10-Q 1 uboh20200930_10q.htm FORM 10-Q uboh20190331_10q.htm
 
 

  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

Commission file number 333-86453

 

UNITED BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

Ohio

(State or other jurisdiction of incorporation or organization)

 

105 Progressive Drive, Columbus Grove, Ohio

(Address of principal executive offices)

 

34-1516518

(I.R.S. Employer Identification Number)

 

45830

(Zip Code)

 

(419) 659-2141

(Registrant’s telephone number, including area code)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of Each Exchange

Common Stock, No Par Value

UBOH

NASDAQ Global Market

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller Reporting Company ☒
Emerging growth company ☐      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2020: 3,271,651.

 

This document contains 44 pages. The Exhibit Index is on page 37 immediately preceding the filed exhibits.

 

 

1

 

 

 
 
 

UNITED BANCSHARES, INC.

 

Table of Contents

  

 

 

 

 

 

Page

 

 

 

Part I – Financial Information

 

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

 

Item 4 – Controls and Procedures

35

 

 

 

Part II – Other Information

 

 

 

 

 

Item 1 – Legal Proceedings

36

 

 

 

 

Item 1A – Risk Factors

36

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

Item 3 – Defaults Upon Senior Securities

36

 

 

 

 

Item 4 – Mine Safety Disclosures

37

 

 

 

 

Item 5 – Other Information

37

 

 

 

 

Item 6 – Exhibits

37

 

 

2

 

  

 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

United Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 September 30, 2020 (unaudited) and December 31, 2019

 

 

   

(in thousands except share data)

 
   

September 30,

   

December 31,

 
   

2020

   

2019

 

ASSETS

               

CASH AND CASH EQUIVALENTS

               

Cash and due from banks

  $ 10,462     $ 9,167  

Interest-bearing deposits in other banks

    19,314       17,245  

Total cash and cash equivalents

    29,776       26,412  

SECURITIES, available-for-sale

    182,972       183,611  

FEDERAL HOME LOAN BANK STOCK, at cost

    5,598       5,302  

LOANS HELD FOR SALE

    32,117       15,301  

LOANS AND LEASES

    671,479       576,424  

Less allowance for loan and lease losses

    8,451       4,131  

Net loans and leases

    663,028       572,293  

PREMISES AND EQUIPMENT, net

    18,790       18,789  

GOODWILL

    28,616       28,616  

CORE DEPOSIT INTANGIBLE ASSETS, net

    680       794  

CASH SURRENDER VALUE OF LIFE INSURANCE

    18,896       18,613  

OTHER ASSETS, including accrued interest receivable

    12,908       10,283  

TOTAL ASSETS

  $ 993,381     $ 880,014  

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

LIABILITIES

               

Deposits:

               

Non-interest-bearing

  $ 169,590     $ 116,360  

Interest-bearing

    651,408       590,774  

Total deposits

    820,998       707,134  

Other borrowings

    43,000       58,750  

Junior subordinated deferrable interest debentures

    12,933       12,908  

Other liabilities

    7,041       6,441  

Total liabilities

    883,972       785,233  

SHAREHOLDERS’ EQUITY

               

Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares

    3,761       3,761  

Surplus

    15,403       15,251  

Retained earnings

    91,490       80,629  

Accumulated other comprehensive income

    6,431       2,872  

Treasury stock, at cost, 488,906 shares at September 30, 2020 and 492,462 shares at December 31, 2019

    (7,676 )     (7,732 )

Total shareholders’ equity

    109,409       94,781  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 993,381     $ 880,014  

 

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

                 

3

 

 

 

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

Three and nine months ended September 30, 2020 and 2019 (unaudited)

 

   

(in thousands except share data)

 
   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

INTEREST INCOME

                               

Loans and leases, including fees

  $ 9,110     $ 8,392     $ 26,106     $ 24,385  

Securities:

                               

Taxable

    435       656       1,533       1,973  

Tax-exempt

    539       416       1,548       1,232  

Other

    16       131       223       461  

Total interest income

    10,100       9,595       29,410       28,051  

INTEREST EXPENSE

                               

Deposits

    789       1,703       3,282       4,712  

Other borrowings

    913       621       2,020       1,888  

Total interest expense

    1,702       2,324       5,302       6,600  

Net interest income

    8,398       7,271       24,108       21,451  

PROVISION FOR LOAN AND LEASE LOSSES

    3,000       150       4,450       400  

Net interest income after provision for loan and lease losses

    5,398       7,121       19,658       21,051  

NON-INTEREST INCOME

                               

Gain on sale of loans

    8,484       2,785       17,032       6,409  
    Net securities gains     1       2       288       2  

Other non-interest income

    2,659       1,046       4,779       3,063  

Total non-interest income

    11,144       3,833       22,099       9,474  

NON-INTEREST EXPENSES

    10,084       8,070       27,099       22,784  

INCOME BEFORE INCOME TAXES

    6,458       2,884       14,658       7,741  

PROVISION FOR INCOME TAXES

    1,208       466       2,652       1,224  

NET INCOME

  $ 5,250     $ 2,418     $ 12,006     $ 6,517  
NET INCOME PER SHARE                                
Basic   $ 1.61     $ 0.74     $ 3.67     $ 1.99  

Diluted

  $ 1.60     $ 0.74     $ 3.67     $ 1.99  

Weighted average common shares outstanding (basic)

    3,271,402       3,272,023       3,270,705       3,271,028  

Weighted average common shares outstanding (diluted)

    3,274,784       3,273,189       3,274,087       3,272,194  

 

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

             

4

 

  

 

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three and nine months ended September 30, 2020 and 2019 (unaudited)

 

   

(in thousands)

 
   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

NET INCOME

  $ 5,250     $ 2,418     $ 12,006     $ 6,517  
                                 

OTHER COMPREHENSIVE INCOME (LOSS)

                               

Unrealized gain on securities:

                               

Unrealized holding gains (losses) during period

    (248 )     1,295       4,793       6,005  

Reclassification adjustments for gains included in net income

    (1 )     (2 )     (288 )     (2 )

Other comprehensive income (loss), before income taxes

    (249 )     1,293       4,505       6,003  

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

    (52 )     272       946       1,261  

Other comprehensive income (loss)

    (197 )     1,021       3,559       4,742  

COMPREHENSIVE INCOME

  $ 5,053     $ 3,439     $ 15,565     $ 11,259  

 

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

              

5

 

  

 

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands except share data)

 

Nine months ended September 30, 2020 and 2019 (unaudited)

 

   

Common stock

   

Surplus

   

Retained earnings

   

Accumulated other comprehensive income (loss)

   

Treasury stock

   

Total

 

BALANCE AT DECEMBER 31, 2019

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

Comprehensive income:

                                               

Net income

    -       -       12,006       -       -       12,006  

Other comprehensive income

    -       -       -       3,559       -       3,559  

3,556 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan

    -       33       -       -       56       89  

Stock option expense

    -       119       -       -       -       119  

Cash dividends declared, $0.35 per share

    -       -       (1,145 )     -       -       (1,145 )

BALANCE AT SEPTEMBER 30, 2020

  $ 3,761     $ 15,403     $ 91,490     $ 6,431     $ (7,676 )   $ 109,409  
                                                 

BALANCE AT DECEMBER 31, 2018

  $ 3,761     $ 14,960     $ 71,670     $ (1,764 )   $ (7,683 )   $ 80,944  

Comprehensive income:

                                               

Net income

    -       -       6,517       -       -       6,517  

Other comprehensive income

    -       -       -       4,742       -       4,742  

2,957 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan

    -       25       -       -       46       71  

Stock option expense

    -       188       -       -       -       188  

Cash dividends declared, $0.39 per share

    -       -       (1,277 )     -       -       (1,277 )

BALANCE AT SEPTEMBER 30, 2019

  $ 3,761     $ 15,173     $ 76,910     $ 2,978     $ (7,637 )   $ 91,185  

 

 

Three months ended September 30, 2020 and 2019 (unaudited)

 

   

Common stock

   

Surplus

   

Retained earnings

    Accumulated other comprehensive income    

Treasury stock

   

Total

 

BALANCE AT JUNE 30, 2020

  $ 3,761     $ 15,396     $ 86,698     $ 6,628     $ (7,689 )   $ 104,794  

Comprehensive income:

                                               

Net income

    -       -       5,250       -       -       5,250  

Other comprehensive loss

    -       -       -       (197 )     -       (197 )
837 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan     -       7       -       -       13       20  

Stock option expense

    -       -       -       -       -       -  

Cash dividends declared, $0.14 per share

    -       -       (458 )     -       -       (458 )

BALANCE AT SEPTEMBER 30, 2020

  $ 3,761     $ 15,403     $ 91,490     $ 6,431     $ (7,676 )   $ 109,409  
                                                 

BALANCE AT JUNE 30, 2019

  $ 3,761     $ 15,080     $ 74,919     $ 1,957     $ (7,663 )   $ 88,054  

Comprehensive income:

                                               

Net income

    -       -       2,418       -       -       2,418  

Other comprehensive income

    -       -       -       1,021       -       1,021  
1,680 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan     -       16       -       -       26       42  

Stock option expense

    -       77       -       -       -       77  

Cash dividends declared, $0.13 per share

    -       -       (427 )     -       -       (427 )

BALANCE AT SEPTEMBER 30, 2019

  $ 3,761     $ 15,173     $ 76,910     $ 2,978     $ (7,637 )   $ 91,185  

 

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

 

6

 

 

 

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

Nine months ended September 30, 2020 and 2019 (unaudited)

 

   

(in thousands)

 
    Nine months ended September 30,  
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

  $ (10,662 )   $ (2,330 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Proceeds from sales, calls and maturities of available-for-sale securities

    44,277       34,830  

Purchases of available-for-sale securities

    (39,569 )     (42,029 )
Purchases of FHLB stock     (296 )     -  
Proceeds from sale of other real estate owned     -       68  

Net increase in loans and leases

    (86,903 )     (11,252 )

Purchases of premises and equipment

    (510 )     (495 )

Net cash used in investing activities

    (83,001 )     (18,878 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in deposits

    113,833       40,032  

Repayments of other borrowings

    (15,750 )     (6,443 )

Proceeds from sale of treasury shares

    89       71  

Cash dividends paid

    (1,145 )     (1,277 )

Net cash provided by financing activities

    97,027       32,383  

NET INCREASE IN CASH AND CASH EQUIVALENTS

    3,364       11,175  

CASH AND CASH EQUIVALENTS

               

At beginning of period

    26,412       16,475  

At end of period

  $ 29,776     $ 27,650  

SUPPLEMENTAL CASH FLOW DISCLOSURES

               

Cash paid during the period for:

               

Interest

  $ 5,525     $ 6,652  

Federal income taxes

  $ 1,450     $ 600  

Non-cash investing activities:

               

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

  $ 4,505     $ 6,003  

 

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

 

7

 

United Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2020

 

 

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 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 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, 2019.

 

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 June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Management has developed four different models for calculating the allowance for loan losses under the requirements of ASU 2016-13 and has been running them parallel to the Bank’s existing methodology.  Management has not yet determined the expected impact the adoption of ASU 2016-13 will have on the consolidated financial statements.  For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2019. On July 17, 2019, the FASB voted to issue a proposal for public comment that would potentially result in a postponement of the required implementation date for ASU 2016-13.  On October 16, 2019, the FASB extended the implementation deadline until the fiscal year and interim periods beginning after December 15, 2022.  

 

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 from the goodwill impairment test. For public companies, this update is effective for interim and annual periods beginning after December 15, 2019. The Corporation adopted ASU 2017-04 effective January 1, 2020 but the new guidance did not have a material impact on the consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.  This ASU eliminates, adds, and modifies certain disclosure requirements for estimated fair value measurements.  Among the changes, entities will no longer be required to disclose the amount of and reasons for transfer between Level 1 and Level 2 of the estimated fair value hierarchy, but will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value measurements.  ASU 2018-13 is effective for all entities for interim and annual reporting periods beginning after December 15, 2019.  The Corporation adopted ASU 2018-13 effective January 1, 2020.  The revised disclosure requirements did not have a significant impact on the consolidated financial statements.

 

In April, 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.  This update is not expected to have a significant impact on the Corporation's consolidated financial statements.

 

In December, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.  The amendments also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance.  This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020.  Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued.  Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis.  The Corporation is currently reviewing the provisions of this new pronouncement, but does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

 

In January, 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.  The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.  The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.  The amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted, including early adoption in an interim period for which financial statements have not yet been issued.  This update is not expected to have a significant impact on the Corporation's consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments.  This update affects a wide variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.  This update is not expected to have a significant impact on the Corporation's consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting.  The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  The amendments are effective for all entities as of March 12, 2020 through December 31, 2022.  The Corporation is currently reviewing the amendments in this Update, but does not expect this guidance to have a material impact on its consolidated financial statements.

 

 
8

 

 

 

NOTE 3 - SECURITIES

 

The amortized cost, unrealized gains and losses, and fair value of available-for-sale securities as of September 30, 2020 and December 31, 2019 are as follows:

 

   

(in thousands)

 

September 30, 2020

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

 

Available-for-sale:

                               

Obligations of states and political subdivisions

  $ 85,986       5,150     $ 166     $ 90,970  

Mortgage-backed

    87,805       3,140       -       90,945  

Other

    1,040       17       -       1,057  
                                 

Total

  $ 174,831     $ 8,307     $ 166     $ 182,972  

 

 

   

(in thousands)

 

December 31, 2019

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

 

Available-for-sale:

                               

Obligations of states and political subdivisions

  $ 70,043     $ 2,593     $ 82     $ 72,554  

Mortgage-backed

    108,907       1,292       158       110,041  

Other

    1,025       -       9       1,016  
                                 

Total

  $ 179,975     $ 3,885     $ 249     $ 183,611  

  

9

 

  

 

NOTE 4 – LOANS AND LEASES

 

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the nine month periods ended September 30, 2020 and 2019:

 

   

(in thousands)

 
   

Residential 1 – 4 family real estate

    Commercial and multi-family real estate     Commercial    

Consumer

   

Total

 

Balance at December 31, 2019

  $ 592     $ 2,536     $ 939     $ 64     $ 4,131  

Provision charged to expenses

    919       2,977       482       72       4,450  

Losses charged off

    (97 )     (45 )     (4 )     (19 )     (165 )

Recoveries

    8       14       13       -       35  

Balance at September 30, 2020

  $ 1,422     $ 5,482     $ 1,430     $ 117     $ 8,451  
                                         

Balance at December 31, 2018

  $ 534     $ 2,355     $ 576     $ 62     $ 3,527  

Provision charged to expenses

    368       (6 )     29       9       400  

Losses charged off

    (98 )     (23 )     (31 )     (5 )     (157 )

Recoveries

    32       128       23       1       184  

Balance at September 30, 2019

  $ 836     $ 2,454     $ 597     $ 67     $ 3,954  

  

10

 

 

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, 2020 and December 31, 2019:

  

   

(in thousands)

 

September 30, 2020

 

Residential 1 – 4 family real estate

    Commercial and multi-family real estate     Commercial    

Consumer

   

Total

 

Allowance for loan and lease losses:

                                       

Attributable to loans and leases individually evaluated for impairment

  $ -     $ 76     $ 270     $ -     $ 346  

Collectively evaluated for impairment

   

1,422

      5,406       1,160       117       8,105  

Total allowance for loan and lease losses

  $ 1,422     $ 5,482     $ 1,430     $ 117     $ 8,451  
                                         

Loans and leases:

                                       

Individually evaluated for impairment

  $ -     $ 1,547     $ 788     $ -     $ 2,335  

Acquired with deteriorated credit quality

    58       116       -       -       174  

Collectively evaluated for impairment

    110,047       363,155       188,515       7,253       668,970  

Total ending loans and leases balance

  $ 110,105     $ 364,818     $ 189,303     $ 7,253     $ 671,479  

 

 

December 31, 2019

 

Residential 1 – 4 family real estate

    Commercial and multi-family real estate     Commercial    

Consumer

   

Total

 

Allowance for loan and lease losses:

                                       

Attributable to loans and leases individually evaluated for impairment

  $ -     $ 93     $ 342     $ -     $ 435  

Collectively evaluated for impairment

    592       2,443       597       64       3,696  

Total allowance for loan and lease losses

  $ 592     $ 2,536     $ 939     $ 64     $ 4,131  
                                         

Loans and leases:

                                       

Individually evaluated for impairment

  $ -     $ 1,499     $ 1,279     $ -     $ 2,778  

Acquired with deteriorated credit quality

    61       127       -       -       188  

Collectively evaluated for impairment

    122,844       365,988       76,379       8,247       573,458  

Total ending loans and leases balance

  $ 122,905     $ 367,614     $ 77,658     $ 8,247     $ 576,424  

 

11

 

  

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, 2020 was $2,710,000 compared to $2,258,000 for the nine month period ended September 30, 2019. There was $346,000 of allowance for loan and lease losses specifically reserved as of September 30, 2020 for impaired loans compared to $369,000 as of September 30, 2019. Additionally, there was approximately $34,000 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, 2020 and $169,000 for the nine month period ended September 30, 2019.

 

The following table presents 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, 2020 and December 31, 2019. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.

 

   

(in thousands)

 

September 30, 2020

 

Nonaccrual

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

Residential 1-4 family real estate

  $ 420     $ 39     $ 201  

Commercial and multi family real estate

    793       -       547  

Agricultural real estate

    13       -       -  
Commercial     19       -       770  
Agriculture     -       -       -  
Consumer     -       -       -  

Total

  $ 1,245     $ 39     $ 1,518  
                         

December 31, 2019

                       

Residential 1-4 family real estate

  $ 414     $ 138     $ 223  

Commercial and multi family real estate

    545       -       623  

Agricultural real estate

    4       -       -  

Commercial

    -       -       772  

Agriculture

    -       -       -  

Consumer

    -       -       -  

Total

  $ 963     $ 138     $ 1,618  

 

12

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of September 30, 2020 and December 31, 2019 by class of loans and leases:

 

   

(in thousands)

 

September 30, 2020

  30 – 59 days past due     60 – 89 days past due     Greater than 90 days past due    

Total past due

    Loans and leases not past due    

Total

 

Residential 1-4 family real estate

  $ 886     $ 93     $ 299     $ 1,278     $ 108,827     $ 110,105  

Commercial and multi family real estate

    67       -       521       588       325,145       325,733  

Agricultural real estate

    -       92       -       92       38,993       39,085  

Commercial

    547       -       19       566       178,643       179,209  

Agriculture

    -       -       -       -       10,094       10,094  

Consumer

    17       -       -       17       7,236       7,253  

Total

  $ 1,517     $ 185     $ 839     $ 2,541     $ 668,938     $ 671,479  
                                                 

December 31, 2019

                                               

Residential 1-4 family real estate

  $ 2,709     $ 99     $ 322     $ 3,130     $ 119,775     $ 122,905  

Commercial and multi family real estate

    177       302       15       494       332,161       332,655  

Agricultural real estate

    -       -       -       -       34,959       34,959  

Commercial

    -       57       5       62       67,826       67,888  

Agriculture

    -       -       -       -       9,770       9,770  

Consumer

    2       -       -       2       8,245       8,247  

Total

  $ 2,888     $ 458     $ 342     $ 3,688     $ 572,736     $ 576,424  

 

13

 

  

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 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 generally includes non-homogenous loans and leases, such as commercial and commercial real estate loans and leases. The Corporation uses the following definitions for risk ratings:

 

Pass: 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.

 

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.

 

The following table provides a summary of the loan portfolio risk grades, as applicable, based on the most recent analysis performed, as of September 30, 2020 and December 31, 2019. The Corporation risk rates all commercial and commercial real estate loans.

 

As of September 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans and leases is as follows:

 

   

(in thousands)

 

September 30, 2020

 

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Not rated

 

Residential 1 - 4 family

  $ 7,207     $ -     $ -     $ -     $ 102,898  

Commercial and multi- family real estate

    358,171       3,894       2,711       -       42  

Commercial

    60,350       897       2,276       -       125,780  

Consumer

    122       -       -       -       7,131  

Total

  $ 425,850     $ 4,791     $ 4,987     $ -     $ 235,851  
                                         

December 31, 2019

                                       

Residential 1 - 4 family

  $ 9,219     $ -     $ -     $ -     $ 113,686  

Commercial and multi- family real estate

    362,519       1,797       3,258       -       40  

Commercial

    75,559       410       1,688       -       1  

Consumer

    45       -       -       -       8,202  

Total

  $ 447,342     $ 2,207     $ 4,946     $ -     $ 121,929  

 

14

 

 

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, 2020 and December 31, 2019:

 

   

(in thousands)

 

September 30, 2020

 

Residential 1-4 family

   

Commercial and multi-family real estate

   

Commercial

   

Consumer

   

Total

 
                                         

Performing

  $ 102,599     $ 26     $ 125,780     $ 7,131     $ 235,536  

Nonperforming

    299       16       -       -       315  

Total

  $ 102,898     $ 42     $ 125,780     $ 7,131     $ 235,851  
                                         

December 31, 2019

                                       
                                         

Performing

  $ 113,364     $ 24     $ -     $ 8,202     $ 121,590  

Nonperforming

    322       16       1       -       339  

Total

  $ 113,686     $ 40     $ 1     $ 8,202     $ 121,929  

  

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. All TDRs are also classified as impaired loans and leases.

 

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 for which there was a payment default during the nine month period ended September 30, 2020.  As a result of the COVID-19 pandemic, payment deferrals and interest only payment options for consumer, small business, and commercial customers for up to 90 days were offered.  Payment extensions of up to 90 days for mortgage customers were also offered. Through September 30, 2020, 155 loans were modified or extended, approximating $60.8 million.  These modifications and extensions were made under the CARES act and are not considered TDR's.

 

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.

  

15

 

 

The following is information related to loans and leases acquired in these transactions, including purchased impaired loans:

 

   

The Ohio State Bank

 
   

(in thousands)

 
    Contractual                  
    Principal     Accretable     Carrying  
    Receivable     Difference     Amount  

Purchased Performing Loans and Leases

                       

Balance at December 31, 2019

  $ 13,047     $ (430 )   $ 12,617  

Change due to payments received

    (2,569 )     82       (2,487 )

Transfer to foreclosed real estate

    -       -       -  

Change due to loan charge-off

    -       -       -  

Balance at September 30, 2020

  $ 10,478     $ (348 )   $ 10,130  
                         

Purchased Impaired Loans and Leases

                       

Balance at December 31, 2019

  $ 160     $ (134 )   $ 26  

Change due to payments received

    (48 )     71       23  

Transfer to foreclosed real estate

    -       -       -  

Change due to loan charge-off

    -       -       -  

Balance at September 30, 2020

  $ 112     $ (63 )   $ 49  

 

 

   

Benchmark Bank

 
   

(in thousands)

 
    Contractual                  
    Principal     Accretable     Carrying  
    Receivable     Difference     Amount  

Purchased Performing Loans and Leases

                       

Balance at December 31, 2019

  $ 58,953     $ (1,177 )   $ 57,776  

Change due to payments received

    (17,716 )     449       (17,267 )

Transfer to foreclosed real estate

    -       -       -  

Change due to loan charge-off

    -       -       -  

Balance at September 30, 2020

  $ 41,237     $ (728 )   $ 40,509  
                         

Purchased Impaired Loans and Leases

                       

Balance at December 31, 2019

  $ 354     $ (192 )   $ 162  

Change due to payments received

    (56 )     19       (37 )

Transfer to foreclosed real estate

    -       -       -  

Change due to loan charge-off

    -       -       -  

Balance at September 30, 2020

  $ 298     $ (173 )   $ 125  

 

There was no provision for loan and lease losses recognized during the nine month periods ended September 30, 2020 and 2019 related to the acquired loans as there was no significant change to the credit quality of the loans during the period.

 

16

 

 

 

NOTE 5 – OTHER BORROWINGS

 

Other borrowings consists of the following at September 30, 2020 and December 31, 2019

 

   

(in thousands)

 
   

September 30,

   

December 31,

 
   

2020

   

2019

 

Federal Home Loan Bank borrowings:

               

Secured note, with interest at 1.72%, due September, 2020

  $ -     $ 6,000  

Secured note, with interest at 2.90%, due June, 2021

    8,000       8,000  

Secured note, with variable interest, at 0.49% at September 30, 2020 and 2.13% at December 31, 2019, due September, 2021

    7,000       7,000  

Secured note, with interest at 1.86%, due September, 2021

    6,000       6,000  

Secured note, with interest at 2.94%, due December, 2021

    8,000       8,000  

Secured note, with interest at 2.98%, due June, 2022

    -       9,000  

Secured note, with interest at 1.97%, due September, 2022

    6,000       6,000  

United Bankers Bank

               

Note payable, with interest at 4.875% and $250,000 principal payments payable quarterly with any remaining unpaid principal, due September 1, 2022. All Union Bank stock is held as collateral.

    8,000       8,750  

Total other borrowings

  $ 43,000     $ 58,750  

  

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $178,723,000 and $186,076,000 at September 30, 2020 and December 31, 2019 respectively.

 

Future maturities of other borrowings are as follows: 2020, $250,000; 2021, $30,000,000; and 2022, $12,750,000.

 

The Bank elected during the third quarter of 2020 to repay the secured note due in June 2022 and incurred a prepayment penalty of $450,000 which is included in other interest expense.

 

17

 

 

 

NOTE 6 – 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 3.38% aSeptember 30, 2020 and 5.10% at December 31, 2019. 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, 2020 and December 31, 2019 was $2,633,000 and $2,608,000, 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 3.11% at September 30, 2020 and 4.78% at December 31, 2019.

 

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 $405,000 and $557,000 for the nine month periods ended September 30, 2020 and 2019, respectively, and is included in other borrowings interest expense in the accompanying consolidated statements of income.  

 

18

 

 

 

NOTE 7 - 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, 2020 and December 31, 2019 include available-for-sale securities, which are valued using Level 1 and Level 2 inputs, as well as mortgage servicing rights, amounting to $965,000 at September 30, 2020 and $1,061,000 at December 31, 2019, which are valued using Level 3 inputs. Financial assets measured at fair value on a nonrecurring basis at September 30, 2020 include loans classified as impaired totaling $1,651,000 compared to $1,495,000 at December 31, 2019

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, 2020, due to the lack of observable quotes in inactive markets for those instruments at September 30, 2020.

 

19

 

  

The tables below present a reconciliation and income statement classification of gains and losses for mortgage servicing rights, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine month period ended September 30, 2020 and for the year ended December 31, 2019:

 

   

(in thousands)

 
   

September 30,

   

December 31,

 
   

2020

   

2019

 

Mortgage Servicing Rights

               

Balance at beginning of period

  $ 1,061     $ 1,313  

Gains or losses, including realized and unrealized:

               

Purchases, issuances, and settlements

    544       192  

Disposals - amortization based on loan payments and payoffs

    (253 )     (186 )

Changes in fair value

    (387 )     (258 )

Balance at end of period

  $ 965     $ 1,061  

  

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.

 

20

 

  

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 or evaluations as well as Level 3 inputs based on customized discounting criteria such as additional appraisal adjustments to consider deterioration of value subsequent to appraisal date and estimated cost to sell. Additional appraisal adjustments range between 15% and 35% of appraised value, and estimated selling cost ranges between 10% and 20% of the adjusted appraised value.  Due to the significance of the Level 3 inputs, impaired loans fair values have been classified as Level 3.

 

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 or evaluations utilizing a market value approach. Due to the significance of the Level 3 inputs, other real estate owned is 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, 2020 and December 31, 2019.

  

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NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts and estimated fair values of recognized financial instruments at September 30, 2020 and December 31, 2019 were as follows:

 

   

(in thousands)

         
   

September 30, 2020

   

December 31, 2019

         
   

Carrying amount

   

Estimated value

   

Carrying amount

   

Estimated value

   

Input Level

 
                                         

FINANCIAL ASSETS

                                       

Cash and cash equivalents

  $ 29,776     $ 29,776     $ 26,412     $ 26,412       1  

Securities, including FHLB stock

    188,570       188,570       188,913       188,913       2,3  

Loans held for sale

    32,117       32,117       15,301       15,301       3  

Net loans and leases

    663,028       664,241       572,293       572,936       3  

Mortgage servicing rights

    965       965       1,061       1,061       3  

Derivative assets

    5,961       5,961       970       970       3  

Total Financial Assets

  $ 920,417     $ 921,630     $ 804,950     $ 805,593          
                                         

FINANCIAL LIABILITIES

                                       

Deposits

                                       

Maturity

  $ 158,480     $ 159,716     $ 197,391     $ 197,428       3  

Non-maturity

    662,518       662,518       509,743       509,743       1  

Other borrowings

    43,000       43,221       58,750       58,692       3  

Junior subordinated deferrable interest debentures

    12,933      
9,037
      12,908       11,067       3  

Derivative liabilities

    377       377       27       27       3  

Total Financial Liabilities

  $ 877,308     $ 874,869     $ 778,819     $ 776,957          

 

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.

 

There are also unrecognized financial instruments at September 30, 2020 and December 31, 2019 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounted to $155,454,000 at September 30, 2020 and $133,220,000 at December 31, 2019. 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.

 

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

 

Mortgage servicing rights:

 

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

 

Derivative assets and liabilities:

 

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

 

Deposit liabilities:

 

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

 

Other 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.

  

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NOTE 9 – 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 has issued 33,853 options during 2019 at an exercise price of $22.97, and 63,858 options during 2020 at an average exercise price of $16.77 under the Plan. Following is a summary of activity for stock options for the nine month periods ended September 30, 2020 and September 30, 2019

 

    September 30,     September 30,  
    2020     2019  

Outstanding, beginning of period

    117,647       93,069  

Granted

    63,858       33,853  

Exercised

    -       -  

Forfeited

    (20,733 )     -  

Outstanding, end of period

    160,772       126,922  

Weighted average exercise price at end of quarter

  $ 19.82     $ 21.81  

 

Options vest over a three-year period on the anniversary of the date of grant. At September 30, 2020, 71,224 options were vested compared to 51,624 options vested at September 30, 2019 and outstanding options had a weighted average remaining contractual term of 8.4 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 that are still vesting:

 

   

2020

   

2019

   

2018

   

2017

 

Weighted-average fair value of options granted

  $ 4.83     $ 7.77     $ 7.87     $ 7.35  

Average dividend yield

    2.93

%

    2.26

%

    2.18

%

    2.23

%

Expected volatility

    40.00

%

    40.00

%

    40.00

%

    40.00

%

Risk-free interest rate

    0.49

%

    1.93

%

    2.81

%

    2.06

%

Expected term (years)

    7       7       7       7  

 

Total compensation expense related to the stock options granted in 2019 net of forfeitures, is expected to be $183,000 and is being recognized ratably over the 36 month period beginning July 1, 2019.  Total compensation expense related to the stock options granted in 2020 is expected to be $308,000 and is being recognized ratably over the 36 month period beginning July 1, 2020. Stock option expense for outstanding awards amounted to $119,000 for the nine months ended September 30, 2020 and $77,000 and $188,000 for the quarter and nine months ended September 30, 2019.  No option expense was recognized for the quarter ended September 30, 2020 as the impact of forfeited options offset the vesting of issued options.

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NOTE 10 – NON-INTEREST INCOME

 

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

 

Service charges on deposit accounts: 

 

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

 

Interchange fee income: 

 

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

 

Wealth management income

 

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

 

The following table presents the Corporation’s non-interest income for the nine months ended September 30, 2020 and 2019.  Items outside the scope of ASC 606 are noted as such.

 

   

Nine Months ended September 30,

 
   

2020

   

2019

 

Service charges on deposit accounts

  $ 827     $ 1,110  

Gain on sale of loans (1)

    17,032       6,409  
Net securities gains (1)     288       2  

Change in fair value of mortgage servicing rights (1)

    (387 )     (295 )

Increase in cash surrender value of life insurance (1)

    283       292  

Other

               

Credit and debit card interchange fees

    1,113       1,086  

Wealth management

    237       229  

Net loan servicing fees (1)

    171       255  

Other non-interest income 

    2,535       386  

Total non-interest income

  $ 22,099     $ 9,474  

 

(1) Not within the scope of ASC 606

 

 

NOTE 11 – SUBSEQUENT EVENTS 

 

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after September 30, 2020 but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at September 30, 2020 have been recognized in the consolidated financial statements for the period ended September 30, 2020. Events or transactions that provided evidence about conditions that did not exist at September 30, 2020 but arose before the financial statements were issued have not been recognized in the consolidated financial statements for the period ended September 30, 2020.

 

On October 20, 2020, the Corporation's Board of Directors approved a cash dividend of $0.16 per common share payable December 15, 2020 to shareholders of record at the close of business on November 30, 2020.

 

  

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

SELECTED FINANCIAL DATA

 

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

 

   

As of or for the three months ended September 30,

   

As of or for the nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

SIGNIFICANT RATIOS (Unaudited)

                               

Net income to:

                               

Average assets (a)

    2.09 %     1.12 %     1.66 %     1.02 %

Average tangible shareholders’ equity (non-GAAP) (a)

    26.96 %     16.12 %     22.16 %     15.50 %

Net interest margin (a)

    3.65 %