UBOH 10-Q Quarter ended Sept. 30, 2018

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		(in thousands except share data)
		September 30,				December 31,
		2018				2017
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks		$	9,658			$	10,718
Interest-bearing deposits in other banks			8,991				16,556
Total cash and cash equivalents			18,649				27,274
SECURITIES, available-for-sale			163,504				169,428
FEDERAL HOME LOAN BANK STOCK, at cost			5,302				5,302
LOANS HELD FOR SALE			6,437				2,384
LOANS AND LEASES			550,777				506,412
Less allowance for loan and lease losses			3,314				2,835
Net loans and leases			547,463				503,577
PREMISES AND EQUIPMENT, net			19,038				19,336
GOODWILL			28,616				25,203
CORE DEPOSIT INTANGIBLE ASSETS, net			996				1,126
CASH SURRENDER VALUE OF LIFE INSURANCE			18,122				17,828
OTHER REAL ESTATE OWNED			166				159
OTHER ASSETS, including accrued interest receivable			6,860				8,833
TOTAL ASSETS		$	815,153			$	780,450
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest-bearing		$	112,775			$	105,828
Interest-bearing			547,574				524,720
Total deposits			660,349				630,548
Other borrowings			60,000				57,148
Junior subordinated deferrable interest debentures			12,865				12,840
Other liabilities			4,983				4,210
Total liabilities			738,197				704,746
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares			3,761				3,761
Surplus			14,905				14,783
Retained earnings			69,626				64,994
Accumulated other comprehensive loss			(3,653	)			(124	)
Treasury stock, at cost, 491,199 shares at September 30, 2018 and 492,914 shares at December 31, 2017			(7,683	)			(7,710	)
Total shareholders’ equity			76,956				75,704
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	815,153			$	780,450

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		(in thousands except share data)
		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
INTEREST INCOME
Loans and leases, including fees		$	7,596			$	5,384			$	21,777			$	14,516
Securities:
Taxable			686				581				1,898				1,833
Tax-exempt			372				420				1,193				1,266
Other			105				99				342				257
Total interest income			8,759				6,484				25,210				17,872
INTEREST EXPENSE
Deposits			1,028				559				2,600				1,466
Borrowings			659				217				1,681				569
Total interest expense			1,687				776				4,281				2,035
Net interest income			7,072				5,708				20,929				15,837
PROVISION (CREDIT) FOR LOAN AND LEASE LOSSES			150				-				350				(350	)
Net interest income after provision (credit) for loan and lease losses			6,922				5,708				20,579				16,187
NON-INTEREST INCOME
Gain on sale of loans			1,469				235				3,425				466
Net securities gains (losses)			(12	)			30				(6	)			111
Other operating income			1,007				1,095				3,456				3,168
Total non-interest income			2,464				1,360				6,875				3,745
NON-INTEREST EXPENSES			7,249				6,427				20,599				15,949
INCOME BEFORE INCOME TAXES			2,137				641				6,855				3,983
PROVISION FOR INCOME TAXES			351				239				1,070				1,002
NET INCOME		$	1,786			$	402			$	5,785			$	2,981
NET INCOME PER SHARE (basic and diluted)		$	0.55			$	0.12			$	1.77			$	0.91
Weighted average common shares outstanding (basic)			3,269,128				3,267,527				3,268,435				3,267,191
Weighted average common shares outstanding (diluted)			3,275,922				3,273,313				3,275,229				3,272,976

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		(in thousands)
		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
NET INCOME		$	1,786			$	402			$	5,785			$	2,981
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) during period			(1,100	)			189				(4,442	)			2,023
Reclassification adjustments for losses (gains) included in net income			12				(30	)			6				(111	)
Other comprehensive income (loss), before income taxes			(1,088	)			159				(4,436	)			1,912
Income tax expense (credit) related to items of other comprehensive income (loss)			(228	)			54				(931	)			650
Other comprehensive income (loss)			(860	)			105				(3,505	)			1,262
COMPREHENSIVE INCOME		$	926			$	507			$	2,280			$	4,243

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		(in thousands except share data)
		Common stock				Surplus				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total
BALANCE AT DECEMBER 31, 2017		$	3,761			$	14,783			$	64,994			$	(124	)		$	(7,710	)		$	75,704
Comprehensive income:
Net income			-				-				5,785				-				-				5,785
Other comprehensive loss			-				-				-				(3,505	)			-				(3,505	)
1,715 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan			-				13				-				-				27				40
Stock option expense			-				109				-				-				-				109
Cash dividends declared, $0.36 per share			-				-				(1,177	)			-				-				(1,177	)
Reclassification for accounting change			-				-				24				(24	)			-				-
BALANCE AT SEPTEMBER 30, 2018		$	3,761			$	14,905			$	69,626			$	(3,653	)		$	(7,683	)		$	76,956
BALANCE AT DECEMBER 31, 2016		$	3,761			$	14,674			$	62,717			$	(866	)		$	(7,728	)		$	72,558
Comprehensive income:
Net income			-				-				2,981				-				-				2,981
Other comprehensive income			-				-				-				1,262				-				1,262
1,126 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan			-				7				-				-				18				25
Stock option expense			-				65				-				-				-				65
Cash dividends declared, $0.36 per share			-				-				(1,177	)			-				-				(1,177	)
BALANCE AT SEPTEMBER 30, 2017		$	3,761			$	14,746			$	64,521			$	396			$	(7,710	)		$	75,714

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		(in thousands)
		Nine months ended September 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES		$	2,397			$	582
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and maturities of available-for-sale securities			34,696				42,791
Purchases of available-for-sale securities			(33,817	)			(29,941	)
Proceeds from certificates of deposit			-				249
Proceeds from sale of other real estate owned			31				358
Acquisition of Benchmark Bancorp, Inc., net of cash received			-				(24,660	)
Net increase in loans and leases			(43,248	)			(23,556	)
Purchases of premises and equipment			(368	)			(3,943	)
Net cash used in investing activities			(42,706	)			(38,702	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			29,969				17,449
Proceeds from other borrowings			25,000				40,260
Repayments of other borrowings			(22,148	)			(18,774	)
Proceeds from sale of treasury shares			40				25
Cash dividends paid			(1,177	)			(1,177	)
Net cash provided by financing activities			31,684				37,783
NET DECREASE IN CASH AND CASH EQUIVALENTS			(8,625	)			(337	)
CASH AND CASH EQUIVALENTS
At beginning of period			27,274				14,186
At end of period		$	18,649			$	13,849
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest		$	4,282			$	1,899
Federal income taxes		$	-			$	425
Non-cash investing activities:
Transfer of loans to other real estate owned		$	70			$	241
Change in net unrealized gain or loss on available-for-sale securities		$	(4,436	)		$	1,912

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NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of United Bancshares, Inc. and subsidiaries (the “Corporation”) have been prepared without audit and in the opinion of management reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated. Since the unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, they do not contain all information and footnotes typically included in financial statements prepared in conformity with generally accepted accounting principles. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The balance sheet as of December 31, 2017 is derived from completed audited consolidated financial statements with footnotes, which are included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017.

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The Union Bank Company (the “Bank”). 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. (“UBC Property”), to hold and manage certain property. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Corporation conform to generally accepted practices within the banking industry. The Corporation considers all of its principal activities to be banking related.

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification.  For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017.  The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP.  The adoption of ASU 2014-09 effective January 1, 2018 did not have a material impact on the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, amending ASU Subtopic 825-10. The amendments in this update make targeted improvements to generally accepted accounting principles (GAAP) as follows: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and 8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The adoption of ASU 2016-01 effective January 1, 2018 did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.  Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases be recognized on the balance sheet.  For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018.  Early application is permitted.  The adoption of this guidance is not expected to have a material impact on the Corporation’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either assets or liabilities and classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements and related disclosures upon adoption effective December 31, 2018.

In September 2016, the 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 will be effective for interim and annual periods beginning after December 15, 2019. Management has begun gathering data and evaluating the process for calculating the allowance for loan losses under the requirements of ASU 2016-13. Management cannot at the present time accurately estimate the expected impact the adoption of ASU 2016-13 will have on the consolidated financial statements since the calculation at the adoption date will be dependent on various data and assumptions that cannot be reasonable determined at the present time.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 calculation from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Corporation does not expect the guidance to have a material impact on the consolidated financial statements based on its current financial condition.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in this ASU are effective for reporting periods after December 15, 2018, and management does not believe the changes will have a material effect on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-2, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company elected to early adopt the provisions of ASU 2018-2 and recognized a reclassification adjustment of $24,000 between accumulated other comprehensive loss and retained earnings during the first quarter of 2018.

NOTE 3 - SECURITIES

The amortized cost and fair value of available-for-sale securities as of September 30, 2018 and December 31, 2017 are as follows:

A summary of gross unrealized gains and losses on available-for-sale securities as of September 30, 2018 and December 31, 2017 follows:

NOTE 4 – LOANS AND LEASES

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the periods ending September 30, 2018 and 2017:

The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment and based on impairment method as of September 30, 2018 and December 31, 2017:

The average recorded investment in impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) for the nine month period ended September 30, 2018 and 2017 was approximately $415,000 and $1.8 million, respectively. There was $59,000 of allowance for loan loss specifically reserved as of September 30, 2018 for impaired loans compared to no specific reserves as of September 30, 2017. Additionally, there was approximately $36,000 and $86,000 in interest income recognized by the Corporation on impaired loans and leases on an accrual or cash basis for the nine month period ended September 30, 2018 and 2017, respectively.

The following tables present the recorded investment in nonaccrual loans and leases, loans and leases past due over 90 days still on accrual and troubled debt restructurings by class of loans as of September 30, 2018 and December 31, 2017. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.

The following table presents the aging of the recorded investment in past due loans and leases as of September 30, 2018 and December 31, 2017 by class of loans and leases:

Credit Quality Indicators:

The Corporation categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt, such as:  current final financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Corporation analyzes loans and leases individually by classifying the loans and leases as to the credit risk.  This analysis is completed on all non-homogenous loans and leases, such as commercial and commercial real estate loans and leases at origination and at the renewal of line of credit.  For amortizing loan relationships, an annual assessment is performed on relationships with outstanding aggregate balance greater than $500,000.  The Corporation uses the following definitions for risk ratings:

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Special Mention: Loans and leases which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans and leases pose unwarranted financial risk that, if not corrected, could weaken the loan or lease 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 and leases are inadequately protected by the current sound net worth and paying ability of the borrower. Loans and leases of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow. These loans and leases may also have historic and/or severe delinquency problems, and Corporation management may depend on secondary repayment sources to liquidate these loans and leases. The Corporation could sustain some degree of loss in these loans and leases if the weaknesses remain uncorrected.

●

Doubtful: Loans and leases in this category display a high degree of loss, although the amount of actual loss at the time of classification is undeterminable. This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification.

Loans and leases not meeting the previous criteria that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. Beginning in March 2018, all commercial loans, including commercial and multi-family real estate loans, are risk rated.  Loans and leases not rated, including commercial loans and leases prior to March 31, 2018, generally are less than $500,000 or are included in groups of homogenous loans.

As of September 30, 2018 and December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans and leases is as follows:

The Corporation considers the performance of the loan and lease 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 and leases 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 and leases that are not risk rated, based on payment activity as of September 30, 2018 and December 31, 2017:

Modifications:

The Corporation’s loan and lease portfolio also includes certain loans and leases that have been modified in a Troubled Debt Restructuring (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.

When the Corporation modifies a loan or lease, 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 or lease agreement, except when the sole (remaining) source of repayment for the loan or lease 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 or lease is less than the recorded investment in the loan or lease (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 or lease balance if collection is not expected.

There were no modifications for TDR loans and leases, or troubled debt restructurings for which there was a payment default during the nine month period ended September 30, 2018.

The Corporation acquired The Ohio State Bank (“OSB”) in November 2014 and Benchmark Bank in September 2017. As a result of these acquisitions, the Corporation has loans and leases, 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 following is information related to loans and leases acquired in these transactions, including purchased impaired loans:

There was no provision for loan and lease losses recognized during the nine month period ended September 30, 2018 related to the acquired loans as there was no significant change to the credit quality of the loans during the period. There was a $101,000 provision for loan and lease losses recognized during the nine month period ended September 30, 2017 related to one purchase credit impaired commercial loan from the OSB acquisition for which the sheriff’s appraisal was substantially below the expected collateral value.

NOTE 5 – 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 fair value.  Changes in the fair value of the derivative instruments are recognized in gain on sale of mortgage loans held for sale on 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. For the period ended September 30, 2018, the Corporation recognized a net gain from hedging activity of $90,000 which is included in gain on sale of loans in the 2018 condensed consolidated statement of income and reported a net hedging asset of $210,000, which is included in other assets in the September 30, 2018 consolidated balance sheet.

NOTE 6 – OTHER BORROWINGS

Other borrowings consists of the following at September 30, 2018 and December 31, 2017:

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximati ng $136,449,000 a nd $88,454,000 at September 30, 2018 and December 31, 2017 respectively.

NOTE 7 – 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 payable quarterly at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR, amounting to 5.52% at September 30, 2018 and 4.82% at December 31, 2017. 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 through 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 carrying value as of September 30, 2018 and December 31, 2017 was $2,565,000 and $2,540,000, respectively. 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 5.19% at September 30, 2018 and 4.21% at December 31, 2017.

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, under Federal Reserve Board guidelines, the securities cannot be used to constitute more than 25% of the Corporation’s core Tier I capital inclusive of these securities.

Interest expense on the debentures amounted to $765,000 and $411,000 for the nine month periods ended September 30, 2018 and 2017, respectively, and is included in interest expense-other borrowings in the accompanying consolidated statements of income.

NOTE 8 - FAIR VALUE MEASUREMENTS

ASC 820-10 defines fair value 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.

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.

Financial assets (there were no financial liabilities) measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 include available-for-sale securities, which are valued using Level 2 inputs as well as mortgage servicing rights, amounting to $1,338,000 at September 30, 2018 and $1,270,000 at December 31, 2017, which are valued using Level 3 inputs. There were approximately $356,000 and $885,000 of impaired loans net of specific reserves at September 30, 2018 and December 31, 2017, respectfully, all of which are valued using Level 3 inputs.

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during the period ended September 30, 2018, due to the lack of observable quotes in inactive markets for those instruments at September 30, 2018.

The tables below present a summary of activity for the nine month period ended September 30, 2018 and year ended December 31, 2017 for mortgage servicing rights, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3), as well as the Bank’s one security which was valued using Level 3 inputs for the year ended December 31, 2017:

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.

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 securities, 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 are classified within Level 3 of the valuation hierarchy.

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 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 typically range between 15% and 35% of appraised value, and estimated selling cost typically ranges between 10% and 20% of the adjusted appraised value.  Due to the significance of the Level 3 inputs, impaired loans fair values are typically classified as Level 3.

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 11% and 13%, in addition to prepayment, internal rate of return, servicing costs, inflation rate of servicing costs and earnings rate assumptions 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.

Other Real Estate Owned

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less appraisal adjustments typically between 10% and 30% of appraised value, and expected selling costs between 10% and 20% of adjusted appraised value. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.

Certain other financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. Financial assets and financial liabilities, excluding impaired loans and other real estate owned, measured at fair value on a nonrecurring basis were not significant at September 30, 2018 and December 31, 2017.

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of recognized financial instruments at September 30, 2018 and December 31, 2017 were as follows:

The above summary does not include accrued interest receivable or 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 September 30, 2018 and December 31, 2017 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounted to $140,429,000 at September 30, 2018 and $127,508,000 at December 31, 2017. Such amounts are also considered to be the estimated fair values.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:

Cash and cash equivalents:

Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.

Securities:

The fair value of securities is determined based on quoted market prices of the individual securities; if not available, estimated fair value is obtained by comparison to other known securities with similar risk and maturity characteristics. Such value does not consider possible tax ramifications or estimated transaction costs.

Loans held for sale:

The fair value of loans held for sale is determined based on the sales price of similar loans. Loan held for sale are typically held for 60 days or less.

Loans and leases:

Fair value for loans and leases was estimated for portfolios of loans and leases 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.

Mortgage servicing rights:

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

Deposit liabilities:

The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at quarter end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.

Other borrowings and junior subordinated deferrable interest debentures:

The fair value of other borrowings and junior subordinated deferrable interest debentures are determined using the net present value of discounted cash flows based on current borrowing rates for similar types of borrowing arrangements, and are obtained from an independent third party.

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 other liabilities is generally considered to be carrying value except for the deferred compensation agreement. The fair value of the contract is determined based on a discounted cash flow analysis using a current interest rate for a similar instrument.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

NOTE 10 – STOCK OPTIONS

The United Bancshares, Inc. 2016 Stock Option Plan (the “Plan”) permits the Corporation to award non-qualified stock options to eligible participants. A total of 250,000 shares are available for issuance pursuant to the Plan.

The Corporation issued 33,352 options during the fourth quarter of 2016 at an exercise price of $19.32, 30,151 options during the third quarter of 2017 at an exercise price of $21.70, and 31,267 options during the third quarter of 2018 at an exercise price of $23.30 under the Plan. Following is a summary of activity for stock options for the nine month periods ended September 30, 2018 and September 30, 2017:

The options vest over a three-year period on the anniversary of the date of grant. At September 30, 2018, 20,601 options were vested (none at September 30, 2017) and outstanding options had a weighted average remaining contractual term of 6.0 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:

Total compensation expense related to the stock options granted in 2016 is expected to be $209,000 and is being recognized ratably over the 36 month period beginning January 1, 2017. Total compensation expense related to the stock options granted in 2017, net of forfeitures, is expected to be $209,000 and is being recognized ratably over the 36 month period beginning August 1, 2017. Total compensation expense related to the stock options granted in 2018 is expected to be $246,000 and is being recognized ratably over the 36 month period beginning September 1, 2018. Stock option expense for outstanding awards amounted to $42,000 and $109,000 for the quarter and nine month period ended September 30, 2018, respectively. Stock option expense for outstanding awards amounted to $30,000 and $65,000 for the quarter and nine month period ended September 30, 2017, respectively.

NOTE 11 – ACQUISITION

On September 8, 2017, after receiving full board of director and regulatory approval, the Corporation completed the acquisition of Benchmark Bancorp, Inc. (“Benchmark”) and its wholly-owned subsidiary, Benchmark Bank, in an all cash transaction. As a result of the acquisition, the two full-service banking centers of Benchmark Bank located in Gahanna and Westerville, Ohio, became full service offices of the Bank, and one mortgage loan production office located in Gahanna Ohio, became a mortgage loan production office of the Bank. With the acquisition, the Corporation expanded its geographical footprint in an effort to help continue the growth of the Corporation’s overall profile in size and in earnings.  Goodwill was initially recorded in connection with the transaction as follows:

In August, the Corporation completed a review of the accounting and tax implications of the transaction and determined its liability for federal income tax associated with the transaction was approximately $3.2 million greater than estimated at the time of the acquisition.  As a result, consistent with measurement date purchase accounting adjustments for business combinations as required by ASC 805 and ASU No. 2015-16, the Corporation recorded the additional tax liability, as well as certain other measurement date deferred tax adjustments during the third quarter of 2018 with a corresponding $3.4 million increase to goodwill.