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Table of Contents

 

Exhibit 13

Table of Contents

 

   

Page(s)
     
 

President’s Letter

1
 

Description of the Corporation

2
 

Five-Year Summary of Selected Financial Data 

3
  Management’s Discussion and Analysis of Financial Condition and Results of Operations 5
 

Report of Independent Registered Public Accounting Firm (PCAOB ID 655)

16
 

Financial Statements

  
 

Consolidated Balance Sheets

19
 

Consolidated Statements of Income

20

 

Consolidated Statements of Comprehensive (Loss) Income

21
 

Consolidated Statements of Shareholders’ Equity

22
 

Consolidated Statements of Cash Flows

23
 

Notes to Consolidated Financial Statements

25
  Directors and Officers

64

 

 
Table of Contents

 

Shareholders, Clients, and Team Members:

 

I am pleased to report that, once again, your Company had a successful year. In addition to reporting income before taxes of approximately $12.5 million, return on average tangible equity of 17.70% and return on average assets of 1.06%, your Company continues to focus on serving our clients and communities.  As a result of these successes, the Board of Directors declared a $0.22 per share dividend, payable March 15, 2023 to shareholders of record at the close of business on February 29, 2023.  This is a 4.8% increase as compared to the fourth quarter of 2022. This declaration was the 13th increase in dividends since 2012.

 

During 2022 the banking industry faced record inflation, a dramatic decrease in residential mortgage activity, rapidly rising interest rates, and recession fears.  The company adjusted to those factors by reducing staff, aggressively managing its balance sheet and controlling interest costs.  As a result, excluding PPP fees, net interest income increased $4.4 million with 43 basis points increase in net margin, non-interest expenses decreased $2.6 million, and gross loan and deposit balances increased $74 million and $23 million, respectively during 2022. 

 

The cumulative effect of those adjustments throughout the first three quarters of 2022 were evident by the company’s reporting of $1.10 earnings per share in the fourth quarter ($.91 per share excluding the tax effected positive impact of $606,000 from the negative loan loss provision and offsetting increase in the unfunded commitment liability).  

 

Additionally the rapid increase in interest rates has created a decline in the market value of our available for sale securities portfolio of $53.6 million, which has decreased your Company’s tangible book value by $13.43 per share since December 31, 2021.  While this decrease has no impact on regulatory capital, it has likely been a noticeable factor in the company’s recent decrease in share price.  Based on the Company’s current alternative sources of liquidity, I believe it is very unlikely that those losses will be realized. As such, we remain focused on continuing to add value to our shareholders through core revenue growth, strong asset quality, and consistent dividends. 

 

The Company also continues to make investments in technology to create internal efficiencies, reduce the risk of fraud, and enhance customer tools and resources. Such efforts have yielded positive results in our cost structure and in customers’ use of technology-based products. We believe that effectively implementing technology will promote growth and support for our growing footprint and provide the opportunity to increase the effectiveness of our team members in serving our clients.  

 

While the financial performance of your Company continues to be strong, we experienced an incredible and sudden loss of our long-time, beloved Board Secretary and Human Resource Manager, Heather Oatman.  Heather was not only a trusted 25-year team member, but she was also a dear friend to so many on our team.  While we will miss her immensely, her kindness, care, and love for others, will always be a part of each of us and as well as our entire organization.

 

Thank you for your ongoing support and the trust you have placed in us.

 

 

Respectfully,

 

 

 

Brian D. Young

President & CEO

 

 

1
Table of Contents
Table of Contents
 

 

UNITED BANCSHARES, INC.

 

DESCRIPTION OF THE CORPORATION

 

United Bancshares, Inc., an Ohio corporation (the “Corporation”), is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation was incorporated and organized in 1985. The executive offices of the Corporation are located at 105 Progressive Drive, Columbus Grove, Ohio 45830. Effective February 1, 2007, the Bank formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio. The operations of UBC are located in Wilmington, Delaware. Effective, December 4, 2009, the Bank formed a wholly-owned subsidiary UBC Property, Inc. to hold and manage certain property that was acquired in lieu of foreclosure. At this time all other real estate owned property is being held at the Bank. Through its subsidiary, the Bank, the Corporation is engaged in the business of full-service community banking offering a full range of commercial and consumer banking services.  Effective May 5, 2022, the Corporation formed a wholly-owned subsidiary, UBC Risk Management, Inc. (UBC Risk) which insures various liability and property damage policies for the Corporation and its related subsidiaries.

 

The Union Bank Company is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Paulding, Putnam, Sandusky, Van Wert, and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Marysville, Ottawa, Paulding, Pemberville, Plymouth, and Westerville, Ohio.

 

United Bancshares, Inc. has traded its common stock on the OTCQX Exchange under the symbol “UBOH” since August 2022. As of December 31, 2022, the common stock was held by 989 shareholders of record.

 

 

AVAILABILITY OF MORE INFORMATION

 

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

 

Denise Giesige, Secretary

United Bancshares, Inc.

105 Progressive Drive

Columbus Grove, Ohio 45830

800-837-8111

 

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UNITED BANCSHARES, INC.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

 

   

(Dollars in thousands, except per share data)

  
   

Years ended December 31,

  
   

2022

    

2021

    

2020

    

2019

    

2018

  

Statements of income:

                                        

Total interest income

   $ 38,942     $ 38,804     $ 40,030     $ 37,819     $ 34,365  

Total interest expense

     3,258       3,069       6,988       8,924       6,158  

Net interest income

     35,684       35,735       33,042       28,895       28,207  

Provision (credit) for loan losses

     (1,000 )     300       6,200       550       450  

Net interest income after provision (credit) for loan losses

     36,684       35,435       26,842       28,345       27,757  

Total non-interest income

     9,954       17,346       27,000       15,048       9,428  

Total non-interest expenses

     34,114       36,706       37,165       31,117       27,436  

Income before federal income taxes

     12,524       16,075       16,677       12,276       9,749  

Federal income taxes

     1,214       2,494       2,922       1,615       1,529  

Net income

   $ 11,310     $ 13,581     $ 13,755     $ 10,661     $ 8,220  

Per share of common stock:

                                        

Net income - basic

   $ 3.47     $ 4.14     $ 4.21     $ 3.26     $ 2.51  

Dividends

     0.84       0.73       0.51       0.52       0.48  

Book value

   $ 26.23     $ 36.34     $ 34.11     $ 29.00     $ 24.76  

Average shares outstanding - basic

     3,259,924       3,277,062       3,270,996       3,270,878       3,268,667  

Average shares outstanding - diluted

     3,264,632       3,338,151       3,306,503       3,277,198       3,269,834  

Year end balances:

                                        

Loans (1)

   $ 687,545     $ 618,705     $ 652,530     $ 591,725     $ 569,319  

Securities (2)

     285,146       312,771       200,178       188,913       172,656  

Total assets

     1,087,293       1,076,556       978,532       880,014       830,300  

Deposits

     953,883       930,413       838,378       707,134       666,236  

Shareholders' equity

     82,691       119,095       111,599       94,781       80,944  

Average balances:

                                        

Loans (1)

     637,326       632,829       663,097       582,377       540,687  

Securities (2)

     295,728       237,695       185,847       179,075       173,592  

Total assets

     1,072,002       1,046,350       967,828       861,693       802,989  

Deposits

     952,621       904,975       792,938       694,857       647,987  

Shareholders' equity

     92,471       114,981       101,631       86,652       76,142  

Selected ratios:

                                        

Net yield on average interest earning assets (3)

     3.74 %     3.76 %     3.77 %     3.75 %     3.96 %

Return on average assets

     1.06 %     1.30 %     1.42 %     1.24 %     1.02 %

Return on average shareholders' equity

     12.23 %     11.81 %     13.53 %     12.30 %     10.80 %

Net loan charge-offs (recoveries) as a percentage of average outstanding net loans

     (0.01 )%     (0.01 )%     0.05 %     (0.01 )%     (0.04 )%

Allowance for loan losses as a percentage of year end loans (4)

     1.38 %     1.70 %     1.58 %     0.72 %     0.63 %

Shareholders' equity as a percentage of total assets

     7.61 %     11.06 %     11.40 %     10.77 %     9.75 %

 

Notes:

1)     Includes loans held for sale.

2)     Includes restricted bank stock.

3)     Net yield on average interest-earning assets was computed on a tax-equivalent basis.

4)     Does not include loans held for sale

 

 

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Forward-looking Statements

 

 

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. From time to time, we have made or will make forward-looking statements within the meaning of the Act. These statements do not relate strictly to historical or current facts. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, is forward-looking. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “outlook,” “plan,” “strategy,” “expect,” “anticipate,” “project,” “believe,” “estimate,” or other words of similar meaning, or by words or phrases indicating that an event or trend “may,” “should,” “will,” “is likely,” or that an event or trend is “probable” to occur or “continue,” has “begun,” “is scheduled,” or is “on track.” Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”).

 

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

 

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

 

Overview

 

United Bancshares, Inc. (the “Corporation”) is a financial holding company that conducts business through its wholly-owned subsidiaries, The Union Bank Company (the “Bank”) and UBC Risk Management, Inc.

 

The Bank is an Ohio state-chartered commercial bank that provides financial services to communities based in northwest Ohio and central Ohio, where it operates 18 full-service branches and 3 loan production offices.  As a commercial bank, the Bank concentrates its efforts on serving the financial needs of the businesses in and around the counties it serves. The Bank also provides financing to customers seeking to purchase or build their own homes. The Bank provides deposit, treasury management, wealth management, and other traditional banking products through its full-service branch office network and its electronic banking services.

 

UBC Risk Management, Inc. is a subsidiary of the Corporation and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which insures various liability and property damage policies for the Corporation and its related subsidiaries.

 

Recent Developments

 
Growth in the U.S. economy slowed in 2022, compared to the higher rates of growth experienced in 2021, as pressures from higher inflation and rising energy prices as well as concerns over the Russia-Ukraine war and talks of recession resulted in U.S. Gross Domestic Product ("GDP") that shrank slightly in the first half of 2022, before rebounding somewhat in the third and fourth quarters.   Despite the FRB's efforts to control inflation by raising short-term interest rates, it remains elevated, reflecting supply and demand imbalances related to the pandemic and higher energy prices as well as other broader price pressures, and exceeded an annual rate of 6.5% in 2022, well above the FRB's target inflation rate of 2%. In addition, the Russia-Ukraine war and related events are likely to create additional upward pressure on inflation and weigh on economic activity.  Despite the fact that GDP declined slightly in the first and second quarters of 2022, before recovering slightly in the third and fourth quarters of 2022, the total unemployment rate has remained low, and was 3.5 percent at December 2022 compared with 3.9 percent at December 2021.  The FRB increased short-term interest rates by 425 basis points in 2022 and has indicated that ongoing increases in short-term interest rates will continue in early 2023, or as long as necessary, to control the rate of inflation.

 

As a result of these uncertainties, our credit administration continues to closely monitor and analyze the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors. Based on the Corporation's capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we are cautiously optimistic that the Corporation is positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting our customer base and local economies.  While we remain adequately capitalized, with strong levels of loan loss provisions, the Corporation may be required to make additional loan loss provisions, if warranted, by the extremely fluid global economic condition.

 

Cash and Cash equivalents

 

Cash and cash equivalents at December 31, 2022 were $30.7 million, a $44.5 million (59.2%) decrease from $75.2 million at December 31, 2021.  The decrease is due to a decrease of overnight funds on deposit at the Federal Reserve and was used to fund loan growth. 

 

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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. As of December 31, 2022, certain securities are in an unrealized loss position and this imposes some limitations on selling these securities for liquidity needs, as the unrealized loss would be recognized through income.

                                    

Securities, including FHLB stock, totaled $285.1 million at December 31, 2022 compared to $312.8 million at December 31, 2021, a decrease of $27.6 million (8.8%).  Obligations of states and political subdivisions decreased $14.5 million (9.6%) despite purchases of $15.4 million due to an increase in the unrealized loss of $29.8 million. Mortgage-backed securities decreased $14.8 million (9.7%) despite purchases of $8.6 million due to an increase in the unrealized loss of  $23.4 million.  U.S. Government agencies increased $2.1 million (85.5%).

 

At December 31, 2022 the net unrealized loss on available-for-sale securities amounted to $48.6 million compared to an unrealized gain of $5.1 million at December 31, 2021, due to the rapid increases in interest rates during the year.  At December 31, 2022, the Corporation held 386 securities which were in a loss position with the fair value of $265.6 million and gross unrealized losses of $48.7 million.  Management has considered the access it has to alternative sources of liquidity, the current interest rate environment, the volatility in the bond market, and the Corporation’s liquidity needs in the near term in concluding that the impairment on these securities is market driven, not credit related, and thus considered to be temporary.

 

The Corporation maintains a certain level of FHLB stock as a member of the FHLB of Cincinnati.  FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment. There was $1,269,000 of FHLB stock redeemed during 2022. 

 

At December 31, 2022, the Corporation’s investment securities portfolio included $136.3 million in U.S. states and political subdivisions securities, which is $53.6 million (64.9%) higher than shareholders’ equity as of that date. The largest exposure to any one state is $37.1 million, or 23%, from issuers located within the state of Texas. The Corporation’s procedures for evaluating investments in securities issued by states, municipalities and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.

 

 

Loans

 

 

At December 31, 2022, gross loans, including loans held for sale, amounted to $687.5 million compared to $618.7 million at December 31, 2021, an increase of $68.8 million (11.1%).  Commercial and multi-family real estate loans increased $65.8 million (16.3%), and residential real estate loans increased $17.2 million (15.3%).  This growth was offset by decreases in commercial loans of $8.9 million (10.3%), loans held for sale of $5.2 million (56.6%) and consumer loans of $71,000 (1.3%).  Loans originated through the PPP program are included in the Commercial segment and had an outstanding balance of $293,000 as of December 31, 2022 compared to $6.6 million at December 31, 2021.  

 

 

Throughout the course of 2022, loan demand remained strong, particularly surrounding the development opportunities in the Columbus market.  Some of this demand started to soften towards the end of 2022 with talks of recession and the impact of inflation outpacing the liquidity in the market place.  Resulting uncertainties in economic conditions in our market areas may lead to reductions in the growth of our commercial and industrial, commercial real estate, residential real estate and consumer loan portfolios.

 

Deposits

 

Total deposits at December 31, 2022 were $953.9 million, an increase of $23.5 million (2.5%) compared with total deposits of $930.4 million at December 31, 2021. The increase in deposits consisted of an $20.6 million increase in non-interest bearing deposits and a $2.9 million increase in interest bearing deposits.   

 

Other Borrowings

 

In addition to customer deposits, the Corporation utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth. Other borrowings at December 31, 2022 consists of overnight borrowings from the Federal Home Loan Bank of $23.5 million, a federal funds line of credit from another bank of $31,000, a line of credit from another bank of $1,500,000, and a term borrowing from another bank of $6,000,000 payable in quarterly installments of $250,000 with any remaining principal due in December 2028.  Other borrowings at December 31, 2021, included a federal funds line of credit from another bank of $12,000, and a term borrowing from another bank of $7,000,000.  Management plans to maintain access to FHLB and other various borrowing alternatives as an appropriate funding source.

 

Shareholders’ Equity

 

Total shareholders’ equity decreased $36.4 million (30.6%) to $82.7 million at December 31, 2022 from $119.1 million at December 31, 2021. This was the result of an increase in unrealized losses on available for sale securities, net of tax of $42.4 million, share repurchases of $2.9 million and dividends paid of $2.7 million.  These reductions in shareholders’ equity were offset by net income of $11.3 million. The increase in unrealized losses on available for sale securities from December 31, 2021 to December 31, 2022 was attributable to the rapid increases in interest rates during the year.  

 

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Results of Operation – 2022 Compared to 2021

 

Performance Summary

 

Net income for the year ended December 31, 2022, totaled $11,310,000, or $3.47 basic earnings per share, compared to $13,581,000, or $4.14 basic earnings per share for the same period in 2021, a decrease of $2,271,000 (16.7%) or $0.67 per share. The decrease in operating results for the year ended December 31, 2022 as compared to December 31, 2021 was primarily attributable to a decrease in net interest income of $51,000 (0.1%) and a decrease in non-interest income of $7,392,000 (42.6%), offset by a decrease in non-interest expenses of $2,592,000 (7.1%), a decrease in the provision for loan losses of $1,300,000, and a decrease in the provision for income taxes of $1,280,000 (51.3%). The results for 2022 include an $802,000, or $0.25 basic earnings per share, increase in non-interest income due to BOLI death benefit payments.

 

The Corporation’s return on average assets was 1.06% in 2022, compared to 1.29% in 2021.  The Corporation’s return on average tangible shareholders’ equity was 17.70% in 2022, compared to 15.83% in 2021. 

 

Net Interest Income

 

Net interest income is the amount by which income from interest-earning assets exceeds interest incurred on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities while interest-bearing liabilities include interest-bearing deposit accounts and borrowed funds. Net interest income remains the primary source of revenue for the Corporation. Changes in market interest rates, as well as changes in the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income. Net interest income was $35,684,000 in 2022, compared to $35,735,000 in 2021, a decrease of $51,000 (0.1%).   Interest income in 2022 was $38,942,000, a decrease of  $138,000 (0.4%) from $38,804,000 in 2021. Interest expense in 2022 was $3,258,000, an increase of $189,000 (6.2%) from $3,069,000 in 2021, due to rising interest rates in the latter half of 2022.

 

Loan interest income decreased $2,519,000, due primarily to a reduction in PPP loan fees of $4,415,000, offset by an increase in loan interest income of $1,896,000, which can be attributed to rising portfolio rates and strong loan growth.  Investment portfolio income increased $2,014,000 due to increased volumes, and other interest income increased $643,000 due to higher interest rates on balances at the Federal Reserve.  

 

The yield on average earning assets (on a taxable equivalent basis) remained steady at 4.08% in 2022 and 2021, despite the $4,415,000 decrease in PPP loan fee income due to a shifting mix of earning assets.  The year-to-date average interest-bearing cash, securities, and loan balances were $46.5 million, $295.7 million, and $637.3 million in 2022, respectively compared to $98.9 million, $237.7 million and $632.8 million in 2021, respectively. 

 

Deposit interest expense increased $41,000 and interest paid on borrowings increased $148,000 due to the increase in interest rates, which increased the cost of funds to 0.43% in 2022 compared to 0.42% in 2021.  Management expects the cost of funds to continue to increase in 2023 as deposit offering rates for non-maturity and time deposits have increased with the market and competition.

 

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. The net interest margin (on a taxable equivalent basis) was 3.74% for the year ended December 31, 2022, compared to 3.77% for the year ended December 31, 2021.  This decrease can largely be attributed to PPP fee collected in the comparable periods in 2021.  Loans comprised 69.8% of interest-earning assets at December 31, 2022 compared to 61.7% of interest-earning assets at December 31, 2021. Interest-bearing deposits comprised 97.4% of interest-bearing liabilities at December 31, 2022, compared to 97.2% for the same period in 2021.

 

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 Corporation has a credit administration department that performs regular credit file reviews which facilitate the timely identification of problem or potential problem credits, enable sound credit decisions, and assist in the determination of the allowance for loan losses. The Corporation also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process. The loan policy, loan review process, and credit analysis function facilitate management's evaluation of the credit risk inherent in the lending function.

 

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

 

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

 

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the portfolio. Even though management uses all available information to assess possible loan losses, future additions or reductions to the allowance may be required as changes occur in economic conditions and specific borrower circumstances. The regulatory agencies that periodically review the Corporation’s allowance for loan 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.

 

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The allowance for loan losses at December 31, 2022 was $9.4 million, or 1.38% of total loans, compared to $10.4 million, or 1.70% of total loans at December 31, 2021. The change in the allowance for loan losses during 2022 included a negative provision for loan losses of $1,000,000 and net recoveries of $46,000.  

 

The provision for loan losses is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors.  Settlements of impaired or potential problem loans can also result in an increase or reduction in the required allowance for loan losses and a negative provision, or credit, being reflected in current operations. The negative provision for loan losses of $1,000,000 in 2022 was a $1.3 million decrease compared to the provision expense of $300,000 in 2021. The decrease in the provision for loan losses is a result of the continued waning impact of COVID related concerns, as well as the current status of the Bank's loan portfolio.

 

Impaired loans, principally consisting of commercial and commercial real estate, amounted to $1,604,000, all with no specific reserve, at December 31, 2022.  Total impaired loans were $1,948,000 at December 31, 2021, also, all with no specific reserve.

 

In addition to impaired loans, the Corporation had other potential problem credits of $8.2 million at December 31, 2022 compared to $24.7 million at December 31, 2021, a decrease of $16.6 million (67.2%) due mainly to payoffs.  The Corporation’s credit administration department continues to closely monitor these credits.

 

Non-Interest Income

 

Total non-interest income decreased $7,392,000 (42.6%) to $9,954,000 in 2022 from $17,346,000 in 2021, which was primarily attributable to decreases in gain on sale of loans of $11,598,000 (86.1%), offset by an increase in other operating income of $3,256,000 (154.5%), an increase in BOLI income of $764,000, an increase in service charges of $142,000, and an increase in the fair value of mortgage servicing rights of $142,000. 

 

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 were $1.2 million in 2022 compared to $1.1 million in 2021.

 

The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated and retains the servicing rights relating to certain of those loans. During 2022, gain on sale of loans was $1,870,000, including $258,000 of capitalized servicing rights. Gain on sale of loans was $13,468,000 in 2021, including $628,000 of capitalized servicing rights. The significant decrease in gain on sale of loans was attributable to decreased loan origination and sales activities within the residential mortgage and governmental lending operations along with a decrease in the average gain on sale per loan.  For the year ended December 31, 2022, there were $173.3 million in loans originated and sold compared to $359.4 million in 2021. The net gain on sale was 0.85% in 2022 compared to 3.58% in 2021.

 

The Corporation’s serviced portfolio decreased $836,000 during 2022 to $263.4 million at December 31, 2022.  The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $437,000 increase in the fair value of mortgage servicing rights during 2022, compared to a $295,000 increase in the fair value of mortgage servicing rights in 2021. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2022 the PSA factor was 114 compared to 180 at December 31, 2021.

 

Cash surrender value of life insurance increased $764,000 in 2022 to $1,166,000 compared to $402,000 in 2021 due to $802,000 received in BOLI death benefit payments.

 

Other operating income increased $3,256,000 to $5,363,000 in 2022 from $2,107,000 in 2021.  The increase in other non-interest income resulted from increases in the Corporation's loan hedging program of $3,139,000.  The increase in loan hedging income is designed to offset the lower net gain on sales of loan yields experienced in 2022.

 

Non-Interest Expenses

 

Non-interest expenses were $34,114,000 for the year ended December 31, 2022, compared to $36,706,000 for the same period in 2021, a decrease of $2,592,000. The decrease in non-interest expenses was primarily attributable to decreases in salaries and benefits of $2,249,000 (10.9%), a result of lower mortgage loan commissions, loan origination expenses of $599,000 (39.7%), advertising and promotional expense of $552,000 (24.8%), and fixed asset depreciation of $187,000 (10.8%). These decreases in expense were offset by increases in the unfunded commitment reserve of $157,000, equipment service expense of $150,000 (13.3%), travel and entertainment expense of $115,000 (110.4%), asset management legal expense of $103,000 (198.1%), ATM/debit card processing expense of $90,000 (10.7%), and exam and auditing expense of $86,000 (13.8%).

 

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

 

Provision for Income Taxes

 

The provision for income taxes for 2022 was $1,214,000, an effective tax rate of 9.7%, compared to $2,494,000 in 2021, an effective rate of 15.5%.  The decrease in the effective tax rate is largely due to tax-exempt securities and the BOLI death benefit payment comprising 35.9% of pre-tax income in 2022 compared to 19.3% in 2021.

 

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Results of Operation – 2021 Compared to 2020

 

For a discussion of our results of operations for 2021 versus 2020, see "Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Form 10-K filed with the SEC on March 4, 2022, which information is incorporated by reference to the 2021 UBOH Annual Report to Shareholders filed as Exhibit 13 thereto.

 

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 access to FHLB advances, various lines of credit facilities available through correspondent banks and the Federal Reserve. Another source of liquidity is represented by loans that are available to be sold. Certain other loans within the Corporation’s loan 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 2022, 2021, and 2020 follows.

 

The Corporation generated cash from operating activities of $16.8 million in 2022, $26.4 million in 2021, and $17.2 million in 2020.

 

Net cash flows used in investing activities amounted to $103.0 million in 2022, $96.5 million in 2021, and $65.1 million in 2020. Significant investing cash flow activities in 2022 included $28.3 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $73.8 million of net cash outflows to fund net loan growth. Significant investing cash flow activities in 2021 included $118.2 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $25.1 million of net cash inflows due to a decrease in loan balances.  Significant investing cash flow activities in 2020 included $6.0 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $57.3 million of net cash outflow to fund net loan growth.

 

Net cash flows provided by financing activities amounted to $41.7 million in 2022, $88.2 million in 2021, and $78.5 million in 2020. Net cash provided by financing activities in 2022 primarily resulted from an increase in deposits of $23.5 million and $25.0 million in other borrowings offset by $2,876,000 to purchase treasury shares and $2,747,000 in cash dividends paid. Net cash provided by financing activities in 2021 primarily resulted from an increase in deposits of $92.1 million offset by $2,394,000 in cash dividends paid. Net cash provided by financing activities in 2020 primarily resulted from an increase in deposits of $131.3 million offset by payments on other borrowings of $51.0 million, and by $1,668,000 in cash dividends paid.

 

Asset Liability Management

 

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

 

The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”. An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”. This generally means that, when interest rates increase, an institution’s net interest income will increase and, when interest rates decrease, the institution’s net interest income will decrease. An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “negative gap”. This generally means that, when interest rates increase, the institution’s net interest income will decrease and, when interest rates decrease, the institution’s net interest income will increase. The Corporation’s one year cumulative gap (ratio of risk-sensitive assets to risk-sensitive liabilities) at December 31, 2022 is approximately 155% which means the Corporation has more assets than liabilities re-pricing within one year.  Due to the makeup of the Corporation's deposit base, the Corporation’s liabilities do not have the ability to reprice down the full 100 bps which is why the margin decreases in a 100 bps down shock scenario. This is quantified in the earnings sensitivity to market rates table in the Quantitative and Qualitative Disclosures about Market Risk.

 

Effects of Inflation

 

The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by fluctuations in interest rates than inflation. Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies. Interest rates and inflation do not necessarily move with the same velocity or within the same period; therefore, a direct relationship to the inflation rate cannot be shown. The financial information presented in the Corporation’s consolidated financial statements has been presented in accordance with accounting principles generally accepted in the United States, which require that the Corporation measure financial position and operating results primarily in terms of historical dollars. We expect that interest rates will continue to increase with the Federal Reserve focusing its concerns on reducing inflation.  Persistent inflation could have a material adverse impact on us, and/or our customers.

 

Significant Accounting Policies

 

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

 

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

 

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The allowance for loan losses is based on periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national, regional and local economic conditions such as unemployment data, loan delinquencies, demand for single family homes, demand for commercial real estate and building lots, loan portfolio composition, historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the appropriateness of the loan loss allowance for its homogeneous and non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single family and consumer loan portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate and multi-family loan portfolios involves assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Company's own loss experience and other qualitative factors and are assigned to all loans without identified credit weaknesses. For each non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans, or portions thereof, that are deemed uncollectible.

 

The appropriateness of the allowance for loan losses is dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans is typically based on the appraised value of the property less estimated selling costs. The estimates are reviewed periodically and any adjustments are recorded in the provision for loan losses in the periods in which the adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios, the actual loss experience and other qualitative factors. The Company increases its allowance for loan losses by charging the provision for loan losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for loan losses and recording loan charge-offs. The current year activity resulted in a decrease in the allowance and a credit to the loan loss provision. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified. Although management believes that based on current conditions the allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for loan losses and adjustments may be required in the future. In addition, the Company will be required to adopt Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in the first quarter of 2023. See “Note 1 - New Accounting Pronouncements” in the Notes to Consolidated Financial Statements for further information on the potential impact of adopting ASU 2016-13.

 

Management considers the valuation of goodwill from various past acquisitions through an annual impairment test which considers, among other things, the assets and equity of the Corporation as well as price multiples for sales transactions involving other local financial institutions. Management engaged an independent valuation specialist to perform a goodwill impairment evaluation as of September 30, 2022, 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, 2022.

 

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The Company’s mortgage servicing rights relating to loans serviced for others represent an asset of the Company. This asset is initially capitalized and included on the Company’s consolidated balance sheet. The mortgage servicing rights are then amortized as non-interest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage servicing rights. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Company, including the estimated prepayment speed of the loan and the discount rate used to present value the servicing right. For example, if the mortgage loan is prepaid, the Company will receive fewer servicing fees, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Company’s balance sheet. Therefore, in an attempt to reflect an accurate expected value to the Company of the mortgage servicing rights, the Company receives a valuation of its mortgage servicing rights from an independent third party. The independent third party’s valuation of the mortgage servicing rights is based on relevant characteristics of the Company’s loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions. Management, with the advice from its third-party valuation firm, review the assumptions related to prepayment speeds, discount rates, and capitalized mortgage servicing income on a quarterly basis.  In addition, based upon the independent third party’s valuation of the Company’s mortgage servicing rights, management then establishes a valuation allowance, if necessary, to quantify the likely impairment of the value of the mortgage servicing rights to the Company. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Company’s net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions. 

 

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

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

 

The Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relates to the allowance for loan losses. For tax purposes only the net charge-offs are deductible while the entire provision for loan losses is used to determine book income. A deferred tax asset is created because of the timing difference of when the expense is recognized for book and tax purposes. Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax planning strategies, and assessments of the current and future economic and business conditions. The positive evidence considered includes the Company’s cumulative net income in the prior three-year period, the ability to implement tax planning strategies to accelerate taxable income recognition, and the probability that taxable income will be generated in future periods. The Company could not currently identify any negative evidence. It is possible that future conditions may differ substantially from those anticipated in determining that no valuation allowance was required on deferred tax assets and adjustments may be required in the future.

 

Determining the ultimate settlement of any tax position requires significant estimates and judgments in arriving at the amount of tax benefits to be recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.

 

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Impact of Recent Accounting Pronouncements

 

A summary of new accounting standards adopted or subject to adoption in 2022, as well as newly issued but not effective accounting standards at December 31, 2022, is presented in Note 2 to the consolidated financial statements.

 

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

 

The following table summarizes loan commitments, including letters of credit, as of December 31, 2022:

 

   

Amount of commitment to expire per period

  
   

Total

    

Less than

    

1 - 3

    

4 - 5

    

Over

  
   

Amount

    

1 year

    

years

    

years

    

5 years

  
   

(in thousands)

  

Type of Commitment

                                        

Commercial lines-of-credit

   $ 70,603     $ 62,219     $ 7,697       -     $ 687  

Real estate lines-of-credit

     133,951       9,563       9,587       16,501       98,300  

Consumer lines-of-credit

     365       -       -       -       365  

Letters of Credit

     319       319       -       -       -  
                                         

Total commitments

   $ 205,238     $ 72,101     $ 17,284     $ 16,501     $ 99,352  

 

As indicated in the preceding table, the Corporation had $205.2 million in total loan commitments at December 31, 2022, with $72.1 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.  

 

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

 

The following table summarizes the Corporation’s contractual obligations as of December 31, 2022:

 

   

Payments due by period

  
   

Total

    

Less than

    

1 - 3

    

4 - 5

    

Over

  
   

Amount

    

1 year

    

years

    

Years

    

5 years

  
   

(in thousands)

  

Contractual obligations

                                        

Long-term debt

   $

19,009

     $ 1,000     $ 2,000     $ 2,000     $ 14,009  

Federal Funds Purchased and other borrowings

     25,079       25,079       -       -       -  

Operating leases

     1,689       263       508       168       750  

Time deposits

    
125,777
     
75,725
     
47,250
     
2,659
     
143
 

Deposits without stated maturities

    
801,217
      -       -       -       801,217  

Future deferred compensation payments, including interest

    
909
     
69
     
138
      138      
564
 
                                         

Total obligations

   $ 973,680     $ 102,136     $ 49,896     $ 4,965     $ 816,683  

 

Long-term debt presented in the preceding table consists of a term borrowing from another bank of $6,000,000 and $13.0 million of junior subordinated deferrable interest debentures, including $10.3 million issued by the Corporation and $2.7 million assumed from the November 2014 OSB acquisition.

 

Federal funds purchased and other borrowings consist of overnight borrowings from the Federal Home Loan Bank of $23.5 million, a federal funds line of credit from another bank of $31,000, a line of credit from another bank of $1,500,000.

 

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

 

The future deferred compensation payments, including interest, is a deferred compensation liability assumed with The OSB acquisition for the benefit of its retired president, with payment that began on May 1, 2010. At December 31, 2022, the net present value of future deferred compensation payments amounted to $886,000, which is included in other liabilities in the December 31, 2022 consolidated balance sheet.

 

As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2022. The Corporation also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $1,577,000 at December 31, 2022 for supplemental retirement benefits.

 

Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

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

 

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Quantitative and Qualitative Disclosures about Market Risk - Continued

 

The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2022:

 

Change in Interest Rates

    

Percentage Change in

    

Percentage Change in

  

(basis points)

    

Net Interest Income

    

Net Income

  
               

+100

     -2.7%     -10.1%  
-100     0.1%     2.2%  
               

+200

     -5.5%     -20.9%  
-200     -1.8%     -2.7  
               

+300

     -8.4%     -31.6%  
-300     -6.1%     -15.9%  

 

Given a linear 100bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 2.7% and net income would decrease by 0.1%. A 100bp decrease in interest rates would increase net interest income by 0.1% and increase net income by 2.2%. Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 5.5% and net income would decrease by 20.9%. A 200bp decrease in interest rates would decrease net interest income by 1.8% and decrease net income by 2.7%. Given a linear 300bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 8.4% and net income would decrease by 31.6%. A 300bp decrease in interest rates would decrease net interest income by 6.1% and net income would decrease by 15.9%. The anticipated increase in interest rates will negatively impact the Company's Net Interest Income and Net Income in 2023 assuming that no action to the balance sheet is taken.

 

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a01.jpg

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

Shareholders and Board of Directors

United Bancshares, Inc.

Columbus Grove, Ohio

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and subsidiaries (the Corporation) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

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Shareholders and Board of Directors

United Bancshares, Inc.

 

 

Critical Audit Matters

 

The critical audit matter communicated below arose from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan and Lease Losses

As described in Notes 1 and 4 to the consolidated financial statements, the Corporation’s allowance for loan and lease losses was $9,401,000 as of December 31, 2022, consisting of two components (i) specific reserves of zero based on probable losses on impaired loans, and (ii) general reserves of $9,401,000 based on historical loan loss experience, general economic conditions, and other qualitative risk factors both internal and external to the Corporation. Management estimates the allowance based on loan losses believed to be inherent in the Corporation’s loan portfolio, segmented by product type and risk classification, as of the balance sheet date.

 

The Corporation’s allowance for loan and lease losses consists of general reserves which management develops based on historical loss experience adjusted for qualitative factors not reflected in the historical loss experience, as well as specific reserves based on management’s identification of impaired loans. Historical loss ratios are an annualized rate based on the previous 12 quarters of loss experience.

 

Management considers several qualitative factors, both internal and external to the Corporation, including management and staff; loan underwriting, policy and procedures; internal/external audit and loan review; macro and local economic factors; impact of competition, legal and regulatory issues; nature and volume of the loan portfolio; concentration of credit risk; net charge-off trends and non-accrual, past due and classified trends when determining the general reserve. The adjustment for qualitative factors requires a significant amount of judgement by management and involves a high degree of estimation.

 

The qualitative adjustment contributed significantly to the general reserve component of the allowance for loan and lease losses. Management’s identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan and lease losses. We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

 

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Shareholders and Board of Directors

United Bancshares, Inc.

 

 

The primary procedures we performed to address this critical audit matter, including evaluating management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, consisted of the following:

 

 

●

We obtained an understanding of the Corporation’s process for establishing the allowance for loan and lease losses, including the qualitative factors used in estimating the allowance for loan and lease losses.

 

 

●

Evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the information gathered.

 

 

●

Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data.

 

 

●

Assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period.

 

 

●

Analytically evaluating the qualitative adjustment in the current year compared to prior year for directional consistency and reasonableness.

 

 

●

Testing the calculations used by management to translate the assumptions and key factors into the calculation.

 

 

 

/s/ CliftonLarsonAllen LLP

 

CliftonLarsonAllen LLP

 

We have served as the Corporation’s auditor since 2000.

 

Toledo, Ohio

March 13, 2023

 
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UNITED BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

December 31, 2022 and 2021

 

  

(in thousands except share data)

 
  

2022

  

2021

 

ASSETS

        

CASH AND CASH EQUIVALENTS

        

Cash and due from banks

 $20,756  $11,654 

Interest-bearing deposits in other banks

  9,924   63,548 

Total cash and cash equivalents

  30,680   75,202 

SECURITIES, available-for-sale

  281,286   307,642 

FEDERAL HOME LOAN BANK STOCK, at cost

  3,860   5,129 

LOANS HELD FOR SALE

  3,970   9,146 

LOANS AND LEASES

  683,575   609,559 

Less allowance for loan and lease losses

  9,401   10,355 

Net loans and leases

  674,174   599,204 

PREMISES AND EQUIPMENT, net

  24,147   21,840 

GOODWILL

  28,616   28,616 

CORE DEPOSIT INTANGIBLE ASSETS, net

  359   499 

CASH SURRENDER VALUE OF LIFE INSURANCE

  19,207   19,383 

OTHER ASSETS, including accrued interest receivable

  20,994   9,895 

TOTAL ASSETS

 $1,087,293  $1,076,556 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

LIABILITIES

        

Deposits:

        

Non-interest bearing

 $215,966  $195,374 

Interest-bearing

  737,917   735,039 

Total deposits

  953,883   930,413 

Federal funds purchased and other borrowings

  31,079   7,012 

Junior subordinated deferrable interest debentures

  13,009   12,976 

Other liabilities

  6,631   7,060 

Total liabilities

  1,004,602   957,461 

SHAREHOLDERS’ EQUITY

        

Common stock, stated value $1.00, 10,000,000 shares authorized; 3,817,237 and 3,793,881 shares issued; 3,153,368 and 3,272,585 shares outstanding at December 31, 2022 and December 31, 2021, respectively.

  3,817   3,794 

Surplus

  17,045   16,305 

Retained earnings

  112,466   103,903 

Accumulated other comprehensive (loss) income

  (38,366)  3,993 

Treasury stock, at cost, 663,869 shares at December 31, 2022 and 521,296 shares at December 31, 2021

  (12,271)  (8,900)

Total shareholders’ equity

  82,691   119,095 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $1,087,293  $1,076,556 

 

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

 

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UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31, 2022, 2021 and 2020 

 

  

(in thousands except share data)

 
  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

INTEREST INCOME

            

Loans and leases, including fees

 $31,201  $33,720  $35,696 

Securities:

            

Taxable

  3,137   1,977   1,938 

Tax-exempt

  3,710   2,856   2,137 

Other

  894   251   259 

Total interest income

  38,942   38,804   40,030 

INTEREST EXPENSE

            

Deposits

  2,322   2,281   3,998 

Borrowings

  936   788   2,990 

Total interest expense

  3,258   3,069   6,988 

Net interest income

  35,684   35,735   33,042 

PROVISION FOR LOAN AND LEASE LOSSES

  (1,000)  300   6,200 

Net interest income after provision for loan and lease losses

  36,684   35,435   26,842 

NON-INTEREST INCOME

            

Service charges on deposit accounts

  1,232   1,090   1,102 

Gain on sale of loans

  1,870   13,468   24,139 

Net securities gains (losses)

  (114)  (16)  289 

Change in fair value of mortgage servicing rights

  437   295   (293)

Increase in cash surrender value of life insurance and death benefits received

  1,166   402   368 

Other operating income

  5,363   2,107   1,395 

Total non-interest income

  9,954   17,346   27,000 

NON-INTEREST EXPENSES

            

Salaries, wages and employee benefits

  18,452   20,702   22,127 

Occupancy expenses

  4,436   4,485   3,630 

Other operating expenses

  11,226   11,519   11,408 

Total non-interest expenses

  34,114   36,706   37,165 

Income before income taxes

  12,524   16,075   16,677 

PROVISION FOR INCOME TAXES

  1,214   2,494   2,922 

NET INCOME

 $11,310  $13,581  $13,755 

NET INCOME PER SHARE BASIC

 $3.47  $4.14  $4.21 

NET INCOME PER SHARE DILUTED

 $3.46  $4.07  $4.16 

 

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

 

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UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME 

 

Years Ended December 31, 2022, 2021 and 2020

 

   

(in thousands)

  
   

Year Ended December 31,

  
   

2022

    

2021

    

2020

  
                         

NET INCOME

   $ 11,310     $ 13,581     $ 13,755  

OTHER COMPREHENSIVE (LOSS) INCOME

                        

Unrealized (losses) gains on securities:

                        

Unrealized holding (losses) gains during period

     (53,733 )     (4,272 )     5,964  

Reclassification adjustments for losses (gains) included in net income

     114       16       (289 )

Other comprehensive (loss) income, before income taxes

     (53,619 )     (4,256 )     5,675  

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

     (11,260 )     (894 )     1,192  

Other comprehensive (loss) income

     (42,359 )     (3,362 )     4,483  

COMPREHENSIVE (LOSS) INCOME

   $ (31,049 )   $ 10,219     $ 18,238  

 

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

 

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UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

Years Ended December 31, 2022, 2021 and 2020

 

  

(in thousands)

 
  

Common stock

  

Surplus

  Retained earnings  Accumulated other comprehensive income (loss)  

Treasury stock

  

Total

 

BALANCE AT DECEMBER 31, 2019

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

Comprehensive income:

                        

Net income

  -   -   13,755   -   -   13,755 

Other comprehensive income

  -   -   -   4,483   -   4,483 

Shares cancelled under stock option plan

  -   (11)  -   -   -   (11)

Sale of 3,889 treasury shares

  -   34   -   -   61   95 

Stock option expense

  -   164   -         164 

Cash dividends declared, $0.51 per share

  -   -   (1,668)  -   -   (1,668)
                         

BALANCE AT DECEMBER 31, 2020

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

Comprehensive income:

                        

Net income

  -   -   13,581   -   -   13,581 

Other comprehensive loss

  -   -   -   (3,362)  -   (3,362)

Repurchase of 11,651 shares

  -   -   -   -   (368)  (368)

Sale of 12,252 treasury shares

  -   50   -   -   193   243 

Stock Option Exercise, net of 33,324 shares repurchased 

  33   634   -   -   (1,054)  (387)

Stock option expense

  -   183   -         183 

Cash dividends declared, $0.73 per share

  -   -   (2,394)  -   -   (2,394)
                         

BALANCE AT DECEMBER 31, 2021

  3,794   16,305   103,903   3,993   (8,900)  119,095 

Comprehensive loss:

                        

Net income

  -   -   11,310   -   -   11,310 

Other comprehensive loss

  -   -   -   (42,359)  -   (42,359)

Repurchase of 130,553 shares

  -   -   -   -   (2,876)  (2,876)

Sale of 9,185 treasury shares

  -   68   -   -   175   243 

Stock Option Exercise, net of 21,205 shares repurchased

  23   450   -   -   (670)  (197)

Stock option expense

  -   222   -         222 

Cash dividends declared, $0.84 per share

  -   -   (2,747)  -   -   (2,747)

BALANCE AT DECEMBER 31, 2022

 $3,817  $17,045  $112,466  $(38,366) $(12,271) $82,691 

 

 

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

 

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UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2022, 2021 and 2020

 

  

(in thousands)

 
  

Years Ended December 31,

 
  

2022

  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

            

Net income

 $11,310  $13,581  $13,755 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation and amortization

  1,612   1,543   1,499 

Purchase accounting loan discount accretion

  (191)  (533)  (720)

Deferred income taxes

  1,619   1,380   (795)

Provision for loan losses

  (1,000)  300   6,200 

Gain on sale of loans

  (1,870)  (13,468)  (24,139)

Net securities losses (gains)

  114   16   (289)

Change in fair value of mortgage servicing rights

  (437)  (295)  293 

Increase in cash surrender value of life insurance and death benefits received

  (1,166)  (402)  (368)

Net amortization of security premiums and discounts

  905   832   954 

Stock option expense

  222   183   164 

Deferred compensation expense

  227   200   251 

Loss on sale or write-down of premises and equipment

  21   255   - 

Proceeds from sale of loans held for sale

  202,840   452,533   657,116 

Originations of loans held for sale

  (196,051)  (430,412)  (636,792)

Increase (decrease) in other assets

  (956)  1,558   (1,248)

Increase (decrease) in other liabilities

  (421)  (833)  1,336 

Net cash provided by operating activities

 $16,778  $26,438  $17,217 

CASH FLOWS FROM INVESTING ACTIVITIES

            

Proceeds from sales of available-for-sale securities

  -   -   15,538 

Proceeds from maturities of available-for-sale securities, including paydowns on mortgage-backed securities

  23,293   34,378   41,639 

Purchases of available-for-sale securities

  (51,575)  (152,544)  (63,136)

Purchases of FHLB stock

  -   -   (296)

Proceeds from redemption of FHLB stock

  1,269   469   - 

   Net (increase) decrease in loans and leases

  (73,779)  25,138   (57,296)

Bank owned life insurance premium

  1,342   -   - 

Purchases of premises and equipment

  (3,578)  (3,958)  (1,580)

Net cash used in investing activities

  (103,028)  (96,517)  (65,131)

Continued

 

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UNITED BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

Years Ended December 31, 2022, 2021 and 2020

 

CASH FLOWS FROM FINANCING ACTIVITIES

                        

Net increase in deposits

   $ 23,473     $ 92,061     $ 131,285  

Other borrowings:

                        

Net increase in fed funds purchased

     19       12       -  

       Proceeds from other borrowings

     25,048       7,000       -  

Principal payments on other borrowings

     (1,000 )     (7,750 )     (51,000 )

Purchase of treasury shares

     (2,876 )     (368 )     -  

Proceeds from sale of treasury shares

     243       243       95  

Payments of deferred compensation

     (235 )     (170 )     (165 )

Cash paid for cancellation of stock options

     -       -       (11 )

Cash paid for net shares repurchased from stock option exercise

     (197 )     (387 )     -  

Cash dividends paid

     (2,747 )     (2,394 )     (1,668 )

Net cash provided by financing activities

     41,728       88,247       78,536  

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (44,522 )     18,168       30,622  

CASH AND CASH EQUIVALENTS

                        

At beginning of year

     75,202       57,034       26,412  

At end of year

   $ 30,680     $ 75,202     $ 57,034  

SUPPLEMENTAL CASH FLOW DISCLOSURES

                        

Cash paid during the year for:

                        

Interest

   $ 3,171     $ 3,165     $ 7,299  

Federal income taxes

     -     $ 2,370     $ 4,050  

Non-cash operating activity:

                        

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

   $ 11,260     $ 894     $ (1,192 )

Non-cash investing activities:

                        

Non-cash investing and financing activity:

                        

Recognition of right-of-use lease asset (other assets) and lease liability (other liabilities)

   $ -     $ -     $ 7  

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

   $ (53,619 )   $ (4,256 )   $ 5,675  

 

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

 

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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”) and UBC Risk Management. The Bank has formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio. The operations of UBC are located in Wilmington, Delaware. The Bank has also formed a wholly-owned subsidiary, UBC Property, Inc. to hold and manage certain property that is acquired in lieu of foreclosure.

 

The Corporation, through its wholly-owned subsidiary, the Bank, is a full service community bank offering a full range of commercial and consumer banking services. The Bank, organized in 1904 as an Ohio-chartered bank, is headquartered in Columbus Grove, Ohio, with branch offices in Bowling Green, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Paulding, Pemberville, Plymouth and Westerville, Ohio.

 

The primary source of revenue of the Corporation is providing loans to customers primarily located in Northwestern and West Central Ohio. Such customers are predominately small and middle-market businesses and individuals.

 

UBC Risk Management, Inc. is located in Las Vegas, Nevada.  It is a captive insurance subsidiary which insures various liability and property damage policies for the Corporation and its subsidiaries. 

 

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 accounting principles generally accepted in the United States of America 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 consolidated 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 include the determination of the allowance for loan losses, valuation of securities, deferred tax assets, and goodwill.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, the Bank, and its wholly-owned 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.

 

Securities and Federal Home Loan Bank Stock

 

The Corporation has designated all securities as available-for-sale. Such securities are recorded at fair value, with unrealized gains and losses, net of applicable income taxes, excluded from income and reported as accumulated other comprehensive (loss) income.

 

The cost of debt 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. For debt securities purchased at a premium, the amortization period is shortened to the earliest call date. 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 that 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.

 

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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 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 Corporation had no unrealized losses at December 31, 2022 and 2021.

 

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 its 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.

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses (“allowance”) 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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability 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 or lease. 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 or lease is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease 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 or lease 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 individually for commercial 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.

 

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Under certain circumstances, the Corporation will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Corporation, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.

 

Acquired Loans

 

Purchased loans acquired in a business combination are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

 

•

Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

 

 

•

Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30 “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display at least some level of credit deterioration since origination.

 

 

•

Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

 

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

 

Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. If the Corporation does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

 

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 estimated cost to sell, at the date of foreclosure, establishing a new cost basis with loan balances in excess of fair value charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and subsequent valuation 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 Corporation. The 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 Corporation generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, earnings rate, and discount rates commensurate with the risks involved. 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.

 

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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 Corporation 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. The Corporation maintains a separate allowance for off-balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is included in other liabilities.

 

Goodwill and Core Deposit Intangible Assets

 

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. At December 31, 2022, the Corporation believes the Bank does not have any indicators of potential impairment based on the estimated fair value of its reporting unit.

 

The core deposit intangible asset resulting from the November 2014 Ohio State Bank (“OSB”) acquisition was determined to have a definite life and is being amortized on a straight-line basis over ten years through October 2024. The core deposit intangible asset resulting from the September 2017 Benchmark acquisition was also determined to have a definite life and is being amortized on an accelerated basis over ten years through 2027. Amortization of core deposit intangible assets amounted to $140,000, $143,000 and $151,000 for the years ended December 31, 2022, 2021 and 2020. Future amortization of core deposit intangible assets for the years 2023 thru 2027 are $139,000, $121,000, $38,000, $37,000,and $24,000 respectively.

 

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 its 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 Corporation is not currently subject to state or local income taxes.

 

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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 Corporation, (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 Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.

 

Comprehensive (Loss) Income

 

Recognized revenue, expenses, gains and losses are 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 (loss) 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.

 

The weighted average number of shares used for the years ended December 31, 2022, 2021 and 2020 are as follows:

 

  

2022

  

2021

  

2020

 

Basic

  3,259,952   3,277,062   3,270,996 

Diluted

  3,264,661   3,338,151   3,306,503 

 

Dividends per share are based on the number of shares outstanding at the declaration date.

 

Derivative Financial Instruments

 

The price risk related to changes in the fair value of interest rate lock commitments (IRLCs) and mortgage loans held for sale not committed to investors are subject to change primarily due to changes in market interest rates. The Corporation is exposed to this interest rate risk for IRLCs and mortgage loans held for sale originated until those loans are sold in the secondary market. The Corporation manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale not committed to investors by entering into derivative instruments such as forward loan sales commitments and mandatory delivery commitments. Management expects these derivative instruments will experience changes in fair value opposite to changes in the fair value of the IRLCs and mortgage loans held for sale not committed to investors, thereby reducing earnings volatility.  Best effort sale commitments are also executed for certain loans at the time the IRLC is locked with the borrower.  The fair value of the best effort IRLC and mortgage loans held for sale are valued using the commitment price to the investor. 

 

The Corporation started hedging in May of 2018 and takes into account various factors and strategies in determining the portion of the IRLCs and mortgage loans held for sale to be economically hedged. FASB ASC 815-25, Derivatives and Hedging, requires that all derivative instruments be recognized as assets or liabilities on the balance sheets at their estimated fair value.  Changes in the fair value of the derivative instruments are recognized in gain on sale of loans in the statements of operations in the period in which they occur. The Corporation accounts for all derivative instruments as free-standing derivative instruments and does not designate any for hedge accounting. The Corporation recognized a net gain from hedging activity of $1,814,000 for the year ended December 31, 2022 and net losses from hedging activity of $1,325,000 for the year ended December 31, 2021, and $1,532,000 for the year ended December 31, 2020, which are included in gain on sale of loans in the consolidated statements of income.  A net hedging asset of $305,000 as of December 31, 2022 and $876,000 as of  December 31, 2021 was included in other assets in the consolidated balance sheets.

 

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 17. 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. 

 

Subsequent Events

 

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2022, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2022, have been recognized in the financial statements for the year ended December 31, 2022. Events or transactions that provided evidence about conditions that did not exist at December 31, 2022 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2022.

 

On January 19, 2023, United Bancshares, Inc. issued a release announcing that its Board of Directors approved a cash dividend of $0.22 per common share payable March 15, 2023 to shareholders of record at the close of business on February 28, 2023.

 

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NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2019. On July 17, 2019, the FASB voted to issue a proposal for public comment that would potentially result in a postponement of the required implementation date for ASU 2016-13.  On October 16, 2019, the FASB extended the implementation deadline until the fiscal year and interim periods beginning after December 15, 2022. 

 

The Company adopted the guidance on January 1, 2023 through a one-time cumulative-effect adjustment to retained earnings.  The Company has disaggregated its loan portfolio into segments of like kind loans with additional disaggregation based on risk level of the loans. Models have been chosen to be applied to loan segments based on factors such as life of the loan segment and loan payment types. The Company has engaged an independent third party to validate the model, methodologies, and compliance with the regulation, which will be completed during the first quarter of 2023. Qualitative factors have also been included to capture inherent risks that are not included within the quantitative model.  At adoption, the Company did not have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of adoption, January 1, 2023.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting.  The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  The amendments are effective for all entities as of March 12, 2020 through December 31, 2024.  The Corporation does not expect this guidance to have a material impact on its consolidated financial statements.

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):  Scope, which is in response to stakeholder concerns related to reference rate reform.  The amendments in this Update are elective and apply to all entities that have derivative instruments that use an interest rate for managing, discounting, or contract price alignment that is modified as a result of reference rate reform.  The amendments in this Update are effective immediately for all entities.  The Corporation is currently reviewing the amendments in this Update, but does not expect this guidance to have a material impact on its consolidated financial statements.

 

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NOTE 3 – SECURITIES

 

The amortized cost, unrealized gains and losses on securities, and fair value of securities as of December 31, 2022 and 2021 are as follows:

 

  

Amortized cost

  

Gross unrealized gains

  

Gross unrealized losses

  

Fair Value

 

2022

 

(In Thousands)

 

Available-for-sale:

                

Obligations of states and political

                

subdivisions

 $161,128  $157  $24,956  $136,329 

Mortgage-backed

  161,162   1   23,371   137,792 

U.S. Government agencies

  5,000   -   395   4,605 

Other

  2,560   -   -   2,560 
                 

Total

 $329,850  $158  $48,722  $281,286 

 

 

2021

 

(In Thousands)

 

Available-for-sale:

                

Obligations of states and political

                

subdivisions

 $145,775  $5,494  $485  $150,784 

Mortgage-backed

  152,507   1,248   1,185   152,570 

U.S. Government agencies

  2,500   -   17   2,483 

Other

  1,805   -   -   1,805 
                 

Total

 $302,587  $6,742  $1,687  $307,642 

 

The amortized cost and fair value of securities at December 31, 2022, 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.

 

  

(in thousands)

 
  

Amortized Cost

  

Fair value

 
         

Due in one year or less

 $1,673  $1,669 

Due after one year through five years

  8,965   8,934 

Due after five years through ten years

  26,890   25,585 

Due after ten years

  289,762   242,538 

Other securities having no maturity date

  2,560   2,560 

Total

 $329,850  $281,286 

 

Securities with a carrying value of $42.9 million at December 31, 2022 and $34.0 million at December 31, 2021 were pledged to secure public deposits and for other purposes as required or permitted by law.

 

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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, 2022 and 2021:

 

  

(in thousands)

 
  

Securities in a continuous unrealized loss position

 
  

Less than 12 months

  

12 months or more

  

Total

 

2022

 

Unrealized losses

  

Fair value

  

Unrealized losses

  

Fair value

  

Unrealized losses

  

Total Fair value

 

Obligations of states and political subdivisions

 $14,051  $95,233  $10,095  $28,058  $24,956  $123,291 

Mortgage-backed

  6,580   59,163   16,791   78,523   23,371   137,686 

U.S. Government agencies

  65   2,435   330   2,170   395   4,605 

Other

  -   -   -   -   -   - 

Total temporarily impaired securities

 $20,696  $156,831  $28,026  $108,751  $48,722  $265,582 

 

 

  

Less than 12 months

  

12 months or more

  

Total

 

2021

 

Unrealized losses

  

Fair value

  

Unrealized losses

  

Fair value

  

Unrealized losses

  

Total Fair value

 

Obligations of states and political subdivisions

 $485  $38,544  $90  $1,805  $575  $40,349 

Mortgage-backed

  1,095   101,651   -   -   1,095   101,651 

 

  17   2,483   -   -   17   2,483 

Other

  -   -   -   -   -   - 

Total temporarily impaired securities

 $1,597  $142,678  $90  $1,805  $1,687  $144,483 

 

There were 386 securities in an unrealized loss position at December 31, 2022, 113 of which was in a continuous unrealized loss position for 12 months or more. There were 114 securities in an unrealized loss position at December 31, 2021, 1 of which was in a continuous unrealized loss position for 12 months or more.  Management has considered industry analyst reports, whether downgrades by bond rating agencies have occurred, sector credit reports, issuer’s financial condition and prospects, the Corporation’s ability and intent to hold securities to maturity, and volatility in the bond market, in concluding that the unrealized losses as of December 31, 2022 were primarily the result of fluctuations in the bond market related primarily to changes in market interest rates. As a result, all security impairments as of December 31, 2022 are considered to be temporary.

 

Gross realized losses from sale of securities, including securities calls, amounted to $114,000 in 2022 with a related income tax effect of $24,000, and $16,000 in 2021 with related income tax effect of $3,000.  There were no gross realized losses from sale of securities in 2020.  There were no gross realized gains from sale of securities in 2022 or 2021.  Gross realized gains from sale of securities, including securities calls, amounted to $289,000 in 2020, with the income tax provision applicable to such gains amounting to $61,000 in 2020.

 

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NOTE 4 – LOANS

 

Loans receivable at December 31, 2022 and 2021 consist of the following:

 

  

2022

  

2021

 
         

Residential 1-4 family real estate

 $129,383  $112,196 

Commercial and multi-family real estate

  470,768   404,964 

Commercial

  77,930   86,834 

Consumer

  5,494   5,565 

Total loans and leases

 $683,575  $609,559 

 

Fixed rate loans approximated $192,220,000at December 31, 2022 and $172,238,000 at December 31, 2021. 

 

Most of the Corporation’s lending activities are with customers located in Northwestern and Central Ohio.  The Corporation has identified lending for income-generating rental properties as an industry concentration.  Total loans for income-generating rental property totaled $322.2 million at December 31, 2022 representing 47.1% of total loans.

 

The Corporation originates 1-4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Corporation’s underwriting standards for 1-4 family loans are generally in accordance with the Federal Home Loan Mortgage Corporation (FHLMC) manual underwriting guidelines.  Properties securing 1-4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by the Board of Directors and the Loan Policy Committee. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Corporation will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Corporation’s 1-4 family real estate loans are secured primarily by properties located in its primary market area.

 

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the cost or appraised value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Board of Directors. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on cash flows, collateral and risk rating criteria. The Corporation may require guarantees on these loans. The Corporation’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

 

Commercial and agricultural operating loans are underwritten based on the Corporation’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and/or hail insurance may be required for agricultural borrowers. Loans are generally guaranteed by the principal(s). The Corporation’s commercial and agricultural operating lending is primarily in its primary market area.

 

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The Corporation maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee. The internal audit process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

 

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2022, 2021 and 2020:

 

  

(in thousands)

 
  Residential 1 – 4 family real estate  Commercial and multi- family real estate  

Commercial

  

Consumer

  

Total

 

Balance at December 31, 2021

 $1,719  $7,121  $1,414  $101  $10,355 

Provision for loan and lease losses

  (137)  (558)  (280)  (25)  (1,000)

Losses charged off

  -   -   -   (1)  (1)

Recoveries

  41   3   -   3   47 

Balance at December 31, 2022

 $1,623  $6,566  $1,134  $78  $9,401 

 

  Residential 1 – 4 family real estate  Commercial and multi-family real estate  

Commercial

  

Consumer

  

Total

 

Balance at December 31, 2020

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

Provision for loan and lease losses

  1   426   (102)  (25)  300 

Losses charged off

  -   (01)  -   (10)  (11)

Recoveries

  35   32   1   4   72 

Balance at December 31, 2021

 $1,719  $7,121  $1,414  $101  $10,355 

 

  Residential 1 – 4 family real estate  Commercial and multi-family real estate  

Commercial

  

Consumer

  

Total

 

Balance at December 31, 2019

 $592  $2,536  $939  $64  $4,131 

Provision for loan and lease losses

  1,310   4,224   566   100   6,200 

Losses charged off

  (228)  (125)  (4)  (33)  (390)

Recoveries

  9   29   14   1   53 

Balance at December 31, 2020

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

 

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The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2022 and 2021:

 

  

(in thousands)

 
  Residential 1 – 4 family real estate  Commercial and multi-family real estate  

Commercial

  

Consumer

  

Total

 

2022

                    

Allowance for loan and lease losses:

                    

Attributable to loans and leases individually evaluated for impairment

 $-  $-  $-  $-  $- 

Collectively evaluated for impairment

  1,623   6,566   1,134   78   9,401 

Total allowance for loan and lease losses

 $1,623  $6,566  $1,134  $78  $9,401 
                     

Loans and leases:

                    

Individually evaluated for impairment

 $35  $505  $1,099  $-  $1,639 

Acquired with deteriorated credit quality

  73   51   -   -   124 

Collectively evaluated for impairment

  129,275   470,212   76,831   5,494   681,812 

Total ending loans and leases balance

 $129,383  $470,768  $77,930  $5,494  $683,575 

 

  Residential 1 – 4 family real estate  Commercial and multi-family real estate  

Commercial

  

Consumer

  

Total

 

2021

                    

Allowance for loan and lease losses:

                    

Attributable to loans and leases individually evaluated for impairment

 $-  $-  $-  $-  $- 

Collectively evaluated for impairment

  1,719   7,121   1,414   101   10,355 

Total allowance for loan and lease losses

 $1,719  $7,121  $1,414  $101  $10,355 
                     

Loans and leases:

                    

Individually evaluated for impairment

 $-  $676  $1,272  $-  $1,948 

Acquired with deteriorated credit quality

  76   96   -   -   172 

Collectively evaluated for impairment

  112,120   404,192   85,562   5,565   607,439 

Total ending loans and leases balance

 $112,196  $404,964  $86,834  $5,565  $609,559 

 

The following is a summary of the activity in the allowance for loan and lease losses of impaired loans, which is a part of the Corporation’s overall allowance for loan and lease losses for the years ended December 31, 2022, 2021 and 2020:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 
             

Balance at beginning of year

 $-  $255  $435 

Provision (credit) for loan and lease losses

  -   (255)  (180)

Loans charged off

  -   -   - 

Recoveries

  -   -   - 

Balance at end of year

 $-  $-  $255 

 

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The average balance of impaired loans (excluding loans acquired with deteriorated credit quality) amounted to $1,578,000, $2,558,000 and $2,788,000 during 2022, 2021 and 2020, respectively. Interest income on impaired loans was $103,000 in 2022, $167,000 in 2021, and $43,000 in 2020.  

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022 and 2021:

 

  

(in thousands)

 
  

2022

  

2021

 
  

Recorded investment

  

Allowance for loan and lease losses allocated

  

Recorded investment

  

Allowance for loan and lease losses allocated

 

With no related allowance recorded:

                

Residential 1-4 family real estate

 $35  $-  $-  $- 

Commercial and multi-family real estate

  500   -   668   - 

Agricultural real estate

  5   -   8   - 

Commercial

  1,099   -   1,272   - 

Agriculture

  -   -   -   - 

Consumer

  -   -   -   - 

With an allowance recorded:

                

Residential 1-4 family real estate

  -   -   -   - 

Commercial and multi-family real estate

  -   -   -   

-

 

Agricultural real estate

  -   -   -   - 

Commercial

  -   -   -   - 

Agriculture

  -   -   -   - 

Consumer

  -   -   -   - 

Total

 $1,639  $-  $1,948   

-

 

 

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The following table presents the recorded investment in nonaccrual loans, loans past due over 90 days still on accrual and troubled debt restructurings by class of loans as of December 31, 2022 and 2021:

 

  

(in thousands)

 
  

2022

  

2021

 
  

Nonaccrual

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

Nonaccrual

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

Residential 1-4 family real estate

 $156  $58  $122  $184   -  $139 

Commercial and multi-family real estate

  353   -   7   136   -   14 

Agricultural real estate

  -   -   -   -   -   - 

Commercial

  467   -   632   -   -   767 

Agriculture

  -   -   -   -   -   - 

Consumer

  -         -       

Total

 $976  $58  $761  $320   -  $920 

 

The nonaccrual balances in the table above include troubled debt restructurings that have been classified as nonaccrual.

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2022 and 2021 by class of loans:

 

  

(in thousands)

 
  

30 – 59 days past due

  

60 – 89 days past due

  Greater than 90 days past due  

Total past due

  Loans and leases not past due  

Total

 

2022

                        

Residential 1-4 family real estate

 $1,146   -  $93  $1,239  $128,144  $129,383 

Commercial and multi-family real estate

  103   -   234   337   414,294   414,631 

Agricultural real estate

  6   -   -   6   56,131   56,137 

Commercial

  86   -   467   553   68,494   69,047 

Agriculture

  -   -   -   -   8,883   8,883 

Consumer

  -   -      -   5,494   5,494 

Total

 $1,341   -  $794  $2,135  $681,440  $683,575 

 

  

30 – 59 days past due

  

60 – 89 days past due

  Greater than 90 days past due  

Total past due

  Loans and leases not past due  

Total

 

2021

                        

Residential 1-4 family real estate

 $425   -  $48  $473  $111,723  $112,196 

Commercial and multi-family real estate

  153   -   2   155   351,824   351,979 

Agricultural real estate

  -   -   -   -   52,985   52,985 

Commercial

  1,170   1,082   -   2,252   76,071   78,323 

Agriculture

  -   -   -   -   8,511   8,511 

Consumer

  5   -      5   5,560   5,565 

Total

 $1,753  $1,082  $50  $2,885  $606,674  $609,559 

 

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Credit Quality Indicators:

 

The Corporation 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 Corporation analyzes loans individually by classifying the loans as to the credit risk. This analysis generally includes non-homogenous loans, such as commercial and commercial real estate loans. The Corporation uses the following definitions for risk ratings for adverse classified loans:

 

●Pass: Loans not meeting the previous criteria that are analyzed individually as part of the above-described process are considered to be pass rated loans.

●

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 Corporation management may depend on secondary repayment sources to liquidate these loans. The Corporation 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.

 

The following table provides a summary of the loan portfolio risk grades, as applicable, based on the most recent analysis performed, as of December 31, 2022 and 2021.

 

  

(in thousands)

     
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Not rated

  

Total

 
                         

2022

                        

Residential 1 - 4 family

 $2,306  $-  $-  $-  $127,077  $129,383 

Commercial and multi- family real estate

  465,361   646   4,717   -   44   470,768 

Commercial

  73,604   528   3,505   -   293   77,930 

Consumer

  -   -   -   -   5,494   5,494 

Total

 $541,271  $1,174  $8,222  $-  $132,908  $683,575 

 

 

  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Not rated

  

Total

 
                         

2021

                        

Residential 1 - 4 family

 $2,479  $-  $-  $-  $109,717  $112,196 

Commercial and multi- family real estate

  380,936   10,080   13,823   -   125   404,964 

Commercial

  77,772   228   2,272   -   6,562   86,834 

Consumer

  -   -   -   -   5,565   5,565 

Total

 $461,187  $10,308  $16,095  $-  $121,969  $609,559 

 

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The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan and lease losses. For all loan classes that are not rated, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Generally, all loans not rated that are 90 days past due or are classified as nonaccrual and collectively evaluated for impairment, are considered nonperforming. The following table presents the recorded investment in all loans that are not risk rated, based on payment activity as of December 31, 2022 and 2021:

 

  

(in thousands)

     
  

Residential 1-4 family

  

Commercial and multi-family real estate

  

Commercial

  

Consumer

  

Total

 

2022

                    

Performing

 $126,985  $44  $293  $5,494  $132,816 

Nonperforming

  92   -   -   -   92 

Total

 $127,077  $44  $293  $5,494  $132,908 

 

 

  

Residential 1-4 family

  

Commercial and multi-family real estate

  

Commercial

  

Consumer

  

Total

 

2021

                    

Performing

 $109,669  $125  $6,562  $5,565  $121,921 

Nonperforming

  48   -   -   -   48 

Total

 $109,717  $125  $6,562  $5,565  $121,969 

 

Modifications:

 

The Corporation’s loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. All TDRs are also classified as impaired loans.

 

When the Corporation modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down of the loan balance if collection is not expected.

 

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There were no modifications for TDR loans during the years ended December 31, 2022 or December 31, 2021.  There were no other subsequent defaults relating to TDR loans during the years ended December 31, 2022 and 2021.

 

The following is additional information with respect to loans s acquired in the Benchmark and OSB transactions as of December 31, 2022 and 2021:

 

  

Benchmark Bank

 
  

(in thousands)

 
  

Contractual

         
  

Principal

  

Accretable

  

Carrying

 

2022

 

Receivable

  

Difference

  

Amount

 

Purchased Performing Loans and Leases

            

Balance at December 31, 2021

 $22,233  $(328) $21,905 

Change due to payments received

  (4,987)  (110)  (5,097)

Balance at December 31, 2022

 $17,246  $(218) $17,028 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2021

 $260  $(138) $122 

Change due to payments received

  (80)  (10)  (90)

Balance at December 31, 2022

 $180  $(128) $52 

 

 

  

Contractual

         
  

Principal

  

Accretable

  

Carrying

 

2021

 

Receivable

  

Difference

  

Amount

 

Purchased Performing Loans and Leases

            

Balance at December 31, 2020

 $37,386  $(655) $36,731 

Change due to payments received

  (15,153)  (327)  (15,480)

Balance at December 31, 2021

 $22,233  $(328) $21,905 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2020

 $287  $(173) $114 

Change due to payments received

  (27)  (35)  (62)

Balance at December 31, 2021

 $260  $(138) $122 

 

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The Ohio State Bank

 
  

(in thousands)

 
  

Contractual

         
  

Principal

  

Accretable

  

Carrying

 

2022

 

Receivable

  

Difference

  

Amount

 

Purchased Performing Loans and Leases

            

Balance at December 31, 2021

 $7,024  $(190) $6,834 

Change due to payments received

  (1,776)  (70)  (1,846)

Balance at December 31, 2022

 $5,248  $(120) $5,128 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2021

 $59  $(09) $50 

Change due to payments received

  18   4   22 

Balance at December 31, 2022

 $77  $(05) $72 

 

 

  

Contractual

         
  

Principal

  

Accretable

  

Carrying

 

2021

 

Receivable

  

Difference

  

Amount

 

Purchased Performing Loans and Leases

            

Balance at December 31, 2020

 $10,181  $(319) $9,862 

Change due to payments received

  (3,157)  (129)  (3,286)

Balance at December 31, 2021

 $7,024  $(190) $6,834 
             

Purchased Impaired Loans and Leases

            

Balance at December 31, 2020

 $109  $(59) $50 

Change due to payments received

  (50)  75   25 

Balance at December 31, 2021

 $59  $(09) $50 

 

As a result of the acquisitions, the Corporation has loans, for which there was at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans was $52,000 as of December 31, 2022 and $122,000 as of December 31, 2021 related to the Benchmark acquisition and $72,000 at  December 31, 2022 and $50,000  December 31, 2021 for the OSB acquisition.

 

There was no provision for loan and lease losses recognized for the years ended December 31, 2022 and 2021 related to the acquired loans as there was no significant change to the credit quality of the loans during the periods.

 

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan customers of the Corporation. Such loans are made in the ordinary course of business in accordance with the normal lending policies of the Corporation, including the interest rate charged and collateralization. Such loans amounted to $1,330,000 and $1,105,000 at December 31, 2022 and 2021 respectively. The following is a summary of activity during 2022, 2021 and 2020 for such loans:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 

Beginning of year

 $1,105  $965  $1,154 

Additions

  319   4   4 

Effect of change in composition of related parties

  27   331   - 

Repayments

  (121)  (195)  (193)

End of year

 $1,330  $1,105  $965 

 

Additions and repayments include loan and lease renewals, as well as net borrowings and repayments under revolving lines-of-credit.

 

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NOTE 5 - PREMISES AND EQUIPMENT

 

The following is a summary of premises and equipment at December 31, 2022 and 2021:

 

  

(in thousands)

 
  

2022

  

2021

 

Land and improvements

 $4,081  $4,081 

Buildings

  24,108   20,831 

Equipment

  7,198   7,222 
   35,387   32,133 

Less accumulated depreciation

  11,240   10,294 

Premises and equipment, net

 $24,147  $21,840 

 

Depreciation expense amounted to $1,250,000 in 2022, $1,204,000 in 2021 and $1,028,000 in 2020.

 

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NOTE 6 - 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 amounted to $262,757,000 and $263,593,000 at December 31, 2022 and 2021, respectively.

 

Mortgage servicing rights are included in other assets in the accompanying consolidated balance sheets. The Corporation 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, 2022 and 2021 include:

 

 Prepayment assumptions:Based on the PSA Standard Prepayment Model
 Internal rate of return: 8% to 11%
 

Servicing costs:

$75 – $90 per loan, annually, increased at the rate of $1 per 1% delinquency based on loan count

 Inflation rate of servicing costs: 3%
 Earnings rate:0.25%
   

    

Following is a summary of mortgage servicing rights activity for the years ended December 31, 2022, 2021 and 2020:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 

Fair value at beginning of year

 $1,868  $1,132  $1,061 

Capitalized servicing rights – new loan sales

  258   628   690 

Disposals (amortization based on loan payments and payoffs)

  (192)  (187)  (326)

Change in fair value

  437   295   (293)

Fair value at end of year

 $2,371  $1,868  $1,132 

 

The changes in fair value of servicing rights for the years ended December 31, 2022, 2021 and 2020 resulted from changes in external market conditions, including prepayment assumptions, which is a key valuation input used in determining the fair value of servicing. The prepayment assumption factor used in determining the fair value of servicing at December 31, 2022 was 114 compared to 180 at December 31, 2021 and 365 at December 31, 2020. The earnings rate used in determining the fair value of servicing was 0.25% in 2022, 2021 and 2020.

 
 

NOTE 7 - DEPOSITS

 

Time deposits at December 31, 2022 and 2021 include individual deposits greater than $250,000 of $18,258,000 and $8,240,000, respectively. Interest expense on time deposits greater than $250,000 amounted to $60,000 for 2022,$134,000 for 2021, and $186,000 for 2020.

 

At December 31, 2022, time deposits amounted to $125,777,000 and were scheduled to mature as follows: 2023,$75,725,000;2024,$40,938,000;2025,$6,312,000;2026,$1,390,000;2027,$1,269,000; and thereafter, $143,000.

 

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation. Such deposits amounted to $4,298,000 and $4,596,000at December 31, 2022 and 2021, respectively.

 

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NOTE 8 – FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS

 

Other borrowings consists of the following at December 31, 2022 and December 31, 2021:

 

 

(in thousands)

 

2022

  

2021

Federal Home Loan Bank 

      
CMA variable rate advances, interest rate of 4.42% payable monthly, principal due at maturity ranging from March 17, 2023 through March 30, 2023$

 23,548

  $

-

United Bankers Bank

      

Federal funds purchased

 

31

   

12

Revolving Line of Credit with interest at 7.25% payable quarterly, principal due at maturity September 1, 2023.  All Union Bank stock is held as collateral.

 

1,500

   

-

Note payable, with interest at 4.00% payable quarterly, and $250,000 principal payments, with any remaining unpaid principal, due December 1, 2028. All Union Bank stock is held as collateral.

 6,000   7,000

Total other borrowings

$31,079  $7,012

 

At December 31, 2022, the Corporation had $158,731,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan Bank and other financial institutions.

 

Future maturities of other borrowings are as follows:  2023, $26,079,000; 2024, $1,000,000; 2025, $1,000,000; 2026, $1,000,000; 2027, $1,000,000; 2028, $1,000,000.  

 

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NOTE 9 - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

 

The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (United Trust) which is not consolidated by the Corporation. United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation. The debentures have a stated maturity date of March 26, 2033. As of March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option. Interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR amounting to 7.87% at December 31, 2022, 3.37% at December 31, 2021, and 3.40% at December 31, 2020, 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.

 

The Corporation assumed $3,093,000 of trust preferred securities from the OSB acquisition with $3,000,000 of the liability guaranteed by the Corporation, and the remaining $93,000 secured by an investment in the trust preferred securities. The trust preferred securities have a carrying value of $2,709,000 at December 31, 2022 and $2,676,000 at December 31, 2021. The difference between the principal owed and the carrying value is due to the below-market interest rate on the debentures. The debentures have a stated maturity date of April 23, 2034. Interest is at a floating rate adjustable quarterly and equal to 285 basis points over the 3-month LIBOR amounting to 7.17% at December 31, 2022 and 2.97% at December 31, 2021.  Management has been evaluating the cessation of Libor and has sought legal advice surrounding the conversion to another index.  With several options still under consideration, utilizing the stated fallback SOFR rate is a viable and likely option and is not expected to result in a materially different interest rate.

 

Interest expense on the debentures amounted to $649,000in 2022, $429,000 in 2021, and $526,000 in 2020, 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.

 

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NOTE 10 - OTHER OPERATING EXPENSES

 

Other operating expenses consisted of the following for the years ended December 31, 2022, 2021 and 2020:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 

Data processing

 $1,931  $2,196  $1,801 

Professional fees

  1,346   1,031   1,294 

Ohio Financial Institution tax

  861   816   635 

Advertising

  1,750   2,284   2,077 

ATM processing and other fees

  930   840   745 

Amortization of core deposit intangible assets

  140   143   151 

Postage

  84   92   93 

Stationery and supplies

  172   155   146 

FDIC assessment

  300   271   231 

Loan closing fees

  967   1,592   2,035 

Deposit losses

  139   60   47 

Other

  2,606   2,039   2,153 

Total other operating expenses

 $11,226  $11,519  $11,408 

 

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NOTE 11 - INCOME TAXES

 

 

The provision for income taxes for the years ended December 31, 2022, 2021 and 2020 consist of the following:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 

Current

 $(127) $1,114  $3,711 

Deferred

  1,341   1,380   (789)

Total provision for income taxes

 $1,214  $2,494  $2,922 

 

The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of 21% in 2022, 2021, and 2020:

 

  

(in thousands)

 
  

2022

  

2021

  

2020

 

Expected tax using statutory tax rate

 $2,630  $3,376  $3,502 

Increase (decrease) in tax resulting from:

            

Tax-exempt income on state and municipal securities and political subdivision loans

  (790)  (619)  (472)

Tax-exempt income on life insurance contracts

  (228)  (85)  (77)

Deductible dividends paid to United Bancshares, Inc. ESOP

  (182)  (73)  (44)

Tax Credits

  (216)  (105)   

Other, net

  -   -   13 

Total provision for income taxes

 $1,214  $2,494  $2,922 

 

The deferred income tax provision (credit) of $1,341,000 in 2022, $1,380,000 in 2021, and ($789,000) in 2020 resulted from the tax effects of temporary differences.

 

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are presented below:

 

  

(in thousands)

 
  

2022

  

2021

 

Deferred tax assets:

        

Allowance for loan losses

 $1,977  $2,175 

Deferred compensation

  335   337 

Alternative minimum tax credits

  -   - 

Nonaccrual loan interest

  56   107 

Deferred loan fees

  193   211 

Accrued vacation expense

  107   - 

Accrued profit sharing

  211   - 

Loans fair value adjustments

  218   210 

Unrealized loss on securities available-for sale

  10,198   - 

Other

  86   149 

Net operating loss carryforwards

  278   420 

Total deferred tax assets

  13,659   3,609 

Deferred tax liabilities:

        

Federal Home Loan Bank stock dividends

  363   483 

Unrealized gain on securities available for sale

  -   1,062 

Capitalized mortgage servicing rights

  499   393 

Fixed asset depreciation

  500   830 

Acquisition intangibles

  1,873   1,886 

Trust preferred fair value adjustment

  62   67 

Other

  365   195 

Total deferred tax liabilities

  3,662   4,916 

Net deferred tax assets (liabilities)

 $9,997  $(1,307)

 

Net deferred tax assets liabilities at December 31, 2022 and 2021 are included in other assets and other liabilities in the consolidated balance sheets, respectively. 

 

The Corporation acquired $15.0 million in federal loss carryforwards with the 2014 acquisition of OSB, which losses expire in years ranging from 2029 to 2033.  Since the use of these losses is limited to $126,000 per year under Section 382 of the Internal Revenue Code, the Corporation recorded in deferred tax assets at the time of acquisition the tax benefit of only $2.5 million of the losses that were deemed more likely than not to be utilized before expiration. The Corporation also acquired $8.9 million in federal loss carryforwards with the 2017 acquisition of Benchmark, which losses expire in years ranging from 2029 to 2036.  Under Section 382 of the Internal Revenue Code, the annual limitation on the use of these losses is $652,000 subject to other adjustments.  At December 31, 2022, $1.3 million of loss carryforwards remained from these acquisitions, resulting in a benefit of $278,000, which was reflected in deferred tax assets.

 

The Corporation had no unrecognized tax benefits at December 31, 2022 and 2021.  The Corporation does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

 

There was no accrued interest related to uncertain tax positions at December 31, 2022 and December 31, 2021.

 

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 2017.  There are no current federal examinations of the Corporation’s open tax years.

 

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NOTE 12 - EMPLOYEE AND DIRECTOR BENEFITS

 

The Corporation sponsors a salary deferral, defined contribution plan which provides for both profit sharing and employer matching contributions. The plan permits 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 $1,261,000, $1,399,000, and $1,478,000 in 2022,2021, and 2020, respectively. At December 31, 2022, the plan owned 346,267 shares of the Corporation’s common stock.

 

The Corporation 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 Corporation has provided an estimated liability for accumulated supplemental retirement benefits amounting to $1,577,000 and $1,571,000 at December 31, 2022 and 2021, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. The Corporation has also purchased split-dollar life insurance policies for investment purposes and to fund other employee benefit plans. The combined cash values of these policies aggregated $19,207,000 and $19,383,000 at December 31, 2022 and 2021, 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 9,185 shares in 2022, 12,252 shares in 2021, and 3,889 shares in 2020 under the plan.

 

The Chief Executive Officer has an employment agreement which provides for certain compensation and benefits should any triggering events occur, as specified in the agreement, including change of control or termination without cause.

 

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NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Corporation 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 Corporation has in these financial instruments.

 

The Corporation’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 Corporation 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, 2022 and 2021:

 

  

(in thousands)

 
  

Contract amount

 
  

2022

  

2021

 

Commitments to extend credit

 $204,919  $198,423 

Letters of credit

 $319  $258 

 

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 Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation 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.

 

Letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation requires collateral supporting these commitments when deemed necessary.

 

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NOTE 14 - 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 Common Equity Tier 1 Capital (CET1) to risk-weighted assets (as defined), total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2022 and 2021, 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, 2022, 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 CET1, 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.

 

In July 2013 the U.S federal banking authorities approved the final rules (the “Basel III Capital Rules”) which established a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules have maintained the general structure of the current prompt corrective action framework, while incorporating provisions which will increase both the quality and quantity of the Bank’s capital. Generally, the Bank became subject to the new rules on January 1, 2015 with phase-in periods for many of the new provisions. Management believes the Bank is complying with the fully phased-in capital requirements.

 

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The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2022 and 2021 are presented in the following table:

 

                  

Minimum to be

 
                  

well capitalized

 
          

Minimum

  

under prompt

 
          

capital

  

corrective

 
  

Actual

  

requirement

  

action provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio (1)

  

Amount

  

Ratio

 
  

(Dollars in thousands)

 

As of December 31, 2022

                        

Common Equity Tier 1 Capital (CET1) (to Risk Weighted Assets)

                        

Consolidated

 $105,450   14.8% $49,733   ≥ 7.0%   N/A   N/A 

Bank

 $109,713   15.5% $49,609   ≥ 7.0%  $46,066   6.5%

Total Capital (to Risk Weighted Assets)

                        

Consolidated

 $114,851   16.2% $74,599   ≥ 10.5%   N/A   N/A 

Bank

 $118,585   16.7% $74,414   ≥ 10.5%  $70,870   10.0%

Tier 1 Capital (to Risk weighted Assets)

                        

Consolidated

 $105,450   14.8% $60,390   ≥ 8.5%   N/A   N/A 

Bank

 $109,713   15.5% $60,240   ≥ 8.5%  $56,696   8.0%

Tier 1 Capital (to Average Assets)

                        

Consolidated

 $105,450   10.1% $41,735   ≥ 4.0%   N/A   N/A 

Bank

 $109,713   10.1% $43,620   ≥ 4.0%  $54,524   5.0%

As of December 31, 2021

                        

Common Equity Tier 1 Capital (CET1) (to Risk Weighted Assets)

                        

Consolidated

 $98,857   14.4% $48,171   ≥ 7.0%   N/A   N/A 

Bank

 $102,235   14.9% $48,036   ≥ 7.0%  $44,604   6.5%

Total Capital (to Risk Weighted Assets)

                        

Consolidated

 $109,212   15.9% $72,256   ≥ 10.5%   N/A   N/A 

Bank

 $110,838   16.2% $72,053   ≥ 10.5%  $68,622   10.0%

Tier 1 Capital (to Risk weighted Assets)

                        

Consolidated

 $98,857   14.4% $58,493   ≥ 8.5%   N/A   N/A 

Bank

 $102,235   14.9% $58,329   ≥ 8.5%  $54,898   8.0%

Tier 1 Capital (to Average Assets)

                        

Consolidated

 $98,857   9.7% $40,685   ≥ 4.0%   N/A   N/A 

Bank

 $102,235   9.7% $42,033   ≥ 4.0%  $52,541   5.0%

 

(1) Includes capital conservation buffer of 2.5% as of December 31, 2021

 

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 (the “ODFI”), 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.

 

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NOTE 15 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION

 

A summary of condensed financial information of the parent company as of December 31, 2022 and 2021 and for each of the years in the three-year period ended December 31, 2022, is as follows:

 

Condensed Balance Sheets

        
  

(in thousands)

 

Assets:

 

2022

  

2021

 

Cash

 $421  $1,860 

Investment in bank subsidiary

  101,176   135,450 

Other assets

  1,791   1,930 

Total assets

 $103,388  $139,240 
         

Liabilities:

        

Junior subordinated deferrable interest debentures

 $13,009  $12,976 

Other borrowings

  7,500   7,000 

Other liabilities

  188   169 

Total Liabilities

  20,697   20,145 

Shareholders' equity

  82,691   119,095 

Total liabilities and shareholders’ equity

 $103,388  $139,240 

 

  

(in thousands)

 

Condensed Statements of Income

 

2022

  

2021

  

2020

 

Income – dividends from bank subsidiary

 $5,000  $5,000  $4,500 

Expenses – interest, professional fees and other expenses, net of federal income tax benefit and interest income

  (1,303)  (979)  (1,150)

Income before equity in undistributed net income of bank subsidiary

  3,697   4,021   3,350 

Equity in undistributed net income of bank subsidiary

  7,613   9,560   10,405 

Net income

 $11,310  $13,581  $13,755 

 

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(in thousands)

 

Condensed Statements of Cash Flows

 

2022

  

2021

  

2020

 

Cash flows from operating activities:

            

Net income

 $11,310  $13,581  $13,755 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Equity in undistributed net income of bank subsidiary

  (7,613)  (9,560)  (10,405)

Stock option expense

  222   183   164 

Depreciation and amortization

  34   35   34 

(Increase) decrease in other assets

  (334)  (537)  843 

Increase (decrease) in other liabilities

  19   (31)  (841)

Net cash provided by operating activities

  3,638   3,671   3,550 
             

Cash flows from financing activities:

            

Proceed from other borrowings

  1,500   7,000   - 

Principal payments on other borrowings

  (1,000)  (7,750)  (1,000)

Purchase of treasury stock

  (2,876)  (368)  - 

Proceeds from sale of treasury shares

  243   243   95 

Cash paid for cancellation of stock options

  -   -   (11)

Cash paid for net shares repurcahsed, stock option exercise

  (197)  (387)  - 

Cash dividends paid

  (2,747)  (2,394)  (1,668)

Net cash provided by (used in) financing activities

  (5,077)  (3,656)  (2,584)

Net increase (decrease) in cash

  (1,439)  15   966 

Cash at beginning of the year

  1,860   1,845   879 

Cash at end of the year

 $421  $1,860  $1,845 

 

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 130,553 shares in 2022 and 11,651 shares in 2021 (none in 2020) under the program.

 

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NOTE 16 - 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.

 

The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2022 and 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

  

(in thousands)

 

2022

 

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

Recurring:

                

Securities available-for-sale:

                

Obligations of state and political subdivisions

 $-  $136,329  $-  $136,329 

Mortgage-backed

  -   137,792   -   137,792 

U.S. Government agencies

  -   4,605   -   4,605 

Other

  2,558   2   -   2,560 

Mortgage servicing rights

  -   -   2,371   2,371 

Total recurring

 $2,558  $278,728  $2,371  $283,657 
                 

Nonrecurring:

                

Impaired Loans

  -   -   -   - 

 

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(in thousands)

 

2021

 

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

Recurring:

                

Securities available-for-sale:

                

Obligations of state and political subdivisions

 $-  $150,784  $-  $150,784 

Mortgage-backed

  -   152,570   -   152,570 

U.S. Government agencies

     2,483      2,483 

Other

  1,803   2   -   1,805 

Mortgage servicing rights

  -   -   1,868   1,868 

Total recurring

 $1,803  $305,839  $1,868  $309,510 
                 

Nonrecurring:

                

Impaired Loans

 $-  $-   -   - 

 

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, 2022, 2021 and 2020:

 

  

(in thousands)

 

Mortgage Servicing Rights

 

2022

  

2021

  

2020

 

Balance at beginning of year

 $1,868  $1,132  $1,061 

Gains or losses, including realized and unrealized:

            

Purchases, issuances, and settlements

  258   628   690 

Disposals – amortization based on loan payments and payoffs

  (192)  (187)  (326)

Changes in fair value

  437   295   (293)

Balance at end of year

 $2,371  $1,868  $1,132 

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, and disclosure of unobservable inputs follows.

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

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Securities Available-for-Sale

 

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government and agencies, 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.

 

Mortgage Servicing Rights

 

The Corporation records mortgage servicing rights at estimated fair value based on a discounted cash flow model which includes discount rates between 9% and 11%, in addition to assumptions disclosed in Note 6 that are considered to be unobservable inputs. Due to the significance of the level 3 inputs, mortgage servicing rights have been classified as level 3.

 

Impaired Loans

 

The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral less estimated cost to sell, if repayment is expected solely from collateral. Collateral values are estimated using level 2 inputs, including market valuations and recent appraisals and level 3 inputs based on customized discounting criteria such as additional appraisal adjustments to consider deterioration of value subsequent to appraisal date and estimated cost to sell. Additional appraisal adjustments range between 10% and 30% of market value, and estimated selling cost ranges between 10% and 20% of the adjusted appraised value.  Due to the significance of the level 3 inputs, impaired loans fair values have been classified as level 3.

 

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NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2022 and 2021 are as follows:

 

  

(in thousands)

    
  

2022

  

2021

    
  

Carrying Amount

  

Estimated Value

  

Carrying Amount

  

Estimated Value

  

Input Level

 

FINANCIAL ASSETS

                   

Cash and cash equivalents

 $30,680  $30,680  $75,202  $75,202  1 

Securities, including FHLB stock

  285,146   285,146   312,771   312,771  2,3 

Loans held for sale

  3,970   3,970   9,146   9,146  3 

Net loans and leases

  674,174   662,217   599,204   600,512  3 

Mortgage servicing rights

  2,371   2,371   1,868   1,868  3 

Hedging assets

  215   215   922   922  3 

Total financial assets

 $996,556  $984,599  $999,113  $1,000,421    

 

 

  

(in thousands)

    
  

2022

  

2021

    
  

Carrying Amount

  

Estimated Value

  

Carrying Amount

  

Estimated Value

  

Input Level

 

FINANCIAL LIABILITIES

                   

Deposits

                   

Maturity

 $125,777  $122,209  $129,447  $129,196  3 

Non-maturity

  828,106   828,106   800,966   800,966  1 

Fed funds purchased and other borrowings

  31,079   31,079   7,012   7,012  3 

Junior subordinated deferrable interest debentures

  13,009   9,608   12,976   10,931  3 

Hedging liabilities

  10   10   46   46  3 

Total financial liabilities

 $997,981  $991,012  $950,447  $948,151    

 

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, and would be considered Level 1 inputs.

 

There are also unrecognized financial instruments at December 31, 2022 and 2021 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounts to $205.2 million at December 31, 2022 and $198.7 million at December 31, 2021. 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:

 

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 3 at December 31, 2022 or 2021.

 

Loans:

 

Loans originated and intended for sale in the secondary market are carried at the estimated fair value in the aggregate. Estimated fair value is determined based on quoted market prices in the secondary market.

 

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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.  The fair value disclosures for both fixed and adjustable-rate loans were adjusted to reflect the exit price amount anticipated to be received from the sale of the loans in an open market transaction.

 

Mortgage servicing rights:

 

The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.

 

Derivative assets and liabilities:

 

The fair value of derivative assets and liabilities are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date.

 

Deposit liabilities:

 

The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at 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.  The fair value disclosures for all of the deposits were adjusted to reflect the exit price amount anticipated to be received from sale of the deposits in an open market transaction.

 

Other 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 fed funds purchased and other borrowings is determined to be the carrying value due to the short-term to maturity of these borrowings. The fair value of the junior subordinated deferrable interest debentures is determined based on quoted market prices of similar instruments.

 

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.

 

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NOTE 18 – REVENUE RECOGNITION

 

The Corporation’s revenue from contracts with customers within the scope of ASC 606 is recognized in noninterest income.  The material groups of noninterest income are defined as follows:

 

Service charges on deposit accounts: 

Service charges on deposit accounts primarily consist of account analysis fees, monthly maintenance fees, overdraft fees, and other deposit account related fees.  Overdraft fees and certain service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction.  The consideration for analysis fees and monthly maintenance fees are variable as the fee can be reduced if the customer meets certain qualifying metrics.  The Company’s performance obligations are satisfied at the time of the transaction or over the course of a month.

 

Interchange fee income: 

The Company earns interchange fees from debit and credit cardholder transactions conducted through the MasterCard payment network.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrently with the transaction processing services provided to the cardholder.

 

Wealth management income: 

The Company earns wealth management and investment brokerage fees from its services with customers to manage assets for investment, to provide advisory services, and for account transactions.  Fees are based on the market value of the assets under management and are recognized monthly as the Company’s performance obligations are met.  Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed.  Other related services are based on a fixed fee schedule and the revenue is recognized when the services are rendered, which is when the Company has satisfied its performance obligation. 

 

The following table presents the Company’s non-interest income for the years ended December 31, 2022, 2021 and 2020.  Items outside the scope of ASC 606 are noted as such.

 

  

Year ended December 31,

 
  

2022

  2021  

2020

 

Service charges on deposit accounts

 $1,232  $1,090  $1,102 

Gain on sale of loans (1)

  1,870   13,468   24,139 

Net securities gains (losses) (1)

  (114)  (16)  289 

Change in fair value of mortgage servicing rights (1)

  437   295   (293)

Increase in cash surrender value of life insurance (1)

  1,166   402   368 

Credit and debit card interchange fees

  1,788   1,806   1,514 

Wealth management

  480   420   319 

Net loan servicing fees (1)

  550   512   262 

Other non-interest income (expense)

  2,545   (631)  (700)

Total non-interest income

 $9,954  $17,346  $27,000 

 

(1) Not within the scope of ASC 606

 

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NOTE 19 – LEASING ARRANGEMENTS

 

The Corporation leases various branch facilities under operating leases. Rent expense was $396,000,$406,000, and $424,000 for the years ended December 31, 2022, 2021 and 2020, respectively.  A right-of-use asset, included in other assets, and lease liability, included in other liabilities, were both $1,364,000 at December 31, 2022 and $1,658,000 at December 31, 2021.

 

The following is a schedule of future minimum rental payments required under the facility leases as of December 31, 2022:

 

Year ending

 

Amount

 

December 31,

 

(in thousands)

 

2023

 $263 

2024

  264 

2025

  244 

2026

  116 

2027

  52 

Thereafter

  750 
Total  1,689 
Present value discount  (325) 

Total

 $1,364 

 

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NOTE 20 – STOCK-BASED COMPENSATION

 

The United Bancshares, Inc.2016 Stock Option Plan (the “Plan”) permits the Corporation to award non-qualified stock options to eligible participants. There are no remaining shares available for issuance pursuant to the Plan.

 

The Corporation issued 35,966 options during 2022 at an exercise price of $23.10, 21,958 options during 2021 at an exercise price of $34.60, and 63,858 options during 2020 at an exercise price of $16.77 under the Plan. Following is a summary of activity for stock options for the years ended December 31, 2022, 2021 and 2020 (number of shares):

 

  

2022

  

2021

  

2020

 

Outstanding, beginning of year

  133,792   157,817   117,647 

Granted

  35,966   21,958   63,858 

Exercised

  (23,356)  (33,324)  - 

Cancelled

  -   -   (2,955)

Forfeited

  

(3,224

)  (12,659)  (20,733)

Outstanding, end of year

  143,178   133,792   157,817 

Weighted average exercise price at end of year

 $22.71  $22.28  $19.83 

 

The options vest over a three-year period on the anniversary of the date of grant. At December 31, 2022, 79,462 options were vested and outstanding options had a weighted average remaining contractual term of 7.7 years.

 

The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. Following are assumptions used in calculating the fair value of the options granted in 2022, 2021 and 2020:

 

  

2022

  

2021

  

2020

 

Weighted-average fair value of options granted

 $6.95  $11.19  $4.83 

Average dividend yield

  3.64%  2.23%  2.93%

Expected volatility

  40.00%  40.00%  40.00%

Risk-free interest rate

  2.90%  1.00%  0.49%

Expected term (years)

  7   7   7 

Shares Granted

  35,966   21,958   63,858 

Exercise Price

 $23.10  $34.60  $16.77 

 

Total compensation expense related to the stock options granted in 2022, net of forfeitures, is expected to be $250,000 and is being recognized ratably over the 36-month period beginning July 1, 2022.  Total compensation expense related to the stock options granted in 2021, net of forfeitures, is expected to be $242,000 and is being recognized ratably over the 36-month period beginning July 1, 2021. Total compensation expense related to the stock options granted in 2020, net of forfeitures, is expected to be $252,000 and is being recognized ratably over the 36-month period beginning July 1, 2020.  Stock option expense for outstanding awards amounted to $222,000, $183,000 and $164,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

 
 

NOTE 21 - 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.

 

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NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)

 

The following represents a summary of selected unaudited quarterly financial data for 2022 and 2021:

 

  

(in thousands, except share data)

 
      

Net

      

Net Income

 
  

Interest

  

Interest

  

Net

  

Per Share

 
  

Income

  

Income

  

Income

  

Basic

  

Diluted

 

2022

                    

First quarter

 $8,765  $8,202  $2,520  $0.77  $0.76 

Second quarter

 $9,253  $8,682  $2,170  $0.66  $0.65 

Third quarter

 $10,126  $9,329  $3,086  $0.94  $0.94 

Fourth quarter

 $10,798  $9,471  $3,534  $1.10  $1.10 
                     

2021

                    

First quarter

 $9,490  $8,655  $4,117  $1.26  $1.24 

Second quarter

 $9,249  $8,436  $2,655  $0.81  $0.80 

Third quarter

 $10,648  $9,903  $4,092  $1.24  $1.22 

Fourth quarter

 $9,417  $8,741  $2,717  $0.83  $0.81 

 

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OFFICERS - UNITED BANCSHARES, INC.

Brian D. Young - President/Chief Executive Officer
Klint D. Manz- Chief Financial Officer

Denise E. Giesige - Secretary
     

OFFICERS - THE UNION BANK COMPANY

Brian D. Young - President/CEO/Chairman 
Klint D. Manz- Chief Financial Officer/Chief Lending Officer

Denise E. Giesige - Secretary/Human Resource Manager
Stacey L. Clemens- Chief Risk Officer

Teresa M. Deitering - Chief Credit Officer
Brent D. Nussbaum- Chief Operations Officer
Travis E. Vulich - Mortgage Division Manager
     

 

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UNITED BANCSHARES, INC.

Columbus Grove, Ohio

 

 

DIRECTORS – UNITED BANCSHARES, INC.

 

NAME

AGE

DIRECTOR

 SINCE

NAME

AGE

DIRECTOR

SINCE

Robert L. Benroth

 60

2003

Daniel W. Schutt

75

2005

Putnam County Auditor

 

 

Chairman, Retired Banker

 

 

 

 

 

 

 

 

Herbert H. Huffman

 72

2018

R. Steven Unverferth

70

2005

Retired - Educator

 

 

Chairman, Unverferth Manufacturing Corporation, Inc.

 

 

 

 

 

 

 

 

H. Edward Rigel

 80

2000

Brian D. Young

56

2012

Farmer, Rigel Farms, Inc.

 

 

President/CEO

 

 

 

 

 

 

 

 

David P. Roach

 72

2001

 

 

 

Vice-President/GM, First Family Broadcasting of Ohio

 

 

 

 

 

  

 

DIRECTORS – THE UNION BANK COMPANY

 

NAME

AGE

DIRECTOR

SINCE (a)

NAME

AGE

DIRECTOR

SINCE (a)

Robert L. Benroth

 60

2001

 David P. Roach 72

1997

Putnam County Auditor

 

 

 Vice-President/GM, First Family Broadcasting of Ohio 

 

 

 

 

 

 

 

 

Anthony M.V. Eramo

 57

2016

 Carol R. Russell 68

2019

Managing Director, MountainView Financial Solutions

 

 

 President/CEO, Schulte Group

 

 

 

 

 

 

 

 

Herbert H. Huffman

 72

1993

Daniel W. Schutt

75

2005

Retired - Educator

 

 

Retired Banker

 

 

 

 

 

 

 

 

Kevin L. Lammon

 68

1996

R. Steven Unverferth

70

1993

Village Administrator, Village of Leipsic

 

 

Chairman, Unverferth Manufacturing Corporation, Inc

 

 

 

 

 

 

 

 

William R. Perry

 64

1990

Dr. Jane M. Wood

 55

2021

Farmer

 

 

 President, Bluffton University

 

 

 

 

 

 

 

 
H. Edward Rigel 80 1979

Brian D. Young

 56

2008

Farmer, Rigel Farms, Inc.

 

 

President/CEO/Chairman

 

 

 

 

 

(a)

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

 

 

 

 

 

 

 

 

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