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United Bancshares, Inc. and Subsidiary
Overview of the Income Statement
For the quarter ended March 31, 2009, the Corporation reported net income of $1,432,000, or $0.42 basic earnings per share. This compares to first quarter 2008 net income of $945,000, or $0.27 basic earnings per share. Compared with the same period in 2008, first quarter 2009 net income increased $487,000 or 51.5%. The $487,000 increase for the quarter was primarily the result of a $426,000 increase in non-interest income, a decrease of $807,000 in interest expense, and a decrease of $58,000 in non-interest expenses offset by a decrease of $266,000 in interest income, an increase of $325,000 in the provision for loan losses and an increase in the provision for income taxes of $213,000.
Interest Income and Expense
Net interest income is the amount by which interest 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 $5,040,000 for the first quarter of 2009, compared to $4,499,000 for the same period of 2008, an increase of $541,000 (12.0%). This increase was mostly due to a $55 million increase in average interest-earning assets for the first quarter of 2009 as compared to the same period in 2008, as well as a slight increase in the net interest margin. The increase in average interest-earnings assets included a $46 million increase in loans.
Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the three months ended March 31, 2009, the net interest margin (on a taxable equivalent basis) was 3.66% compared with 3.62% for the same period of 2008. The increase in the net interest margin for the first quarter of 2009 as compared to the first quarter of 2008 primarily resulted from the decrease in the cost of interest bearing deposits (2.58% in 2009 compared to 3.57% in 2008) having a greater impact on the net interest margin than the decrease in the yield of interest-earning assets (5.98% in 2009 compared to 6.80% in 2008).
Provision for Loan Losses
The 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 $600,000 provision for loan losses was made for the first quarter of 2009 compared to a $275,000 provision for the same period in 2008. The increase in the provision for loan losses for the first quarter of 2009 as compared to the first quarter of 2008 is attributable to an increase in problem and potential problem loans as well as Union's charge-off experience. During the quarter ended March 31, 2009, Union recorded a $183,000 provision for loan losses relating to impaired loans and a $103,000 provision for potential problem loans. See “Allowance for Loan Losses” under Financial Condition for further discussion of 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.
Gain on sales of loans amounted to $417,000 for the quarter ended March 31, 2009, compared to $93,000 for the first quarter of 2008, an increase of $324,000. The quarterly gains included capitalized servicing rights of $181,000 and $21,000 on $20.8 million and $2.5 million of originated loan sales during the quarters ended March 31, 2009 and 2008, respectively. The balance of the gain on sales of loans represented cash gains. The significant increase in loan sales activity for the first quarter of 2009 as compared to 2008 is attributable to the significant decline in mortgage interest rates during the fourth quarter of 2008 and first quarter of 2009. Despite the significant loan sales activity experienced during the first quarter of 2009, Union's serviced portfolio remained essentially unchanged increasing only $1.5 million to $189.0 million at March 31, 2009.
The fair value of mortgage servicing rights decreased $56,000 for the quarter ended March 31, 2009 compared to $251,000 for the quarter ended March 31, 2008. Amortization of mortgage servicing rights, which is reported as a reduction of servicing income (other non-interest income in the accompanying condensed consolidated statements of income), amounted to $73,000 for the quarter ended March 31, 2009 compared to $80,000 for the quarter ended March 31, 2008.
Other non-interest income decreased $77,000 (11.1%) to $617,000 for the quarter ended March 31, 2009 compared to the same period in 2008. The decrease was the result of an $80,000 decrease in NSF and Overdraft charges.
Non-Interest Expenses
For the quarter ended March 31, 2009, non-interest expenses were $3,575,000, compared to $3,633,000 for the first quarter of 2008, a $58,000 (1.6%) decrease.
Non-interest expenses for the quarter ended March 31, 2009 included a $65,000 increase in the Corporation's FDIC assessment and a $79,000 decrease in the write downs on other real estate owned ($25,000 in 2009 compared to $104,000 in 2008), compared to the same quarter in 2008. In addition to the Corporation’s ongoing commitment to the improvement of internal controls and the overall operational environment, the Corporation has and will continue to identify and implement cost saving strategies.
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 March 31, 2009, the Corporation’s efficiency ratio improved to 56.96% compared to 68.67% for the same period of 2008.
Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC insures payment of deposits up to insured limits from the Deposit Insurance Fund. In late 2008, the FDIC announced an increase in insurance premium rates of seven basis points for the first quarter of 2009. On February 27, 2009, the FDIC announced its adoption of an interim final rule imposing a one-time special assessment of up to 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums due from each financial institution. On March 5, 2009, the FDIC announced its plan to reduce the special assessment to 10 basis points. Although at the time of this filing it was unclear to management the precise amount of the special assessment, management expects that the special assessment and the changes in the premium calculation will significantly increase the Corporation’s FDIC insurance expense for the remainder of 2009 and possibly thereafter.
Provision for Income Taxes
The provision for income taxes for the quarter ended March 31, 2009 was $416,000, or 22.5% of income before income taxes, compared to $203,000, or 17.7%, for the comparable 2008 period. The increase in the effective tax rate is attributable to tax-exempt interest income comprising a smaller portion of income before income taxes in 2009 than 2008.
Return on Assets
Return on average assets was 0.93% for the first quarter of 2009, compared to 0.68% for the comparable quarter of 2008. The increase resulted from a 51.5% increase in net income with only a slight increase in the Corporation’s average assets.
Return on Equity
Return on average equity for the first quarter of 2009 was 11.06% compared to 7.66% for the same period of 2008. This increase was the result of the increase in net income. The Corporation and Union met all regulatory capital requirements as of March 31, 2009, and Union is considered “well capitalized” under regulatory and industry standards of risk-based capital.
Condensed Consolidated Statements of Income (Unaudited)
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