Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 2015
Commission File No.: 000-29283
UNITED BANCSHARES, INC.
(exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of
incorporation or organization)
34-1516518
(I.R.S. Employer I.D. No.)
100 S. High Street, Columbus Grove, Ohio 45830
(Address of principal executive offices)
Registrant’s telephone number, including area code: (419) 659-2141
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value – NASDAQ Global Market
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of the voting stock held by non-affiliates of the registrant was 48,956,831, based upon the last sales price as quoted on
the NASDAQ Global Market as of June 30, 2015.
The number of shares of Common Stock, no par value outstanding as of January 31, 2016: 3,299,755
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2015 are incorporated by reference into Part II. Portions
of the Proxy Statement dated March 23, 2016 for the 2016 Annual Meeting of Shareholders to be held on April 27, 2016 are incorporated by
reference into Part III.
2
Forward Looking Statements
From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such
as “goal,” “objective,” “outlook,” “plan,” “strategy,” “expect,” “anticipate,” “project,” “believe,” “estimate,” or other words of similar meaning, or
by words or phrases indicating that an event or trend “may,” “should,” “will,” “is likely,” or that an event or trend is “probable” to occur or
“continue,” has “begun,” “is scheduled,” or is “on track.” Forward-looking statements provide our current expectations or forecasts of future
events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed with or furnished to the
Securities and Exchange Commission (the “SEC”).
Forward-looking statements are not historical facts and, by their nature, are subject to assumptions, risks, and uncertainties, many of which are
outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that
any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ from those described in forward-
looking statements, include, but are not limited to:
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deterioration of commercial real estate market fundamentals;
defaults by our loan counterparties or trends;
adverse changes in credit quality trends;
declining asset prices;
our ability to accurately estimate collateral values, future levels of nonperforming loans, and other borrower fundamentals as part of our
credit review process;
changes in local, regional and international business, economic or political conditions affecting the regions in which we operate;
the extensive and increasing regulation of the U.S. financial services industry;
changes in accounting policies, rules and interpretations;
increasing capital and liquidity standards under applicable regulatory rules;
unanticipated changes in our liquidity position, including but not limited to, changes in the cost of liquidity, our ability to enter the
financial markets and to secure alternative funding sources;
our ability to receive dividends from our subsidiary, The Union Bank Company;
breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;
operational or risk management failures by us or critical third-parties;
adverse judicial proceedings;
the occurrence of natural or man-made disasters or conflicts or terrorist attacks;
a reversal of the U.S. economic recovery due to financial, political or other shocks;
our ability to anticipate interest rate changes and manage interest rate risk;
deterioration of economic conditions in the geographic regions where we operate;
the soundness of other financial institutions;
our ability to attract and retain talented executives and employees and to manage our reputational risks;
our ability to timely and effectively implement our strategic initiatives; and
increased competitive pressure due to industry consolidation.
Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to
update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you
should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-K and our subsequent reports on
Form 10-Q and 8-K and any other filings made with the SEC, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov
and on our website at www.theubank.com.
3
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Signatures
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
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Page(s)
5-26
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Item 1.
Business
PART I
Overview
United Bancshares, Inc. (“UBOH”), an Ohio corporation, organized in 1985, is headquartered in Columbus Grove, Ohio. We are a bank holding
company under the Bank Holding Company Act of 1956, as amended (the “BHCA”), with consolidated total assets of $608.7 million at December 31,
2015. UBOH is regulated as a one-bank holding company by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”),
and its principal asset and operating subsidiary is The Union Bank Company, an Ohio state chartered commercial bank (“Union Bank”). As of
December 31, 2015, UBOH and its subsidiary (collectively the “Corporation”) employed approximately 151 full-time equivalent employees.
United Bancshares, Inc.’s common stock has traded on the NASDAQ Global Market under the symbol “UBOH” since March 2001.
Union Bank
Union Bank is an Ohio state-chartered bank supervised by the State of Ohio, Division of Financial Institutions (the “Division”), and the Federal
Deposit Insurance Corporation (the “FDIC”). Through Union Bank, we provide a wide range of commercial and retail banking services. Union Bank
offers a full range of commercial banking services, including checking accounts, savings and money market accounts; certificates of deposit; on-
line banking and automatic teller machines; commercial, consumer, agricultural, residential mortgage and home equity loans; wealth management
services; treasury management services; safe deposit box rentals; and other personalized banking services. Through our fifteen branch offices
located in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, and Pemberville, Ohio,
we serve the Ohio counties of Allen, Delaware, Hancock, Marion, Putnam, Sandusky, Van Wert, and Wood.
In the operation of its business, Union Bank maintains a strong community orientation. Union Bank’s business model emphasizes personalized
service, clients’ access to key decision makers, individualized-attention, tailored products, and access to on-line banking tools. Union Bank’s
management has placed a special emphasis on personalized attention to its customers’ needs in order to better serve the members of the community
and create opportunities for them. Union Bank concentrates its efforts on serving the financial needs of the business in the Ohio counties that it
serves as well as on providing financing to customers seeking to purchase or build their own homes; routinely seeking opportunities to foster
economic growth and wealth accumulation in local economies through the financing of local entrepreneurs and residences in the areas we serve.
Union Bank has two subsidiaries: UBC Investments, Inc. (“UBC”), an entity formed to hold its securities portfolio, and UBC Property, Inc. (“UBC
Property”), an entity formed to hold and manage certain property that is acquired in lieu of foreclosure.
Additional information
Our executive offices are located at 100 S High Street, Columbus Grove, OH 45830 and our telephone number is (419) 659-2141. Our website is
www.theubank.com.
We make available free of charge, on or through the United Bancshares link on our website (www.theubank.com), our annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15
(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC. Also posted on our website and available in print upon request are the charters for
our Audit Committee, Compensation, and Nominating Committees and our Senior Officer Code of Ethics. Within the time period required by the SEC
and the NASDAQ Global Market, we will post on our website any amendment to the Senior Officer Code of Ethics or the above-referenced
governance documents or you may request the documents by writing to our Chief Financial Officer at The Union Bank Co., 100 South High Street,
Columbus Grove, OH 45830 or by calling (419) 659-2141.
The public may read and copy any filed materials with the SEC at the SEC’s Public Reference Room at 100 E. Street, N.E., Washington, DC 20549.
The public may obtain information on the operation of the Public Referenced Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information that the Corporation electronically
files with the SEC.
5
Competition
The Corporation competes for deposits with other commercial banks, savings associations and credit unions and issuers of commercial paper and
other securities, such as shares in money market mutual funds. Primary factors in competing for deposits include customer service, interest rates
and convenience. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies,
credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The financial
services industry is likely to become more competitive as further technology advances enable more companies to provide financial services. We
compete by offering quality products and innovative services at competitive prices, and by maintaining our products and services offerings to keep
pace with customer preferences in the regions that we operate.
In recent years, mergers and acquisitions have led to greater concentration in the banking industry, placing added competitive pressure on our core
banking products and services. Consolidation continued during 2015, primarily through private merger and acquisition transactions, and led to
redistribution of deposits and certain banking assets to other financial institutions. We expect this trend to continue during 2016, due primarily to
increased compliance costs. We, therefore, expect competition in the markets we serve to intensify with the advent of new technology and
consolidation trends. As a matter of course, we continue to evaluate opportunities in the markets we serve or contiguous markets to improve our
footprint, while balancing the efficiency of technology.
General
Supervision and Regulation
The following discussion addresses the material elements of the regulatory framework applicable to bank holding companies, like UBOH, and our
subsidiary bank, Union Bank. This regulatory framework is intended primarily to protect customers and depositors, the Deposit Insurance Fund (the
“DIF”) of the FDIC, and the banking system as a whole, rather than for the protection of security holders and creditors. We cannot predict changes
in the applicable laws, regulations and regulatory agency policies, yet such changes may have a material effect on our business, financial condition
or results of operations.
UBOH
As a bank holding company, UBOH is subject to the regulation, supervision, and examination by the Federal Reserve Board under the BHCA.
Pursuant to the BHCA, bank holding companies generally may not, in general, directly or indirectly own or control more than 5% of the voting
shares, or substantially all of the assets, of any bank or savings association, without prior approval by the Federal Reserve Board. In addition, bank
holding companies are generally prohibited from engaging in commercial or industrial activities.
Under federal law, a bank holding company, like UBOH, must serve as a source of financial strength to its subsidiary depository institutions by
providing financial assistance to them in the event of their financial distress. This support may be required when we do not have the resources to,
or would prefer not to, provide it. Certain loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits in,
and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the bankruptcy of a bank holding company, any
commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to priority of payment.
Union Bank
As an Ohio state-chartered bank, and a member of the DIF, administered by the FDIC, Union Bank is supervised and regulated by the Division and
the FDIC. As insurer, the FDIC imposes deposit insurance premiums and conducts examinations of and requires reporting by FDIC-insured
institutions under the Federal Deposit Insurance Act, as amended (the “FDIA”).
Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of Union Bank, including
requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be
charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on
activities based on capital and surplus, limitations on payment of dividends, and limitations on branching.
As a member of the FHLB, Union Bank is required to, among other things, maintain an investment in capital stock of the FHLB. Union Bank receives
dividends on its investment in FHLB stock. Under certain conditions, secured advances to Union Bank are available from the FHLB to meet
operational requirements. Such advances are renewable and can be obtained up to specified dollar amounts. These advances are secured primarily
by Union Bank’s eligible mortgage loans and FHLB stock.
6
Regulatory capital and liquidity
Current regulatory capital requirements
Federal banking regulators have promulgated risk-based capital and leverage ratio requirements applicable to UBOH and Union Bank. The
adequacy of regulatory capital is assessed periodically by federal banking agencies in their examination and supervision processes, and in the
evaluation of applications in connection with certain expansion activities.
The risk-based capital guidelines adopted by the federal banking regulators and effective through December 31, 2015, include both a definition and
a framework for calculating risk weighted assets by assigning assets and off-balance sheet items to broad risk categories. The minimum ratio of total
capital to risk weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least 4% is to be comprised of
common shareholders’ equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock, and minority interest in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist, among other things, of mandatory convertible debt securities, a
limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan losses. Each of the federal banking agencies
also impose a minimum leverage ratio (Tier 1 capital to total assets) for banking organizations. The minimum leverage ratio is currently 3% for bank
holding companies that are considered “strong” under the Federal Reserve Board’s guidelines or which have implemented the Federal Reserve
Board’s risk-based capital measure for market risk. The minimum leverage ratio is 1%-2% higher for other bank holding companies and banks based
on their particular circumstances and risk profiles and for those banks experiencing or anticipating significant growth. The FDIC imposes similar
capital requirements on Union Bank adopted by the FDIC.
The Corporation currently satisfies all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a
variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC.
The junior subordinated deferrable interest debentures issued in 2003 and the trust preferred securities from The Ohio State Bank acquisition, as
described in Note 10 in the consolidated financial statements contained in the Corporation’s Annual Report, currently qualify as Tier 1 capital for
regulatory purposes. However, it is possible that regulations could change so that such securities do not qualify.
The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these
regulations, institutions, which become undercapitalized, become subject to mandatory regulatory scrutiny and limitations that increase as capital
decreases. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee
the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized.
The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the
amount of dividends that may be declared by its subsidiary bank and other subsidiaries. However, the Federal Reserve Board expects the
Corporation to serve as a source of strength to its subsidiary bank, which may require it to retain capital for further investment in the subsidiary,
rather than for dividends for shareholders of UBOH. The Bank may not pay dividends to UBOH if, after paying such dividends, it would fail to meet
the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The Bank must have the approval
of its regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net
income and the retained net income for the preceding two years, less required transfers to surplus. Payment of dividends by a bank subsidiary may
be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking
practice. These provisions could have the effect of limiting UBOH’s ability to pay dividends on its outstanding common shares.
The FDIA requires the relevant federal banking regulator to take “prompt corrective action” with respect to an FDIC-insured depository institution
that does not meet certain capital adequacy standards. Banks and savings associations are classified into one (1) of five (5) categories based upon
capital adequacy, ranging from “well-capitalized” to “critically undercapitalized.” Restrictions on operations, management and capital distributions
begin to apply at “adequately capitalized” status and become progressively stricter as the insured depository institutions approaches “critically
undercapitalized” status. Generally, the regulations require the appropriate federal banking agency to take prompt corrective action with respect to
an institution which becomes “undercapitalized” and to take additional actions if the institution becomes “significantly undercapitalized” or
“critically undercapitalized.” Under the Prompt Corrective Action requirements effective through December 31, 2015, a depository institution is
considered well-capitalized if it maintains total risk-based capital of greater than or equal to 10%; tier 1 risk-based capital of at least 6%; and a tier 1
leverage ratio of at least 5%. As of December 31, 2015, Union Bank has total risk-based capital of 16.8%, tier 1 risk-based capital and CET 1 capital of
15.9%, and tier 1 leverage of 11.8%. Effective January 1, 2015, final rules promulgated by the FDIC pursuant to the Dodd-Frank Act, provide that for
a depository institution to be considered well-capitalized it must maintain common equity tier 1 capital of at least 6.5%; tier 1 risk-based capital of at
least 8%; total risk-based capital of at least 10%; and leverage ratio of at least 5%. While the Prompt Corrective Action requirements only apply to
FDIC-insured depository institutions and not to bank holding companies, the mandatory Prompt Corrective Action “capital restoration plan”
required of an undercapitalized institution by its relevant regulator must be guaranteed to a limited extent by the institution’s parent bank holding
company.
7
In October 2013, the federal banking regulators published final rules establishing a new comprehensive capital framework for U.S. banking
organizations (the “Regulatory Capital Rules”). The Regulatory Capital Rules implement the Basel Committee’s December 2010 framework known as
“Basel III” for strengthening international capital standard as well as certain provisions of the Dodd-Frank Act. The implementation of the
Regulatory Capital Rules will lead to higher capital requirements and more restrictive leverage liquidity ratios than those currently in place. In
addition, in order to avoid limitations on capital distributions, such as dividend payments and certain bonus payments to executive officers, the
Regulatory Capital Rules require insured financial institutions to hold a capital conservation buffer of common equity tier 1 capital above the
minimum risk-based capital requirements. The capital conservation buffer will be phased in over time, beginning January 1, 2016, for non-advanced
approach institutions, like Union Bank and UBOH, becoming fully effective on January 1, 2019, and will consist of an additional amount of common
equity equal to 2.5% of risk-weighted assets. The Regulatory Capital Rules also revise the regulatory agencies’ prompt corrective action framework
by incorporating the new regulatory capital minimums and updating the definition of common equity. The Regulatory Capital Rules phase in
beginning January 1, 2015, for non-advanced approaches banking organizations, like UBOH and Union Bank, and January 1, 2014, for advanced
approach banking organizations, and will be fully phased in by January 1, 2019. Until the rules are fully phased in, we cannot predict the ultimate
impact they will have upon the financial condition or results of operations of the Corporation.
Federal banking law and regulations impose limitations on the payment of dividends by our bank subsidiary (like Union Bank). Historically,
dividends paid by Union Bank have been an important source of cash flow for UBOH to pay dividends on its equity securities and interest on its
debt. Dividends by our bank subsidiary are limited to the lessor of the amounts calculated under an earnings retention test and an undivided profits
test. Under the earnings retention test, without the prior approval of the FDIC, a dividend may not be paid if the total of all dividends declared by a
bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years. Under the
undivided profits test, a dividend may not be paid in excess of a bank’s undivided profits. Moreover, under the FDIA, an insured depository
institution may not pay a dividend if the payment would cause it to be in a less than “adequately capitalized” prompt corrective action capital
category or if the institution is in default in the payment of an assessment due to the FDIC. For more information about the payment of dividends by
Union Bank to UBOH, please see Note 15 in this report.
FDIA and Resolution Authority
Federal Deposit Insurance Act
The FDIC’s DIF provides insurance coverage for certain deposits, which insurance is funded through assessments on banks, like Union Bank.
Pursuant to the Dodd-Frank Act, the amount of deposit insurance coverage for deposits increased to $250,000 per depositor. Pursuant to the Dodd-
Frank Wall Street Reform and Consumer Protection act (the “Dodd-Frank Act”), the FDIC has established 2.0% as the designated reserve ratio (the
“DRR”), that is, the ratio of the DIF to insured deposits. The Dodd-Frank Act directs the FDIC to amend its assessment regulations so that future
assessments will generally be based upon a depository institution’s average total consolidated assets minus the average tangible equity of the
insured depository institution during the assessment period, whereas assessments were previously based on the amount of an institution’s insured
deposits. The minimum DIF rate will increase from 1.15% to 1.35% by September 30, 2020, and the cost of the increase will be borne by depository
institutions with assets of $10 billion or more. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if
needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.
Conservatorship and receivership of insured depository institutionsUpon the insolvency of an insured depository institution, the FDIC will be
appointed as receiver or, in rare circumstances, conservator for the insolvent institution under the FDIA. In an insolvency, the FDIC may repudiate
or disaffirm any contract to which the institution is a party if the FDIC determines that performance of the contract would be burdensome and that
disaffirming or repudiating the contract would promote orderly administration of the institution’s affairs. If the contractual counterparty made a
claim against the receivership (or conservatorship) for breach of contract, the amount paid to the counterparty would depend upon, among other
factors, the receivership assets available to pay the claim and the priority of the claim relative to others. In addition, the FDIC may enforce most
contracts entered into by the insolvent institution, notwithstanding any provision that would terminate, cause a default, accelerate or give other
rights under the contract solely because of the insolvency, the appointment of the receiver (or conservator), or the exercise of rights or powers by
the receiver (or conservator). The FDIC may also transfer any asset or liability of the insolvent institution without obtaining approval or consent
from the institution’s shareholders or creditors. These provisions would apply to obligations and liabilities of UBOH’s insured depository
institution subsidiary, including any obligations under senior or subordinated debt issued to public investors.
8
Depositor preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors
(including claims of its depositors that have subrogated to the FDIC) and certain claims for administrative expenses of the FDIC as receiver have
priority over other general unsecured claims. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will
be placed ahead of unsecured, nondeposit creditors, including the institution’s parent bank, holding company and subordinated creditors, in order
of priority of payment.
Other Regulatory Developments under the Dodd-Frank Act
Consumer Financial Protection Bureau
Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), a consumer financial services regulator with supervisory
authority over banks and their affiliates with assets of more than $10 billion for compliance with federal consumer protection laws. While the
Corporation is not subject to examination by the CFPB it is subject to rulemaking promulgated by the CFPB. The CFPB’s authority includes
regulation of financial products and services sold to consumers and it has rulemaking authority with respect to federal consumer financial laws.
Any new regulatory requirements promulgated by the CFPB or modifications in the interpretations of existing regulations could require changes to
our consumer-facing businesses. The Dodd-Frank Act also gives the CFPB broad data collecting powers for fair lending for both small business
and mortgage loans, as well as extensive authority to prevent unfair, deceptive and abusive practices.
During 2013, the CFPB issued a series of final rules related to residential mortgage loan originating and servicing. In particular, in January 2013, the
CFPB issued a final rule implementing the ability-to-repay rules and qualified mortgage provisions of the Truth in Lending Act, as amended by the
Dodd-Frank Act. Under these rules, a lender must make a reasonable, good faith determination that a borrower is able to repay a mortgage before
extending the credit, based on a number of factors and consideration of financial information about the borrower. Loans meeting the definition of
“qualified mortgage” are granted a presumption that the lender satisfied the ability-to-repay requirements. The CFPB has also issued rules affecting
other aspects of the residential mortgage loan process, ranging from the customer application to servicing of the loan. These changes and additions
to consumer mortgage banking rules have required enhancements to our compliance programs, as well as changes to Union Bank’s systems and
loan processing practices. The ability to repay and qualified mortgage rules became effective on January 10, 2014.
Truth in Lending Act
The CFPB, pursuant to the Dodd-Frank Act, issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as
implemented by the Truth in Lending Act, requiring creditors to make a reasonable and good faith determination based on verified and documented
information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Creditors are required to
determine consumers’ ability to repay in one of two ways. The first alternative requires the creditor to consider the following eight underwriting
factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly
payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related
obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit
history. Alternatively, the creditor can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan
satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only
payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot
exceed 3% of the total loan amount. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of
compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of
compliance. To meet the mortgage credit needs of a broader customer base, the Corporation is predominantly an originator of mortgages that are in
compliance with the Ability-to-Pay rules.
Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services
industry as a whole, or on the Corporation’s business, results of operations and financial condition. Provisions in the legislation that require
revisions to the capital requirements of UBOH and Union Bank could require them to seek other sources of capital in the future.
9
The Bank Secrecy Act
The BSA requires all financial institutions (including banks and securities broker-dealers) to, among other things, maintain a risk-based system of
internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and
reporting requirements (such as cash and suspicious activity reporting) as well as due diligence and know-your-customer documentation
requirements. Union Bank has established and maintains an anti-money laundering program to comply with the BSA’s requirements.
Bank transactions with affiliates
Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates,
including the bank’s parent bank holding company and certain companies the parent bank holding company may be deemed to control for these
purposes. Transactions covered by these provisions must be on arm’s-length terms, and cannot exceed certain amounts which are determined with
reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an
amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the bank holding company may be
required to provide it.
Statistical Financial Information Regarding the Corporation
The following schedules and table analyze certain elements of the consolidated balance sheets and statements of income of the Corporation and its
subsidiary, as required under Securities Act Industry Guide 3 promulgated by the Securities and Exchange Commission, and should be read in
conjunction with the narrative analysis presented in ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION and the Consolidated Financial Statements of the Corporation, both of which are included in the 2015 Annual
Report.
10
I.
A.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
The following are the average balance sheets for the years ended December 31:
ASSETS
Interest-earning assets
Securities (1)
Taxable
Non-taxable
Interest bearing deposits
Federal funds sold
Loans (2)
Total interest-earning assets
Non-interest-earning assets
Cash and due from banks
Premises and equipment, net
Accrued interest receivable and other assets
Allowance for loan losses
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities
Demand deposits
Accrued interest payable and other Liabilities
Shareholders' equity (3)
2015
2014
(dollars in thousands)
2013
$
139,407 $
68,331
11,336
-
358,368
577,442
8,932
12,211
33,754
(3,586)
140,322 $
61,155
31,653
-
310,237
543,367
13,625
9,053
27,727
(4,062)
132,471
60,107
29,770
23
299,379
521,750
8,487
9,174
28,027
(5,681)
$
628,753 $
589,710 $
561,757
$
283,904 $
159,635
12,755
9,739
466,033
87,820
4,919
251,825 $
164,461
10,620
11,601
438,507
81,938
4,396
69,981
64,869
212,464
180,110
10,300
21,589
424,463
69,794
4,136
63,364
$
628,753 $
589,710 $
561,757
(1)
(2)
(3)
Securities include securities available-for-sale, which are carried at fair value, and restricted bank stock carried at cost. The average balance
includes monthly average balances of fair value adjustments and daily average balances for the amortized cost of securities.
Loan balances include principal balances of non-accrual loans and loans held for sale.
Shareholders’ equity includes average net unrealized appreciation (depreciation) on securities available-for-sale, net of tax.
11
I.
B.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
(CONTINUED)
The following tables set forth, for the years indicated, the condensed average balances of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the average interest rates earned or paid thereon.
Interest-earning assets
Securities (1)
Taxable
Non-taxable (2)
Loans (3, 4)
Interest-Bearing Deposits
Total interest-earning assets
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Total interest-bearing liabilities
2015
Average
Balance
Interest
Average
Rate
(dollars in thousands)
$
$
$
139,407 $
68,331
358,368
11,336
577,442
283,904
159,635
12,755
9,739
466,033
2,549
2,555
18,322
279
23,705
335
1,245
446
52
2,078
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
$
21,627
1.83%
3.74%
5.11%
2.46%
4.11%
0.12%
0.78%
3.50%
0.53%
0.45%
3.75%
(1)
(2)
(3)
(4)
Securities include securities available-for-sale, which are carried at fair value, and restricted bank stock carried at cost. The average balance
includes monthly average balances of fair value adjustments and daily average balances for the amortized cost of securities.
Computed on tax equivalent basis for non-taxable securities (34% statutory rate).
Loan balances include principal balance of non-accrual loans.
Interest income on loans includes fees of $705,810.
12
I.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
(CONTINUED)
Interest-earning assets
Securities (1)
Taxable
Non-taxable (2)
Loans (3, 4)
Interest-Bearing Deposits
Total interest-earning assets
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Total interest-bearing liabilities
2014
Average
Balance
Interest
Average
Rate
(dollars in thousands)
$
$
$
140,322 $
61,155
310,237
31,653
543,367
251,825
164,461
10,620
11,601
438,507
2,851
2,554
14,966
114
20,485
304
1,665
356
343
2,668
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
$
17,817
2.03%
4.18%
4.82%
0.36%
3.77%
0.12%
1.01%
3.35%
2.96%
0.61%
3.28%
(1)
(2)
(3)
(4)
Securities include securities available-for-sale, which are carried at fair value, and FHLB stock carried at cost. The average balance includes
monthly average balances of market value adjustments and daily average balances for the amortized cost of securities.
Computed on tax equivalent basis for non-taxable securities (34% statutory rate).
Loan balances include principal balance of non-accrual loans.
Interest income on loans includes fees of $700,578.
13
I.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
(CONTINUED)
Interest-earning assets
Securities (1)
Taxable
Non-taxable (2)
Loans (3, 4)
Other
Total interest-earning assets
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Total interest-bearing liabilities
2013
Average
Balance
Interest
Average
Rate
(dollars in thousands)
$
$
$
132,471 $
60,107
299,379
29,793
521,750
212,464
180,110
10,300
21,589
424,463
2,690
2,816
15,243
102
20,851
304
1,838
353
754
3,249
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
$
17,602
2.03%
4.68%
5.09%
0.34%
4.00%
0.14%
1.02%
3.43%
3.49%
0.77%
3.38%
(1)
(2)
(3)
(4)
Securities include securities available-for-sale, which are carried at fair value, and FHLB stock carried at cost. The average balance includes
monthly average balances of market value adjustments and daily average balances for the amortized cost of securities.
Computed on tax equivalent basis for non-taxable securities (34% statutory rate).
Loan balances include principal balance of non-accrual loans and loans held for sale.
Interest income on loans includes fees of $798,786.
14
I.
C.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
(CONTINUED)
The following tables set forth the effect of volume and rate changes on interest income and expenses for the periods indicated. For
purposes of these tables, changes in interest due to volume and rate were determined as follows:
Volume variance - change in volume multiplied by the previous year’s rate.
Rate variance - change in rate multiplied by the previous year’s volume.
Rate/volume variance - change in volume multiplied by the change in rate.
· This variance was allocated to volume variances and rate variances in proportion to the relationship of the absolute
dollar amount of the change in each.
Interest on non-taxable securities has been adjusted to a fully tax equivalent basis using a statutory tax rate of 34% in all years
presented.
INTEREST INCOME
Securities -
Taxable
Non-taxable
Loans
Other
Subtotal
INTEREST EXPENSE
Deposits -
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Subtotal
NET INTEREST INCOME
2015/2014
Total
Variance
Variance Attributable To
Rate
Volume
(dollars in thousands)
$
(89) $
1
(18) $
283
3,357
2,422
(48)
(96)
3,221
2,591
31
(309)
90
(291)
(479)
38
(48)
74
(48)
16
(71)
(282)
935
48
630
(7)
(261)
16
(243)
(495)
$
3,700 $
2,575 $
1,125
15
I.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
(CONTINUED)
INTEREST INCOME
Securities -
Taxable
Non-taxable
Loans
Other
Subtotal
INTEREST EXPENSE
Deposits -
Savings and interest-bearing demand deposits
Time deposits
Junior subordinated deferrable interest debentures
Other borrowings
Subtotal
NET INTEREST INCOME
2014/2013
Total
Variance
Variance Attributable To
Rate
Volume
(dollars in thousands)
$
161 $
160 $
(262)
(277)
12
(366)
48
541
7
1
(310)
(818)
5
756
(1,122)
-
52
(173)
(159)
3
(411)
(581)
10
(309)
(406)
$
215 $
1,162 $
(52)
(14)
(7)
(102)
(175)
(947)
16
II.
A.
INVESTMENT PORTFOLIO
The carrying amounts of securities available-for-sale as of December 31 are summarized as follows:
2015
U.S. Government agency securities
Obligations of states and political subdivisions
Mortgage-backed securities
Other
$
$
2014
(dollars in thousands)
9,537 $
58,098
137,819
1,007
206,461 $
3,966 $
73,482
104,480
1,001
182,929 $
2013
12,333
66,540
117,472
735
197,080
The above excludes restricted bank stock amounting to $4,829,500 in 2015 and 2014 and $4,893,800 in 2013.
B.
The maturity distribution and weighted average yield of securities available-for-sale at December 31, 2015 are as follows (1):
Agencies
Obligations of states and political subdivisions
Mortgage-backed securities (2)
Agencies
Obligations of states and political subdivisions
Mortgage-backed securities (2)
Weighted Average Yield - Portfolio
Within
One Year
Maturing
After One
Year
But Within
Five Years
After Five
Years
But Within
Ten Years
(dollars in thousands)
After
Ten Years
$
$
- $
1,137
-
3,966 $
12,306
466
- $
40,446
14,832
-
19,593
89,182
1,137 $
16,738 $
55,278 $
108,775
0.00%
4.57%
0.00%
4.57%
Weighted Average Yield
1.23%
2.64%
4.37%
2.35%
0.00%
2.77%
3.16%
2.87%
0.00%
3.12%
2.43%
2.55%
(1)
(2)
Table excludes restricted bank stock and $1,001,343 of securities having no maturity date.
Maturity based upon estimated weighted-average life.
The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering
amortization or accretion if the securities were purchased at a premium or discount.
C.
There were no securities which exceeded 10% of shareholders’ equity at December 31, 2015.
17
III.
A.
LOAN PORTFOLIO
Types of Loans – Total loans, including loans held for sale, are comprised of the following classifications at December 31 for the years
indicated:
Commercial and agricultural
Real estate mortgage
Consumer loans
$
$
272,297 $
78,443
3,857
354,597 $
2015
2014
2013
(dollars in thousands)
235,152 $
56,651
3,934
295,737 $
275,769 $
80,598
4,800
361,167 $
2012
2011
241,730 $
61,276
4,396
307,402 $
270,454
64,888
5,358
340,700
Real estate mortgage loans include real estate construction loans of $10.3 million in 2015, $1.3 million in 2014, $3.6 million in 2013, $2.6 million in 2012,
and $5.3 million in 2011. There were no lease financing receivables in any year.
CONCENTRATIONS OF CREDIT RISK – The Corporation’s depository institution subsidiary grants commercial, real estate, installment, and credit
card loans to customers primarily located in Northwestern and West Central Ohio. Commercial loans include loans collateralized by business assets
and agricultural loans collateralized by farm equipment. As of December 31, 2015, commercial and agricultural loans make up 76.79% of the loan
portfolio; the loans are expected to be repaid from cash flow from operations of the businesses. As of December 31, 2015, real estate mortgage loans
make up 22.12% of the loan portfolio and are collateralized by first mortgages on residential real estate. As of December 31, 2015, consumer loans to
individuals make up 1.09% of the loan portfolio and are primarily collateralized by consumer assets.
B.
Maturities and Sensitivities of Loans to Changes in Interest Rates – The following table shows the amounts of commercial and agricultural
loans outstanding as of December 31, 2015 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Also, the amounts have been classified according to sensitivity to changes in interest rates for commercial and agricultural loans due after
one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)
Maturing
Within one year
After one year but within five years
After five years
18
Commercial
and
Agricultural
(dollars in thousands)
50,299
$
32,767
189,231
272,297
$
III.
LOAN PORTFOLIO (CONTINUED)
Due after one year but within five years
Due after five years
Interest Sensitivity
Fixed
Rate
Variable and
Adjustable Rate
(dollars in thousands)
Total
$
$
23,390 $
8,288
31,678 $
9,377 $
180,943
190,320 $
32,767
189,231
221,998
C.
Risk Elements – Non-accrual, Past Due, Restructured and Impaired Loans – The following table summarizes non-accrual, past due,
restructured and impaired loans at December 31:
(a) Loans accounted for on a non-accrual basis
$
5,945 $
2015
2014
2013
(dollars in thousands)
6,511 $
5,220 $
2012
2011
17,171 $
21,700
(b) Loans contractually past due 90 days or more as to interest or
principal payments and still accruing interest
(c) Loans not included in (a) or (b) which are "Troubled Debt
Restructurings" as defined by accounting principles generally
accepted in the United States of America
The following is reported for the years ended December 31:
Gross interest income that would have been recorded on non-
accrual loans outstanding if the loans had been current, in
accordance with their original terms and had been outstanding
throughout the period or since origination, if held for part of the
period
Interest income actually recorded on non- accrual loans and
included in net income for the period
260
1,513
37
25
55
1,796
2,121
495
2,139
4,479
$
8,001 $
8,854 $
7,043 $
19,335 $
26,234
2015
2014
2013
(dollars in thousands)
2012
2011
$
432 $
596 $
633 $
1,143 $
1,438
-
-
-
-
-
Interest income not recognized during the period
$
432 $
596 $
633 $
1,143 $
1,438
19
III.
LOAN PORTFOLIO (CONTINUED)
1.
Discussion of the non-accrual policy
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 that are placed on nonaccrual or charged-off is reversed against interest income.
Interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
2.
Potential problem loans
As of December 31, 2015, in addition to the $8.0 million of loans reported under Item III C, there are approximately $15.0 million of other
outstanding loans where known information causes management to have doubts as to the ability of such borrowers to comply with
the present loan repayment terms and which may result in disclosure of such loans pursuant to Item III C at some future date.
Consideration was given to loans classified for regulatory purposes as substandard or special mention that have not been disclosed
in Item III C above.
3.
4.
Foreign outstandings
None.
Loan concentrations
At December 31, 2015, loans outstanding relating to agricultural operations or collateralized by agricultural real estate aggregated
$34,997,920. At December 31, 2015, there were four borrowers with loans totaling $71,373 in agricultural loans, which were accounted
for on a non-accrual basis; and there was one accruing agricultural loan totaling $259,858 which was contractually past due 90 days or
more as to interest or principal payments.
D.
Other interest-bearing assets
As of December 31, 2015, there were no other interest-bearing assets that are required to be disclosed.
20
IV.
A.
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended
December 31:
LOANS
Loans outstanding at end of period (1)
Average loans outstanding during period (1)
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period
Loans charged off -
Commercial and agricultural
Real estate mortgage
Consumer loans to individuals
Recoveries of loans previously charged off -
Commercial and agricultural
Real estate mortgage
Consumer loans
Net loans (charged off) recoveries
Provision for loan losses
$
$
$
$
$
2015
2014
2013
(dollars in thousands)
2012
2011
354,597
358,368
$
$
361,167
310,237
$
$
295,737
299,379
$
$
307,402
325,114
$
$
340,700
360,669
3,839
$
4,014
$
6,918
$
8,543
$
8,017
(446)
(176)
(16)
(638)
222
20
9
251
(387)
382
(368)
(117)
(12)
(497)
738
9
5
752
255
(430)
(2,614)
(4)
(23)
(2,641)
541
11
18
570
(2071)
(833)
(2,103)
(144)
(14)
(2,261)
379
14
43
436
(1825)
200
(3,635)
(515)
(88)
(4,238)
162
142
85
389
(3849)
4375
Balance at end of period
$
3,834
$
3,839
$
4,014
$
6,918
$
8,543
Ratio of net charge-offs (recoveries) during the period to
average loans outstanding during the period
(1)
Including loans held for sale.
0.11%
(0.08)%
0.69%
0.56%
1.07%
The amount of loan charge-offs and recoveries fluctuate from year to year due to various factors relating to the condition of the general economy
and specific business segments. The 2015 loan charge-offs included twenty-five consumer, mortgage, HELOC, commercial or agricultural credits,
with the largest individual charge-off being $327,000. In 2014, the net recoveries of $255,000 included seven commercial or agricultural borrowers,
with the largest charge-off being $181,000. The 2013 loan charge-offs included nine commercial or agricultural credits, with the largest individual
charge-off being $1,269,000. The 2012 loan charge-offs included twenty-three commercial or agricultural credits, with the largest individual charge-
off being $509,000. The 2011 loan charge-offs included twenty-seven commercial or agricultural credits, with the largest individual charge-off being
$1,400,000.
21
IV.
SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)
The Corporation had a provision for loan losses of $382,000 in 2015 and recognized a negative provision for loan losses of $430,000 in 2014. Problem
and potential problem loans aggregated $15.0 million at December 31, 2015 compared to $18.7 million December 31, 2014. The Corporation will
continue to monitor the credit quality of its loan portfolio, and especially the quality of those credits identified as problem or potential problem
credits, to ensure the allowance for loan losses is maintained at an appropriate level.
The allowance for loan losses balance and the provision for loan losses are judgmentally determined by management based upon periodic reviews
of the loan portfolio. In addition, management considered the level of charge-offs on loans as well as the fluctuations of charge-offs and recoveries
on loans including the factors which caused these changes. Estimating the risk of loans and the amount of loss is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on
past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral
value and other factors and estimates which are subject to change over time.
22
IV.
B.
SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios.
Commercial and agricultural
Real Estate mortgages
Consumer loans to individuals
Commercial and agricultural
Real Estate mortgages
Consumer loans to individuals
Commercial and agricultural
Real Estate mortgages
Consumer loans to individuals
Allocation of the Allowance for Loan Losses
Percentage
of Loans in
Each Category
to Total
Loans
Allowance
Amount
Percentage
of Loans in
Each Category
to Total
Loans
Allowance
Amount
December 31, 2015
December 31, 2014
(dollars in thousands)
3,433
373
28
3,834
89.5% $
9.7%
0.7%
100.0% $
3,453
363
23
3,839
December 31, 2013
December 31, 2012
6,269
602
47
6,918
3,651
345
18
4,014
December 31, 2011
7,444
999
100
8,543
79.5% $
19.2%
1.3%
100.0% $
79.4%
19.0%
1.6%
100.0%
76.4%
22.3%
1.3%
100.0%
78.7%
19.9%
1.4%
100.0%
$
$
$
$
$
$
The allowance for loan losses at December 31, 2015 included specific reserves for impaired loans amounting to $1,371,000 compared to $807,000 at
December 31, 2014.
While the periodic analysis of the adequacy of the allowance for loan losses may require management to allocate portions of the allowance for
specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.
23
V.
DEPOSITS
Deposits have traditionally been the Corporation’s primary funding source for use in lending and other investment activities. In addition to
deposits, the Corporation derives funds from interest and principal repayments on loans and income from other earning assets. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate in response to economic conditions and interest rates.
Deposits are attracted principally from within the Corporation's designated market area by offering a variety of deposit instruments, including
regular savings accounts, demand deposit accounts, money market deposit accounts, term certificate accounts, and individual retirement accounts
("IRAs"). Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are established periodically by
the Corporation’s management based on the Corporation's liquidity requirements, growth goals, and market trends. From time to time, the
Corporation may also acquire brokered deposits. The amount of deposits from outside the Corporation’s market area is not significant.
A.&B.
The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:
Savings and interest-bearing demand deposits
Time deposits
Demand deposits (non-interest bearing)
2015
Average
Amount
(dollars in thousands)
2015
2014
Average
Average
Amount
Rate
2014
Average
Rate
$
$
283,904
159,635
87,820
531,359
0.12% $
0.85%
-
$
251,825
164,461
81,938
498,224
0.12%
1.01%
-
Savings and interest-bearing demand deposits
Time deposits
Demand deposits (non-interest bearing)
C.&E. There were no foreign deposits in any periods presented.
2013
Average
Amount
2013
Average
Rate
212,464
180,110
69,794
462,368
0.14%
1.02%
-
$
$
24
V.
D.
DEPOSITS (CONTINUED)
Maturities of certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2015 are summarized as
follows:
Three months or less
Over three months and through six months
Over six months and through twelve months
Over twelve months
VI.
RETURN ON EQUITY AND ASSETS
$
$
7,195
8,303
13,824
24,673
53,995
The ratio of net income to average shareholders’ equity and average total assets and certain other ratios are as follows:
Average total assets
Average shareholders' equity (1)
Net Income
Cash dividends declared
Return on average total assets
Return on average shareholders' equity
Dividend payout ratio (2)
Average shareholders' equity to average total assets
$
$
$
$
2015
2014
(dollars in thousands)
589,710
$
64,869
$
4,311
$
$
1,193
0.73%
6.65%
27.67%
11.00%
628,753
$
69,981
$
5,917
$
$
1,201
0.94%
8.51%
20.30%
11.04%
2013
561,757
63,364
4,641
689
0.83%
7.33%
14.85%
11.28%
(1)
(2)
Average shareholders’ equity includes average unrealized gains or losses on securities available-for-sale.
Dividends declared divided by net income.
25
VII.
SHORT-TERM BORROWINGS
The Corporation has established lines of credit with its major correspondent banks to purchase federal funds to meet liquidity needs. At December
31, 2015, the Corporation did not have any federal funds purchased, out of the $76.5 million available under such lines. The Corporation also uses
repurchase agreements as a source of funds. These agreements essentially represent borrowings by the Corporation from customers with maturities
of three months or less. Certain securities are pledged as collateral for these agreements. At December 31, 2015, the Corporation had no repurchase
agreements.
The following table sets forth the maximum month-end balance for the Corporation’s outstanding short-term borrowings (federal funds purchased
and repurchase agreements), along with the average aggregate balances and weighted average interest for 2015, 2014, and 2013.
Balance at year-end
Maximum balance at month-end during the period
Average balance
Weighted average interest rate
Item 1A.
2015
2014
(dollars in thousands)
$
$
-
-
$
$
-
4,601
$
$
-
2,952
0.14%
0.00%
$
$
$
2013
4,600
4,600
4,226
0.14%
RISK FACTORS
An investment in common stock is subject to risks inherent to the Corporation’s business. The material risks and uncertainties that management
believes affect the Corporation are described below. Before making an investment decision, you should carefully consider the risks and
uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and
uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or
focused on or that management currently deems immaterial may also impair the Corporation’s business operations. This report is qualified in its
entirety by these risk factors.
If any of the following risks actually occur, the Corporation’s financial condition and results of operations could be materially and adversely
affected. If this were to happen, the value of the Corporation’s common stock could decline significantly, and you could lose all or part of your
investment.
Risks Related to the Corporation’s Business
The Corporation is Subject to Interest Rate Risk
The Corporation’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between
interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as
deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives on loans and securities and the
amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Corporation’s ability to originate loans and obtain
deposits, (ii) the fair value of the Corporation’s financial assets and liabilities, and (iii) the average duration of the Corporation’s mortgage-backed
securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and
other investments, the Corporation’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
26
Changing interest rates may decrease our earnings and asset values.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in
interest rates on the Corporation’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on the Corporation’s financial condition and results of operations.
Expected interest rate increases could negatively affect our income, if we are not able to anticipate corresponding changes in market forces.
The Corporation’s operating results are dependent to a significant degree on its net interest income, which is the difference between interest income
from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The
interest income and interest expense of the Corporation change as the interest rates on interest-earning assets and interest-bearing liabilities
change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond
the Corporation's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of
loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect the Corporation's income.
We are subject to credit risk related to the interest rate environment and the economic conditions of the markets in which we operate.
There are inherent risks associated with the Corporation’s lending activities. These risks include, among other things, the impact of changes in
interest rates and changes in the economic conditions in the markets where the Corporation operates as well as those across the State of Ohio, the
United States and abroad. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to
repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that
affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action
that could result in the assessment of significant civil monetary penalties against the Corporation.
The Corporation’s level of non-performing loans has decreased over the past couple of years. However, an increase in non-performing loans could
result in a net loss of earnings from these loans, an increase in the provision for possible loans losses and an increase in loan charge-offs, all of
which could have a material adverse effect on the Corporation’s financial condition and results of operations.
27
The Corporation is subject to liquidity risk in its operations, which could adversely affect the ability to fund various obligations.
Liquidity risk is the possibility of being unable to meet obligations as they come due, pay deposits when withdrawn, capitalize on growth
opportunities as they arise, or pay dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a
reasonable cost and within acceptable risk tolerances. Liquidity is derived primarily from retail deposit growth and retention, principal and interest
payments on loans and investment securities, net cash provided from operation and access to other funding sources. Liquidity is essential to our
business. We must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits,
borrowings, the sale or pledging as collateral of loans and other assets could have a material adverse effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in
general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a
market downturn or regulatory action that limits or eliminates our access to alternate funding sources. Our ability to borrow could also be impaired
by factors that are nonspecific to us, such as severe disruption of the financial markets or negative expectations about the prospects for the
financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.
Changes in accounting standards could impact the Corporation’s reported earnings.
Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business
and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and
may change significantly over time. Events that may not have a direct impact on the Corporation, such as bankruptcy of major U.S. companies, have
resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange
Commission, the Public Company Accounting Oversight Board and various taxing authorities, responding by adopting and/or proposing
substantive revision to laws, regulations, rules, standards, policies and interpretations. New accounting pronouncements and varying
interpretations of accounting pronouncements have occurred and may occur in the future. The Corporation’s financial condition and results of
operations may be adversely affected by a change in accounting standards.
The Corporation’s Allowance for Loan Losses May Be Insufficient
The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that
represents management’s best estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing
evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for
loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and
future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require a potentially
significant increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan
losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than
those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Corporation will need additional
provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations.
28
Prepayments of loans may negatively impact our business.
Generally, customers of the Corporation may prepay the principal amount of their outstanding loans at any time. The speed at which such
prepayments occur, as well as the size of such prepayments, are within such customers’ discretion. If customers prepay the principal amount of
their loans, and the Corporation is unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, the
Corporation’s interest income will be reduced. A significant reduction in interest income could have a negative impact on the Corporation’s results
of operations and financial condition.
The Corporation may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or
reimburse purchasers for losses related to those loans.
The Corporation generally sells the fixed rate long-term residential mortgage loans it originates on the secondary market and retains adjustable rate
mortgage loans for its portfolios. In response to the financial crisis, the Corporation believes that purchasers of residential mortgage loans, such as
government sponsored entities, are increasing their efforts to seek to require sellers of residential mortgage loans to either repurchase loans
previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual
or alleged failure to strictly conform to the purchaser's purchase criteria. As a result, the Corporation may face increasing pressure from historical
purchasers of its residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and the
Corporation may face increasing expenses to defend against such claims. If the Corporation is required in the future to repurchase loans previously
sold, reimburse purchasers for losses related to loans previously sold, or if the Corporation incurs increasing expenses to defend against such
claims, its financial condition and results of operations would be negatively affected. Additionally, such actions would lower the Corporation’s
capital ratios as a result of increased assets and reduced income through expenses and any losses incurred.
The Dodd-Frank Act may adversely impact the Corporation’s results of operations, financial condition or liquidity.
The Dodd-Frank Act, enacted in 2010, is complex and several of its provisions are still being implemented. The Dodd-Frank Act established the
Consumer Financial Protection Bureau, which has extensive regulatory and enforcement powers over consumer financial products and services, and
the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank
Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance
requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and
certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates.
The Dodd-Frank Act also required the issuance of numerous regulations, many of which have not yet been issued. The regulations will continue to
take effect over several more years, continuing to make it difficult to anticipate the overall impact.
If the Corporation is required to write-down goodwill and other intangible assets, its financial condition and results of operations would be
negatively affected.
A substantial portion of the value of the merger consideration paid in connection with recent branch acquisitions was allocated to goodwill and
other intangible assets on the Corporation’s consolidated balance sheet. The amount of the purchase price that is allocated to goodwill and other
intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. The Corporation is required to conduct
an annual review to determine whether goodwill and other identifiable intangible assets are impaired.
29
Goodwill is tested for impairment annually as of September 30th. An impairment test also could be triggered between annual testing dates if an
event occurs or circumstances change that would more likely than not reduce the fair value below the carrying amount. Examples of those events or
circumstances would include a significant adverse change in business climate; a significant unanticipated loss of customers or assets under
management; an unanticipated loss of key personnel; a sustained period of poor investment performance; a significant loss of deposits or loans; a
significant reduction in profitability; or a significant change in loan credit quality.
The Corporation cannot assure that it will not be required to take an impairment charge in the future. Any material impairment charge would have a
negative effect on the Corporation’s financial results and shareholders’ equity.
The Corporation’s Profitability Depends Significantly on Economic Conditions in the State of Ohio
The Corporation’s success depends primarily on the general economic conditions of the State of Ohio and the specific local markets in which the
Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and
financial services to customers primarily in the Ohio counties of Allen, Delaware, Hancock, Putnam, Marion, Sandusky, Van Wert, and Wood. The
local economic conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as the ability
of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding
sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other
international or domestic occurrences, unemployment, changes in securities markets or other factors could impact those local economic conditions
and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Operates in a Highly Competitive Industry and Market Area
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of whom are larger and may
have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets the
Corporation operates. The Corporation also faces competition from many other types of financial institutions, including, without limitation, savings
and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The
financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.
Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks,
such as automatic transfer and automatic payment systems. Many of the Corporation’s competitors have fewer regulatory constraints and may
have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a
broader range of products and services as well as better pricing for those products and services than the Corporation can.
30
The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:
·
·
·
·
·
·
The ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards
and safe, sound assets.
The ability to expand the Corporation’s market position.
The scope, relevance and pricing of products and services offered to meet customer needs and demands.
The rate at which the Corporation introduces new products and services relative to its competitors.
Customer satisfaction with the Corporation’s level of service.
Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the
Corporation’s growth and profitability, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of
operations.
Legislative or regulatory changes or actions could adversely impact our business
The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that
govern almost all aspects of our operations. These laws and regulations are primarily intended for the protection of consumers, depositors,
borrowers, and the DIF, not to benefit our shareholders. Changes to laws and regulations or other actions by regulatory agencies may negatively
impact us, possibly limiting the services we provide, increasing the ability of non-banks to compete with us or requiring us to change the way we
operate. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to
impose restrictions on the operation of an institution and the ability to determine the adequacy of an institution’s allowance for loan losses. Failure
by and bank or bank holding company to comply with applicable laws, regulations, and policies could result in sanctions being imposed by the
regulatory agencies, including the imposition of civil money penalties, which could have a material adverse effect on our operations and financial
condition.
In the last several years, Congress and the federal bank regulators have acted on an unprecedented scale in responding to the stresses experienced
in the global financial markets. Some of the laws enacted by Congress and regulations promulgated by the federal bank regulators and the SEC
subject us and other financial institutions to additional restrictions, oversight, and costs that may have an adverse impact on our business and
results of operations.
The Corporation is subject to Environmental Liability Risk Associated with Lending Activities
A significant portion of the Corporation’s loan portfolio is secured by real property. During the ordinary course of business, the Corporation may
foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on
these properties. If hazardous or toxic substances are found, the Corporation may be liable for remediation costs, as well as for personal injury and
property damage. Environmental laws may require the Corporation to incur substantial expenses and may materially reduce the affected property’s
value or limit the Corporation’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement
policies with respect to existing laws may increase the Corporation’s exposure to environmental liability. Although the Corporation may perform an
environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material
adverse effect on the Corporation’s financial condition and results of operations.
31
The Corporation’s Controls and Procedures May Fail or Be Circumvented
Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and
procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s
business, results of operations and financial condition.
UBOH Relies On Dividends from Its Subsidiaries for Most of Its Revenue
UBOH is a separate and distinct legal entity from its subsidiary. It receives substantially all of its revenue from dividends from its subsidiary. These
dividends are the principal source of funds to pay dividends on UBOH common stock, interest and principal on UBOH debt, and other operating
expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Union Bank may pay to the UBOH. Under these
law and regulations, the amount of dividends that may be paid by Union Bank in any calendar year is generally limited to the current year’s net
profits, combined with the retained net profits of the preceding two years. In addition, the FDIC has issued policy statements that provide that
insured banks should generally only pay dividends out of current operating earnings. Thus, the ability of Union Bank to pay dividends to UBOH in
the future will be subject to Union Bank’s ability to earn profits in the future, and the federal statutory provisions, regulations, regulatory policies,
and capital guidelines which are applicable to UBOH and Union Bank. Furthermore, the Federal Reserve’s Small Bank Holding Company Policy
Statement provides, inter alia, that it is expected that dividends by a holding company will be eliminated in the event that a holding company is: (1)
not reducing its debt consistent with the requirement that the debt to equity ratio be reduced to 30:1, or (2) not meeting the requirements of its loan
agreement(s). Also, UBOH’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event the Union Bank is unable to pay dividends to UBOH, UBOH may not be able to service debt, pay
obligations or pay dividends on the UBOH’s common stock or trust preferred securities. The inability to receive dividends from the Union Bank
could have a material adverse effect on UBOH’s business, financial condition and results of operations.
The Corporation May Not Be Able To Attract and Retain Skilled People
The Corporation’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities
engaged in by the Corporation can be intense and the Corporation may not be able to hire such people or to retain them. The unexpected loss of
services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their
skills, knowledge of the Corporation’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
32
The Corporation’s Information Systems May Experience an Interruption or Breach in Security
The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security
of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and
other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption, or security
breach of its information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do
occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of the Corporation’s information
systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny,
or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s
financial condition and results of operations.
The Corporation Continually Encounters Technological Change
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven
products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to
reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to
provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Many
of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation may not be able to
effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the
Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.
Damage to the Corporation’s reputation could damage its businesses.
Maintaining trust in the Corporation is critical to our ability to attract and maintain customers, investors and employees. Damage to our reputation
can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among
others, employee misconduct, security breaches, compliance failures, litigation or regulatory outcomes or governmental investigations. Our
reputation could also be harmed by the failure of an affiliate, a vendor or other third party with which we do business, to comply with laws or
regulations. In addition, a failure or perceived failure to deliver appropriate standards of service and quality, to treat customers and clients fairly, or
to handle or use confidential information of customers or clients appropriately or in compliance with applicable privacy laws and regulations can
result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and
harm to our reputation. Adverse publicity or negative information posted on social media websites regarding the Corporation, whether or not true,
may result in harm to the prospects. Should any of these or other events or factors that can undermine our reputation occur, there is no assurance
that the additional costs and expenses that we may need to incur to address the issues giving rise to the reputational harm could not adversely
affect our earnings and results of operations, or that damage to our reputation will not impair our ability to retain our existing or attract new
customers, investors and employees.
The Corporation Is Subject To Claims and Litigation Pertaining to Fiduciary Responsibility
From time to time, customers make claims and take legal action pertaining to the Corporation’s performance of its fiduciary responsibilities. Whether
customer claims and legal action related to the Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims
and legal action are not resolved in a manner favorable to the Corporation they may result in significant financial liability and/or adversely affect the
market perception of the Corporation and its products and services as well as impact customer demand for those products and services. Any
financial liability or reputation damage could have a material adverse effect on the Corporation’s business, which, in turn, could have a material
adverse effect on the Corporation’s financial condition and results of operations.
33
Severe Weather, Natural Disasters, Acts of War Or Terrorism And Other External Events Could Significantly Impact The Corporation’s
Business
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Corporation’s
ability to conduct business. Such events could affect the stability of the Corporation’s deposit base, impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the
Corporation to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any
such event could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the
Corporation’s financial condition and results of operations.
Risks Associated with the Corporation’s Common Stock
The Corporation’s Stock Price Can Be Volatile
Stock price volatility may make it more difficult for stockholders to resell their common stock at prices they find attractive. The Corporation’s stock
price can fluctuate significantly in response to a variety of factors including, among other things:
· Actual or anticipated variations in quarterly results of operations.
·
Recommendations by securities analysts.
· Operating and stock price performance of other companies that investors deem comparable to the Corporation.
· News reports relating to trends, concerns and other issues in the financial services industry.
·
Perceptions in the marketplace regarding the Corporation and/or its competitors.
· New technology uses, or services offered, by competitors.
·
·
·
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the
Corporation or its competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
Changes in government regulations.
· Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or
recessions, interest rate changes or credit loss trends, could also cause the Corporation’s stock price to decrease regardless of operating results.
An Investment in the Corporation’s Common Stock is NOT an Insured Deposit
The Corporation’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or
by any other public or private entity. Investment in the Corporation’s common stock is inherently risky for the reasons described in this “Risk
Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in many companies. As
a result, individuals that acquire the Corporation’s common stock may lose some or all of their investment.
34
The Corporation’s Articles of Incorporation and Regulations as well as Certain Banking Laws may have an Anti-Takeover Effect
Provisions of the Corporation’s articles of incorporation and regulations and federal banking laws, including regulatory approval requirements,
could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s
shareholders.
The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely
affect the market price of the Corporation’s common stock.
Risks Associated with the Corporation’s Industry
The Earnings of Financial Services Companies are significantly affected by General Business and Economic Conditions
The Corporation’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These
conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations
in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in
which the Corporation operates, all of which are beyond the Corporation’s control. Deterioration in economic conditions could result in an increase
in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Corporation’s products and
services, among other things, any of which could have a material adverse impact on the Corporation’s financial condition and results of operations.
Financial Services Companies Depend on the Accuracy and Completeness of Information about Customers and Counterparties
In deciding whether to extend credit or enter into other transactions, the Corporation may rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports and other financial information. The Corporation may also rely on
representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of
that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material
adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.
Consumers May Decide Not To Use Banks to Complete their Financial Transactions
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative
methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual
funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The
process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer
deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds
could have a material adverse effect on the Corporation’s financial condition and results of operations.
35
Item 1B.Unresolved Staff Comments
Not applicable
Item 2.Properties
The following is a listing and brief description of the properties owned by the Corporation and the Bank and used in its business. All of the 16
properties are suitable for their intended use. In total, the facilities represent approximately 101,643 square feet.
FULL-SERVICE BRANCH LOCATIONS
Main Office: Columbus Grove
100 South High Street
Branch Locations:
Bowling Green
1300 North Main Street
Delaware
30 Coal Bend
Delphos
114 East 3rd Street
Findlay
1500 Bright Road
Gibsonburg
230 West Madison Street
Kalida
110 East North Street
Leipsic
318 South Belmore Street
Lima Locations
3211 Elida Road
1410 Bellefontaine Avenue
701 Shawnee Road
Ottawa
245 West Main Street
Marion
111 South Main Street
220 Richland Road
Pemberville
132 East Front Street
DRIVE-THRU FACILITY
Columbus Grove
101 Progressive Drive
OPERATIONS FACILITY
Columbus Grove
102 – 106 South High Street
Item 3.
Legal Proceedings
As of March 9, 2016, there are no pending legal proceedings to which the Corporation or its subsidiary are a party or to which any of their property
is subject except routine legal proceedings to which the Corporation or its subsidiary are a party incident to its banking business. None of such
proceedings are considered by the Corporation to be material.
Item 4.
Mine Safety Disclosures
Not applicable
36
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Additional information required herein is incorporated by reference from (“Market Price and Dividends on Common Stock”) United Bancshares’
Annual Report to Shareholders for 2015 (“Annual Report”), which is included herein as Exhibit 13.
Stock Repurchase Program
The table below includes certain information regarding the Corporation’s repurchase of United Bancshares, Inc. common stock during the quarterly
period ended December 31, 2015:
Total number
of shares
purchased
Average
price paid
per share
Total number
shares purchased
as part of publicly
announced plan
or program
Maximum number
of shares that may
yet be purchased
under the plan
or program(i)
0
19,790
0
0
16.80
0
333,879
353,669
353,669
266,121
246,331
246,331
Period
10/01/15- 10/31/15
11/01/15- 11/30/15
12/01/15- 12/31/15
(i) A stock repurchase program (“Plan”) was announced on July 29, 2005 (100,000 shares authorized) and expanded by 100,000 shares on December
23, 2005, 200,000 shares on March 20, 2007, and 200,000 shares on December 17, 2013. The Plan authorizes the Corporation to repurchase up to
600,000 of the Corporation’s common shares from time to time in a program of market purchases or in privately negotiated transactions as the
securities laws and market conditions permit.
Additional information required herein is incorporated by reference from (“Market Price and Dividends on Common Stock”) United Bancshares’
Annual Report to Shareholders for 2015 (“Annual Report”), which is included herein as Exhibit 13.
37
Item 6.
Selected Financial Data
The information required herein is incorporated by reference from (“Five Year Summary of Selected Financial Data”) United Bancshares’ Annual
Report to Shareholders for 2015 (“Annual Report”), which is included herein as Exhibit 13.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference from page 4 through 17 (“Management’s Discussion and Analysis”) of United
Bancshares’ Annual Report to Shareholders for 2015 (“Annual Report”), which is included herein as Exhibit 13.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We hereby incorporate information relating to market risk by reference to pages 16 through 17 (“Management’s Discussion and Analysis”) of
United Bancshares’ Annual Report to Shareholders for 2015 (“Annual Report”), which is included herein as Exhibit 13.
Item 8.
Financial Statements and Supplementary Data
The information required herein is incorporated by reference from pages 18 through 60 of United Bancshares’ Annual Report to Shareholders for
2015 (“Annual Report”), which is included herein as Exhibit 13.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Management of the Corporation is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule
13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934. An evaluation was performed under the supervision, and with the participation,
of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of the Corporation’s disclosure controls and procedures as of December 31, 2015. Based on the results of the evaluation, and as of the time of that
evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s
disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and
forms.
38
MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual
report. Management of the Corporation and its subsidiary are responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s internal control over financial reporting is a
process designed under the supervision of the Corporation’s Chief Executive Officer and Chief Financial Officer. The purpose is to provide
reasonable assurance to the Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation’s financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management maintains internal controls over financial reporting. The internal controls contain control processes, and actions are taken to correct
deficiencies as they are identified. The internal controls are evaluated on an ongoing basis by the Corporation’s Management, and Audit
Committee. Even effective internal controls, no matter how well designed, have inherent limitations – including the possibility of circumvention or
overriding of controls – and therefore can provide only reasonable assurance with respect to financial statement preparation. Also, because of
changes in conditions, internal control effectiveness may vary over time.
Management assessed the Corporation’s internal controls as of December 31, 2015, in relation to criteria for effective internal control over financial
reporting described in “Internal Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on this assessment, management believes that, as of December 31, 2015, the Corporation’s internal control over
financial reporting met the criteria.
There were no changes in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended
December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial
reporting.
Item 9B.
Other Information
None.
39
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required herein concerning Directors and Executive Officers is contained under the captions “Election of Directors” and “Directors
and Executive Officers” of the Corporation’s definitive proxy statement dated March 23, 2016, which is incorporated herein by reference.
Information required by this item concerning the Corporation’s Audit Committee is contained under the captions “Audit Committee” and “Audit
Committee Report” of the Corporation’s definitive proxy statement dated March 23, 2016, which is incorporated herein by reference.
Information required by this item concerning the Corporation’s procedures for the nomination of Directors is contained under the caption
“Committees of the Board of Directors” in the Corporation’s definitive proxy statement dated March 23, 2016, which is incorporated herein by
reference.
Information required by this item concerning compliance with section 16(a) of the Securities Exchange Act of 1934, as amended, is contained under
the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Corporation’s definitive proxy statement dated March 23, 2016, which
is incorporated herein by reference.
On February 17, 2004, the Corporation adopted a Code of Ethics that is applicable to the Corporation’s Chief Executive Officer, Chief Financial
Officer, and other Senior Financial Officers. The Board of Directors reviews the Code of Ethics annually with the most recent review performed in
February 2016. A copy of the Code of Ethics is available on the Corporation’s website at www.theubank.com.
Item 11.
Executive Compensation
The information required herein concerning Directors and Executive Officers of the Corporation is contained under the caption “Compensation of
Directors and Executive Officers” in the Corporation’s definitive proxy statement dated March 23, 2016, which is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required herein is contained under the caption “Voting Securities” in the Corporation’s definitive proxy statement dated March 23,
2016, which is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
In the ordinary course of conducting its business, the Corporation, for itself or through its bank subsidiary, may engage in transactions with the
directors, employees, and managers of the Corporation or of the subsidiary which may include, but not be limited to, loans. As required by and in
compliance with Ohio banking law, all banking transactions with directors, employees or managers of the Corporation are conducted on the same
basis and terms as would be provided to any other bank customer and do not involve more than the normal risk of collectability or present any
other unfavorable features.
40
Information required by this item concerning director independence is contained under the caption “Board of Directors Independence” in the
Corporation’s definitive proxy statement dated March 23, 2016, which is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
Information required by this item is contained under the caption “Independent Public Accountants” in the Corporation’s definitive proxy statement
dated March 23, 2016, which is incorporated herein by reference.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
The following consolidated financial statements (and reports thereon) are set forth on pages 18 through 59 of the Corporation’s 2015
Annual Report to Shareholders (Exhibit 13 to this Annual Report on Form 10-K) and are incorporated herein by reference:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2015 and 2014
Consolidated Statements of Income - Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows - Years ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted either because they are not applicable or because the required information is provided in the
Consolidated Financial Statements, including the notes thereto.
41
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference (in accordance with Item 601 of SEC Regulation S-K) in this filing:
Exhibit No.
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.6
13
21
23
31.1
31.2
32.1
32.2
99
Stock Purchase Agreement by and among United Bancshares, Inc., Ohio State Bancshares, Inc. and Rbancshares,
Inc., dated July 1, 2014
Articles of Incorporation
Regulations
Preferred Trust Securities, Placement and Debenture agreements
Agreement – Brian D. Young
Salary Continuation Agreement - Brian D. Young
Salary Continuation Agreement – Heather M. Oatman
Agreement and General Release – Diana L. Engelhardt
2015 Annual Report to Shareholders
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) CEO's Certification
Rule 13a-14(a)/15d-14(a) CFO's Certification
Section 1350 CEO's Certification
Section 1350 CFO's Certification
Safe Harbor under The Private Securities Litigation Reform Act of 1995
101.INS XBRL Instance Document (a)
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.DEF XBRL Taxonomy Extension Definition
101.LAB XBRL Taxonomy Extension Label
101.PRE XBRL Taxonomy Extension Presentation
(7)
(1)
(1)
(2)
(4)
(2)
(5)
(6)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(1) Incorporated herein by reference to the Corporation's Definitive Proxy Statement pursuant to Section 14(a) filed
March 8, 2002, SEC file reference number 333-86543.
(2) Incorporated herein by reference to the Corporation's 2004 Form 10K/A filed August 5, 2005, SEC file reference
number 333-86543.
(3) Included herein.
(4) Incorporated herein by reference to the Corporation’s Form 8-K filed July 20, 2006.
(5) Incorporated herein by reference to the Corporation’s Form 10-K filed March 20, 2009.
(6) Incorporated herein by reference to the Corporation’s Form 8-K filed September 11, 2015.
(7) Incorporated herein by reference to the Corporations’ s Form 8-K filed July 1, 2014
42
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
UNITED BANCSHARES, INC.
By:
By:
/s/ BRIAN D. YOUNG
Brian D. Young, CEO, President
/s/ ANTHONY M.V. ERAMO
Anthony M.V. Eramo
Chief Financial Officer
Date: March 9, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures
/s/ BRIAN D. YOUNG
Brian D. Young
/s/ JAMES N. REYNOLDS
James N. Reynolds
/s/ H. EDWARD RIGEL
H. Edward Rigel
/s/ R. STEVEN UNVERFERTH
R. Steven Unverferth
/s/ ROBERT L. BENROTH
Robert L. Benroth
/s/ DAVID P. ROACH
David P. Roach
/s/ DANIEL W. SCHUTT
Daniel W. Schutt
Title
Director
Director
Director
Director
Director
Director
Director
43
(Back To Top)
Section 2: EX-13 (EXHIBIT 13)
Exhibit 13
Table of Contents
President’s Letter
Market Price and Dividends on Common Stock
Five-Year Summary of Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Date
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
Page(s)
1
2
3
4
18
19
20
21
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Directors and Officers
22
23
24
60
Shareholders, Clients and Team Members:
I am pleased to report that your Company had another prosperous year in 2015. In addition to reporting pre-tax income of approximately $7.3 million,
a 36% increase over 2014, the Company also reported improvements in return on average equity (8.51%), return on average assets (0.94%), net
interest margin (3.71%), and efficiency ratio (68.13%). These positive results were only possible because of the trust our clients have placed in us
and the hard work and dedication of our team members.
While we are thankful for the successes in 2015, we are excited about 2016 and its opportunities. During 2016, we plan to continue looking for the
best places for capital allocation to further improve the value of your investment. We will do this through strategic initiatives which include
deepening our relationships with existing clients, the increase of our customer base, continuation of our share repurchase program, dividends,
redesign and added functionality to our electronic footprint, expanding our wellness initiatives for our team members, and further development of
our abilities to analyze and utilize market data and trends to increase our effectiveness and efficiencies while expanding our market share.
The effective use of technology continues to be a significant driver of our strategic vision. As part of the planning process for 2016 we invested in
new technologies that allowed us to combine financial and market analysis to reach objective conclusions to help optimize the bank’s performance
in its markets and maximize the bank’s franchise value. These new tools are allowing us to more specifically identify and implement the correct
strategies to ensure appropriate capital allocation.
We continue to believe that a solid, established, and financially strong community bank is essential to the success of our communities; just as
strong communities are critical to the success of your Company. Consequently, we take seriously the opportunity we have been given to make a
difference in our communities and improve the lives of its residents. That belief, and the desire to serve our neighbors, has led your Company to
make many financial contributions that promote health, education, public safety, and economic development in addition to countless hours by our
staff members to make our communities a better place. This desire to build better, lasting relationships, is part of our strong corporate values of
respect for and accountability to our shareholders, customers, colleagues, and communities.
As always, we greatly appreciate your continued support and the trust you have placed in us.
Respectfully,
Brian D. Young
President & CEO
1
UNITED BANCSHARES, INC.
DESCRIPTION OF THE CORPORATION
United Bancshares, Inc., an Ohio corporation (the “Corporation”), is a bank 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 100 S. High Street, 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. 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, Hancock, Marion, Putnam, Sandusky, Van Wert and
Wood Counties, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Marion,
Ottawa, and Pemberville, Ohio.
MARKET PRICE AND DIVIDENDS ON COMMON STOCK
United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001. As of
February 17, 2016, the common stock was held by 1,243 shareholders of record. Below are the trading highs and lows for the periods noted.
Year 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
15.37 $
16.00 $
16.00 $
18.50 $
High
Low
16.32 $
16.00 $
15.73 $
15.00 $
$
$
$
$
$
$
$
$
Dividends declared by United Bancshares, Inc. on its common stock during the past two years were as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
AVAILABILITY OF MORE INFORMATION
2015
2014
$
$
0.09 $
0.09
0.09
0.09
0.36 $
14.30
14.37
15.12
15.40
14.25
13.07
13.54
14.14
0.15
0.05
0.07
0.08
0.35
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.
100 S. High Street
Columbus Grove, Ohio 45830
800-837-8111
2
UNITED BANCSHARES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Statements of income:
Total interest income
Total interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Total non-interest income
Total non-interest expenses
Income before federal income taxes
Federal income taxes
Net income
Per share of common stock:
Net income - basic
Dividends
Book value
$
$
$
$
2015
22,836
2,077
20,759
382
20,377
4,637
17,692
7,322
1,405
Years ended December 31,
2013
(Dollars in thousands, except per share data)
2012
2014
2011
$
$
19,620
2,668
16,952
$
19,854
3,250
16,604
(430)
(833)
17,382
4,387
16,375
5,394
1,083
17,437
4,468
16,024
5,881
1,240
$
22,591
4,675
17,916
200
17,716
4,353
16,513
5,556
1,071
26,461
7,326
19,135
4,375
14,760
3,831
15,546
3,045
102
5,917
$
4,311
$
4,641
$
4,485
$
2,943
1.77
0.36
21.62
$
$
1.27
0.35
20.12
$
$
1.35
0.20
18.31
$
$
1.30
0.05
18.62
$
$
0.85
-
17.34
Average shares outstanding - basic
3,309,339
3,406,194
3,446,662
3,446,133
3,445,469
Year end balances:
Loans (1)
Securities (2)
Total assets
Deposits
Shareholders' equity
Average balances:
Loans (1)
Securities (2)
Total assets
Deposits
Shareholders' equity
Selected ratios:
$
354,597
187,759
608,665
518,419
71,561
358,368
207,738
628,858
531,929
69,555
$
$
$
361,167
211,291
650,200
565,445
67,772
295,737
201,974
556,235
468,000
63,008
310,237
201,447
589,710
498,224
64,869
299,379
192,578
561,757
462,368
63,364
$
307,402
182,502
572,448
471,199
64,170
325,114
167,766
568,466
464,448
62,034
340,700
156,850
587,045
480,486
59,748
260,669
151,736
593,465
481,600
57,429
Net yield on average interest earning assets (3)
Return on average assets
Return on average shareholders equity
3.71%
0.94%
8.51%
3.29%
0.73%
6.65%
3.38%
0.83%
7.33%
3.55%
0.79%
7.23%
3.64%
0.50%
5.12%
Net loan charge-offs (recoveries) as a percentage of average
outstanding net loans
Allowance for loan losses as a percentage of year end loans
Shareholders' equity as a percentage of total assets
0.11%
1.08%
11.04%
-0.08%
1.06%
10.42%
0.71%
1.36%
11.33%
0.58%
2.27%
11.21%
1.07%
2.51%
10.18%
3
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) Financial data for 2015 and 2014 includes the impact of The Ohio State Bank 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.
Results for 2014 and 2015 were affected by the completion of the acquisition of The Ohio State Bank on November 14, 2014. 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 one-bank 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 fifteen 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.
4
Financial Condition
The Corporation and the Bank consolidated assets totaled $608.7 million at December 31, 2015, compared to $650.2 million at December 31, 2014,
representing a decrease of $41.5 million or 6.4% from the year-ago period. The asset categories driving the overall decrease in assets from the year-
ago period include cash and cash equivalents, available-for-sale securities, certificates of deposit, gross loans, premises and equipment, other
intangible assets, other real estate owned and other assets with decreases from the year-ago period of $9.4 million (29.2%), $23.5 million (11.4%),
$0.5 million (20.0%), $6.7 million (1.85%), $0.3 million (2.7%), $0.1 million (13.2%), $0.4 million (67.7%) and $1.1 million (17.4%), respectively. The
decrease in total assets from the year-ago period was offset by increases in loans held for sale and cash surrender value of life insurance of $.1
million (51.2%) and $0.4 million (2.6%).
Deposits decreased from the year-ago period by $47.0 million (8.3%).
Loans
At December 31, 2015, total loans, including loans held for sale, amounted to $354.6 million compared to $361.2 million at December 31, 2014, a
decrease of $6.6 million (1.8%). The following categories within the loan portfolio represent the majority of the change during 2015: residential real
estate decreased $2.3 million (2.8%), commercial loans increased $1.3 million (0.6%), agriculture loans decreased $4.8 million (12.0%), and consumer
loans decreased $0.9 million (19.6%).
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 restricted bank stock, totaled $187.8 million at December 31, 2015 compared to $211.3 million at December 31, 2014, a decrease of
$23.5 million (11.1%). The amortized cost of the securities portfolio also decreased $23.5 million in 2015, and the Corporation experienced net
unrealized losses on securities of $23,000 during 2015.
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 2015.
In 2014, the FHLB stock balance was reduced by $749,600 as a result of a stock repurchase initiated by FHLB. The Corporation also acquired
$641,600 in FHLB stock, and $43,740 in other bank restricted stock with The Ohio State Bank acquisition.
At December 31, 2015, the Corporation’s investment securities portfolio included $73.5 million in U.S. states and political subdivisions, which
exceeded shareholders’ equity by 2.7%. The largest exposure to any one state is $11.3 million, or 16%, issued 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.
5
At December 31, 2015 and 2014, net unrealized gains on available-for-sale securities amounted to $2.1 million. At December 31, 2015, the Corporation
held seventy-four securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $63.0
million and $0.9 million, respectively. Management has considered the current interest rate environment, typical volatilities in the bond market, and
the Corporation’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.
Other Assets
During 2015, other real estate owned (OREO) decreased $363,000 to $173,000 at December 31, 2015, compared to $536,000 at December 31, 2014.
During 2015, $427,000 was transferred to OREO. Throughout 2015, the Corporation evaluated its OREO portfolio and made $228,000 of impairment
adjustments.
Deposits
Total deposits at December 31, 2015 amounted to $518.4 million, a decrease of $47.0 million (8.3%) compared with total deposits of $565.4 million at
December 31, 2014. The decrease in deposits includes a $48.0 million decrease in interest bearing deposits and a $1.0 million increase in non-interest
bearing deposits.
Other Borrowings
The Corporation also utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth and periodic deposit
shrinkage. Other borrowings, consisting of FHLB advances amounted to $2.1 million at December 31, 2015 (none at December 31, 2014).
Results of Operation – 2015 Compared to 2014
Performance Summary
Consolidated net income for the Corporation and the Bank was $5.9 million in 2015 compared to $4.3 million in 2014 and $4.6 million in 2013.
Net income in 2015 as compared to 2014 was favorably impacted by a $3,807,000 increase in net interest income and a $250,000 increase in non-
interest income offset by an $812,000 increase in the provision for loan losses, a $1,317,000 increase in non-interest expenses and a $322,000
increase in the provision for income taxes. The increase in the provision for loan losses is more fully explained in the “Provision for Loan Losses
and the Allowance for Loan Losses” section.
The Corporation’s return on average assets was .94% in 2015, compared to .73% in 2014, and .83% in 2013. The Corporation’s return on average
shareholders’ equity was 8.51% in 2015, 6.65% in 2014, and 7.33% in 2013. Basic net income per share was $1.77 per share in 2015, an increase of
$0.50 per share from $1.27 in 2014. Basic net income per share of $1.27 in 2014 represented a decrease of $0.08 per share from $1.35 in 2013. Changes
in these amounts from year to year were generally reflective of changes in the level of net income.
6
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 2015 was $20.8 million, an increase of $3,807,000 (22.5%) from 2014. The increase in net interest income was primarily due to
an increase in the net interest margin. The net interest yield on average interest-earning assets, on a tax-equivalent basis, increased in 2015 to 4.07%
from 3.78% in 2014. A majority of this increase was a result of the average yield on loans for 2015 increasing to 5.11% compared to 4.82% in 2014.
Additionally, the average rate on interest-bearing liabilities decreased to 0.47% in 2015 from 0.61% in 2014.
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 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.
7
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 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 losses at December 31, 2015 was $3.8 million, or 1.08% of total loans, compared to $3.8 million, or 1.06% of total loans at
December 31, 2014. The change in the allowance for loan losses during 2015 included a $382,000 provision for loan losses charged to operations and
loan charge-offs, net of recoveries, of $387,000.
The provision for loan losses charged to operations 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. The
provision for loan losses of $382,000 in 2015 compares to a negative provision of $430,000 in 2014.
Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $6.0 million at December 31, 2015 compared to
$3.7 million at December 31, 2014, an increase of $2.3 million. Impaired loans at December 31, 2015 included $6.0 million in loans with specific
reserves of $1.4 million (no impaired loans without any specific reserves) included in the Corporation’s allowance for loan losses at December 31,
2015. Impaired loans at December 31, 2014 included $1.0 million of loans with no specific reserves included in the allowance for loan losses and $2.7
million of loans with specific reserves of $807,000 included in the Corporation’s allowance for loan losses at December 31, 2014.
In addition to impaired loans, the Corporation had other potential problem credits of $15.0 million at December 31, 2015 compared to $18.7 million at
December 31, 2014, a decrease of $3.7 million (19.8%). The Corporation’s credit administration department continues to closely monitor these
credits.
Non-Interest Income
Total non-interest income increased $250,000 (5.7%) to $4.64 million in 2015 from $4.39 million in 2014. With the exception of net securities gains,
most of the components of non-interest income are recurring, although certain components are more susceptible to change than others. Net
securities gains decreased in 2015 to $116,000 compared to $400,000 in 2014.
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 increased $190,000 (14.3%) to $1,515,000 in 2015
compared to $1,325,000 in 2014.
The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and typically retains
the servicing rights relating to such loans. During 2015, gain on sale of loans was $586,000, including $252,000 of capitalized servicing rights. Gain
on sale of loans was $610,000 in 2014, including $134,000 of capitalized servicing rights. The decrease in gain on sale of loans was minimized by an
increase in loan demand during 2015 with loan sales in 2015 amounting to $28.4 million compared to $15.6 million in 2014. The Corporation’s serviced
portfolio increased $2.2 million during 2015 to $173.5 million at December 31, 2015.
The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $263,000
increase in the fair value of mortgage servicing rights during 2015, compared to a $147,000 decrease in the fair value of mortgage servicing rights in
2014. 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, 2015 the PSA factor was 170 compared to 195 at December 31, 2014.
8
Other operating income decreased $100,000 (5.6%) to $1.7 million in 2015 from $1.8 million in 2014. The increase in non-interest income for the year
ended December 31, 2015 was primarily attributable to a $21,000 increase in debit card fee income, a $45,000 gain on sale of OREO, a $27,000 increase
in income generated by the investment department, a $30,000 increase in cash surrender value of BOLI policies, a $410,000 increase in MTM
adjustment of mortgage servicing rights, a $101,000 increase in recoveries of OSB loans and a $156,000 increase in debit card fee income offset by a
$39,000 decrease in miscellaneous income.
Non-Interest Expenses
Total non-interest expenses amounted to $17,692,000 in 2015, compared to $16,375,000 in 2014, an increase of $1,317,000 (8.0%). Expense increases
for the year ended December 31, 2015 included increases of $875,000 in salary and benefits, $549,000 in occupancy expenses, $353,000 in data
processing and $131,000 in media expense. These increases were partially offset by a $73,000 decrease in stationary and printing as well as a
$139,000 decrease in legal fees. Additionally, miscellaneous expenses were $455,000 lower in 2015 than in 2014 due to prepayment penalties incurred
in 2014 as a result of the payoff of Federal Home Loan Bank advances as of December 31, 2014.
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 2015 was $1,405,000, an effective tax rate of 19.2%, compared to $1,083,000 in 2014, an effective rate of 20.1%. The
Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income
(7.9%) and life insurance contracts (2.0%) as well as a one-time accounting method change relating to bad debt reserve recapture (4.5%). At
December 31, 2015, the Corporation has available alternative minimum tax credits of $792,700 which can be used in the future to the extent regular tax
exceeds the alternative minimum tax.
Results of Operation – 2014 Compared to 2013
Performance Summary
Consolidated net income for the Corporation and the Bank was $4.3 million in 2014 compared to $4.6 million in 2013 and $4.5 million in 2012.
Net income in 2014 as compared to 2013 was negatively impacted by a $430,000 increase in the provision for loan losses, a $351,000 increase in non-
interest expenses and an $80,000 decrease in non-interest income, and favorably impacted by a $348,000 increase in net interest income and a
$157,000 decrease in the provision for income taxes. The increase in the provision for loan losses is more fully explained in the “Provision for Loan
Losses and the Allowance for Loan Losses” section. The increase in net interest income is primarily due to decreased interest expense on
borrowings offset by a decline in the Corporation’s net interest margin from 3.38% in 2013 to 3.29% in 2014.
The Corporation’s return on average assets was .73% in 2014, compared to .83% in 2013, and .79% in 2012. The Corporation’s return on average
shareholders’ equity was 6.65% in 2014, 7.33% in 2013, and 7.23% in 2012. Basic net income per share was $1.27 per share in 2014, a decrease of
$0.08 per share from $1.35 in 2013. Basic net income per share of $1.35 in 2013 represented an increase of $0.05 per share from $1.30 in 2012. Changes
in these amounts from year to year were generally reflective of changes in the level of net income.
9
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 2014 was $16.9 million, an increase of $300,000 (1.8%) from 2013. The increase in net interest income was primarily due to the
Corporation paying off borrowings which reduced interest expense. Although net interest income increased, it was negatively impacted by a
decrease in the net interest margin. The net interest yield on average interest-earning assets, on a tax-equivalent basis, decreased in 2014 to 3.78%
from 3.99% in 2013. A majority of this decrease was a result of the average yield on loans for 2014 decreasing to 4.82% compared to 5.09% in 2013.
The average rate on interest-bearing liabilities decreased to 0.61% in 2014 from 0.77% in 2013.
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 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.
10
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 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 losses at December 31, 2014 was $3.8 million, or 1.06% of total loans, compared to $4.0 million, or 1.36% of total loans at
December 31, 2013. The 2014 ratio was impacted by the loans acquired in The Ohio State Bank acquisition. The change in the allowance for loan
losses during 2014 included a $430,000 negative provision for loan losses charged to operations and loan recoveries, net of charge-offs, of $255,000.
The provision for loan losses charged to operations 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. The
negative provision for loan losses of $430,000 in 2014 compares to a negative provision of $833,000 in 2013. The negative provisions have been
warranted as a result of improving market values on certain collateral, and impaired loans with specific reserves becoming pass-rated or paying off.
Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $3.7 million at December 31, 2014 compared to
$2.8 million at December 31, 2013, an increase of $900,000. Impaired loans at December 31, 2014 included $1.0 million of loans with no specific
reserves included in the allowance for loan losses and $2.7 million of loans with specific reserves of $807,000 included in the Corporation’s
December 31, 2014 allowance for loan losses. Impaired loans at December 31, 2014 with no specific reserves include $181,000 of loan charge-offs
during 2014. Impaired loans at December 31, 2013 included $2.1 million of loans with no specific reserves included in the allowance for loan losses
and $660,000 of loans with specific reserves of $179,000 included in the Corporation’s December 31, 2013 allowance for loan losses. Impaired loans
at December 31, 2013 with no specific reserves include $2.2 million of loan charge-offs during 2013.
In addition to impaired loans, the Corporation had other potential problem credits of $18.7 million at December 31, 2014 compared to $13.4 million at
December 31, 2013, an increase of $5.3 million (39.6%). The Corporation’s credit administration department continues to closely monitor these
credits.
Non-Interest Income
Total non-interest income decreased $80,000 (1.8%) to $4.39 million in 2014 from $4.47 million in 2013. With the exception of net securities gains,
most of the components of non-interest income are recurring, although certain components are more susceptible to change than others. Net
securities gains increased in 2014 to $400,000 compared to $134,000 in 2013.
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 increased $73,000 (5.8%) to $1,325,000 in 2014 compared
to $1,252,000 in 2013.
11
The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and typically retains
the servicing rights relating to such loans. During 2014, gain on sale of loans was $610,000, including $134,000 of capitalized servicing rights. Gain
on sale of loans was $719,000 in 2013, including $313,000 of capitalized servicing rights. The decrease in gain on sale of loans was attributable to a
decrease in loan demand during 2014 with loan sales in 2014 amounting to $15.6 million compared to $31.9 million in 2013. The Corporation’s
serviced portfolio decreased $5.5 million during 2014 to $171.3 million at December 31, 2014.
The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $147,000
decrease in the fair value of mortgage servicing rights during 2014, compared to a $316,000 increase in the fair value of mortgage servicing rights in
2013. 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, 2014 the PSA factor was 195 compared to 164 at December 31, 2013.
Other operating income increased $168,000 (10.3%) to $1.8 million in 2014 from $1.6 million in 2013. The increase in non-interest income for the year
ended December 31, 2014 was primarily attributable to an $87,000 increase in income generated by the investment department and a $63,000 increase
in debit card fee income offset by a $30,000 decrease in miscellaneous income.
Non-Interest Expenses
Total non-interest expenses amounted to $16,375,000 in 2014, compared to $16,024,000 in 2013, an increase of $351,000 (2.2%). Expense increases for
the quarter and year ended December 31, 2014 included increases of $549,000 and $735,000, respectively, in acquisition related costs from The Ohio
State Bank acquisition. These increases were partially offset by a $456,000 decrease in miscellaneous expenses resulting from prepayment penalties
on Federal Home Loan Bank advances in 2014 that were lower than such prepayment penalties in 2013.
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 2014 was $1,083,000, an effective tax rate of 20.1%, compared to $1,240,000 in 2013, an effective rate of 21.1%. The
Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income
(10.6%) and life insurance contracts (2.5%). At December 31, 2014, the Corporation has available alternative minimum tax credits of $657,300 which
can be used in the future to the extent regular tax exceeds the alternative minimum tax.
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 portfolio are also available to collateralize borrowings.
12
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 2015, 2014, and 2013 follows.
The Corporation generated cash from operating activities of $8.5 million in 2015, $4.8 million in 2014, and $5.1 million in 2013.
Net cash flows from investing activities amounted to $29.3 million in 2015, $2.0 million in 2014, and $(18.1) million in 2013. Significant investing cash
inflow activities in 2015 included $22.7 million of net cash inflows resulting from securities purchases, net of proceeds received from sales and
maturities as well as a $5.8 million decrease in loans. Significant investing cash inflow activities in 2014 included $1.3 million of net cash inflows
resulting from securities purchases, net of proceeds received from sales and maturities, along with $6.7 million in net proceeds from the bank
acquisition. Significant investing cash outflow activities in 2014 included a $6.6 million increase in loans. Significant investing cash flow activities in
2013 included $27.8 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities. Significant
investing cash inflow activities in 2013 resulted from a $9.6 million decrease in loans.
Net cash flows from financing activities amounted to $(47.2) million in 2015, $3.1 million in 2014, and $(14.5) million in 2013. Net cash used in
financing activities in 2015 primarily resulted from a $47.0 decrease in deposits, a $0.9 million purchase of treasury stock and a $1.2 million in cash
dividends paid. Net cash provided by financing activities included an increase of $2.1 million in borrowings from FHLB. Net cash used in financing
activities in 2014 primarily resulted from $16.2 million of repayment on FHLB borrowings, a $4.6 million decrease in customer repurchase agreements,
a $1.1 million purchase of treasury stock, and $1.2 million in cash dividends paid. Net cash provided by financing activities included a $26.3 million
increase in deposits. Net cash used in financing activities in 2013 primarily resulted from $10 million of repayment on FHLB borrowings and a $3.2
million decrease in deposits.
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, 2015 is approximately 90%
which means the Corporation has more liabilities than assets re-pricing within one year. Under the current abnormally 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.
13
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 resulting from the 2003 Gibsonburg and Pemberville branches, the 2010 Findlay branch
acquisitions and the 2014 acquisition of The Ohio State Bank branches in Marion and Delaware 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, 2015, 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, 2015.
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.
14
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 2015, as well as newly-issued but not effective accounting standards at
December 31, 2015, 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, 2015:
Total
Amount
Less than
1 year
Amount of commitment to expire per period
1 - 3
years
(Dollars in thousands)
4 - 5
Years
Over
5 years
Type of Commitment
Commercial lines-of-credit
Real estate lines-of-credit
Consumer lines-of-credit
Letters of Credit
$
40,619 $
43,105
345
325
40,239 $
5,213
-
295
217 $
4,792
-
30
- $
7,019
-
-
163
26,081
345
-
Total commitments
$
84,394 $
45,747 $
5,039 $
7,019 $
26,589
As indicated in the preceding table, the Corporation had $84.4 million in total loan commitments at December 31, 2015, with $45.7 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.
15
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, 2015:
Total
Amount
Less than
1 year
Payments due by period
1 - 3
years
(Dollars in thousands)
4 - 5
Years
Over
5 years
Contractual obligations
Long-term debt
Capital leases
Operating leases
Unconditional purchase obligations
Time deposits
Deposits without stated maturities
Future deferred compensation payments, including interest
$
12,772 $
-
22,500
-
148,486
369,933
1,671
- $
-
22,500
-
73,560
-
116
- $
-
-
-
62,800
-
298
- $
-
-
-
11,819
-
282
12,772
-
-
-
307
369,933
975
Total obligations
$
555,362 $
96,176 $
63,098 $
12,101 $
383,987
Long-term debt presented in the preceding table is comprised of $12.8 million of junior subordinated deferrable interest debentures. $10.4 million
was issued by the Corporation, and $2.4 million was assumed from The Ohio State Bank 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
current Chairman of the Board of Directors to provide for retirement compensation benefits. A deferred compensation liability was also assumed
with The Ohio State Bank acquisition for the benefit of the Bank’s retired president, with payment that began on May 1, 2010. At December 31, 2015,
the net present value of future deferred compensation payments amounted to $953,000, which is included in other liabilities in the December 31, 2015
consolidated balance sheet.
As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2015. The Corporation also has a non-qualified
deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $625,000 at December 31, 2015 for
supplemental retirement benefits. Since substantially all participants under the plan are still active, it is not possible to determine the terms of the
contractual obligations and, consequently, such liability is not included in the table.
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.
16
Quantitative and Qualitative Disclosures About Market Risk - Continued
The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2015:
Change in Interest Rates
(basis points)
Percentage Change in
Net Interest Income
Percentage Change in
Net Income
+100
(100)
+200
(200)
+300
(300)
+400
-2.7%
-5.1%
-5.7%
-9.3%
-8.9%
N/A
-12.1%
-6.6%
-13.0%
-14.2%
-23.9%
-22.2%
N/A
-30.3%
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 2.7% and net income would decrease by 6.6%. A 100bp decrease in interest rates would decrease net interest income by 5.1% and
decrease net income by 13.0%. 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 5.7% and net income would decrease by 14.2%. A 200bp decrease in interest rates would decrease net
interest income by 9.3% and decrease net income by 23.9%. 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 8.9% and net income would decrease by 22.2%. A 300bp decrease in
interest rates cannot be simulated at this time due to the historically low interest rate environment. A 400bp increase in interest rates would decrease
net interest income by 12.1% and decrease net income by 30.3%. Management does not expect any significant adverse effect to net interest income
in 2016 based on the composition of the portfolio and anticipated trends in rates.
Other Information
The Dodd-Frank Act, enacted in 2010, is complex and several of its provisions are still being implemented. The Dodd-Frank Act established the
Consumer Financial Protection Bureau, which has extensive regulatory and enforcement powers over consumer financial products and services, and
the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank
Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance
requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and
certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates.
The Dodd-Frank Act also required the issuance of numerous regulations, many of which have not yet been issued. The regulations will continue to
take effect over several more years, continuing to make it difficult to anticipate the overall impact.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
United Bancshares, Inc.
Columbus Grove, Ohio
We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and subsidiaries as of December 31, 2015 and 2014, and
the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-
year period ended December 31, 2015. United Bancshares, Inc.’s management is responsible for these financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United
Bancshares, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
Toledo, Ohio
March 9, 2016
/s/ CliftonLarsonAllen LLP
18
UNITED BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
SECURITIES, available-for-sale
RESTRICTED BANK STOCK, at cost
CERTIFICATES OF DEPOSIT, at cost
LOANS HELD FOR SALE
LOANS & LEASES
Less allowance for loan and lease losses
Net loans & leases
PREMISES AND EQUIPMENT, net
GOODWILL
CORE DEPOSIT INTANGIBLE ASSETS, net
CASH SURRENDER VALUE OF LIFE INSURANCE
OTHER REAL ESTATE OWNED
OTHER ASSETS, including accrued interest receivable
2015
2014
$
11,482,114 $
11,440,251
11,444,096
20,910,484
22,922,365
32,354,580
182,929,038
4,829,540
1,992,000
346,900
206,461,063
4,829,540
2,490,000
229,425
354,250,015
3,834,466
360,937,164
3,839,508
350,415,549
357,097,656
12,048,680
10,072,399
903,220
16,833,950
173,047
5,198,421
12,385,556
10,072,399
1,040,547
16,406,846
535,999
6,296,050
TOTAL ASSETS
$
608,665,109 $
650,199,661
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing
Interest-bearing
Total deposits
Other borrowings
Junior subordinated deferrable interest debentures
Other liabilities
Total liabilities
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares
Surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost, 451,218 shares in 2015 and 392,822 shares in 2014
Total shareholders’ equity
$
93,476,408 $
424,942,934
92,499,725
472,945,234
518,419,342
565,444,959
2,118,000
12,772,401
3,794,189
-
12,738,549
4,243,876
537,103,932
582,427,384
3,760,557
14,669,087
58,641,837
1,397,130
3,760,557
14,665,845
53,925,768
1,412,115
(6,907,434)
(5,992,008)
71,561,177
67,772,277
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
608,665,109 $
650,199,661
The accompanying notes are an integral part of the consolidated financial statements.
19
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2015, 2014 and 2013
Year Ended December 31,
2014
2013
2015
$
18,322,649 $
14,965,582 $
15,243,402
2,548,789
1,686,099
278,769
2,610,954
1,688,577
354,695
2,429,043
1,858,801
322,681
22,836,306
19,619,808
19,853,927
1,579,796
497,719
1,969,296
698,434
2,142,274
1,107,098
2,077,515
2,667,730
3,249,372
20,758,791
16,952,078
16,604,555
INTEREST INCOME
Loans & leases, including fees
Securities:
Taxable
Tax-exempt
Other
Total interest income
INTEREST EXPENSE
Deposits
Borrowings
Total interest expense
Net interest income
PROVISION (CREDIT) FOR LOAN AND LEASE LOSSES
382,000
(430,000)
(832,925)
Net interest income after provision (credit) for loan and lease losses
20,376,791
17,382,078
17,437,480
NON-INTEREST INCOME
Service charges on deposit accounts
Gain on sale of loans
Net securities gains
Change in fair value of mortgage servicing rights
Increase in cash surrender value of life insurance
Other operating income
Total non-interest income
NON-INTEREST EXPENSES
Salaries, wages and employee benefits
Occupancy expenses
Other operating expenses
Total non-interest expenses
Income before income taxes
PROVISION FOR INCOME TAXES
NET INCOME
NET INCOME PER SHARE (basic and diluted)
1,515,104
586,375
115,616
263,114
427,104
1,729,729
1,325,440
610,419
399,760
(147,050)
396,646
1,802,288
1,252,379
719,289
134,177
315,758
411,955
1,634,438
4,637,042
4,387,503
4,467,996
9,290,177
2,133,735
6,268,036
8,414,792
1,584,863
6,375,428
8,237,152
1,555,242
6,231,878
17,691,948
16,375,083
16,024,272
7,321,885
5,394,498
5,881,204
1,405,000
1,083,000
1,240,000
5,916,885 $
4,311,498 $
4,641,204
1.77 $
1.27 $
1.35
$
$
The accompanying notes are an integral part of the consolidated financial statements.
20
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2015, 2014 and 2013
Year Ended December 31,
2014
2013
2015
NET INCOME
$
5,916,885 $
4,311,498 $
4,641,204
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period
Reclassification adjustments for gains included in net income
Other comprehensive income (loss), before income taxes
Income tax benefit (expense) related to items of other comprehensive income (loss)
Other comprehensive income (loss)
92,930
(115,616)
(22,686)
7,701
(14,985)
4,597,215
(399,760)
4,197,455
(1,427,135)
2,770,320
(7,525,775)
(134,177)
(7,659,952)
2,604,384
(5,055,568)
COMPREHENSIVE INCOME (LOSS)
$
5,901,900 $
7,081,818 $
(414,364)
The accompanying notes are an integral part of the consolidated financial statements.
21
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014 and 2013
BALANCE AT DECEMBER 31, 2012
Comprehensive income:
Net income
Other comprehensive loss
Repurchase of 5,000 shares
Sale of 746 treasury shares
Cash dividends declared, $0.20 per share
Common stock Surplus
$
3,760,557 $14,661,664 $
Retained earnings
46,855,865 $
Accumulated
other
comprehensive
income (loss) Treasury stock
Total
3,697,363 $
(4,805,244) $64,170,205
-
-
-
-
-
-
-
-
2,197
-
4,641,204
-
-
-
(689,380)
-
(5,055,568)
-
-
-
- 4,641,204
- (5,055,568)
(72,200)
13,604
(689,380)
(72,200)
11,407
-
BALANCE AT DECEMBER 31, 2013
3,760,557 14,663,861
50,807,689
(1,358,205)
(4,866,037) 63,007,865
Comprehensive income:
Net income
Other comprehensive income
Repurchase of 75,000 shares
Sale of 684 treasury shares
Cash dividends declared, $0.35 per share
-
-
-
-
-
-
-
-
1,984
-
4,311,498
-
-
-
(1,193,419)
-
2,770,320
-
-
-
- 4,311,498
- 2,770,320
(1,136,430) (1,136,430)
12,443
- (1,193,419)
10,459
BALANCE AT DECEMBER 31, 2014
3,760,557 14,665,845
53,925,768
1,412,115
(5,992,008) 67,772,277
Comprehensive income:
Net income
Other comprehensive loss
Repurchase of 59,111 shares
Sale of 715 treasury shares
Cash dividends declared, $0.36 per share
-
-
-
-
-
-
-
-
3,242
-
5,916,885
-
-
-
(1,200,815)
-
(14,985)
-
-
-
- 5,916,885
(14,985)
-
(926,328)
(926,328)
14,143
10,901
- (1,200,815)
BALANCE AT DECEMBER 31, 2015
$
3,760,557 $14,669,087 $
58,641,838 $
1,397,130 $
(6,907,435) $71,561,177
22
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2015, 2014 and 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization and accretion for purchase accounting
Deferred income taxes
Provision (credit) for loan losses
Gain on sale of loans
Net securities gains
Change in fair value of mortgage servicing rights
Loss on sale or write-down of other real estate owned
Increase in cash surrender value of life insurance
Net amortization of security premiums and discounts
Change in fair value of junior subordinated deferrable interest debentures
Deferred compensation Expense
Loss on disposal or write-down of premises and equipment and other assets
Proceeds from sale of loans held for sale
Originations of loans held for sale
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Years Ended December 31,
2014
2013
2015
$
5,916,885 $
4,311,498 $
4,641,204
625,380
(1,495,486)
859,100
382,000
(586,375)
(115,616)
(263,114)
183,224
(427,104)
925,285
33,852
76,362
49,030
28,767,355
(28,433,268)
1,613,031
(1,223,692)
701,025
-
298,500
(430,000)
(610,419)
(399,760)
147,050
183,955
(396,646)
764,073
-
63,724
-
16,089,781
(15,613,686)
1,224,349
(1,499,003)
649,056
-
1,032,000
(832,925)
(719,289)
(134,177)
(315,758)
205,775
(411,955)
791,464
-
33,806
-
32,273,717
(31,867,179)
(446,316)
197,896
Net cash provided by operating activities
6,886,849
4,834,441
5,097,319
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities, including paydowns on
mortgage-backed securities
Purchases of available-for-sale securities
Proceeds from sale of FHLB stock
Net proceeds from (purchase of) certificates of deposits
Proceeds from acquisition
Net (increase) decrease in loans and leases
Purchases of premises and equipment
Proceeds from sale of other real estate owned
28,437,199
9,121,368
8,821,116
30,796,690
(36,534,220)
-
498,000
-
7,306,405
(311,625)
551,441
27,222,959
(35,010,991)
749,600
249,000
6,628,035
(6,638,114)
(314,059)
-
36,658,316
(73,268,830)
-
(249,000)
-
9,595,280
(394,982)
694,271
Net cash provided by (used in) investing activities
30,743,890
2,007,798
(18,143,829)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
Other borrowings:
Change in net borrowings
Change in customer repurchase agreements
Purchase of treasury shares
Proceeds from sale of treasury shares
Payments of deferred compensation
Cash dividends paid
$
(46,914,198) $
26,348,871 $
(3,199,049)
2,118,000
-
(926,328)
14,143
(153,756)
(1,200,815)
(16,240,666)
(4,600,552)
(1,136,430)
12,443
(85,364)
(1,193,419)
(10,000,000)
(456,668)
(72,200)
13,604
(54,146)
(689,380)
Net cash provided by (used in) financing activities
(47,062,954)
3,104,883
(14,457,839)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(9,432,215)
9,947,122
(27,504,349)
CASH AND CASH EQUIVALENTS
At beginning of year
At end of year
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest
32,354,580
22,922,365 $
22,407,458
32,354,580 $
49,911,807
22,407,458
$
$
2,226,892 $
2,687,135 $
3,256,188
Federal income taxes
Non-cash operating activity:
Change in deferred income taxes on net unrealized gain or loss on available-for-sale
securities
Non-cash investing activities:
Transfer of loans to other real estate owned
Change in net unrealized gain or loss on available-for-sale securities
$
$
$
$
665,000 $
660,000 $
350,000
(7,701) $
1,427,135 $
(2,604,383)
371,713 $
- $
-
22,686 $
(4,197,455) $
7,659,952
The accompanying notes are an integral part of the consolidated financial statements.
23
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, and Pemberville 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 servicing assets and goodwill, and fair value of securities and other financial instruments.
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 in the amount of $1,351,000 and $2,623,000 at
December 31, 2015 and 2014, respectively, to meet regulatory reserve and clearing requirements.
24
Securities, Federal Home Loan Bank Stock and Certificates of Deposits
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.
Investments in certificates of deposit are carried at cost and evaluated for impairment annually or when circumstances change that may have a
significant effect on fair value.
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, 2015 and 2014.
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.
25
The allowance for loan and lease losses 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.
26
•
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.
27
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, 2015, the Corporation believes the Bank does not have any indicators of potential impairment based
on the estimated fair value of this reporting unit.
The core deposit intangible asset resulting from the Findlay branch acquisition was determined to have a definite life and is being amortized on a
straight-line basis over seven years through March 2017. The remaining amortization of the core deposit intangible asset is $40,857 for 2016 and
$10,215 in 2017. The core deposit intangible asset resulting from The Ohio State Bank acquisition was also determined to have a definite life and is
being amortized on a straight-line basis over ten years through October 2024. Future amortization of the core deposit intangible asset is $96,470
annually for years 2016 through 2023 and $80,388 in 2024.
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.
28
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
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, 2015, 2014 and 2013:
Basic
Diluted
2015
2014
3,339,242
3,339,242
3,406,194
3,406,194
2013
3,446,662
3,446,662
Dividends per share are based on the number of shares outstanding at the declaration date.
Rate Lock Commitments
Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale are accounted for as derivative instruments.
The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such
commitments, along with any related fees received from potential borrowers, are to be recorded at fair value as derivative assets or liabilities, with
changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar
agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. At
December 31, 2015 and 2014, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial
statements.
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, 2015, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions
that existed at December 31, 2015, have been recognized in the financial statements for the year ended December 31, 2015. Events or transactions
that provided evidence about conditions that did not exist at December 31, 2015 but arose before the financial statements were issued, have not
been recognized in the consolidated financial statements for the year ended December 31, 2015.
29
On January 20, 2016, United Bancshares, Inc. issued a release announcing that its Board of Directors increased its dividend by 22.2% from the
fourth quarter of 2014, approving a cash dividend of $0.11 per common share payable March 15, 2016 to shareholders of record at the close of
business on February 29, 2016.
Reclassifications
Certain reclassifications of prior period amounts have been made to conform to the current presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors. The FASB issued ASU 2014-04 to
reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be
derecognized and the real property recognized. The amendments in this update are effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2014. The Corporation has determined the provisions for ASU 2014-04 did not have a material impact
on future financial statements.
In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, amending ASC topic
860. The FASB issued ASU 2014-11 to change the accounting for repurchase-to-maturity transactions and linked repurchase financials to secure
borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new
disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically
similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase
agreements and similar transactions accounted for as secured borrowings. The amendments in this update are effective for the first interim or annual
period beginning after December 15, 2014, and the Corporation has determined the provisions for ASU 2014-11 did not have a material impact on
future financial statements.
In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors. The FASB issued ASU 2014-14 to
reduce the diversity of how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure.
The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if
the following conditions are met: 1) The loan has a government guarantee that is not separable from the loan before foreclosure.; 2) At the time of
foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has
the ability to recover under that claim.; and 3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of
the real estate is fixed. The amendments in this update are effective for annual periods, and interim periods within those periods, beginning after
December 15, 2014. The Corporation has determined the provisions for ASU 2014-04 did not have a material impact on future financial statements.
In November 2014, the FASB issued ASU 2014-17, Business Combinations – Pushdown Accounting. The FASB issued ASU 2014-17 to provide
guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its
separate financial statements. The amendments in this update provide an acquired entity with an option to apply pushdown accounting in its
separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments in this
update were effective on November 18, 2014. The Corporation has determined the provisions for ASU 2014-17 did not have a material impact on the
financial statements.
30
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, amending ASU
Subtopic 825-10. The amendments in this update make targeted improvements to generally accepted accounting principles (GAAP) as follows: 1).
Require equity investments to be measured at fair value with changes in fair value recognized in net income.; 2). Simplify the impairment assessment
of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.; 3). Eliminate the
requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities.; 4).
Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost on the balance sheet.; 5). Require public business entities to use the
exit price notion when measuring the fair value of financial instruments for disclosure purposes.; 6). Require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.; 7). Require
separate presentation of financial assets and financial liabilities my measurement category and form of financial asset on the balance sheet or the
accompanying notes to the financial statements.; 8). Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset
related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update are effective for
fiscal years beginning after December 15, 2017. The Corporation has not yet made a determination of the impact on the financial statements of the
provisions for ASU 2016-01.
NOTE 3 – ACQUISITION
On July 1, 2014, the Corporation, Ohio State Bancshares, Inc. (“OSB”) and Rbancshares, Inc. (“Rbancshares”) entered into a Stock Purchase
Agreement (the “Purchase Agreement”) pursuant to which the Corporation purchased from OSB all of the issued and outstanding shares of The
Ohio State Bank (“The Ohio State Bank”), an Ohio banking corporation and wholly-owned subsidiary of OSB (the “Acquisition”). Immediately
following the acquisition, The Ohio State Bank was merged into the Bank. The Ohio State Bank operated three full-service branches with a main
office and one other facility in Marion, Ohio and one branch in Delaware, Ohio. These offices became branches of the Bank after the acquisition.
The transaction was completed in November, 2014 with assets acquired and deposits assumed being recorded at their estimated fair values as
follows:
Cash
Loans
Securities
Other stock, at cost
Premises and equipment
Goodwill
Cash surrender value of life insurance
Other intangible assets
Other real estate owned
Other assets, including accrued interest receivable
Total assets acquired
Deposits assumed
Federal Home Loan Bank borrowings
Junior subordinated deferrable interest debentures
Accrued expenses and other liabilities
Total liabilities assumed
$
$
$
$
6,628,035
58,536,569
6,881,331
685,340
3,382,316
1,517,420
1,837,062
964,697
52,000
3,003,090
83,487,860
71,096,023
8,740,666
2,438,549
1,212,622
83,487,860
Consideration paid for the transaction was $1,197,237, which included the repayment of debt of $1,190,856 that was owed by The Ohio State Bank.
Cash acquired at closing is presented above net of the repayment of debt that occurred at closing. Acquisition-related costs of approximately
$935,000 are included in other non-interest operating expenses in the accompanying 2014 consolidated statements of income. This acquisition is
intended to expand the geographical footprint of the Corporation, which will help grow the balance sheet and future earnings.
31
Cash proceeds from the acquisition were used to repay the Federal Home Loan Bank borrowings that were assumed in the acquisition.
Goodwill of $1,517,420 arising from the acquisition consists largely of synergies and the cost savings expected to result from the combining of
operations and is not expected to be deductible for income tax purposes.
32
NOTE 4 – SECURITIES
The amortized cost and fair value of securities as of December 31, 2015 and 2014 are as follows:
Available-for-sale:
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Other
Amortized cost
Fair value
Amortized cost
Fair value
2015
2014
$
3,998,025 $
71,589,038
104,223,205
1,001,888
3,966,390 $
73,481,892
104,479,413
1,001,343
9,640,249 $
56,605,455
137,073,902
1,001,888
9,537,052
58,098,524
137,818,544
1,006,943
Total
$
180,812,156 $
182,929,038 $
204,321,494 $
206,461,063
A summary of unrealized gains and losses on securities at December 31, 2015 and 2014 follows:
Available-for-sale:
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Other
2015
2014
Gross unrealized
gains
Gross unrealized
losses
Gross unrealized
gains
Gross unrealized
losses
$
- $
1,959,662
1,070,629
-
31,635 $
66,808
814,421
545
- $
1,674,221
1,556,536
5,055
103,197
181,152
811,894
-
Total
$
3,030,291 $
913,409 $
3,235,812 $
1,096,243
The amortized cost and fair value of securities at December 31, 2015, 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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Other securities having no maturity date
Total
Amortized Cost
Fair value
$
$
1,124,806 $
16,503,553
53,752,354
108,429,555
1,001,888
180,812,156 $
1,136,513
16,738,420
55,277,996
108,774,766
1,001,343
182,929,038
Securities with a carrying value of approximately $22,606,000 at December 31, 2015 and $20,168,000 at December 31, 2014 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, 2015 and 2014:
33
2015
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Other
Total temporarily impaired securities
2014
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Total temporarily impaired securities
Securities in a continuous unrealized loss position
12 months or more
Total
Less than 12 months
Unrealized
losses
Fair value
$
$
31,635 $ 3,966,390 $
44,058 6,034,425
230,224 26,676,316
545 1,001,343
306,462 $37,678,474 $
Unrealized
losses
Fair value
- $
- $
22,750 1,448,020
584,197 23,859,250
-
606,947 $25,307,270 $
-
Unrealized
losses
Total Fair
value
31,635 $ 3,966,390
66,808 7,482,445
814,421 50,535,566
545 1,001,343
913,409 $62,985,744
Less than 12 months
Unrealized
losses
Fair value
12 months or more
Total
Unrealized
losses
Fair value
Unrealized
losses
Total Fair
value
$
$
103,197 $ 9,537,052
93,265 $ 8,547,052 $
9,932 $
990,000 $
181,152 13,664,247
172,145 11,140,718
9,008 2,523,529
811,894 52,035,018
764,637 37,948,535
47,257 14,086,483
66,197 $17,600,012 $ 1,030,047 $57,636,305 $ 1,096,243 $75,236,317
There were 74 securities in an unrealized loss position at December 31, 2015, 29 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, 2015 were primarily the result of customary and expected fluctuations in the bond market.
As a result, all security impairments as of December 31, 2015 are considered to be temporary.
Gross realized gains from sale of securities, including securities calls, amounted to $141,318 in 2015, $412,812 in 2014, and $134,848 in 2013, with the
income tax provision applicable to such gains amounting to $48,048 in 2015, $140,356 in 2014, and $45,848 in 2013. Gross realized losses from sale of
securities amounted to $25,702 in 2015, $13,052 in 2014, and $671 in 2013 with related income tax effect of $8,739 in 2015, $4,438 in 2014, and $228 in
2013.
NOTE 5 – LOANS AND LEASES
Loans and leases at December 31, 2015 and 2014 consist of the following:
Residential real estate
Commercial
Agriculture
Consumer
Total loans and leases
2015
2014
$
$
78,095,566 $
237,299,236
34,997,920
3,857,293
354,250,015 $
80,367,773
235,988,490
39,781,326
4,799,575
360,937,164
Fixed rate loans and leases approximated $60,131,000 at December 31, 2015 and $65,287,000 at December 31, 2014. Certain commercial and agricultural
loans and leases are secured by real estate.
Most of the Corporation’s lending activities are with customers located in Northwestern and West Central Ohio. As of December 31, 2015 and 2014,
the Corporation’s loans and leases from borrowers in the agriculture industry represent the single largest industry and amounted to $34,997,920 and
$39,781,326, 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.
34
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 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 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.
35
The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2015,
2014 and 2013:
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
Consumer
Total
Balance at December 31, 2014
Provision (credit) charged to
expenses
Losses charged off
Recoveries
$
198,367 $
3,255,148 $
362,895 $
23,098 $
3,839,508
971,187
(348,613)
71,645
(767,134)
(97,959)
150,338
165,745
(175,656)
20,356
12,202
(16,014)
8,861
382,000
(638,242)
251,200
Balance at December 31, 2015
$
892,586 $
2,540,393 $
373,340 $
28,147 $
3,834,466
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
Consumer
Total
Balance at December 31, 2013
Provision (credit) charged to
expenses
Losses charged off
Recoveries
$
305,434 $
3,346,286 $
344,803 $
17,868 $
4,014,391
(563,961)
(97,901)
554,795
(4,254)
(270,032)
183,148
125,961
(116,812)
8,943
12,254
(12,197)
5,173
(430,000)
(496,942)
752,059
Balance at December 31, 2014
$
198,367 $
3,255,148 $
362,895 $
23,098 $
3,839,508
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
Consumer
Total
Balance at December 31, 2012
Provision (credit) charged to
expenses
Losses charged off
Recoveries
$
1,027,837 $
5,240,175 $
602,291 $
47,302 $
6,917,605
(518,117)
(218,394)
14,108
(25,938)
(2,394,884)
526,933
(264,301)
(3,896)
10,709
(24,569)
(23,305)
18,440
(832,925)
(2,640,479)
570,190
Balance at December 31, 2013
$
305,434 $
3,346,286 $
344,803 $
17,868 $
4,014,391
36
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, 2015 and 2014:
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
Consumer
Total
2015
Allowance for loan and lease losses:
Attributable to loans and leases
individually evaluated for
impairment
Collectively evaluated for
impairment
Total allowance for loan and lease
losses
$
$
Loans and leases:
Individually evaluated for
527,940 $
842,643 $
- $
- $
1,370,583
364,646
1,697,750
373,340
28,147
2,463,883
892,586 $
2,540,393 $
373,340 $
28,147 $
3,834,466
impairment
$
2,192,266 $
3,819,786 $
- $
- $
6,012,052
Acquired with deteriorated credit
quality
Collectively evaluated for impairment
Total ending loans and leases
42,733
64,091,775
669,336
201,481,260
73,625
78,021,941
-
3,857,293
785,694
347,452,269
balance
$
66,326,774 $
205,970,382 $
78,095,566 $
3,857,293 $
354,250,015
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
Consumer
Total
2014
Allowance for loan and lease losses:
Attributable to loans and leases
individually evaluated for
impairment
$
Collectively evaluated for impairment
Total allowance for loan and lease
$
$
losses
Loans and leases:
Individually evaluated for
impairment
Acquired with deteriorated credit
quality
Collectively evaluated for
impairment
Total ending loans and leases
- $
198,367
806,944 $
2,448,204
- $
362,895
- $
23,098
806,944
3,032,564
198,367 $
3,255,148 $
362,895 $
23,098 $
3,839,508
197,803 $
3,483,640 $
- $
- $
3,681,443
20,573
1,060,927
201,343
652
1,283,495
63,604,790
207,402,083
80,166,430
4,798,923
355,972,226
balance
$
63,823,166 $
211,946,650 $
80,367,773 $
4,799,575 $
360,937,164
37
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, 2015, 2014, and 2013:
Balance at beginning of year
Provision charged to expenses
Loans charged off
Recoveries
Balance at end of year
2015
2014
2013
$
$
806,944 $
852,126
(326,801)
38,314
1,370,583 $
179,016 $
262,834
(230,905)
595,999
806,944 $
2,921,950
(573,330)
(2,419,873)
250,269
179,016
No additional funds are committed to be advanced in connection with impaired loans and leases.
The average balance of impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) approximated $5,579,000
$3,851,000, and $9,761,000 during 2015, 2014, and 2013, respectively. There was approximately $339,000, $197,000, and $203,000 in interest income
recognized by the Corporation on impaired loans and leases on an accrual or cash basis during 2015, 2014, and 2013, respectively.
The following table presents loans and leases individually evaluated for impairment by class of loans as of December 31, 2015 and 2014:
With no related allowance recorded:
Commercial
Commercial and multi-family real estate
Agriculture
Agricultural real estate
Consumer
Residential 1-4 family real estate
With an allowance recorded:
Commercial
Commercial and multi-family real estate
Agriculture
Agricultural real estate
Consumer
Residential 1-4 family real estate
Total
2015
2014
Recorded investment
Allowance for loan
and lease losses
allocated
Recorded
investment
Allowance for loan
and lease losses
allocated
$
$
- $
-
-
-
-
-
2,192,266
3,819,787
-
-
-
-
6,012,053 $
38
- $
-
-
-
-
-
527,940
842,643
-
-
-
-
1,370,583 $
- $
1,005,067
-
-
-
-
197,803
2,478,573
-
-
-
-
3,681,443 $
-
-
-
-
-
-
85,561
721,383
-
-
-
-
806,944
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, 2015 and 2014:
2015
Loans and
leases past due
over 90 days
still accruing
2014
Loans and
leases past due
over 90 days
still accruing
Commercial
Commercial real estate
Agricultural real estate
Agriculture
Consumer
Residential:
1 – 4 family
Home equity
Total
Nonaccrual
$
355,415 $
4,112,605
52,061
19,312
11,977
Troubled Debt
Restructurings Nonaccrual
- $
1,403,187
-
-
-
199,160 $
3,351,521
78,640
-
4,450
- $
-
259,858
-
-
Troubled Debt
Restructurings
-
1,967,898
-
-
-
25,284 $
1,253,936
-
-
758
1,393,568
-
5,944,938 $
-
-
259,858 $
392,455
-
1,795,642 $
1,355,060
231,885
5,220,716 $
210,793
22,228
1,512,999 $
153,260
-
2,121,158
$
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, 2015 and 2014 by class of loans
and leases:
2015
Commercial
Commercial real estate
Agriculture
Agricultural real estate
Consumer
Residential real estate
Total
2014
Commercial
Commercial real estate
Agriculture
Agricultural real estate
Consumer
Residential real estate
Total
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
80,898 $
643,541
150,064
93,871
49,389
2,146,892
3,164,655 $
50,000 $
15,422
-
-
301
244,123
309,846 $
121,057 $
1,225,385
19,312
259,858
4,824
388,584
2,019,020 $
251,955 $
1,884,348
169,376
353,729
54,514
2,779,599
5,493,521 $
53,210,222 $
181,952,711
12,695,221
21,779,594
3,802,779
75,315,967
348,756,494 $
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
212,495 $
1,150,611
49,312
-
26,295
249,963
1,688,676 $
210,541 $
1,852,191
-
-
44,537
386,278
2,493,547 $
36,494 $
3,053,809
-
17,535
2,941
732,913
3,843,692 $
459,530 $
6,056,611
49,312
17,535
73,773
1,369,154
8,025,915 $
48,300,122 $
181,172,227
15,014,202
24,700,277
4,725,802
78,998,619
352,911,249 $
$
$
$
$
Total
53,462,177
183,837,059
12,864,597
22,133,323
3,857,293
78,095,566
354,250,015
Total
48,759,652
187,228,838
15,063,514
24,717,812
4,799,575
80,367,773
360,937,164
39
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 loans and leases with an outstanding balance greater than $500,000 (increased from $250,000 in 2015) and non-homogenous
loans and leases, such as commercial and commercial real estate loans and leases. This analysis is performed on a quarterly basis. The Corporation
uses the following definitions for risk ratings:
·
·
·
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.
Loans and leases not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
rated loans and leases. Loans and leases listed as not rated are generally either less than $500,000 (increased from $250,000 in 2015) or are included
in groups of homogenous loans and leases. As of December 31, 2015 and 2014, and based on the most recent analysis performed, the risk category
of loans by class of loans and leases is as follows:
2015
Commercial
Commercial and multi-family real estate
Residential 1 - 4 family
Consumer
Total
Pass
Special
Mention
Substandard
Doubtful
Not rated
$
$
41,184,348 $
139,351,079
222,552
-
180,757,979 $
2,806,324 $
7,562,337
-
-
10,368,661 $
2,656,154 $
5,975,868
-
-
8,632,022 $
- $
-
-
-
- $
19,679,948
53,081,098
77,873,014
3,857,293
154,491,353
Pass
Special
Mention
Substandard
Doubtful
Not rated
2014
Commercial
Commercial and multi-family real estate
Residential 1 - 4 family
Consumer
Total
$
$
53,737,496 $
172,674,560
-
-
226,412,056 $
1,515,485 $
9,780,593
-
-
11,296,078 $
180,574 $
8,902,162
110,759
758
9,194,253 $
197,803 $
110,202
-
-
308,005 $
8,191,808
20,479,134
80,257,013
4,798,817
113,726,772
40
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, 2015 and 2014:
2015
Performing
Nonperforming
Total
2014
Performing
Nonperforming
Total
Modifications:
Commercial
Commercial and
multi-family real
estate
Residential 1-4
family
Consumer
19,539,579 $
140,369
19,679,948 $
52,249,417 $
831,681
53,081,098 $
77,484,430 $
388,584
77,873,014 $
3,852,469
4,824
3,857,293
Commercial
Commercial and
multi-family real
estate
Residential 1-4
family
Consumer
8,166,789 $
25,019
8,191,808 $
19,307,124 $
1,172,010
20,479,134 $
78,045,118 $
2,211,895
80,257,013 $
4,788,985
9,832
4,798,817
$
$
$
$
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.
41
The following table includes the recorded investment and number of modifications for TDR loans and leases during the years ended December 31,
2015 and December 31, 2014
2015
Residential Real Estate
Commercial Real Estate
Total
2014
Commercial Real Estate
Number of modifications Recorded investment
Allowance for loan and
lease losses allocated
8
8
16
1
$
$
$
245,016 $
416,403
661,419 $
-
-
1,967,706 $
606,179
The concessions granted during 2015 included the following: the bank extended the current due dates and payments on seven loans, extended the
maturity and re-amortized the payments on two loans, re-amortized the payments on five loans, granted an interest only period on one loan and
converted a line of credit to a term loan on one loan. In 2014, the concession granted which resulted in the TDR was the Bank agreed to extend an
interest only period to the borrower.
The following is additional information with respect to loans and leases acquired with The Ohio State Bank acquisition as of December 31, 2015 and
December 31, 2014:
Purchased Performing Loans and Leases
Balance at December 31, 2014
Accretion of loan discounts
Transfer to foreclosed real estate
Change due to loan charge-off
Balance at December 31, 2015
Purchased Impaired Loans and Leases
Balance at December 31, 2014
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Balance at December 31, 2015
Contractual
Principal
Receivable
Accretable
Difference
Carrying
Amount
58,436,586 $
(16,555,787)
-
(7,120)
41,873,679 $
(3,143,613) $
1,332,920
-
1,225
(1,809,468) $
55,292,973
(15,222,867)
-
(5,895)
40,064,211
Contractual
Principal
Receivable
Non
Accretable
Difference
Carrying
Amount
2,688,709 $
(367,624)
(213,675)
(147,983)
1,959,427 $
(1,788,138) $
241,261
207,043
145,650
(1,194,184) $
900,571
(126,363)
(6,632)
(2,333)
765,243
$
$
$
$
As a result of The Ohio State Bank acquisition, 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 as of December 31, 2015, December 31, 2014 as well as the date of acquisition, November 14, 2014 was $765,243, $900,571 and
$958,744, respectively.
42
No provision for loan and lease losses was recognized during the year ended December 31, 2015 related to the acquired loans as there was no
significant change to the valuation of loans acquired from the date of acquisition of November 14, 2014 to December 31, 2015.
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 $63,285, $34,391, and $45,480 at December 31,
2015, 2014, and 2013, respectively. The following is a summary of activity during 2015, 2014, and 2013 for such loans:
Beginning of year
Additions
Repayments
End of year
2015
2014
2013
$
$
34,391 $
160,000
(131,106)
63,285 $
45,480 $
4,045
(15,134)
34,391 $
989,194
-
(943,714)
45,480
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, 2015 and 2014:
Land and improvements
Buildings
Equipment
Less accumulated depreciation
Premises and equipment, net
2015
2014
$
$
3,401,312 $
11,652,345
4,244,864
19,298,521
7,249,841
12,048,680 $
3,401,312
11,587,176
4,295,575
19,284,063
6,898,507
12,385,556
Depreciation expense amounted to $599,471 in 2015, $450,729 in 2014, and $447,326 in 2013.
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 approximated $173,464,000 and $171,255,000 at December 31, 2015 and 2014, 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, 2015 and 2014 include:
Prepayment assumptions:
Internal rate of return:
Servicing costs:
Inflation rate of servicing costs:
Earnings rate:
Based on the PSA Standard Prepayment Model
9% to 11%
$50 – $65 per loan, annually, increased at the rate of $1 per 1% delinquency based on loan count
3%
0.25% in 2015 and 2014
43
Following is a summary of mortgage servicing rights activity for the years ended December 31, 2015, 2014 and 2013:
Fair value at beginning of year
Capitalized servicing rights – new loan sales
Disposals (amortization based on loan payments and payoffs)
Change in fair value
Fair value at end of year
2015
2014
2013
$
$
1,217,931 $
252,288
(551,846)
263,114
1,181,487 $
1,398,396 $
134,324
(167,739)
(147,050)
1,217,931 $
930,760
312,751
(160,873)
315,758
1,398,396
The change in fair value of servicing rights for the year ended December 31, 2015 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, 2015 was 170 compared to 195 at December 31, 2014 and 164 at December 31, 2013. The
earnings rate used in determining the fair value of servicing at December 31, 2015 was 0.25% and was 0.25% in 2014 and 2013 as well.
NOTE 8 - DEPOSITS
Time deposits at December 31, 2015 and 2014 include individual deposits greater than $250,000 approximating $3,392,941 and $3,046,208,
respectively. Interest expense on time deposits greater than $250,000 approximated $22,912 for 2015, and $37,123 for 2014.
At December 31, 2015, time deposits approximated $148,485,689 and were scheduled to mature as follows: 2016, $73,559,404; 2017, $49,891,270; 2018,
$7,724,583; 2019, $5,184,146; 2020, $11,702,146; and thereafter, $424,140.
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 $3,704,947, and $4,616,970 at December 31, 2015, and 2014, respectively.
Overdrafted deposit accounts reclassified as loans amounted to $63,654 and $126,804 at December 31, 2015 and 2014, respectively.
NOTE 9 – OTHER BORROWINGS
Other borrowings consists of the following at December 31, 2015 (none at December 31, 2014):
Federal Home Loan Bank borrowings:
Secured note, with interest at .45%, due March 25, 2016
Secured note, with interest at .45%, due March 28, 2016
Total other borrowings
2015
2014
$
645,000 $
1,473,000
$
2,118,000 $
-
-
-
Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $71,817,093 at
December 31, 2015. The interest rate on the advance outstanding at December 31, 2015, secured by individual mortgages under blanket agreement
was 0.45%, with maturity in March 2016. At December 31, 2015, the Corporation had $76,510,327 of borrowing availability under various line-of-
credit agreements with the Federal Home Loan Bank and other financial institutions.
44
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. The interest rate of the debentures was fixed at 6.40% for a five-year period through March 26, 2008. Effective March 27, 2008,
interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR amounting to 3.57% at December 31, 2015
and 3.40% at December 31, 2014 and 2013, 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 Ohio State Bank acquisition. $3,000,000 of the liability is guaranteed by
the Corporation, and the remaining $93,000 is secured by an investment in the trust preferred securities. The trust preferred securities have a
carrying value of $2,472,401 at December 31, 2015 and $2,438,549 at December 31, 2014. The difference between the principal owed and the carrying
value is due to the below-market interest rate on the debentures. The debentures have a stated maturity date of April 23, 2034. Interest is at a
floating rate adjustable quarterly and equal to 285 basis points over the 3-month LIBOR amounting to 3.27% at December 31, 2015. The effective
cost of the debentures was 6.61% at December 31, 2015.
Interest expense on the debentures amounted to $446,000, in 2015, $355,000 in 2014, and $353,000 in 2013, 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, 2015, 2014 and 2013:
Data processing
Professional fees
Franchise tax
Advertising
ATM processing and other fees
Amortization of core deposit intangible asset
Postage
Stationery and supplies
FDIC assessment
Loan closing fees
Other real estate owned
Deposit losses (recoveries), net
Prepayment penalty on borrowings
Other
Total other operating expenses
2015
2014
2013
$
$
1,052,995 $
906,921
453,278
483,885
437,676
137,327
42,772
99,440
358,132
190,544
354,337
35,448
-
1,715,281
6,268,036 $
699,942 $
1,053,907
436,530
404,558
448,250
56,935
100,241
172,303
330,479
233,068
273,243
(19,928)
528,750
1,657,150
6,375,428 $
434,175
692,375
436,955
462,758
446,017
40,857
165,439
177,947
379,587
174,564
250,632
28,720
984,566
1,557,286
6,231,878
45
NOTE 12 - INCOME TAXES
The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 consist of the following:
Current
Deferred
Total provision for income taxes
2015
2014
2013
$
$
545,900 $
859,100
1,405,000 $
784,500 $
298,500
1,083,000 $
208,000
1,032,000
1,240,000
The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of
34% to income before income taxes as a result of the following:
Expected tax using statutory tax rate of 34%
Increase (decrease) in tax resulting from:
2015
2014
2013
$
2,489,400 $
1,834,100 $
1,999,600
Tax-exempt income on state and municipal securities and political subdivision loans
Tax-exempt income on life insurance contracts
Deductible dividends paid to United Bancshares, Inc. ESOP
Uncertain tax position reserves
Merger and acquisition costs
Accounting method change relating to bad debt reserve recapture
Other, net
(577,200)
(145,200)
(39,300)
(24,700)
-
(331,500)
33,500
(574,200)
(134,900)
(39,600)
(29,800)
52,800
-
(25,400)
(630,600)
(140,100)
(23,700)
7,600
-
-
27,200
Total provision for income taxes
$
1,405,000 $
1,083,000 $
1,240,000
The deferred income tax expense of $859,100 in 2015, $298,500 in 2014, and $1,032,000 in 2013 resulted from the tax effects of temporary differences.
There was no impact for changes in tax rates or changes in the valuation allowance for deferred tax assets; however, there was a one-time tax benefit
of $331,000 recognized in 2015 due to I.R.S. Revenue Procedures 2015-13 and 2015-14 released in January 2015.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31,
2015 and 2014 are presented below:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Alternative minimum tax credits
Nonaccrual loan interest
Deferred loan fees
Other real estate owned
Accrued vacation expense
Accrued profit sharing
Loans fair value adjustments
Other
Net operating loss carryforward
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities available-for- sale
Federal Home Loan Bank stock dividends
Capitalized mortgage servicing rights
Prepaid expenses
Acquisition intangibles
Bad debt reserve recapture
Trust preferred fair value adjustment
Other
Total deferred tax liabilities
Net deferred tax assets
46
2015
2014
1,318,900 $
534,300
792,700
320,600
143,500
318,600
130,600
160,300
919,400
53,400
750,700
1,318,700
560,600
657,300
408,600
154,400
367,500
126,500
117,300
1,534,800
209,800
852,200
5,443,000
6,307,700
719,700
849,200
401,700
87,600
2,470,600
-
211,000
20,500
4,760,300
682,700 $
727,500
769,600
414,100
55,800
2,230,300
298,400
222,500
55,500
4,773,700
1,534,000
$
$
Net deferred tax assets at December 31, 2015 and 2014 are included in other assets in the consolidated balance sheets. At December 31, 2015, the
Corporation had $792,700 of federal alternative minimum tax credits with an indefinite life.
The Corporation acquired over $15 million in federal loss carryforwards with the acquisition of The Ohio State Bank, which losses expire in years
ranging from 2026 to 2033. Use of these losses is limited to $126,000 per year under Section 382 of the Internal Revenue Code; therefore
Management has recorded in deferred tax assets the tax benefit of only $2.5 million of the losses that are more likely than not to be utilized before
expiration. There are no other acquired OSB tax losses that will be limited by Section 382. The benefit of $2.2 million of these losses is reflected in
deferred tax assets at December 31, 2015.
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, 2015 and 2014.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Additions based on tax positions related to the current year
Reductions due to the statute of limitation
Balance at December 31
2015
2014
43,300 $
-
(22,900)
20,400 $
72,100
3,200
(32,000)
43,300
$
$
The Corporation had unrecognized tax benefits of $20,400, and $43,300 at December 31, 2015 and 2014, respectively. Such unrecognized tax benefits,
if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of
unrecognized tax benefits to significantly change in the next twelve months.
The amount of accrued interest, net of federal tax, related to the Corporation’s uncertain tax positions was $1,700 at December 31, 2015 and $3,500 at
December 31, 2014, respectively.
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 2012. There are no current federal examinations of the Corporation’s open tax years.
47
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 $617,405, $542,160, and $530,989, in 2015, 2014, and 2013, respectively. At December 31,
2015, the Plan owned 323,323 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 $1,571,377 and $1,648,770 at December 31, 2015 and 2014, 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 to fund other employee benefit plans. The combined cash values of these policies aggregated
$16,138,484 and $15,738,797 at December 31, 2015 and 2014, 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 715
shares in 2015, 684 shares in 2014, and 746 shares in 2013 under the plan.
The Chief Executive Officer of the Corporation has an employment agreement which provides 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, 2015 and 2014:
Commitments to extend credit
Letters of credit
Contract amount
2015
84,069,000 $
325,000 $
2014
91,861,000
1,060,000
$
$
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.
48
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. Of the total letters of credit outstanding at December 31, 2015, $295,000 expires in 2016 with the remaining $30,000
expiring in 2017. 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 in the regulations and effective
January 1, 2015), total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 2015 and 2014, 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, 2015, 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.
In February of 2015, the Board of Governors of the Federal Reserve System adopted final amendments to the Small Bank Holding Company Policy
Statement (Regulation Y, Appendix C) (the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to
qualify for the Policy Statement. The Company qualifies for treatment under the Policy Statement and is no longer subject to consolidated capital
rules.
49
The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2015 and 2014 are presented in the following table:
As of December 31, 2015
Common Equity Tier 1 Capital
(CET1) (to Risk Weighted Assets) *
Consolidated
Bank
Total Capital (to Risk Weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Risk weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Average Assets)
Consolidated
Bank
As of December 31, 2014
Total Capital (to Risk Weighted Assets )
Consolidated
Bank
Tier 1 Capital (to Risk Weighted Assets )
Consolidated
Bank
Tier 1 Capital (to Average Assets)
Consolidated
Bank
* CET1 is effective as of January 1, 2015
Actual
Minimum
capital
requirement
Minimum to be
well capitalized
under prompt
corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
16.3% $
15.9% $
19,951
19,905
≥4.5%
≥4.5% $
N/A
28,751
17.0% $
16.8% $
35,469
35,386
≥8.0%
≥8.0% $
N/A
44,233
16.3% $
15.9% $
26,602
26,540
≥6.0%
≥6.0%
N/A
35,386
11.7% $
11.8% $
24,704
23,978
≥4.0%
≥4.0% $
N/A
29,972
15.8% $
15.5% $
36,307
36,191
≥8.0%
≥8.0% $
N/A
45,239
15.0% $
14.7% $
18,154
18,096
≥4.0%
≥4.0%
N/A
27,143
11.0% $
10.7% $
24,624
24,735
≥4.0%
≥4.0% $
N/A
30,919
N/A
6.5%
N/A
10.0%
N/A
8.0%
N/A
5.0%
N/A
10.0%
N/A
6.0%
N/A
5.0%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
72,202
70,428
75,517
74,307
72,202
70,428
72,202
70,428
71,742
70,319
67,863
66,440
67,863
66,440
50
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, 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, 2015 and 2014 and for each of the three years in the
period ended December 31, 2015, 2014 and 2013 is as follows:
Condensed Balance Sheets
Assets:
Cash
Investment in bank subsidiary
Premises and equipment, net of accumulated depreciation
Other assets, including income taxes receivable from bank subsidiary of $804,962 and $632,480 in 2015 and
$
2015
2014
334,272 $
82,564,196
266,774
118,632
79,085,666
292,396
2014, respectfully.
Total assets
Liabilities:
Accrued expenses
Federal income taxes payable
Junior subordinated deferrable interest debentures
Total liabilities
Shareholders’ equity:
Common stock
Surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost
Total shareholders’ equity
1,238,591
84,403,833 $
1,185,649
80,682,343
$
70,255 $
-
12,772,401
54,968
116,548
12,738,550
12,842,656
12,910,066
3,760,557
14,669,087
58,641,837
1,397,130
(6,907,434)
3,760,557
14,665,845
53,925,768
1,412,115
(5,992,008)
71,561,177
67,772,277
Total liabilities and shareholders’ equity
$
84,403,833 $
80,682,343
Income – including dividends from bank subsidiary
Expenses – interest expense, professional fees and other expenses, net of federal income
$
Condensed Statements of Income
2015
2014
2013
3,000,104 $
3,200,105 $
975,356
tax benefit
Income before equity in undistributed net income of bank subsidiary
Equity in undistributed net income of bank subsidiaries
Net income
(576,734)
2,423,370
3,493,515
5,916,885 $
(587,451)
2,612,654
1,698,844
4,311,498 $
(523,271)
452,085
4,189,119
4,641,204
$
51
Condensed Statements of Cash Flows
2015
2014
2013
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of bank subsidiary
Depreciation and amortization
Discount accretion on junior subordinated deferrable interest debentures
(Increase) in other assets
Increase (decrease) in other liabilities, including accrued expenses
Net cash provided by operating activities
$
5,916,885 $
4,311,498 $
4,641,204
(3,493,515)
25,622
33,851
(52,942)
(101,261)
2,328,640
(1,698,844)
25,622
-
(4,412)
(70,785)
2,563,079
(4,189,119)
25,622
-
(665,429)
201,086
13,364
Cash flows from investing activities:
Payment for acquisition
Net cash used in investing activities investing activities operating activities
-
-
(1,197,237)
(1,197,237)
-
-
Cash flows from financing activities:
Purchase treasury stock
Proceeds from sale of treasury shares
Cash dividends paid
Net cash used by financing activities
Net increase (decrease) in cash
Cash at beginning of the year
Cash at end of the year
(926,328)
14,143
(1,200,815)
(2,113,000)
215,640
118,632
334,272 $
(1,136,430)
12,443
(1,193,419)
(2,317,406)
(951,564)
1,070,196
118,632 $
(72,200)
13,604
(689,380)
(747,976)
(734,612)
1,804,808
1,070,196
$
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 59,111 shares
in 2015, 75,000 shares in 2014 and 5,000 shares in 2013 under the program.
52
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.
53
The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2015 and 2014,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
2015
Recurring:
Securities available-for-sale:
U.S. Government and Agencies
Obligations of state and political subdivisions
Mortgage-backed
Other
Mortgage servicing rights
Total recurring
Nonrecurring:
Impaired loans, net
Other real estate owned
Total nonrecurring
2014
Recurring:
Securities available-for-sale:
U.S. Government and Agencies
Obligations of state and political subdivisions
Mortgage-backed
Other
Mortgage servicing rights
Total recurring
Nonrecurring:
Impaired loans, net
Other real estate owned
Total nonrecurring
Level 1 inputs
Level 2 inputs
Level 3 inputs
Total fair value
- $
-
-
999,455
-
3,966,390 $
71,093,028
104,479,413
1,888
-
- $
2,388,864
-
-
1,181,487
3,966,390
73,481,892
104,479,413
1,001,343
1,181,487
999,455 $
179,540,719 $
3,570,351 $
184,110,525
- $
-
- $
- $
-
- $
4,641,469 $
173,047
4,641,469
173,047
4,814,516 $
4,814,516
Level 1 inputs
Level 2 inputs
Level 3 inputs
Total fair value
- $
-
-
1,005,055
-
9,537,052 $
55,562,707
137,818,544
1,888
-
- $
2,535,817
-
-
1,217,931
9,537,052
58,098,524
137,818,544
1,006,943
1,217,931
1,005,055 $
202,920,191 $
3,753,748 $
207,678,994
- $
-
- $
- $
-
- $
2,874,499 $
535,999
2,874,499
535,999
3,410,498 $
3,410,498
$
$
$
$
$
$
$
$
There was one security measured at fair value included in the Level 3 hierarchy during 2015 and 2014 due to the lack of observable quotes in
inactive markets for the instrument. This security moved from Level 2 to Level 3 during 2013.
54
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, 2015, 2014 and 2013:
Mortgage Servicing Rights
Balance at beginning of year
Gains or losses, including realized and unrealized:
Purchases, issuances, and settlements
Disposals – amortization based on loan payments and payoffs
Changes in fair value
Balance at end of year
Securities valued using Level 3 inputs
Balance at beginning of year
Principal payments received
Changes in fair value
Balance at end of year
2015
2014
2013
$
1,217,931 $
1,398,396 $
930,760
252,288
(551,846)
263,114
1,181,487 $
134,324
(167,739)
(147,050)
1,217,931 $
312,751
(160,873)
315,758
1,398,396
2,535,817 $
(145,158)
(1,795)
2,388,864 $
2,673,424
(139,400)
1,793
2,535,817
$
$
$
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 9% and 11%, 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.
55
Impaired Loans
The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is
reported at the fair value of the underlying collateral less estimated cost to sell, if repayment is expected solely from collateral. Collateral values are
estimated using level 2 inputs, including recent appraisals and level 3 inputs based on customized discounting criteria such as additional appraisal
adjustments to consider deterioration of value subsequent to appraisal date and estimated cost to sell. Additional appraisal adjustments range
between 15% and 35% of appraised value, and estimated selling cost ranges between 10% and 20% of the adjusted appraised value. Due to the
significance of the level 3 inputs, impaired loans fair values have been classified as level 3.
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 20% of adjusted appraised value. Such values are estimated primarily using
appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.
Certain 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, 2015.
56
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2015 and 2014 are as follows:
2015
Carrying
Amount
Estimated
Value
Carrying
Amount
(dollars in thousands)
2014
Estimated
Value
Input
Level
FINANCIAL ASSETS
Cash and cash equivalents
Securities, including Federal Home Loan Bank
stock
Certificates of deposit
Loans held for sale
Net loans
Mortgage servicing rights
FINANCIAL LIABILITIES
Deposits
Maturity
Non-maturity
Other borrowings
Junior subordinated deferrable interest
debentures
1
2
2
3
3
3
$
22,922 $
22,922 $
32,355 $
32,355
187,759
1,992
347
350,416
1,181
564,617 $
2015
187,759
1,992
347
350,374
1,181
564,575 $
211,291
2,490
229
357,098
1,218
604,681 $
2014
211,291
2,490
229
357,066
1,218
604,649
Carrying
Amount
Estimated
Value
Carrying
Amount
(dollars in thousands)
Estimated
Value
Input
Level
148,486 $
369,934
2,118
12,772
533,310 $
147,164 $
369,934
2,118
8,265
527,481 $
174,929 $
390,516
-
12,739
578,184 $
174,263
390,516
-
12,627
577,406
3
1
3
3
$
$
$
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, 2015 and 2014 which relate to commitments to extend credit and letters of credit.
The contract amount of such financial instruments amounts to $84,394,000 at December 31, 2015 and $92,921,000 at December 31, 2014. 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.
57
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 had one security that was classified as Level 3 at December 31, 2015 and 2014.
Certificates of deposit:
Carrying value of certificates of deposit estimates fair value.
Loans and leases:
Fair value for loans and leases was estimated for portfolios of loans and leases with similar financial characteristics. For adjustable rate loans, which
re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For
fixed rate loans the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio,
adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated
discounted cash flows.
Mortgage servicing rights:
The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on
demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at 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.
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.
58
NOTE 19 – LEASING ARRANGEMENTS
The Corporation acquired a branch that is operated from a facility that is leased under a twenty-year cancelable operating lease expiring in June
2016. There is an option to renew the lease for two successive periods of five years each, but otherwise on the same terms.
The following is a schedule of future minimum rental payments required under the above operating lease as of December 31, 2015:
Year ending December 31
2016
NOTE 20 - CONTINGENT LIABILITIES
Amount
$
22,500
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 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of selected unaudited quarterly financial data for 2015 and 2014:
2015
First quarter
Second quarter
Third quarter
Fourth quarter
2014
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net
Net
Interest
Income
Basic
Income
(Dollars in thousands, except per share data)
Net Income
Per Share
Diluted
$
$
$
$
$
$
$
$
5,710 $
5,670 $
5,755 $
5,701 $
4,859 $
4,814 $
4,799 $
5,148 $
59
5,056 $
5,143 $
5,259 $
4,919 $
4,188 $
4,013 $
4,144 $
5,037 $
1,122 $
1,903 $
1,503 $
1,389 $
901 $
1,325 $
1,038 $
1,047 $
0.333 $
0.569 $
0.451 $
0.419 $
0.262 $
0.387 $
0.306 $
0.311 $
0.333
0.569
0.451
0.419
0.262
0.387
0.306
0.311
UNITED BANCSHARES, INC.
Columbus Grove, Ohio
DIRECTORS – UNITED BANCSHARES, INC.
DIRECTOR
SINCE
2003
NAME
Daniel W. Schutt
Vice Chairman, Retired Banker
AGE
68
DIRECTOR
SINCE
2005
R. Steven Unverferth
President, Unverferth Manufacturing Corporation, Inc.
63
2005
Brian D. Young
President/CEO
49
2012
2000
2000
2001
NAME
Robert L. Benroth
Putnam County Auditor
James N. Reynolds
Chairman, Retired Banker
H. Edward Rigel
Farmer, Rigel Farms, Inc.
AGE
53
78
73
David P. Roach
Vice-President/GM, First Family Broadcasting of Ohio
65
DIRECTORS – THE UNION BANK COMPANY
AGE
NAME
Robert L. Benroth
Putnam County Auditor
Herbert H. Huffman
Retired – Educator
Kevin L. Lammon
Village Administrator, Village of Leipsic
William R. Perry
Farmer
James N. Reynolds
Retired Banker
H. Edward Rigel
Farmer, Rigel Farms, Inc.
DIRECTOR
SINCE (a)
2001
1993
1996
1990
1966
1979
53
65
61
57
78
73
NAME
David P. Roach
Vice-President/GM, First Family Broadcasting of Ohio
AGE
65
DIRECTOR
SINCE (a)
1997
Robert M. Schulte, Sr.
Businessman/Spherion Services
Daniel W. Schutt
Retired Banker
83
68
R. Steven Unverferth
President, Unverferth Manufacturing Corporation, Inc.
63
1994
2005
1993
Brian D. Young
President/CEO/Chairman
49
2008
(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.
60
OFFICERS – UNITED BANCSHARES, INC.
James N. Reynolds – Chairman
Daniel W. Schutt – Vice Chairman
Heather M. Oatman – Secretary
Brian D. Young – President / Chief Executive Officer
Anthony M.V. Eramo – Chief Financial Officer
OFFICERS – THE UNION BANK COMPANY
Brian D. Young – President/CEO/Chairman
Curtis E. Shepherd – Executive Vice President
Teresa M. Deitering
Anthony M.V. Eramo
John P. Miller
Senior Vice President
Senior Vice President, CFO
Senior Vice President
Heather M. Oatman
Norman V. Schnipke
Senior Vice President, Sec.
Senior Vice President
Janice C. Acerro
Dan M. Best
Donna J. Brown
Paul M. Cira
Vicky K. Gilbert
Erin W. Hardesty
Max E. Long
Karen M. Maag
Kathi J. Amstutz
Nancianne Carroll
Elizabeth J. Cooper
David M. Cornwell
Chase H. Doll
Adina S. Fugate
Deborah A. Gaines
Teresa J. Hawkey
Christina J. Hegemier
Machiel K. Hindall
Susan A. Hojnacki
Sarah E. Klausing
Daniel J. Lucke
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Doris A. Neumeier
Brent D. Nussbaum
C. Christopher Ramsey
Amy E. Reese
David E. Stuthard
J. Kevin Taylor
Jason R. Thornell
Paul A. Walker
Matthew K. McCracken
Bart H. Mills
Ellen M. Neiling
Peter J. Rafaniello
Jason A. Recker
Craig R. Stechschulte
Theresa A. Stein-Moenter
Stacia R. Thompson
Matthew J. Tway
Kimberly S. Verhoff
Vikki L. Williams
Pamela J. Workman
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Mary Jo Horstman
Assistant Controller, Officer
Zachary P. Nycz
Trainer, Officer
(Back To Top)
Section 3: EX-21 (EXHIBIT 21)
61
Exhibit 21
United Bancshares, Inc. Subsidiaries
The Union Bank Company
Ohio banking corporation
Columbus Grove, Ohio
United (OH) Statutory Trust I
Connecticut statutory trust
Columbus Grove, Ohio
Ohio State Bancshares Capital Trust 1
Delaware statutory trust
Acquired thru The Ohio State Bank acquisition
Columbus Grove, OH
UBC Investments, Inc. – a wholly-owned subsidiary of The Union Bank Company
Delaware corporation
Wilmington, Delaware
UBC Property, Inc. – a wholly-owned subsidiary of The Union Bank Company
Ohio corporation
Columbus Grove, Ohio
(Back To Top)
Section 4: EX-23 (EXHIBIT 23)
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
United Bancshares, Inc.
We consent to the incorporation by reference in the Registration Statement (No. 333-106929) on Form S-8 of United Bancshares, Inc. of our report
dated March 9, 2016, relating to the consolidated balance sheets of United Bancshares, Inc. and subsidiaries as of December 31, 2015 and 2014 and
the related consolidated statements of income, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-
year period ended December 31, 2015, which report appears in the December 31, 2015 Annual Report on Form 10-K of United Bancshares, Inc.
/s/ CliftonLarsonAllen LLP
Toledo, Ohio
March 9, 2016
(Back To Top)
Section 5: EX-31.1 (EXHIBIT 31.1)
Exhibit 31.1
CERTIFICATION - CEO
In connection with the Annual Report of United Bancshares, Inc. on Form 10-K for the year ended December 31, 2015, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, President and Chief Executive Officer of United Bancshares, Inc.,
certify, that:
(1) I have reviewed this Annual Report on Form 10-K of United Bancshares, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f),
for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ BRIAN D. YOUNG
Brian D. Young
President and Chief Executive Officer
March 9, 2016
(Back To Top)
Section 6: EX-31.2 (EXHIBIT 31.2)
Exhibit 31.2
CERTIFICATION - CFO
In connection with the Annual Report of United Bancshares, Inc. on Form 10-K for the year ended December 31, 2015, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Anthony M.V. Eramo, Chief Financial Officer of United Bancshares, Inc., certify,
that:
(1) I have reviewed this Annual Report on Form 10-K of United Bancshares, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f),
for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ Anthony M.V. Eramo
Anthony M.V. Eramo
Chief Financial Officer
March 9, 2016
(Back To Top)
Section 7: EX-32.1 (EXHIBIT 32.1)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Bancshares, Inc. (the "Corporation") on Form 10-K for the year ended December 31, 2015, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, Chief Executive Officer, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Corporation.
/s/ BRIAN D. YOUNG
Brian D. Young
Chief Executive Officer
Date: March 9, 2016
*This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section
1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or
otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
(Back To Top)
Section 8: EX-32.2 (EXHIBIT 32.2)
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Bancshares, Inc. (the "Corporation") on Form 10-K for the year ended December 31, 2015, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony M.V. Eramo, Chief Financial Officer, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Corporation.
/s/ Anthony M.V. Eramo
Anthony M.V. Eramo
Chief Financial Officer
Date: March 9, 2016
*This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section
1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or
otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
(Back To Top)
Section 9: EX-99 (EXHIBIT 99)
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Exhibit 99
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the
statement. United Bancshares, Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated
by reference in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, is forward-looking. In some cases,
information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from
any such forward-looking statement appears together with such statement. In addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but not limited to, the following:
Interest Rate Risk
The Corporation’s operating results are dependent to a significant degree on its net interest income, which is the difference between interest income
from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The
interest income and interest expense of the Corporation change as the interest rates on interest-earning assets and interest-bearing liabilities
change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond
the Corporation's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of
loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect the Corporation's income.
Possible Inadequacy of the Allowance for Loan Losses
The Corporation maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of
non-performing assets and classified loans, current economic conditions in the primary lending area, past loss experience, possible losses arising
from specific problem loans and changes in the composition of the loan portfolio. While the Board of Directors of the Corporation believes that it
uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments,
and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final
determination.
Loans not secured by one-to-four family residential real estate are generally considered to involve greater risk of loss than loans secured by one- to
four-family residential real estate due, in part, to the effects of general economic conditions. The repayment of multifamily residential, nonresidential
real estate and commercial loans generally depends upon the cash flow from the operation of the property or business, which may be negatively
affected by national and local economic conditions. Construction loans may also be negatively affected by such economic conditions, particularly
loans made to developers who do not have a buyer for a property before the loan is made. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans. In addition, the collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
Competition
The Corporation competes for deposits with other savings associations, commercial banks and credit unions and issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies, credit
unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The size of
financial institutions competing with the Corporation is likely to increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the
Corporation.
Legislation and Regulation that may Adversely Affect the Corporation's Earnings
The Corporation is subject to extensive regulation by the State of Ohio, Division of Financial Institutions (the “ODFI”), the Federal Reserve Bank
(the “FED”), and the Federal Deposit Insurance Corporation (the "FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. Such supervision and regulation of the Corporation and the bank are intended primarily for the
protection of depositors and not for the maximization of shareholder value and may affect the ability of the company to engage in various business
activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may
have an adverse effect on the Corporation's net earnings.
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