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UBOH > SEC Filings for UBOH > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for UNITED BANCSHARES INC/OH

Form 10-Q for UNITED BANCSHARES INC/OH


1-Nov-2012

Quarterly Report


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

SELECTED FINANCIAL DATA

The following data should be read in conjunction with the unaudited consolidated
financial statements and management's discussion and analysis that follows:

                                           As of or for the Three             As of or for the Nine
                                                Months Ended                      Months Ended
                                                September 30,                     September 30,
                                           2012              2011            2012              2011
SIGNIFICANT RATIOS (Unaudited)
Net income to:
Average assets (a)                             0.76 %            0.17 %          0.77 %            0.45 %
Average shareholders' equity (a)               7.03 %            1.70 %          7.18 %            4.69 %
Net interest margin (a)                        3.63 %            3.61 %          3.51 %            3.69 %
Efficiency ratio (b)                          70.20 %           69.75 %         71.14 %           63.08 %
Average shareholders' equity to
average assets                                10.83 %            9.94 %         10.77 %            9.54 %
Loans to deposits (end of period)             71.20 %           72.63 %         71.20 %           72.63 %
Allowance for loan losses to loans
(end of period)                                2.24 %            2.42 %          2.24 %            2.42 %

Book value per share                    $     18.49       $     16.99     $     18.49       $     16.99

(a) Net income to average assets, net income to average shareholders' equity and net interest margin are presented on an annualized basis. Net interest margin is calculated using fully-tax equivalent net interest income as a percentage of average interest earning assets.

(b) Efficiency ratio is a ratio of non-interest expense as a percentage of fully tax equivalent net interest income plus non-interest income.


Introduction

United Bancshares, Inc. (the "Corporation"), an Ohio corporation, is a bank 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 100 S. High Street, Columbus Grove, Ohio 45830. The Corporation is a one-bank holding company, as that term is defined by the Federal Reserve Board.

The Union Bank Company ("the Bank"), a wholly-owned subsidiary of the Corporation, is engaged in the business of commercial banking. The Bank is an Ohio state-chartered bank, which serves Allen, Hancock, Putnam, Sandusky, Van Wert and Wood counties in Ohio, with office locations in Bowling Green, Columbus Grove, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville, Ohio.

The Bank offers a full range of commercial banking services, including checking accounts, savings and money market accounts, time certificates of deposit, automatic teller machines, commercial, consumer, agricultural, residential mortgage and home equity loans, credit card services, safe deposit box rentals, and other personalized banking services. The Bank has formed 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 UBC Property, Inc. to hold and manage certain other real estate owned.

When or if used in the Corporation's Securities and Exchange Commission filings or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases: "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "is estimated," "is projected," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to the risks and uncertainties that include but are not limited to: changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation's market area, and competition. All or some of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in the levels of market interest rates, credit and other risks associated with lending and investing activities, and competitive and regulatory factors could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

The Corporation is registered as a Securities Exchange Act of 1934 reporting company.

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of the financial results.


RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended September 30, 2012, the Corporation reported net income of $1,104,000, or $0.32 basic earnings per share. This compares to the third quarter of 2011 net income of $247,000, or $0.07 basic earnings per share. The increase in operating results for the third quarter of 2012 as compared to the same period in 2011 was primarily attributable to a $1,200,000 decrease in the provision for loan losses, a $148,000 increase in non-interest income, and a $4,000 decrease in non-interest expenses offset by a decrease in net interest income of $167,000, and the related income tax effects of these items.

Net income for the nine months ended September 30, 2012 totaled $3,309,000, or $0.96 basic earnings per share compared to $2,001,000 or $0.58 basic earnings per share for the same period in 2011. Compared with the same period in 2011, net income increased $1,308,000, or 65.4%. The increase for the nine month period ended September 30, 2012, as compared to the nine month period ended September 30, 2011, was primarily the result of an increase in non-interest income of $105,000 and a decrease in the provision for loan losses of $3,775,000, offset by a decrease in net interest income of $1,276,000, an increase in non-interest expenses of $604,000, and an increase in the provision for income taxes of $691,000.

Net Interest Income

Net interest income is the amount by which income from interest-earning assets exceeds interest incurred on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities while interest-bearing liabilities include interest-bearing deposit accounts and borrowed funds. Net interest income remains the primary source of revenue for the Corporation. Changes in market interest rates, as well as changes in the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income. Net interest income was $4,501,000 for the third quarter of 2012, compared to $4,668,000 for the same period of 2011, a decrease of $167,000 (3.6%). For the nine months ended September 30, 2012, net interest income was $13,340,000 compared to $14,616,000 for the same period of 2011, a decrease of $1,276,000 (8.7%).

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the quarterly and nine month periods ended September 30, 2012, the net interest margin (on a taxable equivalent basis) was 3.63% and 3.51%, respectively, compared with 3.61% and 3.69% for the same periods in 2011.

Deposits comprised 91.1% of average interest-bearing liabilities for the nine month period ended September 30, 2012, compared to 89% for the same period in 2011. A lower overall interest rate environment resulted in the Corporation's cost of funds being 1.13% for the first nine months of 2012 compared to 1.56% for the same period in 2011. This decrease in cost of funds was offset by a decrease in the yield of interest-earning assets (4.46% for the first nine months of 2012 compared to 5.05% for the same period of 2011) which negatively impacted the net interest margin.

Provision for Loan Losses

The Corporation's provision for loan losses is determined based upon management's calculation of the allowance for loan losses and is reflective of management's assessment of the quality of the portfolio and overall management of the inherent credit risk of the loan portfolio. Changes in the provision for loan losses are dependent, among other things, on loan delinquencies, collateral position, portfolio risks and general economic conditions in the Corporation's lending markets. A $200,000 provision for loan losses was made during the third quarter of 2012 compared to a $1,400,000 provision for the same period in 2011. For the nine month period ended September 30, 2012 a $200,000 provision for loan losses was made, and a $3,975,000 provision was made for the comparable period of 2011. The decrease in the provision for loan losses resulted primarily from declining historic loss rates, which are used to calculate the reserve for the homogenous pool of loans, a decrease in risk rated loans and an overall decrease in the loan portfolio. See "Allowance for Loan Losses" under Financial Condition for further discussion relating to the provision for loan losses.


Non-Interest Income

The Corporation's non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgage loans, customer deposit account fees, earnings on life insurance policies, income arising from sales of investment products to customers, and occasional security sale transactions. Income related to customer deposit accounts and Bank Owned Life Insurance provides a relatively steady flow of income while the other sources are more volume or transaction related and consequently can vary from quarter to quarter. For the quarter ended September 30, 2012, non-interest income was $955,000, compared to $807,000 for the third quarter of 2011, a $148,000 (18.3%) increase.

Gain on sales of loans amounted to $319,000 for the quarter ended September 30, 2012, compared to $63,000 for the third quarter of 2011, an increase of $256,000. Quarterly gains on sale of loans included capitalized servicing rights of $55,000 and $41,000 for the periods ended September 30, 2012 and 2011, respectively. Gain on sales of loans amounted to $859,000 for the nine months ended September 30, 2012 compared to $276,000 for the comparable period in 2011, an increase of $583,000. Gain on sales of loans for the nine month period included capitalized servicing rights of $251,000 in 2012 and $91,000 in 2011. The increase in gain on sale of loans corresponds with the increase in loan sales activity. Loan sales for the first nine months of 2012 were $47.5 million, compared to $14.2 million for the first nine months of 2011.

The fair value of mortgage servicing rights decreased $81,000 for the quarter ended September 30, 2012, compared to a $318,000 decrease for the quarter ended September 30, 2011. For the nine month period ended September 30, 2012, there was a decrease in fair value of mortgage servicing rights of $69,000, compared to a decrease in fair value of mortgage servicing rights of $263,000 for the nine months ended September 30, 2011.

Gain on sales of securities amounted to $27,000 for the quarter ended September 30, 2012, compared to $253,000 for the third quarter of 2011, a decrease of $226,000 (89.3%). Gain on sales of securities amounted to $268,000 for the nine months ended September 30, 2012 compared to $893,000 for the comparable period in 2011, a decrease of $625,000 (70%).

Non-Interest Expenses

For the quarter ended September 30, 2012, non-interest expenses were $3,989,000, compared to $3,992,000 for the third quarter of 2011, a $3,000 (0.1%) decrease. For the nine month period ended September 30, 2012, non-interest expenses totaled $12,197,000, compared to $11,593,000 for the comparable period of 2011, an increase of $604,000 (5.2%). The increase in non-interest expenses for the nine month period ended September 30, 2012 was primarily attributable to a $456,000 increase in salaries and benefits, a $212,000 increase in other real estate owned expenses, an $87,000 increase in ATM/debit card processing expenses, and a $75,000 increase in loan closing fees, offset by a $216,000 decrease in FDIC premium expenses and a $132,000 decrease in asset management legal expenses. The increase in salaries and benefits resulted primarily from filling vacant and new positions, coupled with a slight increase due to annual salary and benefit increases.

Maintaining acceptable levels of non-interest expenses and operating efficiency are key performance indicators for the Corporation in its strategic initiatives. The financial services industry uses the efficiency ratio (total non-interest expense as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance. For the quarter ended September 30, 2012, the Corporation's efficiency ratio was 70.2%, compared to 69.75% for the same period of 2011. For the nine month period ended September 30, 2012, the Corporation's efficiency ratio was 71.1%, compared to 63.1% for the same period of 2011. The efficiency ratio was negatively impacted by the decrease in net interest income and the increase in non-interest expenses for the nine month period ended September 30, 2012 compared to the same period of 2011.


Provision for Income Taxes

The provision (credit) for income taxes for the quarter ended September 30, 2012 was $164,000, compared to $(164,000) for the comparable 2011 period. The provision for income taxes for the nine month period ended September 30, 2012 was $746,000, or 18.4% of income before income taxes, compared to $55,000 or 2.7% for the comparable 2011 period. The effective tax rate for the nine months ended September 30, 2011 was low due to tax exempt income from securities and loans, as well as bank-owned life insurance comprising approximately 71% of the Corporation's income before income taxes. For the nine month periods ended September 30, 2012 and 2011, the provision for income taxes was also reduced by an $80,000 and $50,000 FIN 48 reserve that was established under the Tax Equity and Fiscal Responsibility Act (TEFRA) being reversed back into income.

Return on Assets

Return on average assets was 0.76% for the third quarter of 2012, compared to 0.17% for the third quarter of 2011. For the nine month period ended September 30, 2012, return on average assets was 0.77%, compared to 0.45% for the same period of 2011.

Return on Equity

Return on average shareholders' equity for the third quarter of 2012 was 7.03%, compared to 1.7% for the same period of 2011. Return on average equity for the nine months ended September 30, 2012 was 7.18%, compared to 4.69% for the same period in 2011.

The Corporation and Bank met all regulatory capital requirements as of September 30, 2012, and the Bank is considered "well capitalized" under regulatory and industry standards of risk-based capital.


FINANCIAL CONDITION

Overview of Balance Sheet

Total assets amounted to $555.2 million at September 30, 2012, compared to $587 million at December 31, 2011, a decrease of $31.8 million, or 5.4%. The decrease in total assets was primarily the result of a decrease of $32.5 million (56.7%) in cash and cash equivalents, a decrease of $16.4 million (4.9%) in gross loans, and a $1 million (35.3%) decrease in other real estate owned, offset by an increase in available-for-sale securities of $15.8 million (10.4%). Deposits during this same period decreased $24.5 million, or 5.1%.

Shareholders' equity increased from $59.7 million at December 31, 2011 to $63.7 million at September 30, 2012. This increase was the result of net income ($3,309,000), the issuance of 626 treasury shares under the Corporation's Employee Stock Purchase Plan ($11,000), and a $641,000 increase in unrealized securities gains, net of tax. The increase in unrealized securities gains during the nine month period ended September 30, 2012, was the result of customary and expected changes in the bond market. Net unrealized gains on securities are reported as accumulated other comprehensive income in the consolidated balance sheets.

Cash and Cash Equivalents

Cash and cash equivalents totaled $24.8 million at September 30, 2012, compared to $57.3 million at December 31, 2011. Cash and cash equivalents at September 30, 2012 includes interest-bearing deposits in other banks of $16.7 million compared to $48.4 million at December 31, 2011. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation's present liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and corresponding liquidity sources and uses. Management believes the Corporation's liquidity needs in the near term will be satisfied by the current level of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that will mature within one year. These sources of funds should enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.

Securities

Management monitors the earnings performance and liquidity of the securities portfolio on a regular basis through Asset/Liability Committee (ALCO) meetings. As a result, all securities, except FHLB stock, have been designated as available-for-sale and may be sold if needed for liquidity, asset-liability management or other reasons. Such securities are reported at fair value, with any net unrealized gains or losses reported as a separate component of shareholders' equity, net of related incomes taxes.

The amortized cost and fair value of available-for-sale securities as of September 31, 2012 totaled $161.3 million and $167.7 million, respectively, resulting in net unrealized gains of $6.4 million and a corresponding after tax increase in shareholders' equity of $4.2 million. The amortized cost of available-for-sale securities increased $15.8 million from December 31, 2011.

Loans

The Corporation's lending is primarily centered in Northwestern and West Central Ohio. Gross loans totaled $321.5 million at September 30, 2012, compared to $337.9 million at December 31, 2011, a decrease of $16.4 million (4.9%). The Bank has continued to experience soft loan demand in its lending markets. The decrease in loan balances during the first nine months of 2012 resulted primarily from a decline in loan origination activity, normal pay downs and runoff on current loans, and a continued focus by the Bank's credit administration department to identify and dispose of or reduce problem credits.


Allowance for Loan Losses

The following table presents a summary of activity in the allowance for loan
losses for the nine months ended September 30, 2012 and 2011, respectively:

                                 (dollars in thousands)

                                       2012           2011
Balance, beginning of period   $      8,543       $  8,017
Provision for loan losses               200          3,975

Charge offs                          (1,902 )       (3,879 )
Recoveries                              360            329
Net charge offs                      (1,542 )       (3,550 )

Balance, end of period         $      7,201       $  8,442

The allowance for loan losses as a percentage of gross loans was 2.24% at September 30, 2012 and 2.53% at December 31, 2011. The increased allowance for loan losses as a percentage of gross loans over the past few years is attributable to the higher level of charge-offs experienced by the Bank, continued distress in the overall quality of the loan portfolio as evidenced by the level of classified credits, and continued concerns with the prolonged economic downturn.

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the portfolio. Even though management uses all available information to assess possible loan losses, future additions or reductions to the allowance may be required as changes occur in economic conditions and specific borrower circumstances. The regulatory agencies that periodically review the Bank's allowance for loan losses may also require additions to the allowance or the charge-off of specific loans based upon the information available to them at the time of their examinations.

Loans on non-accrual status amounted to $17.9 million and $21.7 million at September 30, 2012 and December 31, 2011, respectively. Non-accrual loans as a percentage of outstanding loans amounted to 5.6% at September 30, 2012, compared to 5.1% at December 31, 2011.

The Bank considers a loan to be impaired when it becomes probable that the Bank will be unable to collect under the contractual terms of the loan, based on current information and events. Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $16.1 million at September 30, 2012 and $21 million at December 31, 2011. Impaired loans at September 30, 2012 and December 31, 2011, included $5.7 million and $7.7 million, respectively, of loans with no specific reserves included in the allowance for loan losses and $10.4 million and $13.3 million, respectively, of loans with specific reserves of $2.6 million and $2 million included in the Bank's September 30, 2012 and December 31, 2011 allowance for loan losses.

In addition to impaired loans, the Bank had other potential problem credits of $19.9 million at September 30, 2012 and $24.6 million at December 31, 2011. The Bank's credit administration department continues to closely monitor these credits.

The Bank provides pooled reserves for potential problem loans using loss rates calculated considering historic net loan-charge off experience. The Bank has experienced $1.5 million of net loan charge-offs during the first nine months of 2012 compared to annual net loan charge-offs of $3.8 million in 2011, $3.3 million in 2010, and $5.9 million in 2009, with most of the charge-offs coming from the commercial and commercial real estate loan portfolios. The Bank also provides general reserves for the remaining portion of its loan portfolio not considered to be problem or potential problem loans. These general reserves are also calculated considering, among other things, the historic net charge-off experience for the relative loan type. The negative provision of $1.3 million to the commercial loan portfolio segment during the first nine months of 2012 resulted from a decrease in commercial loan balances, a decrease in specific reserves allocated to the commercial segment, and a decrease in historic loss rates applied to calculate reserves. During the first nine months of 2012, historic loss rates applied to commercial loans decreased significantly as the 2009 charge-offs become less of a factor in the calculation. During the same period, there was a $1.8 million provision charged to expenses for the commercial and multi-family real estate portfolio, with $1.2 million being related to two impaired credits.


Funding Sources

The Corporation considers a number of alternatives, including but not limited to, deposits, as well as short-term and long-term borrowings when evaluating funding sources. Deposits, including customer deposits, brokered certificates of deposit, and public funds deposits, continue to be the most significant source of funds for the Corporation, totaling $456 million, or 93.5% of the Corporation's funding sources at September 30, 2012. Total deposits decreased $24.5 million during the nine months ending September 30, 2012.

Non-interest bearing deposits remain a smaller portion of the funding source for the Corporation than for most of its peers. Non-interest bearing deposits comprised 14% of total deposits at September 30, 2012, compared to 11.5% at September 30, 2011.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. Other borrowings consisted of FHLB borrowings totaling $17.5 million at September 30, 2012 and $27.6 million at December 31, 2011, and customer repurchase agreements totaling $3.7 million and $5.2 million at September 30, 2012 and December 31, 2011, respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of $10.3 million at September 30, 2012 and December 31, 2011. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Shareholders' Equity

For the nine month period ended September 30, 2012, the Corporation had net income of $3,309,000. The increase in net unrealized gains on available-for-sale securities, net of income taxes, was $641,000 and $1,528,000 for the nine months ended September 30, 2012 and 2011, respectively. Since all of the securities in the Corporation's portfolio are classified as available-for-sale, both securities and the equity section of the consolidated balance sheets are sensitive to the changing market values of securities.

The Corporation has also complied with the standards of capital adequacy mandated by the banking industry. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets) is assigned to each asset on the balance sheet and to certain off-balance sheet commitments.


Liquidity and Interest Rate Sensitivity

The objective of the Corporation's asset/liability management function is to maintain consistent growth in net interest income through management of the Corporation's balance sheet liquidity and interest rate exposure based on changes in economic conditions, interest rate levels, and customer preferences.

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