercial banking industry. The Bank, organized in 1904 as an Ohio-chartered bank, is headquartered in Columbus Grove, Ohio, with branch offices in Bowling Green, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville Ohio.
The primary source of revenue of the Bank is providing loans to customers primarily located in Northwestern and West Central Ohio. Such customers are predominately small and middle-market businesses and individuals.
Significant accounting policies followed by the Corporation are presented below.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The estimates most susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of servicing assets and goodwill.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within four days.
Restrictions on Cash
The Bank was required to maintain cash on hand or on deposit with the Federal Reserve Bank in the amount of $410,000 at December 31, 2010 and $358,000 at December 31, 2009 to meet regulatory reserve and clearing requirements.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities and Federal Home Loan Bank Stock
Securities are classified as available-for-sale and recorded at fair value, with unrealized gains and losses, net of applicable income taxes, excluded from income and reported as accumulated other comprehensive income (loss).
The cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in fair value of securities below their cost that are deemed to be other-than-temporary are reflected in income as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the securities and the more likely than not requirement for the Corporation will be required to sell the securities prior to recovery, (2) the length of time and the extent to which the fair value has been less than cost, and (3) the financial condition and near-term prospects of the issuer. Gains and losses on the sale of securities are recorded on the trade date, using the specific identification method, and are included in non-interest income.
Investment in Federal Home Loan Bank of Cincinnati stock is classified as a restricted security, carried at cost, and evaluated for impairment.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Estimated fair value is determined based on quoted market prices in the secondary market. Any net unrealized losses are recognized through a valuation allowance by charges to income. The Bank had no loans held for sale at December 31, 2010 and 2009.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally stated at their outstanding principal amount adjusted for charge-offs and the allowance for loan losses. Interest is accrued as earned based upon the daily outstanding principal balance. Loan origination fees and certain direct obligation costs are capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Personal loans are typically charged-off no later than when they become 150 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. Interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Corporation’s consolidated financial statements.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers classified loans (substandard or special mention) without specific reserves, as well as non-classified loans, and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and fair value adjustments are included in other operating expenses.
Loan Sales and Servicing
Certain mortgage loans are sold with mortgage servicing rights retained or released by the Bank. The carrying value of mortgage loans sold with servicing rights retained is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. The Bank 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, and discount rates commensurate with the risks involved.
Capitalized servicing rights are reported at fair value and changes in fair value are reported in net income for the period the change occurs.
Servicing fee income is recorded for servicing loans, based on a contractual percentage of the outstanding principal, and is reported as other operating income. Amortization of mortgage servicing rights is charged against loan servicing fee income.
Premises and Equipment
Premises and equipment is stated at cost, less accumulated depreciation. Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income. Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed primarily using the straight-line method.
Premises and equipment is reviewed for impairment when events indicate the carrying amount may not be recoverable from future undiscounted cash flows. If impaired, premises and equipment is recorded at fair value and any corresponding write-downs are charged against current year earnings.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Core Deposit Intangible Assets
Goodwill arising from the Gibsonburg, Pemberville and Findlay branch acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred. The core deposit intangible asset, resulting from the Gibsonburg and Pemberville branch acquisitions, was determined to have a definite life and was amortized on a straight-line basis over seven years through March 2010. The core deposit intangible asset resulting from the Findlay branch acquisition was also determined to have a definite life and is being amortized on a straight-line basis over seven years through March 2017. Future amortization of the core deposit intangible asset is $40,857 for years 2011 through 2016 and $10,215 in 2017.
Supplemental Retirement Benefits
Annual provisions are made for the estimated liability for accumulated supplemental retirement benefits under agreements with certain officers and directors. These provisions are determined based on the terms of the agreements, as well as certain assumptions, including estimated service periods and discount rates.
Advertising Costs
All advertising costs are expensed as incurred.
Income Taxes
Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.
Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon examination by a taxing authority is considered to be 50% or less. The Corporation has adopted the policy of classifying any interest and penalties resulting from the filing of its income tax returns in the provision for income taxes.
The Bank is not currently subject to state or local income taxes.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.
Per Share Data
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.
The weighted average number of shares used for the years ended December 31, 2010, 2009 and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Basic | 3,444,703 |
| 3,443,093 |
| 3,447,536 |
| |
|
|
|
|
|
Diluted | 3,444,703 |
| 3,443,283 |
| 3,448,467 |
Dividends per share are based on the number of shares outstanding at the declaration date.
Rate Lock Commitments
Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale are accounted for as derivative instruments. The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are to be recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. At December 31, 2010 and 2009, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial statements.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 21. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsequent Events
Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2010, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2010, have been recognized in the financial statements for the year ended December 31, 2010. Events or transactions that provided evidence about conditions that did not exist at December 31, 2010 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2010.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860-10 addresses accounting for transfers of financial assets. Among other requirements, ASC 860-10 removes the concept of a qualifying special-purpose entity and removes the exception from applying consolidation of variable interest entities to qualifying special-purpose entities. The objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860-10 applies to any transfer of financial assets, which for the Corporation primarily relates to loan participations sold. The adoption of ASC 860-10 effective January 1, 2010 did not have any impact on the Corporation’s December 31, 2010 consolidated financial statements since the Bank did not sell any loan participations during the year ended December 31, 2010.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06,Fair Value Measurements and Disclosures(ASU 2010-06), which provides amendments to ASC 820-10 and is intended to improve disclosure requirements related to fair value measurements. ASU 2010-06 clarifies that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities measured at fair value. A class is often a subset of assets or liabilities within a line item in the statement of financial position. Reporting entities should also provide disclosures about the valuation techniques and inputs used to measure fair value for fair value measurements falling within Level 2 or 3. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Information on fair value measurements is included in Note 20 to the consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20,Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which increases disclosures made about the credit quality of loans and the allowance for credit losses. The disclosures provide additional information about the nature of credit risk inherent in the Bank’s loans portfolio, how credit risk is analyzed and assessed, and the reasons for the change in the allowance for loan losses. The expanded disclosure requirements are included in Note 5 of the Corporation’s December 31, 2010 consolidated financial statements, except for activity occurring during the period, which will be required to be reported in 2011. The additional disclosure requirements relating to troubled debt restructurings were deferred by ASU 2011-01, issued in January 2011.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BRANCH ACQUISITION
On November 30, 2009, the Bank entered into an agreement to purchase the Findlay, Ohio branch of The Home Savings and Loan Company. Under the terms of the agreement, the Bank assumed all deposits and purchased the related branch premises and certain loans. The transaction was completed in March 2010 with assets acquired and deposits assumed being recorded at their estimated fair values as follows:
| | |
Cash | $22,260,144 |
Loans | 1,804,505 |
Bank premises | 1,021,000 |
Goodwill | 1,272,966 |
Core deposit intangible asset | 286,000 |
| | | |
Total assets acquired | $ 26,644,615 |
| | |
Deposits assumed | $ 26,644,615 |
Cash proceeds from the branch acquisition were used to fund $10.0 million of brokered certificates of deposit and $16.5 million of FHLB borrowings that matured during the second quarter of 2010.
NOTE 4 - SECURITIES
The amortized cost and fair value of securities as of December 31, 2010 and 2009 are as follows:
| | | | | | | |
| | 2010 | | 2009 |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value |
Available for sale: | | | | | | | |
U.S. Government and agencies |
$ - | |
$ - | |
$3,993,013 | |
$3,982,760 |
Obligations of states and political subdivisions |
46,547,112 | |
47,298,232 | |
46,757,381 | |
47,828,791 |
Mortgage-backed | 90,647,900 | | 92,632,687 | | 83,758,593 | | 86,270,563 |
Other | 501,888 | | 509,442 | | 501,888 | | 504,248 |
| | | | | | | | |
Total | $137,696,900 | | $140,440,361 | | $135,010,875 | | $138,586,362 |
A summary of unrealized gains and losses on securities at December 31, 2010 and 2009 follows:
| | | | | | | |
| | 2010 | | 2009 |
| | Gross unrealized gains | | Gross unrealized losses | | Gross unrealized gains | | Gross unrealized losses |
Available for sale: | | | | | | | |
U.S. Government and agencies |
$ - | |
$ - | |
$ - | |
$ 10,253 |
Obligations of states and political subdivisions |
989,596 | |
238,476 | |
1,280,274 | |
208,864 |
Mortgage-backed | 2,529,120 | | 544,333 | | 2,756,975 | | 245,005 |
Other | 7,554 | | - | | 2,360 | | - |
| | | | | | | | |
Total | $3,526,270 | | $782,809 | | $4,039,609 | | $ 464,122 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES (CONTINUED)
The amortized cost and fair value of securities at December 31, 2010, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | |
| | Amortized cost | | Fair value |
| | | | |
Due in one year or less | $ 831,229 | | $ 847,615 |
Due after one year through five years | 7,578,209 |
| 7,956,993 |
Due after five years through ten years | 12,777,209 |
| 13,313,918 |
Due after ten years | 116,008,365 |
| 117,812,393 |
Other securities having no maturity date | 501,888 | | 509,442 |
| | | | |
Total | $ 137,696,900 | | $ 140,440,361 |
Securities with a carrying value of approximately $92,860,000 at December 31, 2010 and $77,579,000 at December 31, 2009 were pledged to secure public deposits and for other purposes as required or permitted by law, including certain borrowings described in Note 10.
The following table presents gross unrealized losses and fair value of debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010 and 2009:
| | | | | | | | |
| | Securities in a continuous unrealized loss position |
| | Less than 12 months | 12 months or more |
Total |
2010 | Unrealized losses | Fair value | Unrealized Losses | Fair value | Unrealized losses | Fair value |
Obligations of states and political subdivisions | $ 238,476 | $ 14,114,225 | $ - | $ - | $ 238,476 | $ 14,114,225 |
Mortgage-backed | 544,333 | 23,998,771 | - | - | 544,333 | 23,998,771 |
| | | | | | | |
Total temporarily impaired securities |
$ 782,809 ======== | $ 38,112,996 ========== | $ - ========= | $ - ========= | $ 782,809 ========= | $ 38,112,996 =========== |
2009
| | | | | | |
U.S. Government and agencies | $ 10,253 | $ 1,988,760 | $ - | $ - | $ 10,253 | $ 1,988,760 |
Obligations of states and political subdivisions | 69,987 | 7,810,566 | 138,877 | 3,159,180 | 208,864 | 10,969,746 |
Mortgage-backed | 74,689 | 8,053,841 | 170,316 | 5,914,022 | 245,005 | 13,967,863 |
| | | | | | | |
Total temporarily impaired securities | $ 154,929 ======== | $ 17,853,167 =========== | $ 309,193 ========= | $ 9,073,202 ========= | $ 464,122 ========= | $ 26,926,369 =========== |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES (CONTINUED)
There were 39 securities in an unrealized loss position at December 31, 2010, none of which were in a continuous unrealized loss position for twelve months or more. Management has considered industry analyst reports, whether downgrades by bond rating agencies have occurred, sector credit reports, issuer’s financial condition, the Corporation’s ability to hold securities to maturity, and volatility in the bond market, in concluding that the unrealized losses as of December 31, 2010 were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of December 31, 2010 are considered to be temporary.
Gross realized gains from sale of securities, including securities calls, amounted to $278,242 in 2010, $130,600 in 2009, and $50,887 in 2008, with the income tax provision applicable to such gains amounting to $94,602 in 2010, $44,404 in 2009, and $17,301 in 2008. Gross realized losses from sale of securities amounted to $1,107 in 2009 and $1,832 in 2008 (none in 2010), with related income tax effect of $376 in 2009, and $623 in 2008.
NOTE 5 – LOANS
Loans at December 31, 2010 and 2009 consist of the following:
| | | |
| | 2010 | | 2009 |
| | | | |
Residential real estate | $ 111,562,060 | | $ 107,515,138 |
Commercial | 198,013,634 |
| 215,457,166 |
Agriculture | 65,818,468 |
| 71,027,689 |
Consumer | 8,513,225 | | 13,814,930 |
Total loans | $ 383,907,387 | | $ 407,814,923 |
Fixed rate loans approximated $70,000,000 at December 31, 2010 and $70,088,000 at December 31, 2009. Certain commercial and agricultural loans are secured by real estate.
The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2010, 2009, and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Balance at beginning of year | $ 4,803,595 | | $ 3,198,130 | | $ 2,232,708 |
Provision charged to operations | 6,550,000 | | 7,525,000 | | 2,195,000 |
Loans charged-off | (3,823,427) | | (6,276,801) | | (1,538,749) |
Recoveries of loans charged-off | 486,618 | | 357,266 | | 309,171 |
| | | | | | |
Total | $ 8,016,786 | | $ 4,803,595 | | $ 3,198,130 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (CONTINUED)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:
| | | | | | | | | | |
| | | Commercial | | | | |
| | | and | Residential | | | |
| | Commercial | multi-family real estate | 1 – 4 family real estate | Construction | Consumer | Total |
Allowance for loan losses: | | | | | | |
Attributable to loans individually evaluated for impairment | $ 252,263 | $ 439,517 | $ - | $ - | $ - | $691,780 |
Collectively evaluated for impairment | 2,634,204 | 3,475,806 | 886,879 | 67,590 | 260,527 |
7,325,006 |
Acquired with deteriorated credit quality | - | - | - | - | - | - |
| | | | | | | |
Total allowance for loan losses | $ 2,886,467 ========== | $ 3,915,323 ========== | $ 886,879 ========== | $ 67,590 ========= | $ 260,527 ======== | $ 8,016,786 ========== |
Loans: | | | | | | |
Individually evaluated for impairment | $ 3,663,669 | $ 11,834,092 | $ 190,864 | $ - | $ - | $ 15,688,625 |
Collectively evaluated for impairment | 76,178,015 | 208,473,683 | 68,582,003 | 6,471,836 | 8,513,225 | 368,218,762 |
Acquired with deteriorated credit quality | - | - | - | - | - | - |
| | | | | | | |
Total ending loans balance | $ 79,841,684 ========== | $ 220,307,775 ========== | $ 68,772,867 ========== | $ 6,471,836 ========= | $ 8,513,225 ======== | $383,907,387 ========== |
Impaired loans were as follows as of December 31, 2010 and 2009:
| | | |
| | 2010 | | 2009 |
| | | | |
Loans with no allowance for loan losses allocated | $ 9,612,896 | | $ 8,166,619 |
Loans with allowance for loan losses allocated | 6,075,729 | | 5,009,477 |
| | | | |
Total impaired loans | $ 15,688,625 | | $ 13,176,096 |
| | | | |
Amount of the allowance allocated to impaired loans | $ 691,780 | | $ 1,228,814 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
The following is a summary of the activity in the allowance for loan losses of impaired loans, which is a part of the Bank’s overall allowance for loan losses for the years ended December 31, 2010, 2009, and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Balance at beginning of year | $ 1,228,814 | | $ 1,054,518 | | $ 366,500 |
Provision charged to operations | 2,157,658 |
| 5,640,681 |
| 1,281,943 |
Loans charged-off | (2,694,692) | | (5,466,385) | | (593,925) |
| |
|
|
|
|
|
Balance at end of year | $ 691,780 | | $ 1,228,814 | | $ 1,054,518 |
No additional funds are committed to be advanced in connection with impaired loans.
The average balance of impaired loans approximated $15,487,000 in 2010, $7,851,000 in 2009, and $3,617,000 in 2008. There was no interest income recognized by the Bank on impaired loans on an accrual or cash basis during 2010, 2009, and 2008.
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:
| | | |
| | Recordedinvestment | | Allowance for loan losses allocated |
With no related allowance recorded: | | | |
Commercial | $ 2,381,774 | | $ - |
Commercial and multi-family | | | |
real estate | 7,040,258 | | - |
Residential 1 – 4 family | | | |
real estate | 190,864 | | - |
| | | | |
With an allowance recorded: | | | |
Commercial | 1,281,895 | | 252,263 |
Commercial and multi-family | | | |
real estate | 4,793,834 | | 439,517 |
Residential 1 – 4 family | | | |
real estate | - | | - |
| | | | |
Total | $ 15,688,625 | | $ 691,780 |
Loans on non-accrual of interest approximated $16,497,000 and $12,937,000 at December 31, 2010 and 2009, respectively. Loans past due 90 days or more and still accruing interest approximated $126,000 and $2,456,000 at December 31, 2010 and 2009, respectively.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:
| | | |
| | Nonaccrual | | Loans past due over 90 days still accruing |
| | | | |
Commercial | $ 40,460 | | $ - |
Commercial real estate | 9,604,525 | | - |
Agricultural real estate | 1,350,336 | | - |
Agriculture | 2,272,939 | | - |
Consumer: | | | |
Direct | 3,244 | | 29,083 |
Indirect | - | | 36,146 |
Residential: | | | |
1 – 4 family | 3,077,011 | | 55,745 |
Home equity | 148,902 | | 4,992 |
| | | | |
Total | $ 16,497,417 | | $ 125,966 |
The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:
| | | | | | | | |
| 30 – 59 days past due | 60 – 89 days past due | Greater than 90 days past due | Total past due | Loans not past due | Total |
Residential | | | | | | |
real estate | $ 1,626,599 | $ 720,314 | $ 1,456,454 | $ 3,803,367 | $ 107,758,693 | $ 111,562,060 |
Commercial | 2,294,126 | 641,607 | 6,367,537 | 9,303,270 | 188,710,364 | 198,013,634 |
Agriculture | 772,012 | 134,361 | 2,237,295 | 3,143,668 | 62,674,800 | 65,818,468 |
Consumer: | | | | | | |
Direct | 29,069 | 17,633 | 29,082 | 75,784 | 5,775,363 | 5,851,147 |
Indirect | 98,748 | 34,301 | 36,146 | 169,195 | 2,492,883 | 2,662,078 |
| | | | | | | |
Total | $ 4,820,554 ========= | $ 1,548,216 ======== | $ 10,126,514 ========== | $ 16,495,284 ========= | $ 367,412,103 ========== | $ 383,907,387 ========== |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to the credit risk. This analysis generally includes loans with an outstanding balance greater than $100,000 and non-homogenous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
·
Special Mention: Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered "potential", versus "defined", impairments to the primary source of loan repayment.
·
Substandard: These loans are inadequately protected by the current sound net worth and paying ability of the borrower. Loans of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow. These loans may also have historic and/or severe delinquency problems, and bank management may depend on secondary repayment sources to liquidate these loans. The bank could sustain some degree of loss in these loans if the weaknesses remain uncorrected.
·
Doubtful: Loans in this category display a high degree of loss, although the amount of actual loss at the time of classification is undeterminable. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally either less than $100,000 or are included in groups of homogenous loans. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | | | | | | | |
| | Pass | SpecialMention | Substandard | Doubtful | Not rated |
| | | | | | |
Commercial | $ 70,851,864 | $ 4,553,372 | $ 2,324,007 | $ 2,112,441 | $ - |
Commercial and multi-family real estate | 187,655,569 | 6,314,661 | 25,403,600 | 933,945 | - |
Construction | 5,126,885 | - | 654,500 | - | 690,451 |
Residential 1 – 4 | | | | | |
family | - | 305,505 | 3,485,129 | 16,926 | 64,965,307 |
Consumer | - | - | - | - | 8,513,225 |
Total | $ 263,634,318 =========== | $ 11,173,538 ========== | $ 31,867,236 ========== | $ 3,063,312 ========= | $ 74,168,983 ========== |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential 1 – 4 family and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in non-impaired residential 1 – 4 family and consumer loans based on payment activity as of December 31, 2010:
| | | |
| |
Consumer | | Residential 1 – 4 family |
| | | | |
Performing | $ 8,447,997 | | $ 67,281,976 |
Nonperforming | 65,228 | | 1,300,027 |
| | | | |
Total | $ 8,513,225 | | $ 68,582,003 |
Purchased Loans:
From time to time, the Company enters into loan participation agreements to purchase loans and also acquired loans through the Findlay branch acquisition described in Note 3. At December 31, 2010, the Bank held no loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan customers of the Bank. Such loans are made in the ordinary course of business in accordance with the normal lending policies of the Bank, including the interest rate charged and collateralization. Such loans amounted to $3,164,300 and $3,353,452 at December 31, 2010 and 2009, respectively. The following is a summary of activity during 2010, 2009, and 2008 for such loans:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Beginning of year | $ 3,353,452 | | $ 3,988,374 | | $ 3,657,288 |
Additions | 60,997 |
| 1,999,262 |
| 629,002 |
Repayments | (250,149) | | (2,634,184) | | (297,916) |
| | | | | | |
End of year | $ 3,164,300 | | $ 3,353,452 | | $ 3,988,374 |
Additions and repayments include loan renewals, as well as net borrowings and repayments under revolving lines-of-credit.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
Most of the Bank’s lending activities are with customers located in Northwestern and West Central Ohio. As of December 31, 2010 and 2009, the Bank’s loans from borrowers in the agriculture industry represent the single largest industry and amounted to $65,818,468 and $71,027,689, respectively. Agriculture loans are generally secured by property, equipment, and livestock. Repayment is primarily expected from cash flow generated through the harvest and sale of crops; milk production for dairy products; or the breeding, development, and sale of livestock. Agriculture customers are subject to various risks and uncertainties which can adversely impact the cash flow generated from their operations, including weather conditions; milk production; health and stability of livestock; costs of key operating items such as fertilizer, fuel, seed, or animal feed; and market prices for crops, milk, and livestock. Credit losses arising from the Bank’s lending experience in the agriculture industry compare favorably with the Bank’s loss experience on their loan portfolio as a whole. Credit evaluation of agricultural lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received.
NOTE 6 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2010 and 2009:
| | | |
| | 2010 | | 2009 |
| | | | |
Land and improvements | $ 2,479,913 | | $ 2,076,054 |
Buildings | 8,969,778 | | 8,301,950 |
Equipment | 4,128,361 | | 3,942,779 |
| | | | |
| | 15,578,052 | | 14,320,783 |
Less accumulated depreciation | 5,644,620 | | 5,188,535 |
| | | | |
Premises and equipment, net | $ 9,933,432 | | $ 9,132,248 |
During 2008, the Bank opened a new branch office on the southwestern side of Lima and closed its downtown Lima branch office. As a result of closing the facility, the Bank recognized an impairment loss of $235,000 in 2008. In January 2009, the Bank received $145,000 of insurance proceeds from water damage to the property and such amount was applied against the property’s net carrying value. The property was sold in December 2009, and the Bank received net proceeds of $187,240, resulting in a gain on sale of $5,576.
Depreciation expense amounted to $531,937 in 2010, $493,130 in 2009 and $458,814 in 2008.
NOTE 7 - SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $175,931,000 and $188,702,000 at December 31, 2010 and 2009, respectively.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SERVICING (CONTINUED)
Mortgage servicing rights are included in other assets in the accompanying consolidated balance sheets. The Bank has elected to record its mortgage servicing rights using the fair value measurement method. Significant assumptions used in determining the fair value of servicing rights as of December 31, 2010 and 2009 include:
Prepayment assumptions:
Based on the PSA Standard Prepayment Model
Internal rate of return:
8% to 10%
Servicing costs:
$40 – $55 per loan, annually, increased at the rate
of $1 per 1% delinquency based on loan count
Inflation rate of servicing costs:
3%
Following is a summary of mortgage servicing rights activity for the years ended December 31, 2010, 2009 and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Fair value at beginning of year | $ 1,273,525 | | $ 703,388 | | $ 1,531,225 |
Capitalized servicing rights – new loan sales | 315,039 | | 612,499 | | 146,966 |
Disposals (amortization based on loan payments and payoffs) |
(332,851) | |
(237,463) | |
(325,712) |
Change in fair value | (141,587) | | 195,101 | | (649,091) |
| | | | | | |
Fair value at end of year | $ 1,114,126 | | $ 1,273,525 | | $ 703,388 |
The change in fair value of servicing rights for the year ended December 31, 2008 resulted from changes in external market conditions, including conditions that dramatically increased prepayment assumptions, which is a key valuation input used in determining the fair value of servicing. While prepayment assumptions are constantly changing, such changes are typically within a relatively small parameter from period to period. However, due to the declines in the secondary market mortgage rates experienced during the fourth quarter of 2008, the prepayment assumptions used in determining the fair value of servicing at December 31, 2008 was 630 compared to 321 at December 31, 2010 and 300 at December 31, 2009.
NOTE 8 - PREPAID FDIC ASSESSMENTS
On September 29, 2009, the FDIC adopted a Notice of Proposed Rule making it mandatory that insured depository institutions prepay their quarterly risk-based assessments to the FDIC on December 30, 2009 for the fourth quarter of 2009 and for the years 2010 through 2012. As a result, the Bank had prepaid FDIC assessments amounting to $1,888,581 at December 31, 2010 and $2,623,998 at December 31, 2009 and such amounts are included in other assets in the accompanying consolidated balance sheets.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS
Time deposits at December 31, 2010 and 2009 include individual deposits of $100,000 or more approximating $80,791,000 and $82,026,000, respectively. Interest expense on time deposits of $100,000 or more approximated $1,520,000 for 2010, $1,550,000 for 2009 and $2,202,000 for 2008. Time deposits at December 31, 2009 include brokered deposits approximating $14,990,000 (none at December 31, 2010). Interest expense on brokered deposits approximated $158,000 in 2010, $1,019,000 in 2009 and $1,142,000 in 2008.
At December 31, 2010, time deposits approximated $259,085,000 and were scheduled to mature as follows: 2011, $117,594,000; 2012, $105,661,000; 2013, $6,947,000; 2014, $10,155,000; 2015, $17,691,000 and thereafter, $1,037,000.
NOTE 10 – OTHER BORROWINGS
Other borrowings consists of the following at December 31, 2010 and 2009:
| | | |
| | 2010 | | 2009 |
Federal Home Loan Bank borrowings: | | | |
Secured note, with interest at 1.95%, due June 4, 2010 | $ - | | $ 5,000,000 |
Secured note, with interest at 6.55% due June 16, 2010 | - |
| 6,500,000 |
Secured note, with interest at 3.61%, due July 16, 2010 | - |
| 5,000,000 |
Secured note, with interest at 6.46%, due July 28, 2010 | - |
| 5,000,000 |
Secured note, with interest at 4.28%, due June 24, 2011 | 17,000,000 |
| 17,000,000 |
Secured note, with interest at 2.18%, due July 3, 2012 | 5,000,000 |
| 5,000,000 |
Secured note, with interest at 4.25% through February 28, 2008, thereafter putable back at the option of the holder, due August 28, 2012 |
5,000,000 |
|
5,000,000 |
Secured note, with interest at 4.20% through February 28, 2008, thereafter putable back at the option of the holder, due February 28, 2017 |
10,000,000 |
|
10,000,000 |
Secured note, with interest at 3.95% through September 11, 2008, thereafter putable back at the option of the holder, due September 11, 2017 |
7,500,000 |
|
7,500,000 |
Advances secured by individual residential mortgages under blanket agreement |
100,197 |
|
150,497 |
| |
|
|
|
Total Federal Home Loan Bank borrowings | 44,600,197 |
| 66,150,497 |
| | | | |
Customer repurchase agreements with an average | | | |
outstanding rate of .25% at December 31, 2010 and | | | |
.68% at December 31, 2009 | 11,177,637 | | 11,756,091 |
| | | | |
Total other borrowings | $ 55,777,834 | | $ 77,906,588 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – OTHER BORROWINGS (CONTINUED)
Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock, securities with an aggregate carrying value approximating $17,474,000 and eligible mortgage loans approximating $97,034,000 at December 31, 2010. The interest rates on advances outstanding at December 31, 2010, secured by individual mortgages under blanket agreement, ranged from 5.62% to 8.80%, with varying maturities through July 2019. At December 31, 2010, the Bank had $6,700,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan Bank and other financial institutions.
Future contractual maturities of other borrowings, excluding short-term customer repurchase agreements, are as follows at December 31, 2010: 2011, $17,021,464; 2012, $10,019,974; 2013, $16,929; 2014, $11,817; 2015, $8,851 and thereafter, $17,521,162.
NOTE 11 - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (United Trust) which is not consolidated by the Corporation. United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation. The debentures have a stated maturity date of March 26, 2033. As of March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option. The interest rate of the debentures was fixed at 6.40% for a five-year period through March 26, 2008. Effective March 27, 2008, interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR amounting to 3.44% at December 31, 2010 and 3.52% at December 31, 2009, with interest payable quarterly. The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods. Interest expense on the debentures amounted to $353,965 in 2010, $409,971 in 2009, and $626,897 in 2008, and is included in interest expense-borrowings in the accompanying consolidated statements of income.
Each issue of the trust preferred securities carries an interest rate identical to that of the related debenture. The securities have been structured to qualify as Tier I capital for regulatory purposes and the dividends paid on such are tax deductible. However, the securities cannot be used to constitute more than 25% of the Corporation’s Tier I capital inclusive of these securities under Federal Reserve Board guidelines.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - OTHER OPERATING EXPENSES
Other operating expenses consisted of the following for the years ended December 31, 2010, 2009 and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Data processing | $ 510,621 | | $ 586,143 | | $ 598,547 |
Professional fees | 953,801 |
| 683,860 |
| 550,374 |
Franchise tax | 452,185 |
| 522,909 |
| 570,468 |
Advertising | 546,025 |
| 339,246 |
| 410,406 |
ATM processing and other fees | 227,685 |
| 144,606 |
| 367,339 |
Amortization of core deposit intangible asset | 94,218 |
| 253,980 |
| 253,980 |
Postage | 192,699 |
| 192,138 |
| 186,894 |
Stationery and supplies | 172,594 |
| 123,899 |
| 140,208 |
Loss on disposal or write-down of premises and equipment | - |
| - |
| 275,925 |
FDIC assessment | 806,533 |
| 1,150,962 |
| 74,099 |
Loan closing fees | 191,951 |
| 154,230 |
| 152,330 |
Internet banking | 175,683 |
| 181,640 |
| 140,976 |
Other real estate owned | 427,712 |
| 53,283 |
| 120,197 |
Other | 1,540,353 | | 1,225,722 | | 1,562,995 |
| | | | | | |
Total other operating expenses | $ 6,292,060 | | $ 5,612,618 | | $ 5,404,738 |
NOTE 13 - OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2010, 2009, and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
Unrealized holding gains (losses) on | | | | | |
available-for-sale securities | $ (553,784) | | $ 4,329,683 | | $ 297,178 |
Reclassification adjustments for net securities | | | | | |
gains realized in income | (278,242) | | (129,493) | | (49,055) |
Net unrealized gains (losses) | (832,026) | | 4,200,190 | | 248,123 |
Tax effect | (282,889) | | 1,428,065 | | 84,362 |
| | | | | | |
Net-of-tax amount | $ (549,137) | | $ 2,772,125 | | $ 163,761 |
NOTE 14 - INCOME TAXES
The provision for income taxes for the years ended December 31, 2010, 2009 and 2008 consist of the following:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Current | $ 1,008,711 | | $ 436,565 | | $ 1,554,362 |
Deferred | (865,711) | | (280,565) | | (543,362) |
| | | | | | |
Total provision for income taxes | $ 143,000 | | $ 156,000 | | $ 1,011,000 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES (CONTINUED)
The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Expected tax using statutory tax rate of 34% | $ 1,003,200 | | $ 1,033,100 | | $ 1,846,100 |
Increase (decrease) in tax resulting from: Tax-exempt income on state and municipal securities and political subdivision loans |
(696,800) | | (706,800) | | (666,800) |
Interest expense associated with carrying certain state and municipal securities and political subdivision loans |
5,000 | | 8,600 | | 76,400 |
Tax-exempt income on life insurance contracts |
(167,500) | | (174,100) | | (167,600) |
Deductible dividends paid to United Bancshares, Inc. ESOP |
(48,400) | | (61,700) | | (54,500) |
| | | | | | |
Other, net | 47,500 | | 56,900 | | (22,600) |
| | | | | | |
Total provision for income taxes | $ 143,000 | | $ 156,000 | | $ 1,011,000 |
The deferred income tax credit of $865,711 in 2010, $280,565 in 2009, and $543,362 in 2008 resulted from the tax effects of temporary differences. There was no impact for changes in tax laws and rates or changes in the valuation allowance for deferred tax assets.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are presented below:
| | | |
| | 2010 | | 2009 |
Deferred tax assets: | | | |
Allowance for loan losses | $ 2,792,000 | | $ 1,671,200 |
Deferred compensation | 315,600 | | 317,400 |
Alternative minimum tax credits | 267,900 | | 293,700 |
Accrued expenses and other | 480,500 | | 472,866 |
Total deferred tax assets | 3,856,000 | | 2,755,166 |
Deferred tax liabilities: Unrealized gain on securities available-for-sale |
932,777 | |
1,215,666 |
Federal Home Loan Bank stock dividends | 877,500 | | 877,500 |
Capitalized mortgage servicing rights | 378,800 | | 433,000 |
Depreciation and amortization | 1,400,300 | | 1,187,500 |
Other | 119,523 | | 43,000 |
Total deferred tax liabilities | 3,708,900 | | 3,756,666 |
| | | | |
Net deferred tax assets (liabilities) | $ 147,100 | | $ (1,001,500) |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES (CONTINUED)
Net deferred tax assets (liabilities) at December 31, 2010 and 2009 are included in other assets (liabilities) in the consolidated balance sheets.
At December 31, 2010, the Corporation has available alternative minimum tax credit carryforwards of approximately $267,900 which may be utilized in the future to the extent computed regular tax exceeds the alternative minimum tax.
Management believes it is more likely than not that the benefit of deferred tax assets will be realized. Consequently, no valuation allowance for deferred tax assets is deemed necessary as of December 31, 2010 and 2009.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2010, 2009, and 2008 is as follows:
| | | | | |
| | 2010 | | 2009 | | 2008 |
| | | | | | |
Balance at January 1 | $ 203,000 | | $ 154,200 | | $ 82,300 |
Additions based on tax positions related | | | | | |
to the current year | 39,400 | | 48,800 | | 71,900 |
| | | | | | |
Balance at December 31 | $ 242,400 | | $ 203,000 | | $ 154,200 |
There was no impact on unrecognized tax benefits for the years ended December 31, 2010, 2009, and 2008 as a result of additions or reductions of prior years or reductions due to statute of limitations or settlements.
The Corporation had unrecognized tax benefits of $242,400 and $203,000 at December 31, 2010 and 2009, respectively. Such unrecognized tax benefits, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation expects $82,300 of unrecognized tax benefits will be recognized in 2011 as a result of statute of limitations.
The amount of accrued interest related to the Corporation’s uncertain tax positions was $15,700 at December 31, 2010 and $8,100 at December 31, 2009, respectively.
The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation and its subsidiaries are no longer subject to examination by taxing authorities for years before 2007. The Corporation’s 2009 tax year is currently under federal examination. Management anticipates no material impact to the Corporation’s financial position as a result of this examination.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - EMPLOYEE AND DIRECTOR BENEFITS
The Corporation and Bank sponsor a salary deferral, defined contribution plan which provides for both profit sharing and employer matching contributions. The plan permits the investing in the Corporation’s stock subject to certain limitations. Participants who meet certain eligibility conditions are eligible to participate and defer a specified percentage of their eligible compensation subject to certain income tax law limitations. The Corporation makes discretionary matching and profit sharing contributions, as approved annually by the Board of Directors, subject to certain income tax law limitations. Contribution expense for the plan amounted to $511,935, $487,745, and $491,502 in 2010, 2009, and 2008, respectively. At December 31, 2010, the Plan owned 332,018 shares of the Corporation’s common stock.
The Bank also sponsors nonqualified deferred compensation plans, covering certain directors and employees, which have been indirectly funded through the purchase of split-dollar life insurance policies. In connection with the policies, the Bank has provided an estimated liability for accumulated supplemental retirement benefits amounting to $623,699 and $616,307 at December 31, 2010 and 2009, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. The Bank has also purchased split-dollar life insurance policies for investment purposes to fund other employee benefit plans. The combined cash values of these policies aggregated $12,322,390 and $11,851,036 at December 31, 2010 and 2009, respectively.
Under an employee stock purchase plan, eligible employees may defer a portion of their compensation and use the proceeds to purchase stock of the Corporation at a discount determined semi-annually by the Board of Directors as stipulated in the plan. The Corporation sold from treasury 1,123 shares in 2010, 2,103 shares in 2009, and 7,258 shares in 2008 under the plan.
The Bank has an agreement with Leipsic’s former President, who is the Corporation’s current Chairman of the Board of Directors, to provide for retirement compensation benefits. Such benefits are to be paid over a period of twenty years commencing upon retirement effective December 31, 2001. At December 31, 2010 and 2009, the net present value (based on the 12% discount rate in effect at the time of origination of the agreement) of future deferred compensation payments amounted to $304,625 and $317,235, respectively. Such amounts are included in other liabilities in the December 31, 2010 and 2009 consolidated balance sheets. A split-dollar life insurance policy has been purchased and is available to fund a portion of the future deferred compensation payments. The cash value of the policy amounted to $572,281 and $550,948 at December 31, 2010 and 2009, respectively.
The Chief Executive Officer and Chief Financial Officer of the Corporation have employment agreements which provide for certain compensation and benefits should any triggering events occur, as specified in the agreements, including change of control or termination without cause.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCK OPTIONS
The following summarizes stock options activity for the years ended December 31, 2010, 2009, and 2008:
| | | | | | | | | | | | |
| | | 2010 | | 2009 | | 2008 |
| | | | | Weighted average exercise price | | | | Weighted average exercise price | | Shares | | Weighted average exercise price |
| | | | | | | | | |
| | | | | | | | | |
| | | Shares | | | Shares | | | |
Outstanding at | | | | | | | | | | | |
beginning of year | 5,146 | | $ 9.66 | | 5,146 | | $ 9.66 | | 12,006 | | $12.95 |
Expired | (5,146) | | 9.66 | | - | | - | | (6,860) | | 15.42 |
| | | | | | | | | | | | | |
Outstanding and | | | | | | | | | | | |
exercisable | | | | | | | | | | | |
at end of year | - | | $ - | | 5,146 | | $ 9.66 | | 5,146 | | $ 9.66 |
Options outstanding at December 31, 2009 at an exercise price of $9.66 expired May 5, 2010.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments.
The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans.
The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2010 and 2009:
| | | |
| | Contract amount |
| | 2010 | | 2009 |
| | | | |
Commitments to extend credit | $ 67,433,000 | | $ 66,271,000 |
| | | | |
Letters of credit | $ 2,602,000 | | $ 1,067,000 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing commercial properties.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. All letters of credit outstanding at December 31, 2010 expire in 2011. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank requires collateral supporting these commitments when deemed necessary.
NOTE 18 - REGULATORY MATTERS
The Corporation (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2010 and 2009, that the Corporation and Bank meet all capital adequacy requirements to which they are subject. Furthermore, the Board of Directors of the Bank has adopted a resolution to maintain Tier I capital at or above 8% of total assets.
As of December 31, 2010, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank is currently working with regulatory agencies to address certain regulatory matters resulting from the Bank’s most recent examination. The management of the Bank is actively working towards achieving a resolution of any and all matters identified by the regulators during this examination and management does not believe that compliance with these issues will have a material adverse effect on the operations or financial condition of the Bank.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - REGULATORY MATTERS (CONTINUED)
The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2010 and 2009 are presented in the following table:
Minimum to be
well capitalized
Minimum
under prompt
capital
corrective
Actual
requirement
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
As of December 31, 2010
Total Capital (to Risk-
Weighted Assets)
Consolidated
$
60,222
13.4%
$
35,972
> 8.0%
N/A
N/A
Bank
57,740
12.9%
35,890
> 8.0%
$
44,863
10.0%
Tier I Capital (to Risk-
Weighted Assets)
Consolidated
$
54,572
12.1%
$
17,986
> 4.0%
N/A
N/A
Bank
52,103
11.6%
17,945
> 4.0%
$
26,918
6.0%
Tier I Capital (to
Average Assets)
Consolidated
$
54,572
9.0%
$
24,338
> 4.0%
N/A
N/A
Bank
52,103
8.6%
24,311
> 4.0%
$
30,388
5.0%
As of December 31, 2009
Total Capital (to Risk-
Weighted Assets)
Consolidated
$
59,549
12.7%
$
37,546
> 8.0%
N/A
N/A
Bank
55,134
11.8%
37,436
> 8.0%
$
46,795
10.0%
Tier I Capital (to Risk-
Weighted Assets)
Consolidated
$
54,745
11.7%
$
18,773
> 4.0%
N/A
N/A
Bank
50,330
10.8%
18,718
> 4.0%
$
28,077
6.0%
Tier I Capital (to
Average Assets)
Consolidated
$
54,745
9.2%
$
23,848
> 4.0%
N/A
N/A
Bank
50,330
8.3%
24,194
> 4.0%
$
30,243
5.0%
On a parent company only basis, the Corporation’s primary source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the Bank may declare dividends without the approval of the State of Ohio Division of Financial Institutions, unless the total dividends in a calendar year exceed the total of the Bank’s net profits for the year combined with its retained profits of the two preceding years.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - REGULATORY MATTERS (CONTINUED)
The Board of Governors of the Federal Reserve System generally considers it to be an unsafe and unsound banking practice for a bank holding company to pay dividends except out of current operating income, although other factors such as overall capital adequacy and projected income may also be relevant in determining whether dividends should be paid.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), which brings significant financial reform. Among other things, the law:
·
Creates a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
·
Creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies;
·
Establishes strengthened capital standards for banks and bank holding companies, and disallows trust preferred securities from being included in the Tier 1 capital determination for certain financial institutions;
·
Enhances regulation of financial markets, including derivatives and securitization markets;
·
Contains a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments;
·
Grants the Board of Governors of the Federal Reserve System the power to regulate debit card interchange fees;
·
Prohibits certain trading activities by banks;
·
Permanently increases the maximum standard FDIC deposit insurance amount to
$250,000; and
·
Creates an Office of National Insurance with the U.S. Department of Treasury.
While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions such as the Corporation in substantial and unpredictable ways. Consequently, compliance with the Act's provisions may curtail the Corporation's revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Corporation's business or financial results in the future. The Corporation's management is actively reviewing the provisions of the Act and assessing its probable impact on the Corporation's business, financial condition, and results of operations. However, because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on the Corporation and the Bank at this time.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 is as follows:
| | | |
Condensed Balance Sheets | 2010 | | 2009 |
| | | | |
Assets: | | | |
Cash | $416,912 | | $2,800,432 |
Investment in bank subsidiary | 62,835,606 | | 60,163,521 |
Premises and equipment, net of accumulated depreciation | 394,883 | | 420,504 |
Other assets, including income taxes receivable from bank | | | |
subsidiary of $72,900 in 2010 and $873,103 in 2009 | 1,700,012 | | 1,313,827 |
| | | | |
Total assets | $65,347,413 | | $64,698,284 |
| | | | |
Liabilities: | | | |
Accrued expenses | $ 42,350 | | $ 119,179 |
Junior subordinated deferrable interest debentures | 10,300,000 | | 10,300,000 |
| | | | |
Total liabilities | 10,342,350 | | 10,419,179 |
| | | | |
Shareholders’ equity: | | | |
Common stock | 3,760,557 | | 3,760,557 |
Surplus | 14,660,000 | | 14,659,661 |
Retained earnings | 39,600,718 | | 38,343,134 |
Accumulated other comprehensive income | 1,810,684 | | 2,359,821 |
Treasury stock, at cost | (4,826,896) | | (4,844,068) |
| | | | |
Total shareholders’ equity | 55,005,063 | | 54,279,105 |
| | | | |
Total liabilities and shareholders’ equity | $65,347,413 | | $64,698,284 |
| | | | | |
Condensed Statements of Income | 2010 | | 2009 | | 2008 |
| | | | | | |
Income – including dividends from bank subsidiary | $ 6,226 | | $ 3,006,657 | | $ 3,000,000 |
Expenses – interest expense, professional fees and other expenses, net of federal income tax benefit | (419,766) | | (511,641) | | (642,937) |
| | | | | | |
Income (loss) before equity in undistributed net income of bank subsidiary | (413,540) | | 2,495,016 | | 2,357,063 |
| | | | | | |
Equity in undistributed net income of bank subsidiaries | 3,221,222 | | 387,580 | | 2,061,534 |
| | | | | | |
Net income | $ 2,807,682 | | $ 2,882,596 | | $ 4,418,597 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
| | | | | |
Condensed Statements of Cash Flows | 2010 | | 2009 | | 2008 |
| | | | | | |
Cash flows from operating activities: Net income | $ 2,807,682 | |
$ 2,882,596 | | $ 4,418,597 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
Equity in undistributed net income of bank subsidiary | (3,221,222) | | (387,580) | | (2,061,534) |
Credit for accrued compensation – stock options | - | | - | | (11,286) |
Depreciation and amortization | 25,621 | | 25,622 | | 39,038 |
Increase in other assets | (386,185) | | (103,798) | | (600,189) |
Increase (decrease) in accrued expenses | (76,829) | | 614 | | (36,436) |
| | | | | | |
Net cash provided by (used in) operating activities | (850,933) | | 2,417,454 | | 1,748,190 |
| | | | | | |
Cash flows from financing activities: | | | | | |
Purchase of common stock | - | | - | | (775,250) |
Proceeds from sale of treasury shares | 17,511 | | 30,632 | | 98,709 |
Cash dividends paid | (1,550,098) | | (2,065,963) | | (2,064,686) |
| | | | | | |
Net cash used in financing activities | (1,532,587) | | (2,035,331) | | (2,741,227) |
| | | | | | |
Net increase (decrease) in cash | (2,383,520) | | 382,123 | | (993,037) |
| | | | | | |
Cash at beginning of the year | 2,800,432 | | 2,418,309 | | 3,411,346 |
| | | | | | |
Cash at end of the year | $ 416,912 | | $ 2,800,432 | | $ 2,418,309 |
During 2005, the Board of Directors approved a program whereby the Corporation purchases shares of its common stock in the open market. The decision to purchase shares, the number of shares to be purchased, and the price to be paid depends upon the availability of shares, prevailing market prices, and other possible considerations which may impact the advisability of purchasing shares. The Corporation purchased 55,000 shares in 2008 (none in 2010 and 2009) under the program.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.
FASB ASC 820-10,Fair Value Measurements (ASC 820-10) requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 –Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 –Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)
The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2010 and 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
2010 | inputs | | inputs | | inputs | | fair value |
| | | | | | | | |
Recurring: | | | | | | | |
Securities available-for-sale: | | | | | | | |
Obligations of state and | | | | | | | |
political subdivisions | $ - | | $ 47,298,232 | | $ - | | $ 47,298,232 |
Mortgage-backed | - | | 92,632,687 | | - | | 92,632,687 |
Other | - | | 509,442 | | - | | 509,442 |
Mortgage servicing rights | - | | - | | 1,114,126 | | 1,114,126 |
| | | | | | | | |
Total recurring | $ - | | $ 140,440,361 | | $ 1,114,126 | | $ 141,554,487 |
| | | | | | | | |
Nonrecurring: | | | | | | | |
Impaired loans | $ - | | $ - | | $ 12,360,108 | | $ 12,360,108 |
Other real estate owned | - | | - | | 4,524,729 | | 4,524,729 |
| | | | | | | | |
Total nonrecurring | $ - | | $ - | | $ 16,884,837 | | $ 16,884,837 |
| | | | | | | | |
| | | | | | | |
2009 | | | | | | | |
| | | | | | | | |
Recurring: | | | | | | | |
Securities available-for-sale | $ - | | $ 138,586,362 | | $ - | | $ 138,586,362 |
Mortgage servicing rights | - | | - | | 1,273,525 | | 1,273,525 |
| | | | | | | | |
Total recurring | $ - | | $ 138,586,362 | | $ 1,273,525 | | $ 139,859,887 |
| | | | | | | | |
Nonrecurring: | | | | | | | |
Impaired loans | $ - | | $ - | | $ 11,947,282 | | $ 11,947,282 |
Other real estate owned | - | | - | | 5,170,635 | | 5,170,635 |
| | | | | | | | |
Total nonrecurring | $ - | | $ - | | $ 17,117,917 | | $ 17,117,917 |
There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during 2010 and 2009 due to the lack of observable quotes in inactive markets for those instruments at December 31, 2010 and 2009.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)
The table below presents a reconciliation and income statement classification of gains and losses for mortgage servicing rights, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2010, 2009 and 2008:
| | | | | |
| | 2010 | | 2009 | | 2008 |
Balance at beginning of year | $ 1,273,525 | | $ 703,388 | | $1,531,225 |
Gains or losses, including realized and unrealized: | | | | | |
Purchases, issuances, and settlements | 315,039 | | 612,499 | | 146,966 |
Disposals – amortization based on loan | | | | | |
payments and payoffs | (332,851) | | (237,463) | | (325,712) |
Other changes in fair value | (141,587) | | 195,101 | | (649,091) |
| | | | | | |
Balance at end of year | $ 1,114,126 | | $1,273,525 | | $703,388 |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available-for-Sale
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified within Level 3 of the valuation hierarchy. The Corporation did not have any securities classified as Level 1 or Level 3 at December 31, 2010 and 2009.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)
Impaired Loans
The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria. Due to the significance of the level 3 inputs, impaired loans fair values have been classified as level 3.
Losses included in earnings before income taxes amounted to $2,072,456 in 2010 and $5,640,681 in 2009, relating to impaired loans, and such losses are included in the provision for loan losses. There were no gains or losses relating to securities available-for-sale included in earnings before income taxes that were attributable to changes in fair values of securities held at December 31, 2010 and 2009.
Other Real Estate Owned
The Corporation values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. Financial assets and financial liabilities, excluding impaired loans and other real estate owned, measured at fair value on a nonrecurring basis were not significant at December 31, 2010.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2010 and 2009 are as follows:
| | | | | | | | | | |
| | | | | 2010 | | 2009 |
| | | | | Carrying amount | | Estimated value | | Carrying amount | | Estimated value |
| | |
| | | | | (dollars in thousands) |
FINANCIAL ASSETS | | | | | | | | |
Cash and cash equivalents | | $ 48,604 | | $ 48,604 | | $ 27,380 | | $ 27,380 |
Securities, including Federal | | | | | | | | |
Home Loan Bank stock | | 145,334 | | 145,334 | | 143,480 | | 143,480 |
Net loans | | 375,891 | | 389,124 | | 403,011 | | 430,072 |
Mortgage servicing rights | | 1,114 | | 1,114 | | 1,274 | | 1,274 |
| | | | | | | | | | | |
| | | | | $570,943 | | $ 584,176 | | $ 575,145 | | $ 602,206 |
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
| | | | | | | | |
| | | 2010 | | 2009 |
| | | Carrying amount | | Estimated value | | Carrying amount | | Estimated value |
| | |
| | | (dollars in thousands) |
FINANCIAL LIABILITIES | | | | | | | |
| | Deposits | $ 488,651 | | $ 492,413 | | $ 469,668 | | $ 472,617 |
| | Other borrowings | 55,778 | | 58,415 | | 77,907 | | 80,649 |
| | Junior subordinated deferrable | | | | | | | |
| | interest debentures | 10,300 | | 9,913 | | 10,300 | | 8,776 |
| | Other liabilities | 2,883 | | 2,963 | | 4,251 | | 4,341 |
| | | | | | | | | |
| | | $ 557,612 | | $ 563,704 | | $ 562,126 | | $ 566,383 |
The above summary does not include accrued interest receivable and cash surrender value of life insurance which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amounts.
There are also unrecognized financial instruments at December 31, 2010 and 2009 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounts to $70,035,000 at December 31, 2010 and $67,338,000 at December 31, 2009. Such amounts are also considered to be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less and do not represent unanticipated credit concerns.
Securities:
The fair value of securities is determined based on quoted market prices of the individual securities or, if not available, estimated fair value was obtained by comparison to other known securities with similar risk and maturity characteristics. Such value does not consider possible tax ramifications or estimated transaction costs.
Loans:
Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans, which re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For fixed rate loans the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS(CONTINUED)
Mortgage servicing rights:
The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at year end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.
Other financial instruments:
The fair value of commitments to extend credit and letters of credit is determined to be the contract amount, since these financial instruments generally represent commitments at existing rates. The fair value of other borrowings is determined based on a discounted cash flow analysis using current interest rates. The fair value of the junior subordinated deferrable interest debentures is determined based on quoted market prices of similar instruments. The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement described in Note 17. The fair value of the contract is determined based on a discounted cash flow analysis using a current interest rate for a similar instrument.
The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
NOTE 22 - CONTINGENT LIABILITIES
In the normal course of business, the Corporation and its subsidiary may be involved in various legal actions, but in the opinion of management and legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of selected unaudited quarterly financial data for 2010 and 2009:
Income
Net
Net
(loss) per
Interest
interest
income
common share
income
income
(loss)
Basic
Diluted
(Dollars in thousands, except per share data)
2010
First quarter
$
7,712
$
5,223
$
1,024
$
.30
$
.30
Second quarter
7,789
5,406
307
.09
.09
Third quarter
7,522
5,420
879
.26
.26
Fourth quarter
7,241
5,256
598
.17
.17
2009
First quarter
$
8,399
$
5,040
$
1,432
$
.42
$
.42
Second quarter
8,343
5,141
1,335
.39
.39
Third quarter
8,299
5,255
(777)
(.23)
(.23)
Fourth quarter
7,826
5,114
893
.26
.26
This information is an integral part of the accompanying
consolidated financial statements.
