ex_124042.htm

Exhibit 13

Table of Contents

		Page(s)

	President’s Letter	1
	Market Price and Dividends on Common Stock	2
	Five-Year Summary of Selected Financial Data	3
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
	Report of Independent Registered Public Accounting Firm	16

	Financial Statements
	Consolidated Balance Sheets	17
	Consolidated Statements of Income	18

	Consolidated Statements of Comprehensive Income	19
	Consolidated Statements of Shareholders’ Equity	20

	Consolidated Statements of Cash Flows	21
	Notes to Consolidated Financial Statements	23

	Directors and Officers	65

Shareholders, Clients, and Team Members:

I am pleased to report that as a result of the effort and commitment of our team members that once again your Company had a successful year. In addition to reporting income before taxes of approximately $12.3 million, return on average tangible equity of 18.49% and return on average assets of 1.24%, all noticeable increases from previous years, your company continues to focus on sustainable growth. We continue to believe that growth in full relationships with our clients is key to the continued increase in income generation for our shareholders. As such, we continue to focus our activities around driving those relationships across services and product lines.

These focused activities led to year over year growth of 2.6% in loans and 6.1% in deposits. During this same period, the Company recognized a 94.0% increase in gain on loan sales. While net interest income will continue to be our largest source of income, the enduring challenges of industry-wide margin compression make it increasingly important to generate non-interest income. Both our residential mortgage activities and governmental lending units are providing those opportunities, while at the same time capturing customer relationships during those transactions. Relationship banking is, has been, and will continue to be the fundamental driver of our long-term profitability and success.

It is also important to note that during the fourth quarter of 2019, the company realized an increase in other non-interest income due to the settlement of claims related to prior year tax adjustments which resulted in recording a one-time net income recovery of $1,980,000.

In 2020, we plan to continue to invest in our most important driver of success, our team members. In addition to further development of our current team members, we are always exploring ways to add team members with the desired expertise as we continue to expand in size and complexity. All the while, we remain unwavering in the promotion of our core values throughout that process. Those core values are not just a tag line or a feel good cliché, but undeniably the primary driver of our financial successes.

The Company also continues to make investments in technology to create internal efficiencies, reduce the risk of fraud, and enhance customer tools and resources. Such efforts have yielded positive results in our customers’ use of technology-based products. We believe that effectively implementing technology will promote growth and support for our growing footprint and provide the opportunity to increase the effectiveness of our team members in serving our clients.

The continued accomplishments of your Company is the undeniable result of the ongoing efforts of the Company’s dedicated team members and Board of Directors in implementing our Strategic Plan. Their efforts and our strong corporate values of respect for and accountability to our shareholders, clients, colleagues, and communities are the foundation for the continued success of your Company. Thank you for your ongoing support and the trust you have placed in us.

Respectfully,

Brian D. Young

President & CEO

UNITED BANCSHARES, INC.

DESCRIPTION OF THE CORPORATION

United Bancshares, Inc., an Ohio corporation (the “Corporation”), is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation was incorporated and organized in 1985. The executive offices of the Corporation are located at 105 Progressive Drive, Columbus Grove, Ohio 45830. Effective February 1, 2007, the Bank 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. Effective, December 4, 2009, the Bank formed a wholly-owned subsidiary UBC Property, Inc. to hold and manage certain property that was acquired in lieu of foreclosure. At this time all other real estate owned property is being held at the Bank. Through its subsidiary, the Bank, the Corporation is engaged in the business of commercial banking and offers a full range of commercial banking services.

The Union Bank Company is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Putnam, Sandusky, Van Wert and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Pemberville, Plymouth, Westerville and Worthington, Ohio.

United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001. As of December 31, 2019, the common stock was held by 1,143 shareholders of record.

AVAILABILITY OF MORE INFORMATION

To obtain a copy, without charge, of the United Bancshares, Inc.’s annual report (Form 10-K) filed with the Securities and Exchange Commission, please write to:

Heather Oatman, Secretary

United Bancshares, Inc.

105 Progressive Drive

Columbus Grove, Ohio 45830

800-837-8111

UNITED BANCSHARES, INC.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

	(Dollars in thousands, except per share data)
	Years ended December 31,
	2019			2018			2017			2016			2015
Statements of income:
Total interest income	$	37,819		$	34,365		$	25,772		$	21,627		$	22,836
Total interest expense		8,924			6,158			3,118			2,231			2,077
Net interest income		28,895			28,207			22,654			19,396			20,759
Provision (credit) for loan losses		550			450			(350	)		(750	)		382
Net interest income after provision (credit) for loan losses		28,345			27,757			23,004			20,146			20,377
Total non-interest income		15,048			9,428			6,099			4,832			4,572
Total non-interest expenses		31,117			27,436			22,378			17,713			17,627
Income before federal income taxes		12,276			9,749			6,725			7,265			7,322
Federal income taxes		1,615			1,529			2,879			1,744			1,405
Net income	$	10,661		$	8,220		$	3,846		$	5,521		$	5,917
Per share of common stock:
Net income - basic	$	3.26		$	2.51		$	1.18		$	1.68		$	1.77
Dividends		0.52			0.48			0.48			0.44			0.36
Book value	$	29.00		$	24.76		$	23.17		$	22.21		$	21.62
Average shares outstanding - basic		3,270,878			3,268,667			3,267,305			3,289,497			3,309,339
Average shares outstanding - diluted		3,277,198			3,269,834			3,272,310			3,289,497			3,309,339
Year end balances:
Loans (1)	$	591,725		$	569,319		$	508,796		$	377,596		$	354,597
Securities (2)		188,913			172,656			174,730			195,035			187,759
Total assets		880,014			830,300			780,450			633,119			608,665
Deposits		707,134			666,236			630,548			524,680			518,419
Shareholders' equity		94,781			80,944			75,704			72,558			71,561
Average balances:
Loans (1)		582,377			540,687			421,564			361,437			358,368
Securities (2)		179,075			173,592			189,815			191,813			207,738
Total assets		861,693			802,989			683,164			614,688			628,753
Deposits		694,857			647,987			565,710			519,102			531,359
Shareholders' equity		86,652			76,142			75,597			74,067			69,981
Selected ratios:
Net yield on average interest earning assets (3)		3.75	%		3.96	%		3.80	%		3.59	%		3.75	%
Return on average assets		1.24	%		1.02	%		0.56	%		0.90	%		0.94	%
Return on average shareholders' equity		12.30	%		10.80	%		5.09	%		7.45	%		8.46	%
Net loan charge-offs (recoveries) as a percentage of average outstanding net loans		(0.01	)%		(0.04	)%		0.04	%		(0.07	)%		0.11	%
Allowance for loan losses as a percentage of year end loans (4)		0.72	%		0.63	%		0.56	%		0.89	%		1.09	%
Shareholders' equity as a percentage of total assets		10.77	%		9.75	%		9.70	%		11.46	%		11.76	%

Notes:

1) Includes loans held for sale.

2) Includes restricted bank stock.

3) Net yield on average interest-earning assets was computed on a tax-equivalent basis.

4) Does not include loans held for sale

5) Financial data for 2017 and subsequent years includes the impact of the Benchmark Bancorp acquisition.

Forward-looking Statements

This report includes certain forward-looking statements by the Corporation relating to such matters as anticipated operating results, prospects for new lines of business, technological developments, economic trends (including interest rates), and similar matters. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions. While the Corporation believes that the assumptions underlying the forward looking statements contained herein and in other public documents are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: economic conditions, volatility and direction of market interest rates, governmental legislation and regulation, material unforeseen changes in the financial condition or results of operations of the Corporation’s customers, customer reaction to and unforeseen complications with respect to the integration of acquisition, product design initiative, and other risks identified, from time-to-time in the Corporation’s other public documents on file with the Securities and Exchange Commission.

The following discussion provides additional information relating to the financial condition and results of operations of United Bancshares, Inc. which include the impact of the acquisition of Benchmark Bancorp, Inc. and its wholly-owned subsidiary, Benchmark Bank (“Benchmark”) on September 8, 2017. This section should be read in conjunction with the consolidated financial statements and the supplemental data contained elsewhere in the Annual Report on Form 10-K.

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

Overview

United Bancshares, Inc. (the “Corporation”) is a financial holding company that conducts business through its wholly-owned subsidiary, The Union Bank Company (the “Bank”). The Bank is an Ohio state-chartered commercial bank that provides financial services to communities based in northwest Ohio and central Ohio, where it operates 19 full-service branches.

As a commercial bank, the Bank concentrates its efforts on serving the financial needs of the businesses in and around the counties it serves. The Bank also provides financing to customers seeking to purchase or build their own homes. The Bank provides deposit, treasury management, wealth management, and other traditional banking products through its full-service branch office network and its electronic banking services.

Financial Condition

Consolidated assets for the Corporation and the Bank totaled $880.0 million at December 31, 2019, compared to $830.3 million at December 31, 2018, representing an increase of $49.7 million or 6.0%. The increase in total assets was primarily the result of an increase of $14.2 million (2.6%) in net loans, $7.6 million (98.6%) in loans held for sale, $16.3 million (9.7%) in securities available for sale and $9.9 million (60.3%) in cash and cash equivalents. Deposits during this same period increased $40.9 million (6.1%), other borrowings decreased $6.7 million (10.2%) and Shareholders’ equity increased $13.8 million (17.1%).

Loans and Leases

At December 31, 2019, total loans and leases, including loans and leases held for sale, amounted to $591.7 million compared to $569.3 million at December 31, 2018, an increase of $22.4 million (3.9%). The following categories within the loan and lease portfolio represent the majority of the change during 2019: Commercial and multi-family real estate increased $13.2 million (3.7%), residential real estate increased $3.1 million (2.6%), loans held for sale increased $7.6 million (98.6%), and consumer loans increased $1.6 million (23.1%). This growth was slightly offset by a decrease in commercial loans of $3.0 million (3.7%).

Securities

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

Securities, including FHLB stock, totaled $188.9 million at December 31, 2019 compared to $172.7 million at December 31, 2018, an increase of $16.2 million (9.7%). The portfolio experienced an increase in net unrealized gains on securities of $5.9 million during 2019.

The Corporation is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB. FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment. There were no changes to the FHLB stock balance during 2019.

At December 31, 2019, the Corporation’s investment securities portfolio included $72.6 million in U.S. states and political subdivisions securities, which is $22.2 million (23.5%) lower than shareholders’ equity as of that date. The largest exposure to any one state is $14.0 million, or 20%, from issuers located within the state of Wisconsin. The Corporation’s procedures for evaluating investments in securities issued by states, municipalities and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.

At December 31, 2019 the net unrealized gain on available-for-sale securities amounted to $3.6 million while at December 31, 2018, there was a net unrealized loss on available-for-sale securities of $2.2 million. At December 31, 2019, the Corporation held 29 securities which were in a loss position with the fair value of $29.2 million and gross unrealized losses $249,000. Management has considered the current interest rate environment, typical volatility in the bond market, and the Corporation’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.

Cash and Cash equivalents

Cash and cash equivalents at December 31, 2019 were $26.4 million, a $9.9 million (60.3%) increase from $16.5 million at December 31, 2018. The increase is due to an increase of overnight funds on deposit at the Federal Reserve.

Deposits

Total deposits at December 31, 2019 were $707.1 million, an increase of $40.9 million (6.1%) compared with total deposits of $666.2 million at December 31, 2018. The increase in deposits consisted of a $39.9 million increase in interest bearing deposits and a $1.0 million increase in non-interest bearing deposits.

Other Borrowings

In addition to customer deposits, the Corporation utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth. Other borrowings at December 31, 2019, include FHLB secured advances of $50.0 million and term borrowings from another bank of $8,750,000. Other borrowings at December 31, 2018, included FHLB secured advances of $51.3 million, $9,750,000 of term borrowings from another bank, and federal funds purchased from correspondent banks of $4.4 million. FHLB borrowings consist of multiple advances due at various dates through September 2022. Term borrowings from another bank were used to facilitate the 2017 Benchmark acquisition and are payable in quarterly installments of $250,000 with any remaining principal due in September 2022.

Shareholders’ Equity

Total shareholders’ equity increased $13.8 million (17.1%) to $94.8 million at December 31, 2019 compared to $80.9 million at December 31, 2018. The increase was a result of 2019 net income of $10.7 million and other comprehensive income of $4.6 million, offset by the declaration of $1.7 million in common stock dividends.

Results of Operation – 2019 Compared to 2018

Performance Summary

Consolidated net income for the Corporation was $10.7 million in 2019 compared to $8.2 million in 2018 and $3.8 million in 2017.

Net income in 2019, as compared to 2018 was favorably impacted by increases in net interest income of $688,000 and non-interest income of $5.6 million, offset by increases in non-interest expenses of $3.7 million and provision for loan losses of $100,000.

The Corporation’s return on average assets was 1.24% in 2019, compared to 1.02% in 2018, and 0.56% in 2017. The Corporation’s return on average tangible shareholders’ equity was 18.49% in 2019, 16.79% in 2018, and 6.4% in 2017. Basic net income per share was $3.26 per share in 2019, an increase of $0.75 per share from $2.51 in 2018. Basic net income per share of $2.51 in 2018 represented an increase of $1.33 per share from $1.18 in 2017. Changes in these amounts from year to year were generally reflective of changes in the level of net income.

Net Interest Income

Net interest income, which represents the revenue generated from interest-earning assets in excess of the interest cost of funding those assets, is the Corporation's principal source of income. Net interest income is influenced by market interest rate conditions and the volume and mix of interest-earning assets and interest-bearing liabilities. Many external factors affect net interest income and typically include the strength of client loan demand, client preference for individual deposit account products, competitors’ loan and deposit product offerings, the national and local economic climates, and Federal Reserve monetary policy.

Net interest income for 2019 was $28.9 million, an increase of $688,000 (2.4%) from 2018. The increase in net interest income was primarily due to growth in interest earning assets which outpaced the rising cost of interest earning liabilities. Total average interest-earning assets increased $59.0 million to $781.9 million in 2019 from $722.9 in 2018. The yield on average interest-earning assets, on a tax-equivalent basis, increased 8 basis points in 2019 to 4.89% from 4.81% in 2018. Total average interest-bearing liabilities increased $33.5 million to $647.8 million in 2019 compared to $614.3 million in 2018, and the cost of interest bearing liabilities increased 38 basis points to 1.38% in 2019 compared to 1.00% in 2018.

Provision for Loan and Lease Losses and the Allowance for Loan and Lease Losses

The Corporation’s loan policy provides guidelines for managing both credit risk and asset quality. The policy details acceptable lending practices, establishes loan-grading classifications, and prescribes the use of a loan review process. The Corporation has a credit administration department that performs regular credit file reviews which facilitate the timely identification of problem or potential problem credits, ensure sound credit decisions, and assist in the determination of the allowance for loan losses. The Corporation also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process. The loan policy, loan review process, and credit analysis function facilitate management's evaluation of the credit risk inherent in the lending function.

As mentioned, ongoing reviews are performed to identify potential problem and nonperforming loans and also provide in-depth analysis with respect to the quarterly allowance for loan losses calculation. Part of this analysis involves assessing the need for specific reserves relative to impaired loans. This evaluation typically includes a review of the recent performance history of the credit, a comparison of the estimated collateral value in relation to the outstanding loan balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future financial performance. Loans are considered to be impaired when, based upon the most current information available, it appears probable that the borrower will not be able to make payments according to the contractual terms of the loan agreement. Impaired loans are recorded at the observable market price of the loan, the fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan's effective interest rate. Given that the Corporation’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of individual impaired loans is most often based upon the underlying collateral value net of estimated selling costs. Large groups of smaller balance homogenous loans are collectively evaluated for impairment.

To determine the allowance for loan and lease losses, the Corporation prepares a detailed analysis that focuses on delinquency trends, the status of nonperforming loans (i.e., impaired, nonaccrual, restructured, and past due 90 days or more), current and historical trends of charged-off loans within each loan category (i.e., commercial, real estate, and consumer), existing local and national economic conditions, and changes within the volume and mix in each loan category. Higher loss rates are applied in calculating the allowance for loan losses relating to potential problem loans. Loss rates are periodically evaluated considering historic loss rates in the respective potential problem loan categories (i.e., special mention, substandard, doubtful) and current trends.

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

The allowance for loan and lease losses at December 31, 2019 was $4.1 million, or 0.72% of total loans, compared to $3.5 million, or 0.63% of total loans at December 31, 2018. The change in the allowance for loan and lease losses during 2019 included a $550,000 provision for loan losses and loan recoveries, and net recoveries of $54,000.

The provision or credit for loan and lease losses is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors. Favorable settlements of impaired or potential problem loans can also result in a reduction in the required allowance for loan and lease losses and a negative provision, or credit, being reflected in current operations. The provision for loan and lease losses of $550,000 in 2019 was a $100,000 increase compared to the provision of $450,000 in 2018. The increase was primarily attributable to loan growth of $14.8 million during 2019 and an increase in the specific reserve on impaired loans.

Impaired loans, principally consisting of commercial and commercial real estate, amounted to $2,778,000 at December 31, 2019. Impaired loans at December 31, 2019 included $848,000 of loans with no specific reserves included in the allowance for loan losses and $1,930,000 of loans with specific reserves of $435,000 included in the Corporation's December 31, 2019 allowance for loan losses. Total impaired loans of $1,331,000 at December 31, 2018 included $959,000 of loans with no specific reserves included in the allowance for loan losses and $372,000 of loans with specific reserves of $128,000 included in the Corporation's December 31, 2018 allowance for loan losses.

In addition to impaired loans, the Corporation had other potential problem credits of $4.9 million at December 31, 2019 compared to $6.7 million at December 31, 2018, a decrease of $1.8 million (26.9%). The Corporation’s credit administration department continues to closely monitor these credits.

Non-Interest Income

Total non-interest income increased $5.6 million (59.6%) to $15.0 million in 2019 from $9.4 million in 2018, which was primarily attributable to increases in gain on sale of loans of $4.4 million and other non-interest operating income of $1.6 million.

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance. Service charges on deposit accounts was $1.5 million in 2019 compared to $1.6 million in 2018.

The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and retains the servicing rights relating to certain of those loans. During 2019, gain on sale of loans was $9.1 million, including $192,000 of capitalized servicing rights. Gain on sale of loans was $4.7 million in 2018, including $164,000 of capitalized servicing rights. A significant contributing factor to the increase in gain on sale of loans was the favorable rate environment for refinancing existing mortgages and the growth of the residential mortgage and governmental lending operations. The Corporation’s serviced portfolio increased $2.5 million during 2019 to $175.7 million at December 31, 2019.

The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $258,000 decrease in the fair value of mortgage servicing rights during 2019, compared to a $26,000 increase in the fair value of mortgage servicing rights in 2018. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2019 the PSA factor was 214 compared to 136 at December 31, 2018.

Other operating income increased $1.6 million to $4.4 million in 2019 from $2.7 million in 2018. The increase in other non-interest income resulted from the Corporation's settlement of claims related to prior year tax adjustments, which resulted in a one-time net income recovery of $1,980,000 during the fourth quarter of 2019.

Non-Interest Expenses

For the year ended December 31, 2019, non-interest expenses totaled $31,117,000, compared to $27,436,000 for the same period of 2018, an increase of $3,681,000 (13.4%) which was primarily attributable to increases in salaries and benefits expense of $2,762,000 (17.4%), loan fees of $433,000 (46.9%), legal fees of $77,000 (24.3%), consultant fees of $93,000, ATM processing and other fees of $101,000 (15.2%), and information technology expenses of $105,000 (92.0%), offset by a decrease in the FDIC assessment of $185,000 (69.9%).

The significant components of other operating expenses are summarized in Note 11 to the consolidated financial statements.

Provision for Income Taxes

The provision for income taxes for 2019 was $1.6 million an effective tax rate of 13.2%, compared to $1.5 million in 2018, an effective rate of 15.7%. The decrease in the effective tax rate in 2019 as compared to 2018 resulted from the Corporation's $1,980,000 settlement claim being tax exempt.

Results of Operation – 2018 Compared to 2017

Performance Summary

Consolidated net income for the Corporation was $8.2 million in 2018 compared to $3.8 million in 2017 and $5.5 million in 2016.

Net income in 2018, as compared to 2017 was favorably impacted by increases in net interest income of $5.6 million and non-interest income of $3.3 million as well as a decrease in the provision for income taxes of $1.4 million, offset by an increase in non-interest expenses of $5.0 million and a provision for loan losses of $450,000 compared to a credit for loan losses of $350,000 for the year ended December 31, 2017.

The Corporation’s return on average assets was 1.02% in 2018, compared to 0.56% in 2017, and 0.90% in 2016. The Corporation’s return on average tangible shareholders’ equity was 16.79% in 2018, 6.40% in 2017, and 7.45% in 2016. Basic net income per share was $2.51 per share in 2018, an increase of $1.33 per share from $1.18 in 2017. Basic net income per share of $1.18 in 2017 represented a decrease of $0.50 per share from $1.68 in 2016. Changes in these amounts from year to year were generally reflective of changes in the level of net income.

Net Interest Income

Net interest income for 2018 was $28.2 million, an increase of $5.6 million (24.5%) from 2017. The increase in net interest income was primarily due to an increase in loan interest income. The net interest yield on average interest-earning assets, on a tax-equivalent basis, increased in 2018 to 4.81% from 4.31% in 2017. A majority of this increase was a result of the average yield on loans for 2018 increasing to 5.50% compared to 5.05% in 2017 coupled with loans comprising 74.8% of interest-earning assets in 2018 compared to 68.2% in 2017. Conversely, the average rate on interest-bearing liabilities increased to 1.00% in 2018 from 0.62% in 2017. The increase in net interest income included a $5.0 million volume increase and a $600,000 rate increase which is indicative of the growth in the interest-earning asset base from both organic loan growth and the Benchmark transaction, as well as the aforementioned increase in market interest rates.

Provision for Loan and Lease Losses and the Allowance for Loan and Lease Losses

The allowance for loan and lease losses at December 31, 2018 was $3.5 million, or 0.63% of total loans, compared to $2.8 million, or 0.56% of total loans at December 31, 2017. The change in the allowance for loan and lease losses during 2018 included a $450,000 provision for loan losses and loan recoveries, net of charge offs, of $242,000.

The provision for loan and lease losses of $450,000 in 2018 compares to a credit of $350,000 in 2017. The increase was primarily attributable to loan growth of $54.5 million during 2018.

Impaired loans, principally consisting of commercial and commercial real estate, amounted to $1,331,000 at December 31, 2018 (none at December 31, 2017). Impaired loans at December 31, 2018 included $959,000 of loans with no specific reserves included in the allowance for loan losses and $372,000 of loans with specific reserves of $128,000 included in the Corporation's December 31, 2018 allowance for loan losses.

In addition to impaired loans, the Corporation had other potential problem credits of $6.7 million at December 31, 2018 compared to $8.0 million at December 31, 2017, a decrease of $1.3 million (16.1%).

Non-Interest Income

Total non-interest income increased $3.3 million (52.7%) to $9.4 million in 2018 from $6.2 million in 2017, which was primarily attributable to increases in gain on sale of loans of $2.8 million and other operating income of $472,000.

During 2018, gain on sale of loans was $4.7 million, including $164,000 of capitalized servicing rights. Gain on sale of loans was $1.8 million in 2017, including $183,000 of capitalized servicing rights. A significant contributing factor to the increase in gain on sale of loans was the Benchmark acquisition which included the addition of their nationwide mortgage origination program. Gains on sale of loans in the nationwide mortgage origination program amounted to $4.2 million in 2018 and $1.4 million in 2017. The Corporation’s serviced portfolio decreased $1.4 million during 2018 to $173.2 million at December 31, 2018.

The Corporation recognized a $26,000 increase in the fair value of mortgage servicing rights during 2018, compared to a $31,000 decrease in the fair value of mortgage servicing rights in 2017. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2018 the PSA factor was 136 compared to 159 at December 31, 2017.

Other operating income increased $472,000 (20.9%) to $2.7 million in 2018 from $2.3 million in 2017. The increase in non-interest income for the year ended December 31, 2018 was primarily attributable to $341,000 of hedging income and a $118,000 increase in debit card fee income.

Non-Interest Expenses

For the year ended December 31, 2018, non-interest expenses totaled $27,436,000, compared to $22,378,000 for the same period of 2017, an increase of $5,050,000 (22.6%). This increase is primarily attributable to salary, wage and employee benefit increases related to the Benchmark operations and was mitigated by $1,271,000 of acquisition costs incurred by the Corporation during the year ended December 31, 2017 in connection with the acquisition. The year over year results included increases in salaries and benefits expense of $3,865,000 (32.1%), premised and equipment of $239,000 (8.2%), advertising and promotion of $647,000 and loan fees of $501,000, offset by a decrease in consultant fees of $590,000.

Provision for Income Taxes

The provision for income taxes for 2018 was $1.5 million an effective tax rate of 15.7%, compared to $2.9 million in 2017, an effective rate of 42.8%. The decrease in the effective tax rate in 2018 as compared to 2017 resulted from a one-time $1,136,000 tax provision recognized in 2017 due to the impact of the Tax Cuts and Jobs Act, which was enacted in December 2017 and more fully described in Note 12 to the consolidated financial statements. As a result of this tax law change, the Corporation’s effective tax rate was reduced from the federal statutory rate of 34% to 21% resulting in a reduction of deferred tax assets. At December 31, 2018, the corporation had $46,000 of federal alternative minimum tax credit carryforwards which were subsequently refunded in 2019.

Liquidity

Liquidity relates primarily to the Corporation’s ability to fund loan demand, meet the withdrawal requirements of deposit customers, and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available-for-sale, and loans held for sale. A large portion of liquidity is provided by the ability to sell or pledge securities. Accordingly, the Corporation has designated all securities other than FHLB stock as available-for-sale. A secondary source of liquidity is provided by various lines of credit facilities available through correspondent banks and the Federal Reserve. Another source of liquidity is represented by loans that are available to be sold. Certain other loans within the Corporation’s loan and lease portfolio are also available to collateralize borrowings.

The consolidated statements of cash flows for the years presented provide an indication of the Corporation’s sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of cash flows for 2019, 2018, and 2017 follows.

The Corporation generated cash from operating activities of $3.6 million in 2019, $5.1 million in 2018, and $5.9 million in 2017.

Net cash flows used in investing activities amounted to $26.1 million in 2019, $58.4 million in 2018, and $39.9 million in 2017. Significant investing cash flow activities in 2019 included $11.3 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities and $14.1 million of net cash outflow to fund net loan growth. Significant investing cash flow activities in 2018 included $53.8 million of net cash outflow to fund net loan growth. Significant investing cash flow activities in 2017 included $21.1 million of net cash inflows resulting from securities purchases, net of proceeds received from sales and maturities; $34.3 million of net cash outflow resulting from an increase in loans; and a $24.7 million cash outflow for the acquisition of Benchmark.

Net cash flows provided by financing activities amounted to $32.4 million in 2019, $42.5 million in 2018, and $47.1 million in 2017. Net cash provided by financing activities in 2019 primarily resulted from an increase in deposits of $41.0 million offset by payments on other borrowings of $6.7 million, and $1,702,000 in cash dividends paid. Net cash provided by financing activities in 2018 primarily resulted from an increase in deposits of $35.9 million and other borrowings of $8.3 million, offset by $1,568,000 in cash dividends paid. Net cash provided by financing activities in 2017 primarily resulted from an increase in other borrowings of $38.4 million and deposits of $10.4 million, offset by $1,569,000 in cash dividends paid.

Asset Liability Management

Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities. The Corporation manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.

The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”. An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”. This generally means that, when interest rates increase, an institution’s net interest income will increase and, when interest rates decrease, the institution’s net interest income will decrease. An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “negative gap”. This generally means that, when interest rates increase, the institution’s net interest income will decrease and, when interest rates decrease, the institution’s net interest income will increase. The Corporation’s one year cumulative gap (ratio of risk-sensitive assets to risk-sensitive liabilities) at December 31, 2019 is approximately 115% which means the Corporation has more assets than liabilities re-pricing within one year. Under the current low interest rate environment, the Corporation’s liabilities do not have the ability to reprice down the full 100 bps which is why the margin decreases in a 100 bps down shock scenario.

Effects of Inflation

The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by fluctuations in interest rates than inflation. Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies. Interest rates and inflation do not necessarily move with the same velocity or within the same period; therefore, a direct relationship to the inflation rate cannot be shown. The financial information presented in the Corporation’s consolidated financial statements has been presented in accordance with accounting principles generally accepted in the United States, which require that the Corporation measure financial position and operating results primarily in terms of historical dollars.

Significant Accounting Policies

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.

The Corporation’s most significant accounting policies are presented in Note 1 to the consolidated financial statements. These policies, along with other disclosures presented in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the determination of the allowance for loan losses, valuation of goodwill and mortgage servicing rights, and fair value of securities and other financial instruments as the areas that require the most subjective and complex estimates, assumptions and judgments and, as such, could be the most subjective to revision as new information becomes available.

As previously noted, a detailed analysis to assess the adequacy of the allowance for loan losses is performed. This analysis encompasses a variety of factors including the potential loss exposure for individually reviewed loans, the historical loss experience for each loan category, the volume of non-performing loans, the volume of loans past due 30 days or more, a segmentation of each loan category by internally-assigned risk grades, an evaluation of current local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.

Management considers the valuation of goodwill from various past acquisitions through an annual impairment test which considers, among other things, the assets and equity of the Corporation as well as price multiples for sales transactions involving other local financial institutions. Management engaged an independent valuation specialist to perform a goodwill impairment evaluation as of September 30, 2019, which supported management’s assessment that no impairment adjustments to goodwill were warranted. To date, none of the goodwill evaluations have revealed the need for an impairment charge. Management does not believe that any significant conditions have changed relating to the goodwill assessment through December 31, 2019.

Mortgage servicing rights are recognized when acquired through sale of mortgage loans and are reported at fair value. Changes in fair value are reported in net income for the period the changes occur. The Corporation generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, earnings rate and discount rates commensurate with the risks involved. The Corporation has engaged an independent consultant to calculate the fair value of mortgage servicing rights on a quarterly basis. Management regularly reviews the calculation, including assumptions used in making the calculation, and discusses with the consultant. Management also reconciles information used by the consultant, with respect to the Corporation’s serviced portfolio, to the Corporation’s accounting records.

The Corporation reviews securities prices and fair value estimates of other financial instruments supplied by an independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The Corporation’s securities portfolio primarily consists of U.S. Government agencies, and political subdivision obligations, and mortgage backed securities. Pricing for such instruments is typically based on models with observable inputs. From time to time, the Corporation will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other third-party sources or derived using internal models. The Corporation also considers the reasonableness of inputs for financial instruments that are priced using unobservable inputs.

Impact of Recent Accounting Pronouncements

A summary of new accounting standards adopted or subject to adoption in 2019, as well as newly-issued but not effective accounting standards at December 31, 2019, is presented in Note 2 to the consolidated financial statements.

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments

The following table summarizes loan commitments, including letters of credit, as of December 31, 2019:

	Amount of commitment to expire per period
	Total		Less than		1 - 3		4 - 5		Over
	Amount		1 year		years		years		5 years
	(in thousands)
Type of Commitment
Commercial lines-of-credit	$	55,335	$	52,069	$	2,495	$	-	$	771
Real estate lines-of-credit		76,924		5,143		13,209		9,566		49,006
Consumer lines-of-credit		346		-		-		-		346
Letters of Credit		615		515		100		-		-

Total commitments	$	133,220	$	57,727	$	15,804	$	9,566	$	50,123

As indicated in the preceding table, the Corporation had $133.2 million in total loan commitments at December 31, 2019, with $57.7 million of that amount expiring within one year. All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters-of-credit are also included in the amounts noted in the table since the Corporation requires that each letter-of-credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages in residential and nonresidential property. Many of the commercial lines are due on a demand basis, and are established for seasonal operating purposes. It is anticipated that a significant portion of these lines will expire without being drawn upon.

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments – Continued

The following table summarizes the Corporation’s contractual obligations as of December 31, 2019:

	Payments due by period
	Total		Less than		1 - 3		4 - 5		Over
	Amount		1 year		years		Years		5 years
	(in thousands)
Contractual obligations
Long-term debt	$	71,658	$	7,000	$	51,750	$	-	$	12,908
Operating leases		2,588		311		561		566		1,150
Time deposits		197,391		135,003		60,234		1,997		157
Deposits without stated maturities		509,743		-		-		-		509,743
Future deferred compensation payments, including interest		1,207		116		183		138		770

Total obligations	$	782,587	$	142,430	$	112,728	$	2,701	$	524,728

Long-term debt presented in the preceding table consists of Federal Home Loan Bank borrowings of $50.0 million, $8.75 million term loan with a bank, and $12.9 million of junior subordinated deferrable interest debentures, including $10.4 million issued by the Corporation and $2.5 million assumed from the November 2014 OSB acquisition.

Time deposits and deposits without stated maturities included in the preceding table are comprised of customer deposit accounts. Management believes that they have the ability to attract and retain deposit balances by adjusting the interest rates offered.

The future deferred compensation payments, including interest, as noted in the preceding table, includes the Corporation’s agreement with its former Chairman of the Board of Directors to provide for retirement compensation benefits. A deferred compensation liability was also assumed with The OSB acquisition for the benefit of its retired president, with payment that began on May 1, 2010. At December 31, 2019, the net present value of future deferred compensation payments amounted to $761,000, which is included in other liabilities in the December 31, 2019 consolidated balance sheet.

As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2019. The Corporation also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $1,324,000 at December 31, 2019 for supplemental retirement benefits.

Quantitative and Qualitative Disclosures about Market Risk

The most significant market risk to which the Corporation is exposed is interest rate risk. The business of the Corporation and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Corporation’s financial instruments are held for trading purposes.

The Corporation manages interest rate risk regularly through its Asset Liability Committee. The Committee meets on a regular basis and reviews various asset and liability management information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

The Corporation monitors its interest rate risk through a sensitivity analysis, whereby it measures potential changes in its future earnings and the fair values of its financial instruments that may result from one or more hypothetical changes in interest rates. This analysis is performed by estimating the expected cash flows of the Corporation’s financial instruments using interest rates in effect at year-end. For the fair value estimates, the cash flows are then discounted to year-end to arrive at an estimated present value of the Corporation’s financial instruments. Hypothetical changes in interest rates are then applied to the financial instruments, and the cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows. The Corporation applies these interest rate “shocks” to its financial instruments up and down 100, 200 and 300 and up 400 basis points.

Quantitative and Qualitative Disclosures about Market Risk - Continued

The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2019:

Change in Interest Rates	Percentage Change in	Percentage Change in
(basis points)	Net Interest Income	Net Income

+100	-0.9%	-3.0%
-100	-2.6%	-7.7%

+200	-2.4%	-7.6%
-200	-5.4%	-15.9%

+300	-4.2%	-13.3%
-300	N/A	N/A

+400	-6.2%	-19.9%

Given a linear 100bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 0.9% and net income would decrease by 3.0%. A 100bp decrease in interest rates would decrease net interest income by 2.6% and decrease net income by 7.7%. Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 2.4% and net income would decrease by 7.6%. A 200bp decrease in interest rates would decrease net interest income by 5.4% and decrease net income by 15.9%. Given a linear 300bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 4.2% and net income would decrease by 13.3%. A 300bp decrease in interest rates cannot be simulated at this time due to the historically low interest rate environment and a 400bp increase in interest rates would decrease net interest income by 6.2% and decrease net income by 19.9%. Management does not expect any significant adverse effect to net interest income in 2019 based on the composition of the portfolio and anticipated trends in rates.

UNITED BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and 2018

	(in thousands except share data)
	2019			2018
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	9,167		$	11,698
Interest-bearing deposits in other banks		17,245			4,777
Total cash and cash equivalents		26,412			16,475
SECURITIES, available-for-sale		183,611			167,354
FEDERAL HOME LOAN BANK STOCK, at cost		5,302			5,302
LOANS HELD FOR SALE		15,301			7,705
LOANS AND LEASES		576,424			561,614
Less allowance for loan and lease losses		4,131			3,527
Net loans and leases		572,293			558,087
PREMISES AND EQUIPMENT, net		18,789			18,968
GOODWILL		28,616			28,616
CORE DEPOSIT INTANGIBLE ASSETS, net		794			953
CASH SURRENDER VALUE OF LIFE INSURANCE		18,613			18,223
OTHER REAL ESTATE OWNED		-			108
OTHER ASSETS, including accrued interest receivable		10,283			8,509
TOTAL ASSETS	$	880,014		$	830,300
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing	$	116,360		$	115,333
Interest-bearing		590,774			550,903
Total deposits		707,134			666,236
Other borrowings		58,750			65,443
Junior subordinated deferrable interest debentures		12,908			12,874
Other liabilities		6,441			4,803
Total liabilities		785,233			749,356
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares; 3,268,095 and 3,269,358 shares outstanding at December 31 2019 and 2018, respectively		3,761			3,761
Surplus		15,251			14,960
Retained earnings		80,629			71,670
Accumulated other comprehensive income (loss)		2,872			(1,764	)
Treasury stock, at cost, 492,462 shares at December 31, 2019 and 491,199 shares at December 31, 2018		(7,732	)		(7,683	)
Total shareholders’ equity		94,781			80,944
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	880,014		$	830,300

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

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2019, 2018 and 2017

	(in thousands except share data)
	Year Ended December 31,
	2019			2018			2017
INTEREST INCOME
Loans and leases, including fees	$	32,867		$	29,722		$	21,305
Securities:
Taxable		2,601			2,573			2,403
Tax-exempt		1,704			1,557			1,682
Other		647			513			382
Total interest income		37,819			34,365			25,772
INTEREST EXPENSE
Deposits		6,440			3,849			2,125
Borrowings		2,484			2,309			993
Total interest expense		8,924			6,158			3,118
Net interest income		28,895			28,207			22,654
PROVISION (CREDIT) FOR LOAN AND LEASE LOSSES		550			450			(350	)
Net interest income after provision (credit) for loan and lease losses		28,345			27,757			23,004
NON-INTEREST INCOME
Service charges on deposit accounts		1,486			1,610			1,636
Gain on sale of loans		9,071			4,675			1,843
Net securities gains (losses)		4			(6	)		(2	)
Change in fair value of mortgage servicing rights		(258	)		26			(31	)
Increase in cash surrender value of life insurance		390			395			397
Other operating income		4,355			2,728			2,256
Total non-interest income		15,048			9,428			6,099
NON-INTEREST EXPENSES
Salaries, wages and employee benefits		18,665			15,903			12,038
Occupancy expenses		3,174			3,155			2,917
Other operating expenses		9,278			8,378			7,423
Total non-interest expenses		31,117			27,436			22,378
Income before income taxes		12,276			9,749			6,725
PROVISION FOR INCOME TAXES		1,615			1,529			2,879
NET INCOME	$	10,661		$	8,220		$	3,846
NET INCOME PER SHARE BASIC	$	3.26		$	2.51		$	1.18
NET INCOME PER SHARE DILUTED	$	3.25		$	2.51		$	1.18

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

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2019, 2018 and 2017

	(in thousands)
	Year Ended December 31,
	2019			2018			2017

NET INCOME	$	10,661		$	8,220		$	3,846
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period		5,873			(2,051	)		1,122
Reclassification adjustments for losses (gains) included in net income		(4	)		6			2
Other comprehensive income (loss), before income taxes		5,869			(2,045	)		1,124
Income tax expense (benefit) related to items of other comprehensive income (loss)		1,233			(429	)		382
Other comprehensive income (loss)		4,636			(1,616	)		742
COMPREHENSIVE INCOME	$	15,297		$	6,604		$	4,588

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

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2019, 2018 and 2017

	(in thousands)
	Common stock		Surplus		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total
BALANCE AT DECEMBER 31, 2016	$	3,761	$	14,674	$	62,717		$	(866	)	$	(7,728	)	$	72,558
Comprehensive income:
Net income		-		-		3,846			-			-			3,846
Other comprehensive income		-		-		-			742			-			742
Sale of 1,126 treasury shares		-		9		-			-			18			27
Stock option expense		-		100		-			-			-			100
Cash dividends declared, $0.48 per share		-		-		(1,569	)		-			-			(1,569	)

BALANCE AT DECEMBER 31, 2017		3,761		14,783		64,994			(124	)		(7,710	)		75,704
Comprehensive income:
Net income		-		-		8,220			-			-			8,220
Other comprehensive loss		-		-		-			(1,616	)		-			(1,616	)
Reclassification for accounting change		-		-		24			(24	)					-
Sale of 1,715 treasury shares		-		12		-			-			27			39
Stock option expense		-		165		-									165
Cash dividends declared, $0.48 per share		-		-		(1,568	)		-			-			(1,568	)

BALANCE AT DECEMBER 31, 2018		3,761		14,960		71,670			(1,764	)		(7,683	)		80,944
Comprehensive income:
Net income		-		-		10,661			-			-			10,661
Other comprehensive income		-		-		-			4,636			-			4,636
Repurchase of 4,220 shares		-		-		-			-			(95	)		(95	)
Sale of 2,957 treasury shares		-		25		-			-			46			71
Stock option expense		-		266		-									266
Cash dividends declared, $0.52 per share		-		-		(1,702	)		-			-			(1,702	)
BALANCE AT DECEMBER 31, 2019	$	3,761	$	15,251	$	80,629		$	2,872		$	(7,732	)	$	94,781

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

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2019, 2018 and 2017

	(in thousands)
	Years Ended December 31,
	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,661		$	8,220		$	3,846
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,240			1,052			938
Purchase accounting loan discount accretion		(670	)		(1,233	)		(891	)
Deferred income taxes		529			1,740			2,660
Provision (credit) for loan losses		550			450			(350	)
Gain on sale of loans		(9,071	)		(4,675	)		(1,843	)
Net securities losses (gains)		(4	)		6			2
Change in fair value of mortgage servicing rights		258			(26	)		31
Loss (gain) on sale or write-down of other real estate owned		40			59			(22	)
Increase in cash surrender value of life insurance		(390	)		(395	)		(397	)
Net amortization of security premiums and discounts		921			792			848
Stock option expense		266			165			100
Deferred compensation expense		210			138			90
Proceeds from sale of loans held for sale		281,269			175,288			63,495
Originations of loans held for sale		(279,986	)		(176,098	)		(59,430	)
Increase in other assets		(1,259	)		(944	)		(519	)
Increase (decrease) in other liabilities		(941	)		610			(2,698	)
Net cash provided by operating activities	$	3,623		$	5,149		$	5,860
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities		15,985			21,282			38,087
Proceeds from maturities of available-for-sale securities, including paydowns on mortgage-backed securities		26,724			16,056			16,591
Purchases of available-for-sale securities		(54,014	)		(38,107	)		(33,627	)
Net proceeds from certificates of deposits		-			-			1,494
Acquisition of Benchmark Bancorp, Inc., net of cash received		-			(3,413	)		(24,660	)
Proceeds from sale of other real estate owned		68			62			823
Net increase in loans and leases		(14,086	)		(53,797	)		(34,311	)
Bank owned life insurance premium		-			-			(80	)
Purchases of premises and equipment		(753	)		(525	)		(4,182	)
Net cash used in investing activities		(26,076	)		(58,442	)		(39,865	)

Continued

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2019, 2018 and 2017

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		40,969			35,883			10,405
Other borrowings:
Proceeds from other borrowings		-			30,693			57,148
Principal payments on other borrowings		(6,693	)		(22,398	)		(18,774	)
Purchase of treasury shares		(95	)		-			-
Proceeds from sale of treasury shares		71			39			27
Payments of deferred compensation		(160	)		(155	)		(144	)
Cash dividends paid		(1,702	)		(1,568	)		(1,569	)
Net cash provided by financing activities		32,390			42,494			47,093
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		9,937			(10,799	)		13,088

CASH AND CASH EQUIVALENTS
At beginning of year		16,475			27,274			14,186
At end of year	$	26,412		$	16,475		$	27,274
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest	$	8,986		$	6,131		$	3,394
Federal income taxes	$	700		$	3,259		$	425
Non-cash operating activity:
Change in deferred income taxes on net unrealized gain or loss on available-for-sale securities	$	(1,233	)	$	429		$	382
Non-cash investing activities:
Transfer of loans to other real estate owned	$	-		$	70		$	241
Non-cash investing and financing activity:
Recognition of right-of-use lease asset (other assets) and lease liability (other liabilities)	$	2,112		$	-		$	-

Change in net unrealized gain or loss on available-for-sale securities	$	5,869		$	(2,045	)	$	1,124

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

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

United Bancshares, Inc. (the “Corporation”) was incorporated in 1985 in the state of Ohio as a single-bank holding company for 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. to hold and manage certain property that is acquired in lieu of foreclosure.

The Corporation, through its wholly-owned subsidiary, the Bank, operates in one industry segment, the commercial banking industry. The Bank, organized in 1904 as an Ohio-chartered bank, is headquartered in Columbus Grove, Ohio, with branch offices in Bowling Green, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Pemberville, Plymouth and Westerville, Ohio.

The primary source of revenue of the Corporation is providing loans to customers primarily located in Northwestern and West Central Ohio. Such customers are predominately small and middle-market businesses and individuals.

Significant accounting policies followed by the Corporation are presented below.

Use of Estimates in Preparing Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The estimates most susceptible to significant change in the near term include the determination of the allowance for loan losses; valuation of securities, deferred tax assets, and goodwill; and fair value of assets acquired and liabilities assumed in a business combination.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, the Bank, and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within four days.

Restrictions on Cash

The Corporation was required to maintain cash on hand or on deposit with the Federal Reserve Bank of approximately $1.0 million at December 31, 2019 and 2018, respectively, to meet regulatory reserve and clearing requirements.

Securities and Federal Home Loan Bank Stock

The Corporation has designated all securities as available-for-sale. Such securities are recorded at fair value, with unrealized gains and losses, net of applicable income taxes, excluded from income and reported as accumulated other comprehensive income (loss).

The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in fair value of securities below their cost that are deemed to be other-than-temporary are reflected in income as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the securities and the more likely than not requirement that the Corporation will be required to sell the securities prior to recovery, (2) the length of time and the extent to which the fair value has been less than cost, and (3) the financial condition and near-term prospects of the issuer. Gains and losses on the sale of securities are recorded on the trade date, using the specific identification method, and are included in non-interest income.

Investment in Federal Home Loan Bank of Cincinnati stock is classified as a restricted security, carried at cost, and evaluated for impairment.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Estimated fair value is determined based on quoted market prices in the secondary market. Any net unrealized losses are recognized through a valuation allowance by charges to income. The Corporation had no unrealized losses at December 31, 2019 and 2018.

Loans and Leases

Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally stated at its outstanding principal amount adjusted for charge-offs and the allowance for loan and lease losses. Interest is accrued as earned based upon the daily outstanding principal balance. Loan and lease origination fees and certain direct obligation costs are capitalized and recognized as an adjustment of the yield of the related loan.

The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Personal loans are typically charged-off no later than when they become 150 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans and leases that are placed on nonaccrual or charged-off is reversed against interest income. Interest on these loans and leases is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“allowance”) is established as losses are estimated to have occurred through a provision for loan and lease losses charged to income. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans and leases in light of historical experience, the nature and volume of the loan and lease portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Corporation’s consolidated financial statements.

The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans and leases when the discounted cash flows, collateral value, or observable market price of the impaired loan and lease is lower than the carrying value of that loan or lease. The general component covers classified loans and leases (substandard or special mention) without specific reserves, as well as non-classified loans and leases, and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans and leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan or lease and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured individually for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Under certain circumstances, the Corporation will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Corporation, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.

Acquired Loans

Purchased loans acquired in a business combination are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.

•	Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

•	Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30 “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display at least some level of credit deterioration since origination.

•	Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. If the Corporation does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less estimated cost to sell, at the date of foreclosure, establishing a new cost basis with loan balances in excess of fair value charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and subsequent valuation adjustments are included in other operating expenses.

Loan Sales and Servicing

Certain mortgage loans are sold with mortgage servicing rights retained or released by the Corporation. The value of mortgage loans sold with servicing rights retained is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. The Corporation generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, earnings rate, and discount rates commensurate with the risks involved. Capitalized servicing rights are reported at fair value and changes in fair value are reported in net income for the period the change occurs. Servicing fee income is recorded for servicing loans, based on a contractual percentage of the outstanding principal, and is reported as other operating income. Amortization of mortgage servicing rights is charged against loan servicing fee income.

Premises and Equipment

Premises and equipment is stated at cost, less accumulated depreciation. Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income. Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed primarily using the straight-line method.

Premises and equipment is reviewed for impairment when events indicate the carrying amount may not be recoverable from future undiscounted cash flows. If impaired, premises and equipment is recorded at fair value and any corresponding write-downs are charged against current year earnings.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. The Corporation maintains a separate allowance for off-balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is included in other liabilities.

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. At December 31, 2019, the Corporation believes the Bank does not have any indicators of potential impairment based on the estimated fair value of its reporting unit.

The core deposit intangible asset resulting from the March 2010 Findlay branch acquisition was determined to have a definite life and was amortized on a straight-line basis over seven years through March 2017. The core deposit intangible asset resulting from the November 2014 Ohio State Bank (“OSB”) acquisition was also determined to have a definite life and is being amortized on a straight-line basis over ten years through October 2024. The core deposit intangible asset resulting from the September 2017 Benchmark acquisition described in Note 2 was also determined to have a definite life and is being amortized on an accelerated basis over ten years through 2027. Amortization of core deposit intangible assets amounted to $159,000, $173,000 and $124,000 for the years ended December 31, 2019, 2018 and 2017. Future amortization of core deposit intangible assets for the years 2020 thru 2024 are $151,000, $143,000, $140,000, $139,000 and $121,000, respectively.

Supplemental Retirement Benefits

Annual provisions are made for the estimated liability for accumulated supplemental retirement benefits under agreements with certain officers and directors. These provisions are determined based on the terms of the agreements, as well as certain assumptions, including estimated service periods and discount rates.

Advertising Costs

All advertising costs are expensed as incurred.

Income Taxes

Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and its tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.

Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon examination by a taxing authority is considered to be 50% or less. The Corporation has adopted the policy of classifying any interest and penalties resulting from the filing of its income tax returns in the provision for income taxes.

The Corporation is not currently subject to state or local income taxes.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.

Comprehensive Income (Loss)

Recognized revenue, expenses, gains and losses are included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.

Per Share Data

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.

The weighted average number of shares used for the years ended December 31, 2019, 2018 and 2017 are as follows:

	2019		2018		2017
Basic		3,270,878		3,268,667		3,267,305
Diluted		3,277,198		3,269,834		3,272,310

Dividends per share are based on the number of shares outstanding at the declaration date.

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. At December 31, 2019 and 2018, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial statements. The Corporation started hedging in May of 2019 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 year ended December 31, 2019, the Corporation recognized a net gain from hedging activity of $341,000 which is included in gain on sale of loans in the 2019 consolidated statement of income and reported a net hedging asset of $492,000, which is included in other assets in the December 31, 2019 consolidated balance sheet.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 18. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Subsequent Events

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2019, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2019, have been recognized in the financial statements for the year ended December 31, 2019. Events or transactions that provided evidence about conditions that did not exist at December 31, 2019 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2019.

On January 23, 2020, United Bancshares, Inc. issued a release announcing that its Board of Directors approved a cash dividend of $0.14 per common share payable March 16, 2020 to shareholders of record at the close of business on February 28, 2020.

NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Clients (Topic 606). ASU 2014-09 was effective for public business entities for interim and annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, and securities. The Company has performed an assessment of revenue streams that are within the scope of the standard and concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The assessment did not identify material changes to the timing of amount of revenue recognition as the Company's current practices are consistent with the standard.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (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 (that is, securities or loans receivable) 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 adoption of ASU No. 2016-01 on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 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 prior GAAP, which required that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update is effective for interim and annual periods beginning after December 15, 2018. The adoption of ASU No. 2016-02 effective January 1, 2019 resulted in an increase to other assets and other liabilities of $2,168,000. The Corporation chose the effective date as the date of initial application. Consequently, prior period financial information has not been updated or restated.

In June 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 developed four different models for calculating the allowance for loan losses under the requirements of ASU 2016-13 and are running them parallel to the Bank’s existing methodology throughout 2019. Once management determines which method will be utilized, a third party will be contracted to perform a model validation prior to December 31, 2019. Management has not yet determined the expected impact the adoption of ASU 2016-13 will have on the consolidated financial statements. On October 16, 2019, the FASB extended the implementation deadline until the fiscal year and interim periods beginning after December 15, 2022. Management will continue to monitor any new developments regarding this accounting standard.

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 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 but Management is still evaluating.

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 the reporting periods after December 15, 2018. The Corporation adopted ASU No. 2017-12 effective January 1, 2019. There was no significant impact to the consolidated financial statements as a result of the adoption of ASU 2017-12.

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 revised disclosure requirements are not expected to have a material impact on the Company's consolidated financial statements, but Management is still evaluating.

In April, 2109, 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 Company'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. The Company is currently reviewing the provisions of this new pronouncement, but does not expect adoption of this guidance to have a material impact on the Company's consolidated financial statements.

NOTE 3 – 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. Under the terms of the merger agreement, shareholders of Benchmark received approximately $8.59 per share for each outstanding common share. Immediately following the merger of Benchmark with and into the Corporation, Benchmark merged with and into the Bank.

As a result of the acquisition, the two full-service banking center of Benchmark 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. The acquisition expands the geographical footprint of the Corporation in Ohio's fastest growing market and is expected to provide certain cost synergies with the existing Central Ohio operations, as well as income accretion through a larger asset base. Acquisition related costs amounted to $1,271,000 in 2017 and are included in other non-interest expenses.

Consideration paid and the estimated fair value of the assets acquired and the liabilities assumed at the acquisition date are as follows (dollars in thousands):

Cash and cash equivalents	$	6,092
Restricted stock		472
Loans, including loans held for sale		98,804
Premises and equipment		2,483
Core deposit intangible asset		493
Other real estate owned		141
Other assets, including accrued interest receivable		5,342
Total assets acquired		113,827
Deposits		95,545
Other liabilities		2,661
Total liabilities assumed		98,206
Net identifiable assets		15,621
Estimated goodwill		15,131
Total cash paid	$	30,752

In August 2018, 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 $3,413,000 increase to goodwill. The Company recorded a settlement of claims arising from these adjustments, which resulted in recording a one-time other non-interest income recovery of $1,980,000 during the fourth quarter of 2019.

NOTE 4 – SECURITIES

The amortized cost, unrealized gains and losses on securities, and fair value of securities as of December 31, 2019 and 2018 are as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair Value
2019	(In Thousands)
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

2018	(In Thousands)
Available-for-sale:
Obligations of states and political
subdivisions	$	59,585	$	354	$	473	$	59,466
Mortgage-backed		109,000		162		2,238		106,924
Other		1,002		-		38		964

Total	$	169,587	$	516	$	2,749	$	167,354

The amortized cost and fair value of securities at December 31, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	(in thousands)
	Amortized Cost		Fair value

Due in one year or less	$	500	$	501
Due after one year through five years		6,387		6,471
Due after five years through ten years		26,476		26,999
Due after ten years		145,587		148,624
Other securities having no maturity date		1,025		1,016
Total	$	179,975	$	183,611

Securities with a carrying value of $26.0 million at December 31, 2019 and $27.6 million at December 31, 2018 were pledged to secure public deposits and for other purposes as required or permitted by law.

The following table presents gross unrealized losses and fair value of debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:

	(in thousands)
	Securities in a continuous unrealized loss position
	Less than 12 months				12 months or more				Total
2019	Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Total Fair value
Obligations of states and political subdivisions	$	82	$	3,816	$	-	$	-	$	82	$	3,816
Mortgage-backed		69		9,633		89		14,808		158		24,441
Other		-		-		9		991		9		991
Total temporarily impaired securities	$	151	$	13,449	$	98	$	15,799	$	249	$	29,248

	Less than 12 months				12 months or more				Total
2018	Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Total Fair value
Obligations of states and political subdivisions	$	94	$	11,074	$	379	$	14,636	$	473	$	25,710
Mortgage-backed		219		16,171		2,019		62,435		2,238		78,606
Other		-		-		38		964		38		964
Total temporarily impaired securities	$	313	$	27,245	$	2,436	$	78,035	$	2,749	$	105,280

There were 29 securities in an unrealized loss position at December 31, 2019, 15 of which were in a continuous unrealized loss position for 12 months or more. There were 151 securities in an unrealized loss position at December 31, 2018, 89 of which were in a continuous unrealized loss position for 12 months or more. Management has considered industry analyst reports, whether downgrades by bond rating agencies have occurred, sector credit reports, issuer’s financial condition and prospects, the Corporation’s ability and intent to hold securities to maturity, and volatility in the bond market, in concluding that the unrealized losses as of December 31, 2019 were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of December 31, 2019 are considered to be temporary.

Gross realized gains from sale of securities, including securities calls, amounted to $4,000 in 2019, $90,000 in 2018, and $241,000 in 2017, with the income tax provision applicable to such gains amounting to $1,000 in 2019, $19,000 in 2018, and $82,000 in 2017. Gross realized losses from sale of securities amounted to $96,000 in 2018 and $243,000 in 2017 (none in 2019 ) with related income tax effect of $20,000 in 2018 and $83,000 in 2017 (none in 2019).

NOTE 5 – LOANS AND LEASES

Loans and leases at December 31, 2019 and 2018 consist of the following:

	2019		2018

Residential 1-4 family real estate	$	122,905	$	119,841
Commercial and multi-family real estate		367,614		354,446
Commercial		77,658		80,630
Consumer		8,247		6,697
Total loans and leases	$	576,424	$	561,614

Fixed rate loans and leases approximated $137,671,000 at December 31, 2019 and $119,772,000 at December 31, 2018.

Most of the Corporation’s lending activities are with customers located in Northwestern and West Central Ohio. As of December 31, 2019 and 2018, the Corporation’s loans and leases from borrowers in the agriculture industry represent the single largest industry and amounted to $44,729,000 and $43,324,000, respectively. Agriculture loans and leases are generally secured by property and equipment. Repayment is primarily expected from cash flow generated through the harvest and sale of crops or milk production for dairy products. Agriculture customers are subject to various risks and uncertainties which can adversely impact the cash flow generated from their operations, including weather conditions; milk production; health and stability of livestock; costs of key operating items such as fertilizer, fuel, seed, or animal feed; and market prices for crops, milk, and livestock. Credit evaluation of agricultural lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received.

The Corporation originates 1-4 family real estate and consumer loans and leases utilizing credit reports to supplement the underwriting process. The Corporation’s underwriting standards for 1-4 family loans and leases are generally in accordance with the Federal Home Loan Mortgage Corporation (FHLMC) manual underwriting guidelines. Properties securing 1-4 family real estate loans and leases are appraised by fee appraisers, which is independent of the loan and lease origination function and has been approved by the Board of Directors and the Loan Policy Committee. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Corporation will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans and leases include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan or lease. To monitor and manage loan and lease risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan and lease amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Corporation’s 1-4 family real estate loans and leases are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans and leases are subject to underwriting standards and processes similar to commercial and agricultural operating loans and leases, in addition to those unique to real estate loans and leases. These loans and leases are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the cost or appraised value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Board of Directors. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans and leases based on cash flows, collateral and risk rating criteria. The Corporation may require guarantees on these loans and leases. The Corporation’s commercial and agricultural real estate loans and leases are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans and leases are underwritten based on the Corporation’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans and leases may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans and leases. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and/or hail insurance may be required for agricultural borrowers. Loans are generally guaranteed by the principal(s). The Corporation’s commercial and agricultural operating lending is primarily in its primary market area.

The Corporation maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee. The internal audit process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2019, 2018 and 2017:

	(in thousands)
	Residential 1 – 4 family real estate			Commercial and multi- family real estate			Commercial			Consumer			Total
Balance at December 31, 2018	$	576		$	2,355		$	534		$	62		$	3,527
Provision for loan and lease losses		22			52			465			11			550
Losses charged off		(46	)		(23	)		(101	)		(10	)		(180	)
Recoveries		40			152			41			1			234
Balance at December 31, 2019	$	592		$	2,536		$	939		$	64		$	4,131

	Residential 1 – 4 family real estate			Commercial and multi-family real estate			Commercial			Consumer			Total
Balance at December 31, 2017	$	545		$	1,746		$	501		$	43		$	2,835
Provision (credit) for loan and lease losses		8			417			(3	)		28			450
Losses charged off		(52	)		(114	)		(21	)		(10	)		(197	)
Recoveries		75			306			57			1			439
Balance at December 31, 2018	$	576		$	2,355		$	534		$	62		$	3,527

	Residential 1 – 4 family real estate			Commercial and multi-family real estate			Commercial			Consumer			Total
Balance at December 31, 2016	$	542		$	1,876		$	896		$	31		$	3,345
Provision (credit) for loan and lease losses		34			9			(424	)		31			(350	)
Losses charged off		(45	)		(553	)		(63	)		(28	)		(689	)
Recoveries		14			414			92			9			529
Balance at December 31, 2017	$	545		$	1,746		$	501		$	43		$	2,835

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 December 31, 2019 and 2018:

	(in thousands)
	Residential 1 – 4 family real estate		Commercial and multi-family real estate		Commercial		Consumer		Total
2019
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

	Residential 1 – 4 family real estate		Commercial and multi-family real estate		Commercial		Consumer		Total
2018
Allowance for loan and lease losses:
	$	-	$	65	$	63	$	-	$	128
Collectively evaluated for impairment		576		2,290		471		62		3,399
Total allowance for loan and lease losses	$	576	$	2,355	$	534	$	62	$	3,527

Loans and leases:
Individually evaluated for impairment	$	-	$	970	$	361	$	-	$	1,331
Acquired with deteriorated credit quality		70		226		-		-		296
Collectively evaluated for impairment		119,771		353,250		80,269		6,697		559,987
Total ending loans and leases balance	$	119,841	$	354,446	$	80,630	$	6,697	$	561,614

The following is a summary of the activity in the allowance for loan and lease losses of impaired loans, which is a part of the Corporation’s overall allowance for loan and lease losses for the years ended December 31, 2019, 2018 and 2017:

	(in thousands)
	2019		2018		2017

Balance at beginning of year	$	128	$	-	$	1,018
Provision (credit) for loan and lease losses		307		128		(865	)
Loans charged off		-		-		(414	)
Recoveries		-		-		261
Balance at end of year	$	435	$	128	$	-

The average balance of impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) amounted to $2,386,000, $349,000 and $1,450,000 during 2019, 2018 and 2017, respectively. There was $263,000 of interest income on impaired loans and leases in 2019. There was no interest income on impaired loans and leases in 2018 and 2017.

The following table presents loans and leases individually evaluated for impairment by class of loans as of December 31, 2019 and 2018:

	(in thousands)
	2019				2018
	Recorded investment		Allowance for loan and lease losses allocated		Recorded investment		Allowance for loan and lease losses allocated
With no related allowance recorded:
Residential 1-4 family real estate	$	-	$	-	$	-	$	-
Commercial and multi-family real estate		822		-		719		-
Agricultural real estate		4		-		-		-
Commercial		22		-		24		-
Agriculture		-		-		216		-
Consumer		-		-		-		-
With an allowance recorded:
Residential 1-4 family real estate		-		-		-		-
Commercial and multi-family real estate		673		93		251		65
Agricultural real estate		-		-		-		-
Commercial		1,257		342		121		63
Agriculture		-		-		-		-
Consumer		-		-		-		-
Total	$	2,778	$	435	$	1,331	$	128

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 December 31, 2019 and 2018:

	(in thousands)
	2019						2018
	Nonaccrual		Loans and leases past due over 90 days still accruing		Accruing Troubled Debt Restructurings		Nonaccrual		Loans and leases past due over 90 days still accruing		Accruing Troubled Debt Restructurings
Residential 1-4 family real estate	$	414	$	138	$	223	$	354	$	161	$	372
Commercial and multi family real estate		545		-		623		754		-		228
Agricultural real estate		4		-		-		216		-		-
Commercial		-		-		772		121		-		24
Agriculture		-		-		-		-		-		-
Consumer
Total	$	963	$	138	$	1,618	$	1,445	$	161	$	624

The nonaccrual balances in the table above include troubled debt restructurings that have been classified as nonaccrual.

The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2019 and 2018 by class of loans and leases:

	(in thousands)
	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
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

	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
2018
Residential 1-4 family real estate	$	2,471	$	371	$	278	$	3,120	$	116,721	$	119,841
Commercial and multi family real estate		580		-		155		735		322,032		322,767
Agricultural real estate		7		-		241		248		31,431		31,679
Commercial		482		-		-		482		68,503		68,985
Agriculture		-		-		-		-		11,645		11,645
Consumer		4		-		-		4		6,693		6,697
Total	$	3,544	$	371	$	674	$	4,589	$	557,025	$	561,614

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 for adverse classified loans:

● 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 and 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 December 31, 2018 and December 31, 2019.

	(in thousands)
	Pass		Special Mention		Substandard		Doubtful		Not rated		Total

2019
Residential 1 - 4 family	$	9,219	$	-	$	-	$	-	$	113,686	$	122,905
Commercial and multi- family real estate		362,519		1,797		3,258		-		40		367,614
Commercial		75,559		410		1,688		-		1		77,658
Consumer		45		-		-		-		8,202		8,247
Total	$	447,342	$	2,207	$	4,946	$	-	$	121,929	$	576,424

	Pass		Special Mention		Substandard		Doubtful		Not rated		Total

2018
Residential 1 - 4 family	$	10,461	$	-	$	-	$	-	$	109,380	$	119,841
Commercial and multi- family real estate		346,580		4,755		3,111		-		-		354,446
Commercial		79,179		-		1,451		-		-		80,630
Consumer		-		-		-		-		6,697		6,697
Total	$	436,220	$	4,755	$	4,562	$	-	$	116,077	$	561,614

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 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 that are not risk rated, based on payment activity as of December 31, 2019 and 2018:

	(in thousands)
	Residential 1-4 family		Commercial and multi-family real estate		Commercial		Consumer		Total
2019
Performing	$	113,364	$	24	$	-	$	8,202	$	121,590
Nonperforming		322		16		1		-		339
Total	$	113,686	$	40	$	1	$	8,202	$	121,929

	Residential 1-4 family		Commercial and multi-family real estate		Commercial		Consumer		Total
2018
Performing	$	109,103	$	-	$	-	$	6,696	$	115,799
Nonperforming		278		-		-		-		278
Total	$	109,381	$	-	$	-	$	6,696	$	116,077

Modifications:

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

The following table includes the recorded investment and number of modifications for TDR loans and leases during the year ended December 31, 2019 (there were none in 2018). There were no other subsequent defaults relating to TDR loans and leases during the years ended December 31, 2019 and 2018.

	(dollars in thousands)
	Number of modifications		Recorded investment		Allowance for loan and lease losses allocated
2019
Commercial and multi family real estate		2	$	545	$	-
Commercial		1		750		342
Total		3	$	1,295	$	342

2018
Residential 1-4 family real estate			2			$	140			$	-

The concessions granted during 2019 included the following: the bank modified one loan as ordered by the Bankruptcy Court, to comply with the bankruptcy plan. Additionally, the bank rewrote part of a line of credit and termed out another line of credit, which would likely have prohibited the borrower from financing/refinancing at another institution.

The concessions granted during 2018 included the following: the bank modified one loan as ordered by the Bankruptcy Court, to comply with the bankruptcy plan. Additionally, the bank provided a new note under conditions which would likely have prohibited them from financing/refinancing at another institution.

The following is additional information with respect to loans and leases acquired with the Benchmark and OSB acquisitions as of December 31, 2019 and 2018:

	Benchmark Bank
	(in thousands)
	Contractual
	Principal			Accretable			Carrying
2019	Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2018	$	74,837		$	(1,553	)	$	73,284
Change due to payments received		(15,884	)		376			(15,508	)
Balance at December 31, 2019	$	58,953		$	(1,177	)	$	57,776

Purchased Impaired Loans and Leases
Balance at December 31, 2018	$	516		$	(253	)	$	263
Change due to payments received		(162	)		61			(101	)
Balance at December 31, 2019	$	354		$	(192	)	$	162

	Contractual
	Principal			Accretable			Carrying
2018	Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2017	$	89,151		$	(2,066	)	$	87,085
Change due to payments received		(14,314	)		513			(13,801	)
Balance at December 31, 2018	$	74,837		$	(1,553	)	$	73,284

Purchased Impaired Loans and Leases
Balance at December 31, 2017	$	1,588		$	(674	)	$	914
Change due to payments received		(1,072	)		421			(651	)
Balance at December 31, 2018	$	516		$	(253	)	$	263

	The Ohio State Bank
	(in thousands)
	Contractual
	Principal			Accretable			Carrying
2019	Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2018	$	19,043		$	(658	)	$	18,385
Change due to payments received		(5,996	)		228			(5,768	)
Balance at December 31, 2019	$	13,047		$	(430	)	$	12,617

Purchased Impaired Loans and Leases
Balance at December 31, 2018	$	196		$	(163	)	$	33
Change due to payments received		(21	)		14			(7	)
Change due to loan charge-offs		(15	)		15			-
Balance at December 31, 2019	$	160		$	(134	)	$	26

	Contractual
	Principal			Accretable			Carrying
2018	Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2017	$	25,509		$	(929	)	$	24,580
Change due to payments received		(6,466	)		271			(6,195	)
Balance at December 31, 2018	$	19,043		$	(658	)	$	18,385

Purchased Impaired Loans and Leases
Balance at December 31, 2017	$	496		$	(232	)	$	264
Change due to payments received		(232	)		(31	)		(263	)
Change due to loan charge-offs		(68	)		100			32
Balance at December 31, 2018	$	196		$	(163	)	$	33

As a result of the acquisitions, the Corporation has loans, 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 carrying amount of those loans was $162,000 as of December 31, 2019 and $263,000 as of December 31, 2018 related to the Benchmark acquisition and $26,000 at December 31, 2019 and $33,000 at December 31, 2018 for the OSB acquisition.

A $101,000 provision for loan and lease losses was recognized for the year ended December 31, 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. There was no provision for loan and lease losses recognized for the years ended December 31, 2019 and 2018 related to the acquired loans and leases as there was no significant change to the credit quality of the loans and leases during the periods.

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan and lease customers of the Corporation. Such loans and leases are made in the ordinary course of business in accordance with the normal lending policies of the Corporation, including the interest rate charged and collateralization. Such loans amounted to $1,154,000 and $1,371,000 at December 31, 2019 and 2018 respectively. The following is a summary of activity during 2019, 2018 and 2017 for such loans:

	(in thousands)
	2019			2018			2017
Beginning of year	$	1,371		$	491		$	370
Additions		-			952			300
Repayments		(217	)		(72	)		(179	)
End of year	$	1,154		$	1,371		$	491

Additions and repayments include loan and lease renewals, as well as net borrowings and repayments under revolving lines-of-credit.

NOTE 6 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 2019 and 2018:

	(in thousands)
	2019		2018
Land and improvements	$	4,069	$	4,069
Buildings		17,327		17,602
Equipment		5,857		5,253
		27,253		26,924
Less accumulated depreciation		8,464		7,956
Premises and equipment, net	$	18,789	$	18,968

Depreciation expense amounted to $932,000 in 2019, $893,000 in 2018 and $724,000 in 2017.

NOTE 7 - SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others amounted to $175,742,000 and $173,238,000 at December 31, 2019 and 2018, respectively.

Mortgage servicing rights are included in other assets in the accompanying consolidated balance sheets. The Corporation has elected to record its mortgage servicing rights using the fair value measurement method. Significant assumptions used in determining the fair value of servicing rights as of December 31, 2019 and 2018 include:

	Prepayment assumptions:	Based on the PSA Standard Prepayment Model
	Internal rate of return:	11% to 13%
	Servicing costs:	$76 – $91 per loan, annually, increased at the rate of $1 per 1% delinquency based on loan count
	Inflation rate of servicing costs:	3%
	Earnings rate:	0.25%

Following is a summary of mortgage servicing rights activity for the years ended December 31, 2019, 2018 and 2017:

	(in thousands)
	2019			2018			2017
Fair value at beginning of year	$	1,313		$	1,270		$	1,247
Capitalized servicing rights – new loan sales		192			164			183
Disposals (amortization based on loan payments and payoffs)		(186	)		(147	)		(129	)
Change in fair value		(258	)		26			(31	)
Fair value at end of year	$	1,061		$	1,313		$	1,270

The changes in fair value of servicing rights for the years ended December 31, 2019, 2018 and 2017 resulted from changes in external market conditions, including prepayment assumptions, which is a key valuation input used in determining the fair value of servicing. While prepayment assumptions are constantly changing, such changes are typically within a relatively small parameter from period to period. The prepayment assumption factor used in determining the fair value of servicing at December 31, 2019 was 214 compared to 136 at December 31, 2018 and 159 at December 31, 2017. The earnings rate used in determining the fair value of servicing was 0.25% in 2019, 2018 and 2017.

NOTE 8 - DEPOSITS

Time deposits at December 31, 2019 and 2018 include individual deposits greater than $250,000 of $15,568,000 and $9,552,000, respectively. Interest expense on time deposits greater than $250,000 amounted to $239,000 for 2019, $120,000 for 2018, and $111,000 for 2017.

At December 31, 2019, time deposits amounted to $197,391,000 and were scheduled to mature as follows: 2020, $135,003,000; 2021, $44,992,000; 2022, $15,242,000; 2023, $1,202,000; 2024, $795,000; and thereafter, $157,000.

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation. Such deposits amounted to $5,536,000 and $5,457,000 at December 31, 2019 and 2018, respectively.

NOTE 9 – OTHER BORROWINGS

Other borrowings consists of the following at December 31, 2019 and December 31, 2018:

	(in thousands)
	2019		2018
Federal Home Loan Bank borrowings:
Secured note, with interest at 2.55%, due March, 2019	$	-	$	1,281
Secured note, with interest at 1.72%, due September, 2020		6,000		6,000
Secured note, with interest at 2.90%, due June, 2021		8,000		8,000
Secured note, with variable interest, at 2.13% at December 31, 2019 and 2.99% at December 31, 2018, 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		9,000
Secured note, with interest at 1.97%, due September, 2022		6,000		6,000
Zions Bank:
Secured note, with interest at 2.64%, due January, 2019		-		2,917
United Bankers Bank:
Note payable, with interest at 4.875% payable quarterly, and $250,000 principal payments, with any remaining unpaid principal due September 1, 2022. All Union Bank stock is held as collateral.		8,750		9,750
Secured note, with interest at 3.00%, due January, 2019		-		1,495
Total other borrowings	$	58,750	$	65,443

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $186,076,000 at December 31, 2019. At December 31, 2019, the Corporation had $105,524,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan Bank and other financial institutions.

Future maturities of other borrowings are as follows: 2020, $7,000,000; 2021, $30,000,000; and 2022, $21,750,000

NOTE 10 - 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 at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR amounting to 5.10% at December 31, 2019, 5.97% at December 31, 2018, and 4.82% at December 31, 2017, with interest payable quarterly. 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 from 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 have a carrying value of $2,608,000 at December 31, 2019 and $2,574,000 at December 31, 2018. 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 4.78% at December 31, 2019 and 5.33% at December 31, 2018.

Interest expense on the debentures amounted to $728,000 in 2019, $697,000 in 2018, and $596,000 in 2017, and is included in interest expense-borrowings in the accompanying consolidated statements of income.

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

NOTE 11 - OTHER OPERATING EXPENSES

Other operating expenses consisted of the following for the years ended December 31, 2019, 2018 and 2017:

	(in thousands)
	2019		2018		2017
Data processing	$	1,478	$	1,318	$	1,164
Professional fees		1,001		817		1,471
Ohio Financial Institution tax		552		505		523
Advertising		1,802		1,786		1,062
ATM processing and other fees		764		663		611
Amortization of core deposit intangible assets		159		173		133
Postage		69		50		43
Stationery and supplies		164		179		178
FDIC assessment		79		264		185
Loan closing fees		1,354		921		421
Other real estate owned		3		12		36
Deposit losses		52		63		72
Other		1,801		1,627		1,524
Total other operating expenses	$	9,278	$	8,378	$	7,423

Other operating expenses included $1,271,000 in 2017 relating to the acquisition described in Note 3.

NOTE 12 - INCOME TAXES

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the Act) was signed into law. Among other things, the Act reduced the Corporation’s federal tax rate from 34% to 21% effective January 1, 2018. As a result, the Corporation was required to re-measure, through the provision for income taxes, its deferred tax assets and liabilities using the enacted rate at which they are expected be recovered or settled. The re-measurement of the net deferred tax asset resulted in an additional provision for income taxes of $1,136,000 for the year ended December 31, 2017.

The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 consist of the following:

	(in thousands)
	2019		2018			2017
Current	$	1,086	$	(211	)	$	219
Deferred		529		1,740			1,524
Enactment of federal tax reform		-		-			1,136
Total provision for income taxes	$	1,615	$	1,529		$	2,879

The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of 21% in 2019 and 2018, and 34% in 2017, to income before income taxes as a result of the following:

	(in thousands)
	2019			2018			2017
Expected tax using statutory tax rate	$	2,578		$	2,047		$	2,287
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and political subdivision loans		(386	)		(358	)		(572	)
Tax-exempt income on life insurance contracts		(82	)		(83	)		(135	)
Deductible dividends paid to United
Bancshares, Inc. ESOP		(42	)		(37	)		(57	)
Tax-exempt settlement		(416	)		-			-
Non-deductible merger and acquisition costs		-			-			117
Enactment of federal tax reform		-			-			1,136
Other, net		(37	)		(40	)		103
Total provision for income taxes	$	1,615		$	1,529		$	2,879

The deferred income tax provision of $529,000 in 2019, $1.7 million in 2018, and $2.7 million in 2017 resulted from the tax effects of temporary differences.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below:

	(in thousands)
	2019			2018
Deferred tax assets:
Allowance for loan losses	$	868		$	760
Deferred compensation		312			301
Alternative minimum tax credits		-			46
Nonaccrual loan interest		212			256
Deferred loan fees		130			139
Accrued vacation expense		96			91
Accrued profit sharing		123			108
Loans fair value adjustments		421			531
Unrealized loss on securities available-for sale		-			469
Other		124			132
Net operating loss carryforwards		1,285			1,718
Total deferred tax assets		3,571			4,551
Deferred tax liabilities:
Federal Home Loan Bank stock dividends		526			526
Unrealized gain on securities available for sale		764			-
Capitalized mortgage servicing rights		223			276
Fixed asset depreciation		424			337
Acquisition intangibles		1,907			1,881
Trust preferred fair value adjustment		77			109
Other		67			77
Total deferred tax liabilities		3,988			3,206
Net deferred tax assets (liabilities)	$	(417	)	$	1,345

Net deferred tax assets (liabilities) at December 31, 2019 and 2018 are included in other assets (liabilities) in the consolidated balance sheets.

The Corporation acquired $15.0 million in federal loss carryforwards with the 2014 acquisition of OSB, which losses expire in years ranging from 2029 to 2033. Since the use of these losses is limited to $126,000 per year under Section 382 of the Internal Revenue Code, the Corporation recorded in deferred tax assets at the time of acquisition the tax benefit of only $2.5 million of the losses that were deemed more likely than not to be utilized before expiration. At December 31, 2019, the benefit of $1.7 million of these losses is reflected in deferred tax assets.

The Corporation acquired $8.9 million in federal loss carryforwards with the 2017 acquisition of Benchmark, which losses expire in years ranging from 2029 to 2036. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of these losses is $652,000 subject to other adjustments, including the impact of the tax liability adjustment described in Note 3. At December 31, 2019, $4.4 million of the loss carryforwards remain; the benefit of which is reflected in deferred tax assets.

Management believes it is more likely than not that the benefit of recorded deferred tax assets will be realized. Consequently, no valuation allowance for deferred tax assets is deemed necessary as of December 31, 2019 and 2018.

Unrecognized Tax Benefits

The Corporation had no unrecognized tax benefits at December 31, 2019 and 2018. The Corporation does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

There was no accrued interest related to uncertain tax positions at December 31, 2019 and December 31, 2018.

The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation and its subsidiaries are no longer subject to examination by taxing authorities for years before 2016. There are no current federal examinations of the Corporation’s open tax years.

NOTE 13 - EMPLOYEE AND DIRECTOR BENEFITS

The Corporation sponsors a salary deferral, defined contribution plan which provides for both profit sharing and employer matching contributions. The plan permits investing in the Corporation’s stock subject to certain limitations. Participants who meet certain eligibility conditions are eligible to participate and defer a specified percentage of their eligible compensation subject to certain income tax law limitations. The Corporation makes discretionary matching and profit sharing contributions, as approved annually by the Board of Directors, subject to certain income tax law limitations. Contribution expense for the plan amounted to $1,201,000, $1,025,000 and $776,000 in 2019, 2018, and 2017, respectively. At December 31, 2019, the plan owned 397,960 shares of the Corporation’s common stock.

The Corporation also sponsors nonqualified deferred compensation plans, covering certain directors and employees, which have been indirectly funded through the purchase of split-dollar life insurance policies. In connection with the policies, the Corporation has provided an estimated liability for accumulated supplemental retirement benefits amounting to $1,484,000 and $1,435,000 at December 31, 2019 and 2018, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. The Corporation has also purchased split-dollar life insurance policies for investment purposes and to fund other employee benefit plans. The combined cash values of these policies aggregated $18,613,000 and $18,223,000 at December 31, 2019 and 2018, respectively.

Under an employee stock purchase plan, eligible employees may defer a portion of their compensation and use the proceeds to purchase stock of the Corporation at a discount determined semi-annually by the Board of Directors as stipulated in the plan. The Corporation sold from treasury 2,957 shares in 2019, 1,715 shares in 2018, and 1,126 shares in 2017 under the plan.

The three members of the Corporation's senior executive management team have employment agreements which provide for certain compensation and benefits should any triggering events occur, as specified in the agreement, including change of control or termination without cause.

NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of involvement the Corporation has in these financial instruments.

The Corporation’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Corporation uses the same credit policies in making loan commitments as it does for on-balance sheet loans.

The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2019 and 2018:

	(in thousands)
	Contract amount
	2019		2018
Commitments to extend credit	$	132,605	$	146,450
Letters of credit	$	615	$	1,076

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.

Letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation requires collateral supporting these commitments when deemed necessary.

NOTE 15 - REGULATORY MATTERS

The Corporation (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of Common Equity Tier 1 Capital (CET1) to risk-weighted assets (as defined), total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2019 and 2018, that the Corporation and Bank meet all capital adequacy requirements to which they are subject. Furthermore, the Board of Directors of the Bank has adopted a resolution to maintain Tier I capital at or above 8% of total assets.

As of December 31, 2019, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, an institution must maintain minimum CET1, total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

In July 2013 the U.S federal banking authorities approved the final rules (the “Basel III Capital Rules”) which established a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules have maintained the general structure of the current prompt corrective action framework, while incorporating provisions which will increase both the quality and quantity of the Bank’s capital. Generally, the Bank became subject to the new rules on January 1, 2015 with phase-in periods for many of the new provisions. Management believes the Bank is complying with the new capital requirements as they are phased-in.

The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2019 and 2018 are presented in the following table:

										Minimum to be
										well capitalized
						Minimum				under prompt
						capital				corrective
	Actual					requirement				action provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2019
Common Equity Tier 1 Capital (CET1) (to Risk Weighted Assets)
Consolidated	$	73,938		11.6	%	$	44,634		≥ 7.0%		N/A		N/A
Bank	$	80,277		12.6	%	$	44,464		≥ 7.0%	$	41,288		6.5	%
Total Capital (to Risk Weighted Assets)
Consolidated	$	78,069		12.2	%	$	66,950		≥ 10.5%		N/A		N/A
Bank	$	84,493		13.3	%	$	66,697		≥ 10.5%	$	63,521		10.0	%
Tier 1 Capital (to Risk weighted Assets)
Consolidated	$	73,938		11.6	%	$	54,198		≥ 8.5%		N/A		N/A
Bank	$	80,277		12.6	%	$	53,992		≥ 8.5%	$	50,816		8.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	73,938		8.9	%	$	33,233		≥ 4.0%		N/A		N/A
Bank	$	80,277		9.3	%	$	34,454		≥ 4.0%	$	43,068		5.0	%
As of December 31, 2018
Common Equity Tier 1 Capital (CET1) (to Risk Weighted Assets)
Consolidated	$	64,426		10.2	%	$	40,213		≥ 6.375%		N/A		N/A
Bank	$	69,742		11.1	%	$	40,136		≥ 6.375%	$	62,959		6.5	%
Total Capital (to Risk Weighted Assets)
Consolidated	$	67,953		10.8	%	$	62,290		≥ 9.875%		N/A		N/A
Bank	$	73,361		11.7	%	$	62,172		≥ 9.875%	$	62,959		10.0	%
Tier 1 Capital (to Risk weighted Assets)
Consolidated	$	64,426		10.2	%	$	49,675		≥ 7.875%		N/A		N/A
Bank	$	69,742		11.1	%	$	49,580		≥ 7.875%	$	50,367		8.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	64,426		8.3	%	$	30,875		≥ 4.0%		N/A		N/A
Bank	$	69,742		8.8	%	$	31,745		≥ 4.0%	$	39,681		5.0	%

On a parent company only basis, the Corporation’s primary source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the Bank may declare dividends without the approval of the State of Ohio, Division of Financial Institutions (the “ODFI”), unless the total dividends in a calendar year exceed the total of the Bank’s net profits for the year combined with its retained profits of the two preceding years.

NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION

A summary of condensed financial information of the parent company as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019, is as follows:

Condensed Balance Sheets
	(in thousands)
Assets:	2019		2018
Cash	$	879	$	3,438
Investment in bank subsidiary		114,029		99,134
Other assets		2,419		1,198
Total assets	$	117,327	$	103,770

Liabilities:
Junior subordinated deferrable interest debentures	$	12,908	$	12,874
Other borrowings		8,750		9,750
Other liabilities		888		202
Total Liabilities		22,546		22,826
Shareholders' equity		94,781		80,944
Total liabilities and shareholders’ equity	$	117,327	$	103,770

	(in thousands)
Condensed Statements of Income	2019			2018			2017
Income – dividends from bank subsidiary	$	-		$	4,500		$	28,000
Litigation Settlement		1,980			-			-
Expenses – interest, professional fees and other expenses, net of federal income tax benefit and interest income		(1,313	)		(1,346	)		(835	)
Income before equity in undistributed net income of bank subsidiary		667			3,154			27,165
Equity in undistributed net income of bank subsidiary		9,994			5,066			(23,319	)
Net income	$	10,661		$	8,220		$	3,846

	(in thousands)
Condensed Statements of Cash Flows	2019			2018			2017
Cash flows from operating activities:
Net income	$	10,661		$	8,220		$	3,846
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of bank subsidiary		(9,994	)		(5,066	)		23,319
Stock option expense		266			165			100
Depreciation and amortization		34			34			34
(Increase) decrease in other assets		(1,221	)		969			(945	)
Increase (decrease) in other liabilities		421			40			(86	)
Net cash provided by operating activities		167			4,362			26,268

Cash flows from investing activities:
Acquisition of Benchmark		-			(3,413	)		(30,752	)

Cash flows from financing activities:
Proceeds from other borrowings		-			-			10,000
Principal payments on other borrowings		(1,000	)		(250	)		-
Purchase of treasury stock		(95	)		-			-
Proceeds from sale of treasury shares		71			39			27
Cash dividends paid		(1,702	)		(1,568	)		(1,569	)
Net cash provided by (used in) financing activities		(2,726	)		(1,779	)		8,458
Net increase (decrease) in cash		(2,559	)		(830	)		3,974
Cash at beginning of the year		3,438			4,268			294
Cash at end of the year	$	879		$	3,438		$	4,268

During 2005, the Board of Directors approved a program whereby the Corporation purchases shares of its common stock in the open market. The decision to purchase shares, the number of shares to be purchased, and the price to be paid depends upon the availability of shares, prevailing market prices, and other possible considerations which may impact the advisability of purchasing shares. The Corporation purchased 4,220 shares in 2019 (none in 2018 and 2017) under the program.

NOTE 17 - FAIR VALUE MEASUREMENTS

Fair value is defined 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.

FASB ASC 820-10, Fair Value Measurements (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.

The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	(in thousands)
2019	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Recurring:
Securities available-for-sale:
Obligations of state and political subdivisions	$	-	$	72,554	$	-	$	72,554
Mortgage-backed		-		110,041		-		110,041
Other		1,014		2		-		1,016
Mortgage servicing rights		-		-		1,061		1,061
Total recurring	$	1,014	$	182,597	$	1,061	$	184,672

Nonrecurring:
Impaired loans	$	-	$	-	$	1,495	$	1,495

	(in thousands)
2018	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Recurring:
Securities available-for-sale:
Obligations of state and political subdivisions	$	-	$	59,466	$	-	$	59,466
Mortgage-backed		-		106,924		-		106,924
Other		962		2		-		964
Mortgage servicing rights		-		-		1,313		1,313
Total recurring	$	962	$	166,392	$	1,313	$	168,667

Nonrecurring:
Impaired loans	$	-	$	-	$	244	$	244
Other real estate owned		-		-		108		108
Total nonrecurring	$	-	$	-	$	352	$	352

There was one security measured at fair value included in the Level 3 hierarchy during 2017 due to the lack of observable quotes in inactive markets for the instrument. The following table presents the changes in fair value for the security for the year ended December 31, 2017.


Security valued using Level 3 inputs	(in thousands)
Balance at beginning of year	$	2,238
Principal payments received		(2,238	)
Changes in fair value		-
Balance at end of year	$	-

The table below presents a reconciliation and income statement classification of gains and losses for mortgage servicing rights, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019, 2018 and 2017:

	(in thousands)
Mortgage Servicing Rights	2019			2018			2017
Balance at beginning of year	$	1,313		$	1,270		$	1,247
Gains or losses, including realized and unrealized:
Purchases, issuances, and settlements		192			164			183
Disposals – amortization based on loan payments and payoffs		(186	)		(147	)		(129	)
Changes in fair value		(258	)		26			(31	)
Balance at end of year	$	1,061		$	1,313		$	1,270

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, 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 may be classified within Level 3 of the valuation hierarchy.

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 assumptions disclosed in Note 7 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.

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 market valuations and 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 range between 10% and 30% of market 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.

Other Real Estate Owned

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less appraisal adjustments between 10% and 70% of appraised value, and expected selling costs between 10% and 30% 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 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 December 31, 2019 and 2018.

NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2019 and 2018 are as follows:

	(in thousands)
	2019				2018
	Carrying Amount		Estimated Value		Carrying Amount		Estimated Value		Input Level
FINANCIAL ASSETS
Cash and cash equivalents	$	26,412	$	26,412	$	16,475	$	16,475	1
Securities, including FHLB stock		188,913		188,913		172,656		172,656	2,3
Loans held for sale		15,301		15,301		7,705		7,705	3
Net loans and leases		572,293		572,936		558,087		554,223	3
Mortgage servicing rights		1,061		1,061		1,313		1,313	3
Hedging assets		970		970		492		492	3
Total financial assets	$	804,950	$	805,593	$	756,728	$	752,864

	(in thousands)
	2019				2018
	Carrying Amount		Estimated Value		Carrying Amount		Estimated Value		Input Level
FINANCIAL LIABILITIES
Deposits
Maturity	$	197,391	$	197,428	$	180,675	$	178,947	3
Non-maturity		509,743		509,743		485,561		485,561	1
Other borrowings		58,750		58,692		65,443		65,029	3
Junior subordinated deferrable interest debentures		12,908		11,067		12,874		8,318	3
Hedging liabilities		27		27		86		86	3
Total financial liabilities	$	778,819	$	776,957	$	744,639	$	737,941

The above summary does not include accrued interest receivable and 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 December 31, 2019 and 2018 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounts to $133,220,000 at December 31, 2019 and $147,526,000 at December 31, 2018. 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:

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 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 may be classified within Level 3 of the valuation hierarchy. The Corporation did not have any securities classified as Level 3 at December 31, 2019 or 2018.

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.

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 year 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 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 the junior subordinated deferrable interest debentures is determined based on quoted market prices of similar instruments.

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 19 – REVENUE RECOGNITION

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 Company’s performance obligations are satisfied at the time of the transaction or over the course of a month.

Interchange fee income:

The Company 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 Company 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 Company’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 Company has satisfied its performance obligation.

The following table presents the Company’s non-interest income for the years ended December 31, 2019, and 2018. Items outside the scope of ASC 606 are noted as such.

	Year ended December 31,
	2019			2018
Service charges on deposit accounts	$	1,486		$	1,610
Gain on sale of mortgage and government loans (1)		9,071			4,675
Net securities gains (losses) (1)		4			(6	)
Change in fair value of mortgage servicing rights (1)		(258	)		26
Increase in cash surrender value of life insurance (1)		390			395
Other
Credit and debit card interchange fees		1,443			1,388
Litigation settlement (1)		1,980			-
Wealth management		293			237
Net loan servicing fees (1)		327			375
Other non-interest income		312			728
Total non-interest income	$	15,048		$	9,428

(1) Not within the scope of ASC 606

NOTE 20 – LEASING ARRANGEMENTS

The Corporation leases various branch facilities under operating leases. Rent expense was $314,000, $158,000, and $111,000 for the years 2019, 2018 and 2017, respectively. A right-of-use asset, included in other assets, and lease liability, included in other liabilities, were both $2,112,000 at December 31, 2019.

The following is a schedule of future minimum rental payments required under the facility leases as of December 31, 2019:

Year ending	Amount
December 31,	(in thousands)
2020	$	311
2021		281
2022		280
2023		282
2024		284
Thereafter		1,150
Total	$	2,588

NOTE 21 – STOCK-BASED COMPENSATION

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 30,151 options during 2017 at an exercise price of $21.70, 31,267 options during 2018 at an exercise price of $23.30, and 33,853 options during 2019 at an exercise price of $22.97 under the Plan. Following is a summary of activity for stock options for the years ended December 31, 2019, 2018 and 2017 (number of shares):

	2019			2018			2017
Outstanding, beginning of year		93,069			63,503			33,352
Granted		33,853			31,267			30,151
Exercised		-			-			-
Forfeited		(9,275	)		(1,701	)		-
Outstanding, end of year		117,647			93,069			63,503
Weighted average exercise price at end of year	$	21.81		$	21.39		$	20.45

The options vest over a three-year period on the anniversary of the date of grant. At December 31, 2019, 57,033 options were vested and outstanding options had a weighted average remaining contractual term of 8.17 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 in 2019, 2018 and 2017:

	2019			2018			2017
Weighted-average fair value of options granted	$	7.77		$	7.87		$	7.35
Average dividend yield		2.26	%		2.18	%		2.23	%
Expected volatility		40.00	%		40.00	%		40.00	%
Rick-free interest rate		1.93	%		2.81	%		2.06	%
Expected term (years)		7			7			7
Shares Granted		33,853			31,267			30,151
Exercise Price	$	22.97		$	23.30		$	21.70

Total compensation expense related to the stock options granted in 2017 net of forfeitures, is expected to be $192,000 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 $213,000 and is being recognized ratably over the 36 month period beginning September 1, 2018. Total compensation expense related to the stock options granted in 2019 is expected to be $263,000 and is being recognized ratably over the 36 month period beginning July 1, 2019. Stock option expense for outstanding awards amounted to $266,000, $165,000 and $100,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

NOTE 22 - CONTINGENT LIABILITIES

In the normal course of business, the Corporation and its subsidiary may be involved in various legal actions, but in the opinion of management and legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.

NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following represents a summary of selected unaudited quarterly financial data for 2019 and 2018:

	(in thousands, except share data)
			Net				Net Income
	Interest		Interest		Net		Per Share
	Income		Income		Income		Basic		Diluted
2019
First quarter	$	8,986	$	6,935	$	1,814	$	0.55	$	0.55
Second quarter	$	9,470	$	7,245	$	2,285	$	0.70	$	0.70
Third quarter	$	9,595	$	7,271	$	2,418	$	0.74	$	0.74
Fourth quarter	$	9,768	$	7,444	$	4,144	$	1.27	$	1.26

2018
First quarter	$	7,741	$	6,530	$	1,799	$	0.55	$	0.55
Second quarter	$	8,710	$	7,326	$	2,200	$	0.67	$	0.67
Third quarter	$	8,758	$	7,072	$	1,786	$	0.55	$	0.55
Fourth quarter	$	9,156	$	7,279	$	2,435	$	0.74	$	0.74

OFFICERS - UNITED BANCSHARES, INC.
Brian D. Young - President / Chief Executive Officer
Stacy A. Cox - Chief Financial Officer
Heather M. Oatman - Secretary

OFFICERS - THE UNION BANK COMPANY
Brian D. Young - President / CEO / Chairman
Stacy A. Cox - Executive Vice President / CFO
Curtis E. Shepherd - Executive Vice President
Heather M. Oatman - Senior Vice President / Secretary
Teresa M. Deitering - Senior Vice President
John P. Miller - Senior Vice President
Brent D. Nussbaum- Senior Vice President
Norman V. Schnipke - Senior Vice President
Travis E. Vulich - Senior Vice President


Vice President
Janice C. Acerro		Roger A. Nedolast
Donna J. Brown		Doris A. Neumeier
Paul M. Cira		Michael E. Pultz
Thomas M. Cox		Jason A. Recker
Chase H. Doll		Amy E. Reese
Amy C. Felter		Rosemarie Roman
Steven L. Floyd		Ricardo Rosado
Vicky K. Gilbert		Thomas J. Sansone
Robert W. Gray		Craig R. Stechschulte
Erin W. Hardesty		Benjamin K. Stewart
Susan A. Hojnacki		J. Kevin Taylor
Mark G. Honigford		Jason R. Thornell
Karen M. Maag		Dean J. Vande Water
Klint D. Manz		Paul A. Walker
Daron S. McGuire		Vikki L. Williams

Assistant Vice President
Kathi J. Amstutz		Bart H. Mills
Thomas R. Burgoon		Peter J. Rafaniello
Walker K. Carr		Sharon R. Sharpe
Nancianne Carroll		Theresa A. Stein-Moenter
David M. Cornwell		Stacia R. Thompson
Sony S. Dawson		Matthew J. Tway
Christina J. Hegemier		Jarod M. Van Winkle
Mandy L. Hermiller		Amy J. Vasquez
Machiel K. Hindall		Kimberly S. Verhoff
Richard A. Hirsch		Lori L. Watson
Eric R. Holmes		Pamela J. Workman
Laura M. Kitchen		Jean K. Wright
Joyce M. Kuhlman

Officer
Jacqueline Fairbanks
Mary Jo Horstman
Zachary P. Nycz
Matthew A. Sargent

UNITED BANCSHARES, INC.

Columbus Grove, Ohio

DIRECTORS – UNITED BANCSHARES, INC.

NAME	AGE	DIRECTOR SINCE	NAME	AGE	DIRECTOR SINCE
Robert L. Benroth	57	2003	Daniel W. Schutt	72	2005
Putnam County Auditor			Chairman, Retired Banker

Herbert H. Huffman	69	2018	R. Steven Unverferth	67	2005
Retired - Educator			Chairman, Unverferth Manufacturing Corporation, Inc.

H. Edward Rigel	77	2000	Brian D. Young	53	2012
Farmer, Rigel Farms, Inc.			President/CEO

David P. Roach	69	2001
Vice-President/GM, First Family Broadcasting of Ohio

DIRECTORS – THE UNION BANK COMPANY

NAME	AGE	DIRECTOR SINCE (a)	NAME	AGE	DIRECTOR SINCE (a)
Robert L. Benroth	57	2001	David P. Roach	69	1997
Putnam County Auditor			Vice-President/GM, First Family Broadcasting of Ohio

Anthony M.V. Eramo	54	2016	Carol R. Russell	65	2019
Managing Director, MountainView Financial Solutions			President/CEO, Schulte Group

Herbert H. Huffman	69	1993	Daniel W. Schutt	72	2005
Retired - Educator			Retired Banker

Kevin L. Lammon	65	1996	R. Steven Unverferth	67	1993
Village Administrator, Village of Leipsic			Chairman, Unverferth Manufacturing Corporation, Inc

William R. Perry	61	1990	Brian D. Young	53	2008
Farmer			President/CEO/Chairman

H. Edward Rigel	77	1979
Farmer, Rigel Farms, Inc.

(a)

Indicates year first elected or appointed to the board of The Union Bank Company or any of the former affiliate banks, Bank of Leipsic or the Citizens Bank of Delphos.