United Bancshares Inc: Form 10-Q for the period ended Mar 31, 2022

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:

(a) Some of the financial measures included in this table are not measures of financial performance recognized by U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures include tangible book value, return on average tangible equity, net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy. Reconciliations of non-GAAP disclosures used in this table to the comparable GAAP measures are provided in the accompanying table. Management, as well as regulators, financial analysts and other investors may use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. These non-GAAP financial measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

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Forward-Looking Statements

When used in this document, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected" or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure and the impact of the COVID-19 pandemic. Significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction as of March 31, 2022, if there is a resurgence in the virus, United Bancshares, Inc. (the "Corporation") could experience further adverse effects on its business, financial condition, results of operations and cash flows.

The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Introduction

The Corporation is a registered financial holding company incorporated under Ohio law 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. 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 a full service community bank offering a full range of commercial and consumer banking services. The Bank is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Paulding, Putnam, Sandusky, Van Wert and Wood counties in Ohio, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Paulding, Pemberville, Plymouth, Westerville and Worthington, Ohio.

Deposit services include checking accounts, savings and money market accounts; certificates of deposit and individual retirement accounts. Additional supportive services include online banking, bill pay, mobile banking, Zelle payment service, ATM’s and safe deposit box rentals. Treasury management and remote deposit capture products are also available to commercial deposit customers. Deposits of Union Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.

Loan products offered include commercial and residential real estate loans, agricultural loans, commercial and industrial loans, home equity loans, various types of consumer loans and small business administration loans. Union Bank’s residential loan activities consist primarily of loans for purchasing or refinancing personal residences. The majority of these loans are sold to the secondary market.

Wealth management services are offered by Union Bank through an arrangement with LPL Financial LLC, a registered broker/dealer. Licensed representatives offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities and life insurance.

Union Bank has two subsidiaries: UBC Investments, Inc. (“UBC”), an entity formed to hold its securities portfolio, and UBC Property, Inc. (“UBC Property”), an entity formed to hold and manage certain property that is acquired in lieu of foreclosure.

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

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

Economic Environment

The U.S. economy continued its recovery during the first quarter of 2022 despite pressures from higher inflation and rising energy prices as well as concerns over the Russia-Ukraine war and the continued economic uncertainty caused by the COVID-19 pandemic. Inflation 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 8.0% in the first quarter of 2022, well above the FRB's target inflation rate. In addition, the Russia-Ukraine war and related events are likely to create additional upward pressure on inflation and weigh on economic activity. As previously discussed, the COVID-19 pandemic has resulted in disruption to business and economic activity. While the Omicron variant took COVID-19 infection rates to a new high in January 2022, COVID-19 cases declined by the end of the first quarter. However, the duration of the pandemic, including the emergence of new variants, and the ultimate repercussions continue to remain unclear. U.S. Gross Domestic Product ("GDP") is declined slightly in the first quarter of 2022, however the total unemployment rate fell to 3.6 percent at March 2022 as compared with 3.9 percent at December 2021. In March 2022, the FRB increased short-term interest rates by 25 basis points and indicated that ongoing increases in short-term interest rates will occur in 2022 in order to fight inflation.

A lthough the U.S. economy continued to grow during the first quarter of 2022, the impacts of higher inflation, rising energy prices and the Russia-Ukraine war, in addition to the continuing impact of the COVID-19 pandemic on economic conditions both in the United States and abroad, have created significant uncertainty about the future economic environment which will continue to evolve and impact our business in future periods. Concerns over interest rate levels, energy prices, domestic, and global policy issues, trade policy in the U.S. and geopolitical events, as well as the implications of those events on the markets in general, further add to the global uncertainty. Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will continue to impact our results in 2022 and beyond.

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 Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, senior management is cautiously optimistic that the Company is positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the global economy and remain adequately capitalized. However, the Company may be required to make additional loan loss provisions as warranted by the extremely fluid global economic condition.

RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended March 31, 2022, the Corporation reported net income of $2,520,000, or $0.77 basic earnings per share. This compares to the first quarter of 2021 net income of $4,117,000, or $1.26 basic earnings per share. The decrease in operating results for the first quarter of 2022 as compared to the same period in 2021 was primarily attributable to a decrease in non-interest income of $2,660,000 (46.3%) and a decrease in net interest income of $453,000 (5.2%). These were offset by a decrease in non-interest expenses of $707,000 (7.8%), a decrease in the provision for income taxes of $509,000 (58.3%), and a decrease in the provision for loan losses of $300,000 (100.0%).

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 $8,202,000 for the first quarter of 2022, compared to $8,655,000 for the same period of 2021, a decrease of $453,000.

The decrease of $453,000 in net interest income for the three months ended March 31, 2022 is attributable to a decrease in interest income of $725,000 (7.6%) offset by a $272,000 (32.3%) decrease in interest expense.

The $725,000 decrease in interest income for the three months ended March 31, 2022 was due to $1.3 million decrease in loan interest income offset by a $549,000 increase in securities income. The decrease in loan interest income was due to a $712,000 reduction in the loan fee income generated through PPP loans as well as a $402,000 decrease in mortgage loan origination fee income due to reduced origination volumes. Approximately 98% of the loan balances generated through the PPP loan program have been forgiven as of March 31, 2022. There are $71,000 of fees received from the SBA remaining that have been deferred and are being amortized into interest income over the life of the loans.

The yield on average earning assets was 3.65% for the three months ended March 31, 2022 compared to 4.22% for the same period of 2021. This is due to the decrease in PPP and mortgage origination fees and a shifting mix of earning assets. The average interest-bearing cash, securities, and loan balances were $49.6 million, $313.3 million and $623.8 million for the three months ended March 31, 2022, respectively compared to $64.7 million, $199.4 million and $652.0 million for the three months ended March 31, 2021, respectively. The average loan balance decreased $28.2 million between the periods. The average balance of PPP loans decreased approximately $86.2 million and was offset by approximately $58.0 million in new commercial and commercial real estate loan growth.

The decline in interest expense of $272,000 from March 31, 2021 to March 31, 2022 is due to a declining cost of funds, primarily in certificates of deposit. The cost of average interest bearing liabilities was 0.30% for the three months ended March 31, 2022 compared to 0.48% for the same period of 2021. This decrease more than offset the $63.5 million increase in average interest bearing liabilities to $757.6 million for the period ended March 31, 2022 compared to $694.8 million the period ended March 31, 2021.

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the three months ended March 31, 2022 the net interest margin (on a taxable equivalent basis) was 3.42% compared with 3.85% for the same period in 2021. Loans and leases comprised 63.7% of interest-earning assets at March 31, 2022 compared to 68.5% of interest-earning assets at March 31, 2021. Interest-bearing deposits comprised 97.4% of average interest-bearing liabilities at March 31, 2022, compared to 97.2% for the same period in 2021.

As a result of the recognition of the majority of deferred loan fees from the SBA for PPP loan financing, as well as the impact of the COVID-19 pandemic and related future loan charge-offs and increases in non-accrual loans which may occur, we expect that our net interest income and net interest margin will continue to decrease throughout the remainder of 2022.

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. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

Due to a general stabilization of uncertainties related to COVID-19 in the regional and broader U.S. economy, as well as the current status of the Bank's loan portfolio, there was no provision for loan losses recognized during the three month period ended March 31, 2022, compared to a $300,000 provision for the three months ended March 31, 2021. The allowance for loan losses at March 31, 2022 is 1.69% of total loans compared to 1.62% of total loans at March 31, 2021.

There is a possibility that the provision for loan losses could further increase in future periods based on the significant potential for the credit quality of our loan portfolio to decline and loan defaults to increase as a result of economic conditions created by the COVID-19 pandemic. See “Allowance for Loan Losses” under Financial Condition for further discussion relating to the provision for loan and lease losses.

Non-Interest Income

The Corporation’s non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgage loans; customer deposit account fees; earnings on life insurance policies; income arising from sales of investment products to customers; and occasional security sale transactions. Income related to customer deposit accounts and life insurance policies provides a relatively steady flow of income while the other sources are more volume or transaction related and consequently can vary from quarter to quarter.

For the quarter ended March 31, 2022, non-interest income was $3,081,000, compared to $5,741,000 for the first quarter of 2021, a $2,660,000 (46.3%) decrease, which was attributable to decreases in gain on sales of loans of $3,999,000 (87.4%), and an increase in loss on securities of $41,000, offset by an increase in other non-interest income of $1,380,000 (118.0%).

The significant decrease in gain on sale of loans was attributable to a decrease in loan activity by the residential mortgage operations, along with a decrease in the net gain on sale, expressed as a percentage of loan balances sold. During the quarter ended March 31, 2022, there were 192 loans sold totaling $55.3 million, compared to 460 loans sold totaling $117.6 million during the same period of 2021. The net gain on sale was 0.86% for the first quarter of 2022 compared to 3.70% for the same period of 2021.

Other non-interest income was $2,550,000 for the quarter ended March 31, 2022 compared to $1,170,000 for the comparable period in 2021, an increase of $1,380,000. The increase was primarily related to a $1,247,000 increase in income from the Corporation’s loan hedging program.

A fair value write-down of securities resulted in a loss of $46,000 for the quarter ended March 31, 2022, compared to a loss of $5,000 quarter ended March 31, 2021.

Non-Interest Expenses

For the quarter ended March 31, 2022 non-interest expenses were $8,399,000, compared to $9,106,000 for the first quarter of 2021, a $707,000 (7.8%) decrease. The significant quarter-over-quarter decreases include salaries and benefits of $472,000 (9.1%), loan fees of $264,000 (57.4%), and miscellaneous expense of $87,000 (90.1%). The decrease in salaries and benefits is primarily related to a reduction in commissions paid based on loan activity by the residential mortgage operations.

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, 2022, the Corporation’s efficiency ratio was 72.95%, compared to 62.51% for the same period of 2021. A lower efficiency ratio generally indicates that a bank is spending less to generate every dollar of income.

Provision for Income Taxes

The provision for income taxes for the quarter ended March 31, 2022 was $364,000 (effective rate of 12.6%), compared to $873,000 (effective rate of 17.5%) for the comparable 2021 period. The decrease in the effective tax rate was largely due to tax-exempt securities comprising 29.6% of pre-tax income for the quarter ended March 31, 2022 compared to 12.4% for the comparable period in 2021.

FINANCIAL CONDITION

Overview of Balance Sheet

Total assets amounted to $1.07 billion at March 31, 2022 compared to $1.08 billion at December 31, 2021, a decrease of $7.2 million (0.67%). The decrease in total assets was primarily the result of decreases of $9.6 million (12.8%) in cash and cash equivalents, and $11.0 million (3.6%) in securities available-for-sale, offset by a $4.6 million (0.1%) increase in net loans. Deposits totaled $944.8 million at March 31, 2022, compared to $930.4 million at December 31, 2021, an increase of $14.4 million (1.6%).

Shareholders’ equity decreased $19.7 million (16.6%) from $119.1 million at December 31, 2021 to $99.4 million at March 31, 2022. This was the result of an increase in unrealized securities losses, net of tax of $21.6 million and dividends paid of $688,000 offset by net income of $2,520,000. The increase in unrealized securities losses from December 31, 2021 to March 31, 2022 was attributable to increasing long term treasury yields. Net unrealized gains and losses on securities are reported as accumulated other comprehensive (loss) income in the consolidated balance sheets.

Cash and Cash Equivalents

Cash and cash equivalents totaled $65.6 million at March 31, 2022 and $75.2 million at December 31, 2021, including interest-bearing deposits in other banks of $47.8 million at March 31, 2022 and $63.5 million at December 31, 2021. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation’s present liquidity and performance needs especially considering the availability of other funding sources, as described below. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and corresponding liquidity sources and uses. Management believes the Corporation’s liquidity needs in the near term will be satisfied by the current level of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that will mature within one year. These sources of funds should enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.

Securities

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

The amortized cost and fair value of available-for-sale securities as of March 31, 2022 totaled $318.9 million and $296.6 million, respectively, resulting in net unrealized loss before tax of $22.3 million and a corresponding after-tax decrease in shareholders’ equity of $17.6 million.

Loans and Leases

The Corporation’s primary lending areas are Northwestern, West Central, and Central Ohio. Gross loans and leases totaled $614.2 million at March 31, 2022, compared to $609.6 million at December 31, 2021, an increase of $4.6 million (0.8%). As compared to December 31, 2021, commercial and multi-family real estate loans increased $12.4 million, commercial loans decreased $7.4 million, consumer loans decreased $211,000 and residential 1-4 family real estate loan decreased 156,000. Loans originated through the PPP program are included in the Commercial segment and had an outstanding balance of $3.4 million as of March 31, 2022 and $6.6 million at December 31, 2021. Excluding the impact of PPP loans forgiven, loans and leases increased $7.8 million at March 31, 2022 as compared to December 31, 2021.

There are also unrecognized financial instruments at March 31, 2022 and December 31, 2021 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments approximated $203.7 million at March 31, 2022 and $198.7 million at December 31, 2021.

Loan demand has strengthened in the first three months of 2022, however it is possible that uncertainties in economic conditions in our market areas may lead to reductions in the growth of our commercial and industrial loan, commercial real estate loan, residential real estate loan and consumer loan portfolios.

Allowance for Loan and Lease Losses

The following table presents a summary of activity in the allowance for loan and lease losses for the three month periods ended March 31, 2022 and 2021:

(in thousands)

The allowance for loan and lease losses as a percentage of gross loans and leases was 1.69% at March 31, 2022, 1.70% at December 31, 2021, and 1.62% at March 31, 2021. Excluding PPP loans and the related allocation of allowance, the allowance for loan losses as a percentage of gross loans and leases was 1.70% at March 31, 2022, 1.72% at December 31, 2021, and 1.90% at March 31, 2021. Based on current economic indicators, the Corporation increased the economic factors within the allowance for loan losses evaluation.

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

Loans and leases on non-accrual status amounted to $346,000 at March 31, 2022 and $320,000 at December 31, 2021. Non-accrual loans and leases as a percentage of outstanding loans amounted to 0.006% at March 31, 2022 and 0.005% at December 31, 2021.

There were $1,072,000 in commercial loan over 90 days but still accruing at March 31, 2022. These loans were originated through the PPP program and are pending a determination of forgiveness from the SBA.

The Corporation considers a loan or lease to be impaired when it becomes probable that the Corporation will be unable to collect under the contractual terms of the loan or lease, as the case may be, based on current information and events. The Corporation had $1,911,000 at March 31, 2022 and $1,948,000 at December 31, 2021, all with no reserve.

In addition to impaired loans the Corporation had other potential problem credits, consisting of loans graded substandard or special mention, as well as loans over 90 days past due, loans on non-accrual, and TDR loans, amounting to $23.7 million at March 31, 2022 and $24.7 million at December 31, 2021. The Corporation’s credit administration department continues to closely monitor these credits.

As of March 31, 2022 the Corporation has 110 loans, approximating $38.3 million that were modified or extended in response to the COVID-19 pandemic. As indicated above, the CARES Act and guidance issued by the Federal Bank Regulatory agencies provides relief from classifying COVID-19 related loan modifications as TDR loans.

The Corporation provides pooled reserves for potential problem loans and leases using loss rates calculated considering historic net loan charge-off experience, as well as other environmental and qualitative factors. The Corporation experienced no loan charge-offs during the first three months of 2022 compared to $2,000 during the first three months of 2021. The Corporation also provides pooled general reserves for the remaining portion of its loan portfolio not considered to be problem or potential problem loans. These general reserves are also calculated considering, among other things, the historic net charge-off experience for the related loan type.

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 $944.8 million, or 97.4% of the Corporation’s outstanding funding sources at March 31, 2022, compared to $930.4 million at December 31, 2021.

Non-interest bearing deposits comprised 21.1% of total deposits at March 31, 2022 and 21.0% at December 31, 2021.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. Other borrowings consisted of $6,750,000 and $7,012,000 of a term borrowing from the United Bankers’ Bank (UBB) at March 31, 2022 and December 31, 2021, respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of $12,984,000 and $12,976,000 at March 31, 2022 and December 31, 2021, respectively. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Regulatory Capital

The Corporation and Bank met all regulatory capital requirements as of March 31, 2022, and the Bank is considered “well capitalized” under regulatory and industry standards of risk-based capital.

Cash Flow from Operations

As part of the Bank's hedging program, loans held for sale are accumulated into larger blocks before being sold. Depending on the timing of the sales of these blocks, there could be a positive or negative impact to net income and cash flow from operations. As of March 31, 2022, loans held for sale amounted to $10,480,000 compared to $9,146,000 as of December 31, 2021 resulting in a negative impact to cash flow from operations for the three month period ended March 31, 2022 of $1,334,000. There was a positive impact on cash flow from operations for the three month period ended March 31, 2021 of $554,000 from a decrease in loans held for sale. Excluding these changes in loans held for sale, cash flow from operations for the three months ended March 31, 2022 and 2021 would have been a negative $379,000 and a positive $2,973,000, respectively.

Liquidity and Interest Rate Sensitivity

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

The Corporation manages interest rate risk to minimize the impact of fluctuating interest rates on earnings. The Corporation uses simulation techniques that attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns. The primary method of measuring the sensitivity of earnings of changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit re-pricing to more accurately reflect anticipated pricing behavior. These simulations include adjustments for the lag in prime loan re-pricing and the spread and volume elasticity of interest-bearing deposit accounts, regular savings and money market deposit accounts.

The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The Corporation closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or re-price within a designated time frame.

Management believes the Corporation’s current mix of assets and liabilities provides a reasonable level of risk related to significant fluctuations in net interest income and the resulting volatility of the Corporation’s earning base. The Corporation’s management reviews interest rate risk in relation to its effect on net interest income, net interest margin, and the volatility of the earnings base of the Corporation.

Effects of Inflation on Financial Statements

All of the Corporation’s assets relate to commercial banking operations and are generally monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss of purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the commercial banking industry, monetary assets typically exceed monetary liabilities. The Corporation has not experienced a significant level of inflation or deflation during the three month period ended March 31, 2022. Management continues to closely monitor interest rate sensitivity trends through the Corporation's asset liability management program and in calculating the allowance for loan and lease losses.

Evaluation of Controls and Procedures.

With the participation of our management, including our chief executive officer, who is also serving as our interim chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on that evaluation, the Corporation's management, including the Chief Executive Officer, who is also serving as our Chief Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2022.

Changes in Internal Control over Financial Reporting.

There were no significant changes during the period covered by this Quarterly Report on Form 10-Q in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in the discussion pertaining to risk factors that was provided in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.