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, 2016
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 (cid:133) No (cid:95)
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 (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
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 (cid:95) No (cid:133)
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. (cid:133)
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 (cid:133) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller Reporting Company (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes (cid:133) No (cid:95)
The aggregate market value of the voting stock held by non-affiliates of the registrant was $55,655,207, based upon the last sales price as quoted on the
NASDAQ Global Market as of June 30, 2016.
The number of shares of Common Stock, no par value outstanding as of January 31, 2017: 3,266,877
Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2016 are incorporated by reference into Part II. Portions of the
Corporation’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held on April 26, 2017 are incorporated by reference into
Part III.
DOCUMENTS INCORPORATED BY REFERENCE
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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.
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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)
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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 $633.1 million at December 31, 2016. 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, 2016, UBOH and its subsidiary
(collectively the “Corporation”) employed approximately 155 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 “ODFI”), 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 Investor Relations 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.
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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 2016, 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 2017, 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 ODFI 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.
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As a member of the Federal Home Loan Bank, 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.
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, 2016, 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 (“OSB”) acquisition, as described in Note 10 of 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.
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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.” 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 a tier 1 leverage ratio of at least 5%. As of
December 31, 2016, Union Bank has total risk-based capital of 16.6%, tier 1 risk-based capital and CET 1 capital of 15.9%, and tier 1 leverage of 12.0%. 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.
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 will be fully phased in
by January 1, 2019. While UBOH and Union Bank currently meet all regulatory capital requirements, the ultimate impact upon the financial condition or results
of operations cannot be predicted until 2019 when the rules become fully-phased in.
Federal banking law and regulations impose limitations on the payment of dividends by our bank subsidiary, 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 of the consolidated financial statements contained in the Corporation’s
Annual 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 institutions
Upon 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.
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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
Federal regulators continue to implement provisions of the Dodd-Frank Act. The Dodd-Frank Act created many new restrictions and an expanded framework of
regulatory oversight for financial institutions, including depository institutions. Currently, federal regulators are still in the process of drafting the implementing
regulations for some portions of the Dodd-Frank Act. The Corporation is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued
compliance with these regulatory requirements. The following discussion summarizes significant aspects of the Dodd-Frank Act that are already affecting or may
affect UBOH and Union Bank:
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the Consumer Financial Protection Bureau has been established and empowered to exercise broad regulatory, supervisory and enforcement authority
with respect to both new and existing consumer financial protection laws;
the deposit insurance assessment base for federal deposit insurance has been expanded from domestic deposits to average assets minus average tangible
equity;
the prohibition on the payment of interest on commercial demand deposits has been repealed;
the standard maximum amount of deposit insurance per customer has been permanently increased to $250,000;
new corporate governance requirements require new compensation practices, including, but not limited to, providing shareholders the opportunity to cast
a non-binding vote on executive compensation, requiring compensation committees to consider the independence of compensation advisors and meeting
new executive compensation disclosure requirements;
the Federal Reserve Board has established rules regarding interchange fees charged for electronic debit transactions by payment card issuers having
assets over $10 billion. Although the cap is not applicable to Union Bank, it may have an adverse effect on Union Bank as the debit cards issued by
Union Bank and other smaller banks, which have higher interchange fees, may become less competitive;
“ability to repay” regulations generally require creditors to make a reasonable, good faith determination (considering at least 8 specified underwriting
factors) of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan,
reverse mortgage or temporary loan) and provides a presumption that the creditor making a “qualified mortgage” satisfied the ability-to-repay
requirements; and
the authority of the Federal Reserve Board to examine financial holding companies and their non-bank subsidiaries was expanded.
Some aspects of the Dodd-Frank Act are still subject to rulemaking and will take effect in the coming years, making it difficult to anticipate the full financial
impact on the Corporation, their respective customers or the financial services industry more generally. However, the implementation of certain provisions have
already increased compliance costs and the implementation of future provisions will most likely further increase both compliance costs and fees paid to
regulators, along with possibly restricting the operations of the Corporation.
The Bank Secrecy Act (BSA)
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.
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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 2016 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
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)
2016
2015
(in thousands)
2014
$
$
$
$
121,442
70,371
11,042
361,437
564,292
9,081
11,929
32,984
(3,598)
$
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)
614,688
$
628,753
$
589,710
$
285,729
140,562
12,791
4,525
443,607
92,811
4,203
74,067
$
283,904
159,635
12,755
9,739
466,033
87,820
4,919
69,981
251,825
164,461
10,620
11,601
438,507
81,938
4,396
64,869
$
614,688
$
628,753
$
589,710
(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
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
2016
Average
Balance
Interest
Average
Rate
(dollars in thousands)
$
$
$
$
121,442
70,371
361,437
11,042
564,292
285,729
140,562
12,791
4,525
443,607
2,202
2,479
17,457
332
22,470
578
1,109
495
49
2,231
$
20,239
1.81%
3.52%
4.83%
3.01%
3.98%
0.20%
0.79%
3.87%
1.08%
0.50%
3.59%
(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 $971,073.
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
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
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
$
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 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 $705,810.
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)
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
Net interest income, tax equivalent basis
Net interest income as a percent of average interest-earning assets
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
$
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 and loans held for sale.
Interest income on loans includes fees of $700,578.
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.
(cid:120) 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
Total
Variance
2016/2015
Variance Attributable To
Rate
Volume
(in thousands)
$
(347) $
(326) $
(75)
(866)
53
(1,235)
243
(136)
49
(3)
153
75
156
(7)
(102)
2
(150)
1
(37)
(184)
(21)
(150)
(1,022)
60
(1,133)
241
14
48
34
337
$
(1,388) $
82
$
(1,470)
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
Total
Variance
2015/2014
Variance Attributable To
Rate
Volume
(in thousands)
$
(302) $
(18) $
1
3,356
165
3,220
31
(420)
90
(291)
(590)
283
2,422
(115)
2,572
38
(48)
74
(48)
16
(284)
(282)
934
280
648
(7)
(372)
16
(243)
(606)
$
3,810
$
2,556
$
1,254
16
II.
A.
INVESTMENT PORTFOLIO
The carrying amounts of securities available-for-sale as of December 31 are summarized as follows:
U.S. Government agency securities
Obligations of states and political subdivisions
Mortgage-backed securities
Other
2016
2015
(in thousands)
2014
$
$
-
70,624
118,595
986
190,205
$
$
3,966
73,482
104,480
1,001
182,929
$
$
9,537
58,098
137,819
1,007
206,461
The above excludes restricted bank stock amounting to $4,830,000 in 2016, 2015 and 2014.
B.
The maturity distribution and weighted average yield of securities available-for-sale at December 31, 2016 are as follows (1):
Obligations of states and political subdivisions
Mortgage-backed securities (2)
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
$
$
2,324
-
2,324
$
$
16,301
327
16,628
$
$
36,554
15,468
52,022
$
$
16,831
101,414
118,245
2.86%
-
2.86%
Weighted Average Yield
2.84%
5.25%
2.89%
2.65%
3.08%
2.78%
3.15%
2.59%
2.67%
(1)
(2)
Table excludes restricted bank stock and $986,000 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, 2016.
17
III.
A.
LOAN AND LEASE PORTFOLIO
Types of Loans and Leases – Total loans and leases, 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
2016
2015
$
$
283,205
90,379
4,012
377,596
$
$
272,297
78,443
3,857
354,597
2014
(in thousands)
275,769
$
80,598
4,800
361,167
$
2013
2012
$
$
235,152
56,651
3,934
295,737
$
$
241,730
61,276
4,396
307,402
Real estate mortgage loans include real estate construction loans of $2.2 million in 2016, $10.3 million in 2015, $1.3 million in 2014, $3.6 million in 2013, and
$2.6 million in 2012. 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, 2016, commercial and agricultural loans make up 75.00% of the loan portfolio; the loans are expected to
be repaid from cash flow from operations of the businesses. As of December 31, 2016, real estate mortgage loans make up 23.94% of the loan and lease portfolio
and are collateralized by first mortgages on residential real estate. As of December 31, 2016, consumer loans to individuals make up 1.06% of the loan and lease
portfolio and are primarily collateralized by consumer assets.
B.
Maturities and Sensitivities of Loans and Leases to Changes in Interest Rates – The following table shows the amounts of commercial and agricultural
loans outstanding as of December 31, 2016 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.)
Within one year
After one year but within five years
After five years
Maturing
18
Commercial
and
Agricultural
(in thousands)
$
$
447
67,448
215,310
283,205
III.
LOAN AND LEASE PORTFOLIO (CONTINUED)
Due after one year but within five years
Due after five years
Interest Sensitivity
Fixed
Rate
$
$
24,178
19,576
43,754
Variable and
Adjustable Rate
(in thousands)
43,270
$
195,734
239,004
$
Total
$
$
67,448
215,310
282,758
C.
Risk Elements – Non-accrual, Past Due, Restructured and Impaired Loans and Leases – The following table summarizes non-accrual, past due,
restructured and impaired loans and leases at December 31:
(a) Loans accounted for on a non-accrual basis
2016
2015
2014
(in thousands)
2013
2012
$
6,003
$
5,945
$
5,220
$
6,511
$
17,171
(b) Loans contractually past due 90 days or more as to interest or principal payments and
still accruing interest
154
260
1,513
37
25
(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
1,208
1,795
2,121
495
2,139
$
7,365
$
8,000
$
8,854
$
7,043
$
19,335
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
Interest income not recognized during the period
$
$
275
$
432
$
596
$
633
$
1,143
-
-
-
-
-
275
$
432
$
596
$
633
$
1,143
2016
2015
2014
(in thousands)
2013
2012
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, 2016, in addition to the $7.4 million of loans reported under Item III C, there are approximately $9.7 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, 2016, loans outstanding relating to agricultural operations or collateralized by agricultural real estate aggregated $39,108,000. At
December 31, 2016, there were four borrowers with loans totaling $340,000 in agricultural loans, which were accounted for on a non-accrual basis.
D.
Other interest-bearing assets
As of December 31, 2016, 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 (credit) for loan losses
Balance at end of period
Ratio of net charge-offs (recoveries) during the period to average loans outstanding
during the period
(1) Including loans held for sale.
2016
2015
2014
(dollars in thousands)
2013
2012
$ 377,596
$ 361,437
$ 354,597
$ 358,368
$ 361,167
$ 310,237
$ 295,737
$ 299,379
$ 307,402
$ 325,114
$
3,834
$
3,840
$
4,014
$
6,918
$
8,543
(98)
(52)
(10)
(160)
351
61
9
421
261
(750)
$
$
(447)
(176)
(16)
(639)
222
20
9
251
(388)
382
(368)
(117)
(12)
(497)
739
9
5
753
256
(430)
(2,614)
(4)
(23)
(2,641)
541
11
18
570
(2,071)
(833)
(2,103)
(144)
(14)
(2,261)
379
14
43
436
(1,825)
200
$
3,345
$
3,834
$
3,840
$
4,014
$
6,918
(0.07)%
0.11%
(0.08)%
0.69%
0.56%
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 2016 loan charge-offs included forty-six consumer, mortgage, HELOC, commercial or agricultural credits, with the largest individual
charge-off being $86,000. 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 $256,000 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.
21
IV.
SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)
The Corporation recognized a credit for loan losses of $750,000 in 2016, a provision for loan losses of $382,000 in 2015 and a credit for loan losses of $430,000
in 2014. Problem and potential problem loans aggregated $9.7 million at December 31, 2016 compared to $15.0 million December 31, 2015. 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
Percentage
of Loans in
Each Category
to Total
Loans
Allowance
Amount
Allowance
Amount
December 31, 2016
December 31, 2015
(dollars in thousands)
$
$
$
$
$
$
2,772
542
31
3,345
82.9% $
16.2%
0.9%
100.0% $
3,433
373
28
3,834
December 31, 2014
December 31, 2013
3,651
345
18
4,014
3,453
363
23
3,839
December 31, 2012
6,269
602
47
6,918
76.4% $
22.3%
1.3%
100.0% $
78.7%
19.9%
1.4%
100.0%
89.5%
9.7%
0.7%
100.0%
79.5%
19.2%
1.3%
100.0%
The allowance for loan losses at December 31, 2016 included specific reserves for impaired loans amounting to $1,018,000 compared to $1,371,000 at December
31, 2015.
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)
Savings and interest-bearing demand deposits
Time deposits
Demand deposits (non-interest bearing)
C.&E. There were no foreign deposits in any periods presented.
(dollars in thousands)
2016
Average
Amount
2016
Average
Rate
2015
Average
Amount
2015
Average
Rate
285,729
140,562
92,811
519,102
0.20% $
0.79%
-
$
283,904
159,635
87,820
531,359
0.12%
0.78%
-
2014
Average
Amount
2014
Average
Rate
251,825
164,461
81,938
498,224
0.12%
1.01%
-
$
$
$
$
24
V.
D.
DEPOSITS (CONTINUED)
Maturities of certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2016 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
(in thousands)
7,534
6,639
13,543
19,704
47,420
$
$
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
2016
2015
(dollars in thousands)
2014
$
$
$
$
$
$
$
$
614,688
74,067
5,521
1,446
0.90%
7.94%
26.19%
12.05%
$
$
$
$
628,753
69,981
5,917
1,200
0.94%
8.46%
20.28%
11.13%
589,710
64,869
4,311
1,194
0.73%
6.65%
27.67%
11.00%
(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, 2016, the
Corporation did not have any federal funds purchased, out of the $78.6 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, 2016, 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 2016, 2015, and 2014.
Balance at year-end
Maximum balance at month-end during the period
Average balance
Weighted average interest rate
Item 1A. Risk Factors
2016
2015
(dollars in thousands)
2014
$
$
$
$
$
$
-
-
-
-%
$
$
$
-
-
-
-%
-
4,601
2,952
0.14%
There are risks inherent to the Corporation’s business. The material risks and uncertainties that management believes affect the Corporation are described below.
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.
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.
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.
26
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 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.
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.
27
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.
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.
28
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.
The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
29
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.
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.
30
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 financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.
At this time, it is difficult to predict the legislative and regulatory changes that will result from the combination of a new President of the United States and the
first year since 2010 in which both Houses of Congress and the White House have majority memberships from the same political party. In recent years, however,
both the new President and senior members of the House of Representatives have advocated for significant reduction of financial services regulation, to include
amendments to the Dodd-Frank Act and structural changes to the CFPB. The new Administration and Congress also may cause broader economic changes due to
changes in governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and
interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could
affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations
also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.
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.
Emergence of nonbank alternatives to the financial system.
Consumers may decide not to use banks to complete their financial transactions. Technology and other changes, including the emergence of “Fintech Companies”
are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, 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 of deposits as a source of funds could have a material adverse effect on our 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.
31
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.
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 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.
32
Item 1B.
Unresolved Staff Comments
Not applicable
33
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 97,973 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 2, 2017, 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
34
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 2016 (“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, 2016:
Period
10/01/16 - 10/31/16
11/01/16 - 11/30/16
12/01/16 - 12/31/16
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(1)
0
9,997
0
$
$
$
0
19.64
0
387,337
397,334
397,334
212,663
202,666
202,666
(1) 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, 2014. 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 2016 (“Annual Report”), which is included herein as Exhibit 13.
35
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 2016 (“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 5 through 15 (“Management’s Discussion and Analysis”) of United Bancshares’ Annual
Report to Shareholders for 2016 (“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 14 through 15 (“Management’s Discussion and Analysis”) of United Bancshares’
Annual Report to Shareholders for 2016 (“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 17 through 60 of United Bancshares’ Annual Report to Shareholders for 2016 (“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, 2016. 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.
36
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, 2016, in relation to criteria for effective internal control over financial reporting
described in “Internal Control – Integrated Framework” (2014) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on this assessment, management believes that, as of December 31, 2016, 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,
2016, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B.
Other Information
None.
37
PART III
Our Proxy Statement will be filed with the SEC no later than March 30, 2017, in preparation for the 2017 Annual Meeting of Shareholders scheduled for April
26, 2017. As permitted in Paragraph G(3) of the General Instructions for Form 10-K, we are incorporating by reference to that statement portions of the
information required by Part III as noted in Item 10 through Item 14 below.
Item 10.
Directors, Executive Officers and Corporate Governance
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 relating to the Annual Meeting of Shareholders to be held April 26, 2017, 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 relating to the Annual Meeting of Shareholders to be held April 26, 2017, 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 relating to the Annual Meeting of Shareholders to be held April 26, 2017, 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 relating to the Annual Meeting of Shareholders to be
held April 26, 2017, 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 relating to the Annual Meeting of Shareholders to be held April 26, 2017, 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 relating to the Annual Meeting
of Shareholders to be held April 26, 2017, 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.
Information required by this item concerning director independence is contained under the caption “Board of Directors Independence” in the Corporation’s
definitive proxy statement relating to the Annual Meeting of Shareholders to be held April 26, 2017, which is incorporated herein by reference.
38
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 relating to the
Annual Meeting of Shareholders to be held April 26, 2017, 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 17 through 60 of the Corporation’s 2016 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, 2016 and 2015
Consolidated Statements of Income - Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income - Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows - Years ended December 31, 2016, 2015, and 2014
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.
39
(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
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
2016 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
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document (a)
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Label
XBRL Taxonomy Extension Presentation
(6)
(1)
(1)
(2)
(4)
(2)
(5)
(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 Corporations’ s Form 8-K filed July 1, 2014
40
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/ DANIEL J. LUCKE
Daniel J. Lucke
Chief Financial Officer
Date: March 2, 2017
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
41
Date
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
March 2, 2017
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
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Directors and Officers
Page(s)
1
2
3
5
16
17
18
19
20
21
22
59
Shareholders, Clients and Team Members:
I am pleased to report that your Company had another prosperous year in 2016. In addition to reporting income before taxes of approximately $7.3 million, return
on average equity of 7.45% and return on average assets of 0.90%, the Company also reported growth of approximately 6.2% and 5.0% for loans and non-interest
bearing deposits, respectively. I am also pleased to report that our shares closed the year 17% higher than in 2015. 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 and Board of Directors.
The strategic decisions previously communicated to you to reposition our balance sheet after the Ohio State Bank acquisition, through the systematic run off of
volatile deposits and loan relationships, was completed in 2016. During this time of transition the bank built a robust pipeline of opportunities which began to
noticeably increase our balance sheet in the fourth quarter of 2016.
While we are thankful for the successes of 2016, we are now focused on 2017 and the opportunities it will bring. Throughout 2017, we plan to continue seeking
the best places for capital allocation to further improve the value of your investment. We’ll accomplish this through strategic initiatives focused on continued
growth in client relationships and identifying opportunities to grow through partnerships and acquisitions. We believe that a measured balance sheet growth
strategy reduces overall risk and drives long-term value for our shareholders.
We continue to believe that a 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 citizens. That conviction, 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 December 31, 2016,
the common stock was held by 1,196 shareholders of record. Below are the trading highs and lows for the periods noted.
Year 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
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
High
Low
19.73 $
21.66 $
21.44 $
22.60 $
16.00
17.18
17.48
18.41
High
Low
15.37 $
16.00 $
16.00 $
18.50 $
14.30
14.37
15.12
15.40
2016
2015
0.11 $
0.11
0.11
0.11
0.44 $
0.09
0.09
0.09
0.09
0.36
$
$
$
$
$
$
$
$
$
$
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
Average shares outstanding - basic
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:
Net yield on average interest earning assets (3)
Return on average assets
Return on average shareholders' equity
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
$
$
$
$
$
$
$
$
$
$
2016
21,627
2,231
19,396
(750)
20,146
4,903
17,784
7,265
1,744
5,521
1.68
0.44
22.21
3,289,497
377,596
195,035
633,119
524,680
72,558
361,437
191,813
614,688
519,102
74,067
3.59%
0.90%
7.45%
-0.07%
0.89%
11.80%
(in thousands, except per share data)
Years ended December 31,
2014
2013
2015
$
$
$
$
$
22,836
2,077
20,759
382
20,377
4,637
17,692
7,322
1,405
5,917
1.77
0.36
21.62
3,309,339
354,597
187,759
608,665
518,419
71,561
358,368
207,738
628,753
531,359
69,981
3.75%
0.94%
8.46%
0.11%
1.09%
11.13%
$
$
$
$
$
19,620
2,668
16,952
(430)
17,382
4,387
16,375
5,394
1,083
4,311
1.27
0.35
20.12
3,406,194
361,167
211,291
650,200
565,445
67,772
310,237
201,447
589,710
498,224
64,869
3.28%
0.73%
6.65%
-0.08%
1.06%
10.42%
$
$
$
$
$
19,854
3,250
16,604
(833)
17,437
4,468
16,024
5,881
1,240
4,641
1.35
0.20
18.31
3,446,662
295,737
201,974
556,235
468,000
63,008
299,379
192,578
561,757
462,368
63,364
3.38%
0.83%
7.33%
0.69%
1.36%
11.33%
2012
22,591
4,675
17,916
200
17,716
4,353
16,513
5,556
1,071
4,485
1.30
0.05
18.62
3,446,133
307,402
182,502
572,448
471,199
64,170
325,114
167,766
568,466
464,448
62,034
3.55%
0.79%
7.23%
0.56%
2.27%
11.21%
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 2016, 2015 and 2014 includes the impact of The Ohio State Bank acquisition.
3
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 were
affected by the completion of the acquisition of The OSB 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.
4
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.
Financial Condition
The Corporation and the Bank consolidated assets totaled $633.1 million at December 31, 2016, compared to $608.7 million at December 31, 2015, representing
an increase of $24.4 million or 4.0%. The increase in total assets was primarily the result of increases of $22.3 million (6.4%) in net loans and leases and $7.3
million (4.0%) in available-for-sale securities, offset by a decrease in cash of $8.7 million (38.1%).
Other borrowings increased $16.7 million and deposits increased $6.3 million, or 1.2%, during this same period.
Loans
At December 31, 2016, total loans, including loans held for sale, amounted to $377.6 million compared to $354.6 million at December 31, 2015, an increase of
$22.9 million (6.5%). The following categories within the loan portfolio represent the majority of the change during 2016: residential real estate increased $11.9
million (15.2%), commercial loans increased $6.8 million (2.9%), agriculture loans increased $4.1 million (11.7%), and consumer loans increased $0.15 million
(4.0%).
Securities
Management monitors the earnings performance and liquidity of the securities portfolio on a regular basis through Asset/Liability Committee (ALCO) meetings.
As a result, all securities, except Federal Home Loan Bank of Cincinnati (FHLB) stock, have been designated as available-for-sale and may be sold if needed for
liquidity, asset-liability management or other reasons. Such securities are reported at fair value, with any net unrealized gains or losses reported as a separate
component of shareholders’ equity, net of related income taxes.
Securities, including FHLB stock, totaled $195.0 million at December 31, 2016 compared to $187.8 million at December 31, 2015, an increase of $7.2 million
(3.8%). The amortized cost of the securities portfolio also increased $10.7 million in 2016, and the Corporation experienced net unrealized losses on securities of
$3.4 million during 2016.
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 2016. In 2014, the FHLB
stock balance was reduced by $750,000 as a result of a stock repurchase initiated by FHLB. The Corporation also acquired $642,000 in FHLB stock and $44,000
in other bank restricted stock with The OSB acquisition.
At December 31, 2016, the Corporation’s investment securities portfolio included $70.6 million in U.S. states and political subdivisions, which is 2.7% lower
than shareholders’ equity as of that date. The largest exposure to any one state is $12.0 million, or 17%, 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, 2016 net unrealized losses on available-for-sale securities amounted to $1.3 million while at December 31, 2015, net unrealized gains on
available-for-sale securities amounted to $2.1 million. At December 31, 2016, the Corporation held 168 securities which were in a loss position with the fair value
and gross unrealized losses of such securities amounting to $114.8 million and $2.7 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 2016, other real estate owned (OREO) increased $405,000 to $578,000 at December 31, 2016, compared to $173,000 at December 31, 2015. During 2016,
$722,000 was transferred from loans to OREO. Throughout 2016, the Corporation evaluated its OREO portfolio and sold properties generating proceeds of
$278,000 and loss on sale of $38,000. Additionally, there were no impairment adjustments during 2016.
Deposits
Total deposits at December 31, 2016 amounted to $524.7 million, an increase of $6.3 million (1.2%) compared with total deposits of $518.4 million at December
31, 2015. The increase in deposits includes a $1.6 million increase in interest bearing deposits and a $4.7 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 $18.8 million at December 31, 2016 and $2.1 million at December 31, 2015.
Results of Operation – 2016 Compared to 2015
Performance Summary
Consolidated net income for the Corporation and the Bank was $5.5 million in 2016 compared to $5.9 million in 2015 and $4.3 million in 2014.
Net income in 2016 as compared to 2015 was unfavorably impacted by a decrease in net interest income of $1,363,000, an increase in non-interest expenses of
$92,000 and an increase in income taxes of $339,000, offset by an increase in non-interest income of $266,000, as well as a credit for loan losses of $750,000 in
2016 compared to a $382,000 provision in 2015. The change in the provision (credit) 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 .90% in 2016, compared to .94% in 2015, and .73% in 2014. The Corporation’s return on average shareholders’
equity was 7.45% in 2016, 8.46% in 2015, and 6.65% in 2014. Basic net income per share was $1.68 per share in 2016, a decrease of $0.09 per share from $1.77
in 2015. Basic net income per share of $1.77 in 2015 represented an increase of $0.50 per share from $1.27 in 2014. Changes in these amounts from year to year
were generally reflective of changes in the level of net income.
Net Interest Income
Net interest income, which represents the revenue generated from interest-earning assets in excess of the interest cost of funding those assets, is the Corporation's
principal source of income. Net interest income is influenced by market interest rate conditions and the volume and mix of interest-earning assets and interest-
bearing liabilities. Many external factors affect net interest income and typically include the strength of client loan demand, client preference for individual
deposit account products, competitors’ loan and deposit product offerings, the national and local economic climates, and Federal Reserve monetary policy.
Net interest income for 2016 was $19.4 million, a decrease of $1,363,000 (6.6%) from 2015. The decrease in net interest income was primarily due to a decrease
in the net interest margin. The net interest yield on average interest-earning assets, on a tax-equivalent basis, decreased in 2016 to 3.98% from 4.11% in 2015. A
majority of this decrease was a result of the average yield on loans for 2016 decreasing to 4.83% compared to 5.11% in 2015 as a result of a significant reduction
in loan discount accretion from the 2014 OSB acquisition. Additionally, the average rate on interest-bearing liabilities increased to 0.50% in 2016 from 0.45% in
2015.
6
Provision for Loan and Lease Losses and the Allowance for Loan and Lease Losses
The Corporation’s loan policy provides guidelines for managing both credit risk and asset quality. The policy details acceptable lending practices, establishes
loan-grading classifications, and prescribes the use of a loan review process. The Corporation has a credit administration department that performs regular credit
file reviews which facilitate the timely identification of problem or potential problem credits, ensure sound credit decisions, and assist in the determination of the
allowance for loan losses. The Corporation also engages an outside credit review firm to supplement the credit analysis function and to provide an independent
assessment of the loan review process. The loan policy, loan review process, and credit analysis function facilitate management's evaluation of the credit risk
inherent in the lending function.
As mentioned, ongoing reviews are performed to identify potential problem and nonperforming loans and also provide in-depth analysis with respect to the
quarterly allowance for loan losses calculation. Part of this analysis involves assessing the need for specific reserves relative to impaired loans. This evaluation
typically includes a review of the recent performance history of the credit, a comparison of the estimated collateral value in relation to the outstanding loan
balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future
financial performance. Loans are considered to be impaired when, based upon the most current information available, it appears probable that the borrower will
not be able to make payments according to the contractual terms of the loan agreement. Impaired loans are recorded at the observable market price of the loan, the
fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan's effective
interest rate. Given that the Corporation’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of individual impaired
loans is most often based upon the underlying collateral value net of estimated selling costs. Large groups of smaller balance homogenous loans are collectively
evaluated for impairment.
To determine the allowance for loan and lease losses, the Corporation prepares a detailed analysis that focuses on delinquency trends, the status of nonperforming
loans (i.e., impaired, nonaccrual, restructured, and past due 90 days or more), current and historical trends of charged-off loans within each loan category (i.e.,
commercial, real estate, and consumer), existing local and national economic conditions, and changes within the volume and mix in each loan category. Higher
loss rates are applied in calculating the allowance for loan losses relating to potential problem loans. Loss rates are periodically evaluated considering historic loss
rates in the respective potential problem loan categories (i.e., special mention, substandard, doubtful) and current trends.
Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate
for losses within the portfolio. Even though management uses all available information to assess possible loan losses, future additions or reductions to the
allowance may be required as changes occur in economic conditions and specific borrower circumstances. The regulatory agencies that periodically review the
Corporation’s allowance for loan and lease losses may also require additions to the allowance or the charge-off of specific loans based upon the information
available to them at the time of their examinations.
The allowance for loan and lease losses at December 31, 2016 was $3.3 million, or 0.89% of total loans, compared to $3.8 million, or 1.08% of total loans at
December 31, 2015. The change in the allowance for loan losses during 2016 included a $750,000 credit for loan losses and loan recoveries, net of charge offs, of
$261,000.
The provision or credit for loan and lease losses is determined by management after considering the amount of net losses incurred as well as management’s
estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors. Favorable settlements of impaired or
potential problem loans can also result in a reduction in the required allowance for loan losses and a negative provision, or credit, being reflected in current
operations. The credit for loan losses of $750,000 in 2016 compares to a provision of $382,000 in 2015.
Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $2.9 million at December 31, 2016 compared to $6.0
million at December 31, 2015, a decrease of $3.1 million. Impaired loans at December 31, 2016 included $2.9 million in loans with specific reserves of $1.0
million (no impaired loans without any specific reserves) included in the Corporation’s allowance for loan losses at December 31, 2016. 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 and lease losses at December 31, 2015.
7
In addition to impaired loans, the Corporation had other potential problem credits of $9.7 million at December 31, 2016 compared to $15.0 million at December
31, 2015, a decrease of $5.3 million (35.5%). The Corporation’s credit administration department continues to closely monitor these credits.
Non-Interest Income
Total non-interest income increased $266,000 (5.7%) to $4.9 million in 2016 from $4.6 million in 2015. 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 2016
to $158,000 compared to $116,000 in 2015.
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 $166,000 (11.0%) to $1,681,000 in 2016 compared to $1,515,000 in 2015.
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 2016, gain on sale of loans was $618,000, including $273,000 of capitalized servicing rights. Gain on sale of loans was
$586,000 in 2015, including $252,000 of capitalized servicing rights. The increase in gain on sale of loans occurred despite a slight decrease in loan demand
during 2016 with loan sales in 2016 amounting to $27.4 million compared to $28.4 million in 2015. The Corporation’s serviced portfolio decreased $1.3 million
during 2016 to $172.2 million at December 31, 2016.
The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $12,000 decrease in the
fair value of mortgage servicing rights during 2016, compared to a $263,000 increase in the fair value of mortgage servicing rights in 2015. 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, 2016 the PSA factor was 148 compared to 170 at
December 31, 2015.
Other operating income increased $335,000 (19.4%) to $2.1 million in 2016 from $1.7 million in 2015. The increase in non-interest income for the year ended
December 31, 2016 was primarily attributable to a $353,000 increase in service fees on loans sold and a $44,000 increase in debit card fee income offset by losses
on sale of OREO.
Non-Interest Expenses
Total non-interest expenses amounted to $17,784,000 in 2016, compared to $17,692,000 in 2015, an increase of $92,000 (0.5%). The increase in non-interest
expenses for the year ended December 31, 2016 was primarily attributed to increases in salary & benefits expense, premises and equipment expense, advertising
& promotion, media, loan closing fees, ATM processing fees, and IT expense offset by decreases in data processing expense, FDIC Assessment, consultant fees,
Ohio financial institutions and franchise taxes, other real estate owned expense and asset management legal expense.
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 2016 was $1,744,000, an effective tax rate of 24.0%, compared to $1,405,000 in 2015, an effective rate of 19.2%. The increase
in the effective tax rate in 2016 as compared to 2015 resulted from a one-time $332,000 tax benefit recognized in 2015 due to a tax law change. 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 (7.7%) and life
insurance contracts (1.8%). At December 31, 2016, the Corporation has available alternative minimum tax credits of $627,000 which can be used in the future to
the extent regular tax exceeds the alternative minimum tax, as well as federal income tax loss carryforwards, with a recognized tax benefit of $2.1 million
resulting from the 2014 OSB acquisition, as more fully described in Note 12 to the consolidated financial statements.
8
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.
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. The Corporation’s return on average shareholders’ equity was 8.46% in
2015 compared to 6.65% in 2014. Basic net income per share was $1.77 per share in 2015, an increase of $0.50 per share from $1.27 in 2014. Changes in these
amounts from year to year were generally reflective of changes in the level of net income.
Net Interest Income
Net interest income for 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 allowance for loan and lease 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 $388,000.
The provision for loan and lease 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 and
lease losses of $382,000 in 2015 compares to a credit for loan losses 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 and lease losses and $2.7 million of loans with
specific reserves of $807,000 included in the Corporation’s allowance for loan and lease 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. Net securities gains decreased in 2015 to $116,000
compared to $400,000 in 2014.
Service charges on deposit accounts increased $190,000 (14.3%) to $1,515,000 in 2015 compared to $1,325,000 in 2014.
9
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 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. At December 31, 2015 the PSA factor was 170 compared to 195 at December 31, 2014.
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.
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%). At December 31, 2015, the Corporation had 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.
10
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.
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 2016, 2015, and 2014 follows.
The Corporation generated cash from operating activities of $6.6 million in 2016, $6.9 million in 2015, and $4.8 million in 2014.
Net cash flows provided by (used in) investing activities amounted to $(35.9) million in 2016, $30.7 million in 2015, and $2.0 million in 2014. Significant
investing cash flow activities in 2016 included $11.4 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and
maturities as well as a $23.0 million increase in loans. Significant investing cash flow activities in 2015 included $22.7 million of net cash inflows resulting from
securities purchases, net of proceeds received from sales and maturities. Significant investing cash outflow activities in 2015 included a $7.3 million decrease in
loans. Significant investing cash flow activities in 2014 included $1.3 million of net cash outflows 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 inflow activities in 2014 resulted from a
$6.6 million increase in loans.
Net cash flows provided by (used in) financing activities amounted to $20.5 million in 2016, $(47.1) million in 2015, and $3.1 million in 2014. Net cash provided
by financing activities in 2016 primarily resulted from an increase in other borrowings of $16.7 million and a $6.3 million increase in deposits, offset by $833,000
of treasury stock purchases and $1,446,000 million in cash dividends paid. Net cash used in financing activities in 2015 primarily resulted from a decrease in
deposits of $47.0 million, $927,000 of treasury stock purchases, 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 the 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.
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, 2016 is approximately 83% 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.
11
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 and the 2014 OSB
acquisition 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, 2016, 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, 2016.
Mortgage servicing rights are recognized when acquired through sale of mortgage loans and are reported at fair value. Changes in fair value are reported in net
income for the period the changes occur. The Corporation generally estimates fair value for servicing rights based on the present value of future expected cash
flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, earnings rate and discount rates
commensurate with the risks involved. The Corporation has engaged an independent consultant to calculate the fair value of mortgage servicing rights on a
quarterly basis. Management regularly reviews the calculation, including assumptions used in making the calculation, and discusses with the consultant.
Management also reconciles information used by the consultant, with respect to the Corporation’s serviced portfolio, to the Corporation’s accounting records.
The Corporation reviews securities prices and fair value estimates of other financial instruments supplied by an independent pricing service, as well as their
underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The Corporation’s securities
portfolio primarily consists of U.S. Government agencies, and political subdivision obligations, and mortgage backed securities. Pricing for such instruments is
typically based on models with observable inputs. From time to time, the Corporation will validate, on a sample basis, prices supplied by the independent pricing
service by comparison to prices obtained from other third-party sources or derived using internal models. The Corporation also considers the reasonableness of
inputs for financial instruments that are priced using unobservable inputs.
12
Impact of Recent Accounting Pronouncements
A summary of new accounting standards adopted or subject to adoption in 2016, as well as newly-issued but not effective accounting standards at December 31,
2016, 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, 2016:
Type of Commitment
Commercial lines-of-credit
Real estate lines-of-credit
Consumer lines-of-credit
Letters of Credit
Total commitments
Total
Amount
Less than
1 year
Amount of commitment to expire per period
4 - 5
1 - 3
years
Years
(in thousands)
$
$
$
38,943
51,430
340
310
$
37,427
6,223
-
310
$
770
3,134
-
-
$
-
1,871
-
-
91,023
$
43,960
$
3,904
$
1,871
$
Over
5 years
746
40,202
340
-
41,288
As indicated in the preceding table, the Corporation had $91.0 million in total loan commitments at December 31, 2016, with $44.0 million of that amount
expiring within one year. All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters-of-credit are also
included in the amounts noted in the table since the Corporation requires that each letter-of-credit be supported by a loan agreement. The commercial and
consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages in residential and nonresidential property. Many
of the commercial lines are due on a demand basis, and are established for seasonal operating purposes. It is anticipated that a significant portion of these lines
will expire without being drawn upon.
Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments – Continued
The following table summarizes the Corporation’s contractual obligations as of December 31, 2016:
Contractual obligations
Long-term debt
Capital leases
Operating leases
Unconditional purchase obligations
Time deposits
Deposits without stated maturities
Future deferred compensation payments, including
$
interest
Total obligations
Total
Amount
Less than
1 year
Payments due by period
1 - 3
years
(in thousands)
4 - 5
Years
Over
5 years
$
12,806
-
175
-
129,460
395,513
1,555
$
-
-
32
-
73,242
-
116
$
-
-
70
-
37,648
-
232
$
-
-
70
-
12,455
-
232
12,806
-
3
-
6,115
395,513
975
$
539,509
$
73,390
$
37,950
$
12,757
$
415,412
13
Long-term debt presented in the preceding table consists of $12.8 million of junior subordinated deferrable interest debentures, including $10.4 million issued by
the Corporation and $2.4 million assumed from the November 2014 OSB acquisition.
Time deposits and deposits without stated maturities included in the preceding table are comprised of customer deposit accounts. Management believes that they
have the ability to attract and retain deposit balances by adjusting the interest rates offered.
The future deferred compensation payments, including interest, as noted in the preceding table, includes the Corporation’s agreement with its current Chairman of
the Board of Directors to provide for retirement compensation benefits. A deferred compensation liability was also assumed with The OSB acquisition for the
benefit of its retired president, with payment that began on May 1, 2010. At December 31, 2016, the net present value of future deferred compensation payments
amounted to $867,000, which is included in other liabilities in the December 31, 2016 consolidated balance sheet.
As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2016. The Corporation also has a non-qualified deferred
compensation plan covering certain directors and officers, and has provided an estimated liability of $639,000 at December 31, 2016 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.
14
Quantitative and Qualitative Disclosures about Market Risk - Continued
The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2016:
Change in Interest Rates
(basis points)
Percentage Change in
Net Interest Income
Percentage Change in
Net Income
+100
(100)
+200
(200)
+300
(300)
+400
-3.6%
-4.2%
-7.3%
-9.1%
-11.2%
N/A
-15.2%
-8.7%
-10.7%
-17.8%
-22.8%
-27.5%
N/A
-37.3%
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 3.6%
and net income would decrease by 8.7%. A 100bp decrease in interest rates would decrease net interest income by 4.2% and decrease net income by 10.7%.
Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 7.3%
and net income would decrease by 17.8%. A 200bp decrease in interest rates would decrease net interest income by 9.1% and decrease net income by 22.8%.
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
11.2% and net income would decrease by 27.5%. 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 15.2% and decrease net income by 37.3%. 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.
15
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, 2016 and 2015, and the related
consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
Toledo, Ohio
March 2, 2017
16
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
FEDERAL HOME LOAN BANK STOCK, at cost
CERTIFICATES OF DEPOSIT, at cost
LOANS HELD FOR SALE
LOANS AND LEASES
Less allowance for loan and lease losses
Net loans and 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
TOTAL ASSETS
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 (loss)
Treasury stock, at cost, 494,040 shares at December 31, 2016 and 451,218 shares at December 31, 2015
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands except share data)
2016
2015
$
$
$
$
9,926
4,260
14,186
190,205
4,830
1,494
1,510
376,086
3,345
372,741
13,395
10,072
766
17,351
578
5,991
633,119
98,134
426,546
524,680
18,774
12,806
4,301
560,561
3,761
14,674
62,717
(866)
(7,728)
72,558
633,119
$
$
$
$
11,482
11,440
22,922
182,929
4,830
1,992
347
354,250
3,834
350,416
12,049
10,072
903
16,834
173
5,198
608,665
93,476
424,943
518,419
2,118
12,773
3,794
537,104
3,761
14,669
58,642
1,397
(6,908)
71,561
608,665
The accompanying notes are an integral part of the consolidated financial statements.
17
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2016, 2015 and 2014
INTEREST INCOME
Loans and 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
Net interest income after provision (credit) for loan and lease losses
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)
(in thousands except share data)
Year Ended December 31,
2015
2014
2016
$
17,457
$
18,323
$
2,202
1,636
332
21,627
1,687
544
2,231
19,396
(750)
20,146
1,681
618
158
(12)
393
2,065
4,903
9,622
2,224
5,938
17,784
7,265
1,744
5,521
1.68
$
$
2,549
1,686
278
22,836
1,579
498
2,077
20,759
382
20,377
1,515
586
116
263
427
1,730
4,637
9,290
2,134
6,268
17,692
7,322
1,405
5,917
1.77
$
$
$
$
14,966
2,611
1,688
355
19,620
1,969
699
2,668
16,952
(430)
17,382
1,325
611
400
(147)
397
1,802
4,388
8,415
1,585
6,376
16,376
5,394
1,083
4,311
1.27
The accompanying notes are an integral part of the consolidated financial statements.
18
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2016, 2015 and 2014
NET INCOME
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 expense (benefit) related to items of other comprehensive income (loss)
Other comprehensive income (loss)
COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2015
2014
2016
5,521
$
5,917
$
4,311
(3,271)
(158)
(3,429)
(1,166)
(2,263)
3,258
$
93
(116)
(23)
(8)
(15)
5,902
$
4,597
(400)
4,197
1,427
2,770
7,081
$
$
The accompanying notes are an integral part of the consolidated financial statements.
19
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2016, 2015 and 2014
(in thousands)
Common
stock
Surplus
Retained
earnings
$
3,761
$
14,664
$
50,808
Accumulated
other
comprehensive
income (loss)
$
(1,358) $
Treasury
stock
(4,866) $
-
-
-
-
-
-
-
-
2
-
4,311
-
-
-
(1,194)
3,761
14,666
53,925
-
-
-
-
-
3,761
-
-
-
-
-
3,761
$
-
-
-
3
-
14,669
-
-
-
5
-
14,674
$
20
5,917
-
-
-
(1,200)
58,642
5,521
-
-
-
(1,446)
62,717
$
$
-
2,770
-
-
-
1,412
-
(15)
-
-
-
-
-
(1,136)
10
-
(5,992)
-
-
(927)
11
-
Total
63,009
-
4,311
2,770
(1,136)
12
(1,194)
67,772
5,917
(15)
(927)
14
(1,200)
1,397
(6,908)
71,561
-
(2,263)
-
-
-
(866) $
-
-
(833)
13
-
(7,728) $
5,521
(2,263)
(833)
18
(1,446)
72,558
BALANCE AT DECEMBER 31, 2013
Comprehensive income:
Net income
Other comprehensive income
Repurchase of 75,000 shares
Sale of 684 treasury shares
Cash dividends declared, $0.35 per share
BALANCE AT DECEMBER 31, 2014
Comprehensive income:
Net income
Other comprehensive loss
Repurchase of 59,111 shares
Sale of 715 treasury shares
Cash dividends declared, $0.36 per share
BALANCE AT DECEMBER 31, 2015
Comprehensive income:
Net income
Other comprehensive loss
Repurchase of 43,665 shares
Sale of 843 treasury shares
Cash dividends declared, $0.44 per share
BALANCE AT DECEMBER 31, 2016
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016, 2015 and 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Purchase accounting loan discount accretion
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
Deferred compensation expense
Loss on disposal or write-down of premises and equipment
Proceeds from sale of loans held for sale
Originations of loans held for sale
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
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 certificates of deposits
Proceeds from sales of premises and equipment
Proceeds from acquisition
Net (increase) decrease in loans and leases
BOLI premium
Purchases of premises and equipment
Proceeds from sale of other real estate owned
Net cash provided by (used in) investing activities
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
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
At beginning of year
At end of year
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest
Federal income taxes
Non-cash operating activity:
(in thousands)
Years Ended December 31,
2015
2014
2016
$
5,521
$
5,917
$
4,311
909
(450)
793
(750)
(618)
(158)
12
38
(393)
885
85
176
27,714
(27,369)
(354)
572
6,613
11,558
30,106
(53,096)
-
498
315
-
(23,009)
(124)
(2,399)
278
(35,873)
659
(1,495)
859
382
(586)
(116)
(263)
183
(427)
925
76
49
28,767
(28,433)
1,613
(1,223)
6,887
28,437
30,797
(36,534)
-
498
-
-
7,306
-
(312)
552
30,744
701
-
299
(430)
(611)
(400)
147
184
(397)
764
64
-
16,090
(15,613)
1,225
(1,499)
4,835
9,121
27,223
(35,011)
750
249
-
6,628
(6,638)
-
(314)
-
2,008
$
6,279
$
(46,914) $
26,349
16,656
-
(833)
18
(150)
(1,446)
20,524
(8,736)
22,922
14,186
2,195
860
$
$
$
2,118
-
(927)
14
(154)
(1,200)
(47,063)
(9,432)
32,355
22,922
2,227
665
$
$
$
$
$
$
(16,241)
(4,600)
(1,136)
12
(85)
(1,194)
3,105
9,948
22,407
32,355
2,687
660
1,427
-
Change in deferred income taxes on net unrealized gain or loss on available-for-sale securities $
(1,166) $
(8) $
Non-cash investing activities:
Transfer of loans to other real estate owned
Change in net unrealized gain or loss on available-for-sale securities
$
$
721
$
372
$
(3,429) $
(23) $
4,197
The accompanying notes are an integral part of the consolidated financial statements.
21
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 has formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio. The operations of UBC
are located in Wilmington, Delaware. The Bank has also formed a wholly-owned subsidiary, UBC Property, Inc. to hold and manage certain property that is
acquired in lieu of foreclosure.
The Corporation, through its wholly-owned subsidiary, the Bank, operates in one industry segment, the commercial banking industry. The Bank, organized in
1904 as an Ohio-chartered bank, is headquartered in Columbus Grove, Ohio, with branch offices in Bowling Green, Delaware, Delphos, Findlay, 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 $1,091,000 and $1,351,000 at December
31, 2016 and 2015, respectively, to meet regulatory reserve and clearing requirements.
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.
22
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, 2016 and 2015.
Loans and Leases
Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally stated at its outstanding
principal amount adjusted for charge-offs and the allowance for loan and lease losses. Interest is accrued as earned based upon the daily outstanding principal
balance. Loan and lease origination fees and certain direct obligation costs are capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in
process of collection. Personal loans are typically charged-off no later than when they become 150 days past due. Past due status is based on contractual terms of
the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans and leases that are placed on nonaccrual or charged-off is reversed against interest income. Interest on these loans
and leases is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans and leases are returned to accrual status when
all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“allowance”) is established as losses are estimated to have occurred through a provision for loan and lease losses charged
to income. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance 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.
23
Under certain circumstances, the Corporation will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt
restructuring (TDR) if the Corporation, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it
would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the
original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. TDR concessions can
include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction
of the debt.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
Acquired Loans
Purchased loans acquired in a business combination are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired
loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.
• Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not
have evidence of credit deterioration since origination.
• Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30
“Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display at least some level of credit deterioration since
origination.
•
Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit
deterioration since origination.
In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at
acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a
loss accrual or a valuation allowance. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield
and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining
estimated life. Decreases in expected cash flows are recognized immediately as impairment. If the Corporation does not have the information necessary to
reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these
impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be
received).
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less estimated cost to sell, at
the date of foreclosure, establishing a new cost basis with loan balances in excess of fair value charged to the allowance for loan losses. Subsequent to
foreclosure, valuations are periodically performed and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and subsequent valuation adjustments are included in other operating expenses.
Loan Sales and Servicing
Certain mortgage loans are sold with mortgage servicing rights retained or released by the Corporation. The value of mortgage loans sold with servicing rights
retained is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related mortgage loans sold. The Corporation generally estimates fair value for servicing rights
based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing
costs, earnings rate, and discount rates commensurate with the risks involved.
24
Capitalized servicing rights are reported at fair value and changes in fair value are reported in net income for the period the change occurs.
Servicing fee income is recorded for servicing loans, based on a contractual percentage of the outstanding principal, and is reported as other operating income.
Amortization of mortgage servicing rights is charged against loan servicing fee income.
Premises and Equipment
Premises and equipment is stated at cost, less accumulated depreciation. Upon the sale or disposition of the assets, the difference between the depreciated cost and
proceeds is charged or credited to income. Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for
buildings and 3 to 10 years for equipment) and is computed primarily using the straight-line method.
Premises and equipment is reviewed for impairment when events indicate the carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, premises and equipment is recorded at fair value and any corresponding write-downs are charged against current year earnings.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded when they are funded. The Corporation maintains a separate allowance for off-balance sheet
commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is
included in other liabilities.
Goodwill and Core Deposit Intangible Assets
Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred. Significant
judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates,
identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. At December 31,
2016, the Corporation believes the Bank does not have any indicators of potential impairment based on the estimated fair value of its reporting unit.
The core deposit intangible asset resulting from the March 2010 Findlay branch acquisition was determined to have a definite life and is being amortized on a
straight-line basis over seven years through March 2017. The remaining amortization of the core deposit intangible asset is $10,000 in 2017. The core deposit
intangible asset resulting from the November 2014 The OSB acquisition was also determined to have a definite life and is being amortized on a straight-line basis
over ten years through October 2024. Amortization of the core deposit intangible asset for the five years subsequent to December 31, 2016 is $96,000 annually.
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.
25
Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon
examination by a taxing authority is considered to be 50% or less. The Corporation has adopted the policy of classifying any interest and penalties resulting from
the filing of its income tax returns in the provision for income taxes.
The Corporation is not currently subject to state or local income taxes.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial
asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2)
from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided
proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the
same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.
Comprehensive Income (Loss)
Recognized revenue, expenses, gains and losses are included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income,
are components of comprehensive income.
Per Share Data
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per
share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.
The weighted average number of shares used for the years ended December 31, 2016, 2015 and 2014:
Basic
Diluted
Dividends per share are based on the number of shares outstanding at the declaration date.
Rate Lock Commitments
2016
3,289,497
3,289,497
2015
3,339,242
3,339,242
2014
3,406,194
3,406,194
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, 2016 and 2015, derivative assets and liabilities relating to rate lock
commitments were not material to the consolidated financial statements.
26
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,
2016, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2016,
have been recognized in the financial statements for the year ended December 31, 2016. Events or transactions that provided evidence about conditions that did
not exist at December 31, 2016 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the
year ended December 31, 2016.
On January 19, 2017, United Bancshares, Inc. issued a release announcing that its Board of Directors increased its dividend by 9.01% from the fourth quarter of
2015, approving a cash dividend of $0.12 per common share payable March 15, 2017 to shareholders of record at the close of business on February 28, 2017.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from
Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40) . The guidance in this update
supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of
the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not
apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. The Company is currently
assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the
Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, amending ASU Subtopic 825-10.
The amendments in this update make targeted improvements to generally accepted accounting principles (GAAP) as follows: 1). Require equity investments to be
measured at fair value with changes in fair value recognized in net income.; 2). Simplify the impairment assessment of equity investments without readily
determinable fair values by requiring a qualitative assessment to identify impairment.; 3). Eliminate the requirement to disclose the fair value of financial
instruments measured at amortized cost for entities that are not public business entities.; 4). Eliminate the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet.; 5). Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.; 6).
Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.;
7). Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the
accompanying notes to the financial statements.; 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. While management continues to evaluate the potential impact of the adoption of ASU 2016-01 in 2018, management does not believe the
eventual adoption of ASU 2016-01 will have a significant impact on the overall consolidated financial statements of the Corporation.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for
leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows
arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital
leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update will
be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to
have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The
ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform
their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to
reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their
circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit
deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Corporation has not yet
determined the potential impact the adoption of ASU 2016-13 will have on the consolidated financial statements.
27
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 OSB, an Ohio banking
corporation and wholly-owned subsidiary of OSB (the “Acquisition”). Immediately following the acquisition, The OSB was merged into the Bank. The OSB
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
(in thousands)
6,628
58,537
6,881
685
3,382
1,518
1,837
965
52
3,003
83,488
71,096
8,741
2,439
1,212
83,488
$
$
$
$
Consideration paid for the transaction was $1,197,000, which included the repayment of debt of $1,191,000 that was owed by The OSB. Cash acquired at closing
is presented above net of the repayment of debt that occurred at closing. Acquisition-related costs of $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.
Cash proceeds from the acquisition were used to repay the Federal Home Loan Bank borrowings that were assumed in the acquisition.
Goodwill of $1,518,000 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.
28
NOTE 4 - SECURITIES
The amortized cost and fair value of securities as of December 31, 2016 and 2015 are as follows:
Available-for-sale:
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Other
Total
(in thousands)
2016
2015
Amortized cost
Fair value
Amortized cost
Fair value
$
$
$
-
70,757
119,758
1,002
$
-
70,624
118,595
986
$
3,998
71,589
104,223
1,002
3,966
73,482
104,480
1,001
191,517
$
190,205
$
180,812
$
182,929
A summary of unrealized gains and losses on securities at December 31, 2016 and 2015 follows:
Available-for-sale:
U.S. Government and agencies
Obligations of states and political subdivisions
Mortgage-backed
Other
Total
(in thousands)
2016
2015
Gross unrealized
gains
Gross unrealized
losses
Gross unrealized
gains
Gross unrealized
losses
$
$
$
-
644
769
-
$
-
777
1,932
16
$
-
1,960
1,071
-
1,413
$
2,725
$
3,031
$
32
67
814
1
914
The amortized cost and fair value of securities at December 31, 2016, 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
(in thousands)
Amortized Cost
Fair value
$
$
2,313
16,368
51,637
120,197
1,002
191,517
$
$
2,324
16,628
52,022
118,245
986
190,205
Securities with a carrying value of $26,515,000 at December 31, 2016 and $22,606,000 at December 31, 2015 were pledged to secure public deposits and for
other purposes as required or permitted by law.
29
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, 2016 and 2015:
2016
U.S. Government and agencies
Obligations of states and political
subdivisions
Mortgage-backed
Other
Total temporarily impaired
securities
2015
U.S. Government and agencies
Obligations of states and political
subdivisions
Mortgage-backed
Other
Total temporarily impaired
securities
$
$
$
$
Less than 12 months
(in thousands)
Securities in a continuous unrealized loss position
12 months or more
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
-
$
-
$
-
$
-
$
Total
-
$
777
1,882
16
33,312
78,717
986
2,675
$
113,015
$
-
50
-
50
-
1,758
-
777
1,932
16
$
1,758
$
2,725
$
114,773
Less than 12 months
12 months or more
Total
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Total Fair
value
32
$
3,966
$
-
$
-
$
32
$
44
230
1
6,034
26,677
1,001
23
584
-
1,448
23,859
-
67
814
1
306
$
37,678
$
607
$
25,307
$
914
$
3,966
7,482
50,536
1,001
62,985
Total Fair
value
-
33,312
80,475
986
There were 168 securities in an unrealized loss position at December 31, 2016, 19 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, 2016 were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of
December 31, 2016 are considered to be temporary.
Gross realized gains from sale of securities, including securities calls, amounted to $215,000 in 2016, $142,000 in 2015 and $413,000 in 2014, with the income
tax provision applicable to such gains amounting to $73,000 in 2016, $48,000 in 2015 and $140,000 in 2014. Gross realized losses from sale of securities
amounted to $57,000 in 2016, $26,000 in 2015 and $13,000 in 2014 with related income tax effect of $19,000 in 2016, $9,000 in 2015 and $4,000 in 2014.
30
NOTE 5 - LOANS AND LEASES
Loans and leases at December 31, 2016 and 2015 consist of the following:
Residential real estate
Commercial
Agriculture
Consumer
Total loans and leases
(in thousands)
2016
2015
$
$
88,869
244,097
39,108
4,012
376,086
$
$
78,096
237,299
34,998
3,857
354,250
Fixed rate loans and leases approximated $75,723,000 at December 31, 2016 and $60,131,000 at December 31, 2015. 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, 2016 and 2015, the
Corporation’s loans and leases from borrowers in the agriculture industry represent the single largest industry and amounted to $39,108,000 and $34,998,000,
respectively. Agriculture loans and leases are generally secured by property and equipment. Repayment is primarily expected from cash flow generated through
the harvest and sale of crops or milk production for dairy products. Agriculture customers are subject to various risks and uncertainties which can adversely
impact the cash flow generated from their operations, including weather conditions; milk production; health and stability of livestock; costs of key operating items
such as fertilizer, fuel, seed, or animal feed; and market prices for crops, milk, and livestock. Credit evaluation of agricultural lending is based on an evaluation of
cash flow coverage of principal and interest payments and the adequacy of collateral received.
The Corporation originates 1-4 family real estate and consumer loans and leases utilizing credit reports to supplement the underwriting process. The
Corporation’s underwriting standards for 1-4 family loans and leases are generally in accordance with the Federal Home Loan Mortgage Corporation (FHLMC)
manual underwriting guidelines. Properties securing 1-4 family real estate loans and leases are appraised by fee appraisers, which is independent of the loan and
lease origination function and has been approved by the Board of Directors and the Loan Policy Committee. The loan-to-value ratios normally do not exceed 80%
without credit enhancements such as mortgage insurance. The Corporation will lend up to 100% of the lesser of the appraised value or purchase price for
conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans and leases include a
determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan
or lease. To monitor and manage loan and lease risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with
smaller loan and lease amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management
on a regular basis. The Corporation’s 1-4 family real estate loans and leases are secured primarily by properties located in its primary market area.
Commercial and agricultural real estate loans and leases are subject to underwriting standards and processes similar to commercial and agricultural operating
loans and leases, in addition to those unique to real estate loans and leases. These loans and leases are viewed primarily as cash flow loans and secondarily as
loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is
generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is
generally 75% of the cost or appraised value of the assets. Appraisals on properties securing these loans are 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.
31
Commercial and agricultural operating loans and leases are underwritten based on the Corporation’s examination of current and projected cash flows to determine
the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if
applicable and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans and leases may
fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans and leases. Loan to
value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and/or hail insurance
may be required for agricultural borrowers. Loans are generally guaranteed by the principal(s). The Corporation’s commercial and agricultural operating lending
is primarily in its primary market area.
The Corporation maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are
presented to management and the audit committee. The internal audit process complements and reinforces the risk identification and assessment decisions made
by lenders and credit personnel, as well as the Corporation’s policies and procedures.
The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2016, 2015 and 2014:
Balance at December 31, 2015
Provision (credit) for loan and lease losses
Losses charged off
Recoveries
Balance at December 31, 2016
Balance at December 31, 2014
Provision (credit) for loan and lease losses
Losses charged off
Recoveries
Balance at December 31, 2015
Balance at December 31, 2013
Provision (credit) for loan and lease losses
Losses charged off
Recoveries
Balance at December 31, 2014
$
$
$
$
$
$
Commercial
Commercial and
multi-family real
estate
893
55
(86)
34
896
$
$
2,540
(969)
(12)
317
1,876
Commercial
Commercial and
multi-family real
estate
199
971
(349)
72
893
$
$
3,255
(767)
(98)
150
2,540
Commercial
Commercial and
multi-family real
estate
3,346
(4)
(270)
183
3,255
305
(564)
(98)
556
199
$
$
32
(in thousands)
Residential 1 – 4
family real estate
373
$
160
(52)
61
542
$
Residential 1 – 4
family real estate
363
$
166
(176)
20
373
$
Residential 1 – 4
family real estate
345
$
126
(117)
9
363
$
$
$
$
$
$
$
Consumer
Total
28
4
(10)
9
31
23
12
(16)
9
28
18
12
(12)
5
23
$
$
$
$
$
$
3,834
(750)
(160)
421
3,345
3,840
382
(639)
251
3,834
4,014
(430)
(497)
753
3,840
Total
Total
Consumer
Consumer
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, 2016 and 2015:
Commercial and
multi-family real
estate
(in thousands)
Residential 1 – 4
family real estate
Commercial
Consumer
Total
2016
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 balance
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 impairment
Acquired with deteriorated credit quality
Collectively evaluated for impairment
Total ending loans and leases balance
$
$
$
$
$
$
$
$
399
497
896
937
-
62,782
63,719
$
$
$
$
619
1,257
1,876
1,980
573
216,933
219,486
$
$
$
$
-
542
542
-
51
88,818
88,869
Commercial
Commercial and
multi-family real
estate
Residential 1 – 4
family real estate
528
365
893
2,192
43
64,092
66,327
$
$
$
$
843
1,697
2,540
3,820
669
201,481
205,970
$
$
$
$
-
373
373
-
74
78,022
78,096
$
$
$
$
$
$
$
$
-
31
31
-
-
4,012
4,012
Consumer
-
28
28
-
-
3,857
3,857
$
$
$
$
$
$
$
$
1,018
2,327
3,345
2,917
624
372,545
376,086
Total
1,371
2,463
3,834
6,012
786
347,452
354,250
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, 2016, 2015, and 2014:
Balance at beginning of year
Provision (credit) for loan and lease losses
Loans charged off
Recoveries
Balance at end of year
2016
(in thousands)
2015
2014
$
$
1,371
(1,155)
-
802
1,018
$
$
807
852
(326)
38
1,371
$
$
179
263
(231)
596
807
33
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) amounted to $3,691,000, $5,579,000 and
$3,851,000 during 2016, 2015 and 2014, respectively. There was $245,000, 393,000 and $197,000 in interest income recognized by the Corporation on impaired
loans and leases on an accrual or cash basis during 2016, 2015 and 2014, respectively.
The following table presents loans and leases individually evaluated for impairment by class of loans as of December 31, 2016 and 2015:
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
2016
2015
(in thousands)
Recorded
investment
Allowance for loan
and lease losses
allocated
Recorded
investment
Allowance for
loan and lease
losses allocated
$
$
-
-
-
-
-
-
937
1,980
-
-
-
-
2,917
$
$
34
-
-
-
-
-
-
399
619
-
-
-
-
1,018
$
$
-
-
-
-
-
-
2,192
3,820
-
-
-
-
6,012
$
$
-
-
-
-
-
-
528
843
-
-
-
-
1,371
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, 2016 and 2015:
(in thousands)
2016
Loans and
leases past due
over 90 days
still accruing
Nonaccrual
$
$
1,295
3,462
277
-
3
966
-
6,003
$
$
-
-
-
73
-
81
-
154
Troubled Debt
Restructurings
29
$
722
-
-
-
457
-
1,208
$
$
$
2015
Loans and
leases past due
over 90 days
still accruing
Nonaccrual
355
4,113
52
19
12
1,394
-
5,945
$
$
-
-
260
-
-
-
-
260
Troubled Debt
Restructurings
$
-
1,403
-
-
-
392
-
1,795
$
Commercial
Commercial real estate
Agricultural real estate
Agriculture
Consumer
Residential:
1 – 4 family
Home equity
Total
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, 2016 and 2015 by class of loans and leases:
2016
Commercial
Commercial real estate
Agriculture
Agricultural real estate
Consumer
Residential real estate
Total
2015
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
Total
(in thousands)
$
$
$
$
326
103
227
-
10
1,770
2,436
30 – 59
days past
due
81
644
150
94
49
2,147
3,165
$
$
$
$
71
147
-
-
2
484
704
60 – 89 days
past due
50
15
-
-
1
244
310
$
$
$
$
79
553
-
5
-
462
1,099
Greater than
90 days past
due
121
1,225
19
260
5
389
2,019
35
$
$
$
$
476
803
227
5
12
2,716
4,239
Total past
due
252
1,884
169
354
55
2,780
5,494
$
$
$
$
49,988
192,830
13,026
25,850
4,000
86,153
371,847
Loans and
leases not past
due
53,210
181,953
12,696
21,779
3,802
75,316
348,756
$
$
$
$
50,464
193,633
13,253
25,855
4,012
88,869
376,086
Total
53,462
183,837
12,865
22,133
3,857
78,096
354,250
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:
(cid:120)
(cid:120)
(cid:120)
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, 2016 and 2015, and based on the most recent analysis performed, the risk category of loans by class of loans and leases is as
follows:
2016
Commercial
Commercial and multi-family real estate
Residential 1 - 4 family
Consumer
Total
2015
Commercial
Commercial and multi-family real estate
Residential 1 - 4 family
Consumer
Total
Pass
Special Mention
Substandard
Doubtful
Not rated
(in thousands)
$
$
$
$
41,233
162,399
210
-
203,842
$
$
-
4,239
-
-
4,239
$
$
3,666
3,850
-
-
7,516
Pass
Special Mention
Substandard
2,806
7,563
-
-
10,369
$
$
2,656
5,976
-
-
8,632
41,184
139,351
223
-
180,758
$
$
36
$
$
$
$
Doubtful
-
-
-
-
-
-
-
-
-
-
$
$
$
$
18,819
48,999
88,659
4,012
160,489
Not rated
19,680
53,081
77,873
3,857
154,491
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, 2016 and 2015:
2016
Performing
Nonperforming
Total
2015
Performing
Nonperforming
Total
Modifications:
Commercial
Commercial and
multi-family real
estate
Residential 1-4
family
Consumer
(in thousands)
$
$
$
$
18,740
79
18,819
Commercial
19,540
140
19,680
$
$
$
$
48,441
558
48,999
Commercial and
multi-family real
estate
52,249
832
53,081
$
$
$
$
88,197
462
88,659
Residential 1-4
family
77,484
389
77,873
$
$
$
$
4,012
-
4,012
Consumer
3,852
5
3,857
The Corporation’s loan and lease portfolio also includes certain loans and leases that have been modified in a TDR, where economic concessions have been
granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss
mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. All TDRs are
also classified as impaired loans and leases.
When the Corporation modifies a loan or lease, management evaluates any possible concession based on the present value of expected future cash flows,
discounted at the contractual interest rate of the original loan or lease agreement, except when the sole (remaining) source of repayment for the loan or lease is the
operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash
flows. If management determines that the value of the modified loan or lease is less than the recorded investment in the loan or lease (net of previous charge-offs,
deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down
of the loan or lease balance if collection is not expected.
The following table includes the recorded investment and number of modifications for TDR loans and leases during the years ended December 31, 2016 and
December 31, 2015. There were no other subsequent defaults relating to TDR loans and leases during the years ended December 31, 2016 and 2015.
Troubled Debt Restructurings:
2016
Residential Real Estate
Commercial
Commercial Real Estate
Total
2015
Residential Real Estate
Commercial Real Estate
Total
Number of
modifications
(dollars in thousands)
Recorded investment
Allowance for loan and
lease losses allocated
1
1
4
6
8
8
16
$
$
$
$
72
30
256
358
245
416
661
$
$
$
$
-
-
-
-
-
-
-
37
The concessions granted during 2016 included the following: the bank renewed two loans for another one year term, granted an interest only period on one loan,
lowered payments and extended the maturity on one loan, modified payments on one loan and brought interest payments current and liquidating inventory of one
loan. 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.
The following is additional information with respect to loans and leases acquired with The OSB acquisition as of December 31, 2016 and December 31, 2015:
2016
Purchased Performing Loans and Leases
Balance at December 31, 2015
Accretion of loan discounts
Transfer to foreclosed real estate
Change due to loan charge-off
Balance at December 31, 2016
Purchased Impaired Loans and Leases
Balance at December 31, 2015
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Balance at December 31, 2016
(in thousands)
Contractual
Principal
Receivable
Accretable
Difference
Carrying
Amount
$
$
$
$
41,873
(7,457)
-
-
34,416
Contractual
Principal
Receivable
1,959
(238)
-
(201)
1,520
$
$
$
$
(1,809) $
333
-
-
(1,476) $
40,064
(7,124)
-
-
32,940
Non
Accretable
Difference
Carrying
Amount
(1,194) $
108
-
190
(896) $
765
(130)
-
(11)
624
38
2015
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
$
$
$
$
58,437
(16,557)
-
(7)
41,873
Contractual
Principal
Receivable
2,689
(368)
(214)
(148)
1,959
$
$
$
$
(3,144) $
1,334
-
1
(1,809) $
55,293
(15,223)
-
(6)
40,064
Non
Accretable
Difference
Carrying
Amount
(1,788) $
241
207
146
(1,194) $
901
(127)
(7)
(2)
765
As a result of The OSB 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,
2016, December 31, 2015 as well as the date of acquisition, November 14, 2014 was $624,000, $765,000 and $959,000, respectively.
No provision for loan and lease losses was recognized during the years ended December 31, 2016 and 2015 related to the acquired loans as there has been no
significant change to the valuation of loans acquired subsequent to the date of acquisition.
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 $370,000, $63,000 and $34,000 at December 31, 2016, 2015 and 2014, respectively. The
following is a summary of activity during 2016, 2015 and 2014 for such loans:
Beginning of year
Additions
Repayments
End of year
2016
(in thousands)
2015
2014
$
$
63
630
(323)
370
$
$
34
160
(131)
63
$
$
45
4
(15)
34
Additions and repayments include loan and lease renewals, as well as net borrowings and repayments under revolving lines-of-credit.
39
NOTE 6 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2016 and 2015:
Land and improvements
Buildings
Equipment
Construction in progress
Less accumulated depreciation
Premises and equipment, net
(in thousands)
2016
2015
$
$
3,469
10,434
3,621
2,209
19,733
6,338
13,395
$
$
3,401
11,640
4,245
13
19,299
7,250
12,049
Depreciation expense amounted to $562,000 in 2016, $599,000 in 2015 and $451,000 in 2014.
Construction in progress at December 31, 2016 is related to the Corporation’s new Columbus Grove headquarters, which is expected to be completed and in
service during the second quarter 2017. Estimated remaining costs at December 31, 2016 to complete the facility approximates $3.3 million.
40
NOTE 7 - SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced
for others amounted to $172,171,000 and $173,464,000 at December 31, 2016 and 2015, 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, 2016
and 2015 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 2016 and 2015
Following is a summary of mortgage servicing rights activity for the years ended December 31, 2016, 2015 and 2014:
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
2016
(in thousands)
2015
2014
$
$
1,181
273
(195)
(12)
1,247
$
$
1,218
252
(552)
263
1,181
$
$
1,399
134
(168)
(147)
1,218
The change in fair value of servicing rights for the year ended December 31, 2016 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, 2016 was 148 compared to 170 at December 31, 2015 and 195 at December 31, 2014. The earnings rate used in determining the fair value of
servicing was 0.25% in 2016, 2015 and 2014.
NOTE 8 - DEPOSITS
Time deposits at December 31, 2016 and 2015 include individual deposits greater than $250,000 of $4,341,000 and $3,393,000, respectively. Interest expense on
time deposits greater than $250,000 amounted to $31,000 for 2016, $23,000 for 2015, and $37,000 for 2014.
At December 31, 2016, time deposits amounted to $129,460,000 and were scheduled to mature as follows: 2017, $73,242,000; 2018, $30,694,000; 2019,
$6,955,000; 2020, $12,455,000; 2021, $5,866,000; and thereafter, $248,000.
Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation.
Such deposits amounted to $3,436,000 and $3,705,000 at December 31, 2016 and 2015, respectively.
41
NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at December 31, 2016 and December 31, 2015:
Federal Home Loan Bank borrowings:
Secured note, with interest at .45%, due March, 2016
Secured notes, with interest at .74%, due March, 2017
Total other borrowings
(in thousands)
2016
2015
$
$
-
18,774
18,774
$
$
2,118
-
2,118
Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $86,970,000 at December 31,
2016. At December 31, 2016, the Corporation had $78,556,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan
Bank and other financial institutions.
42
NOTE 10 - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (United Trust) which is not consolidated by the Corporation.
United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of
the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase
$10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation. The debentures have a stated maturity date of March 26, 2033. As of
March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option. Interest is at a floating rate adjustable quarterly and equal
to 315 basis points over the 3-month LIBOR amounting to 4.15% at December 31, 2016, 3.57% at December 31, 2015, and 3.40% at December 31, 2014, with
interest payable quarterly. The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest
payment period for a period not exceeding 20 consecutive quarterly periods.
The Corporation assumed $3,093,000 of trust preferred securities from The OSB acquisition. $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 $2,506,000 at December 31,
2016 and $2,472,000 at December 31, 2015. 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 3.73% at December 31, 2016 and 3.27% at December 31, 2015.
Interest expense on the debentures amounted to $496,000 in 2016, $446,000 in 2015, and $355,000 in 2014, 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, 2016, 2015 and 2014:
Data processing
Professional fees
Ohio Financial Institution and Franchise taxes
Advertising
ATM processing and other fees
Amortization of core deposit intangible assets
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
2016
(in thousands)
2015
2014
999
785
285
605
570
137
40
105
269
290
46
27
-
1,780
5,938
$
$
1,053
907
453
484
438
137
43
99
358
191
354
36
-
1,715
6,268
$
$
700
1,054
437
405
448
57
100
172
331
233
273
(20)
529
1,657
6,376
$
$
43
NOTE 12 - INCOME TAXES
The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 consist of the following:
Current
Deferred
Total provision for income taxes
2016
(in thousands)
2015
$
$
951
793
1,744
$
$
546
859
1,405
$
$
2014
785
299
1,083
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:
2016
(in thousands)
2015
2014
Expected tax using statutory tax rate of 34%
$
2,470
$
2,489
$
1,834
Increase (decrease) in tax resulting from:
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
(558)
(134)
(49)
(22)
-
-
37
(577)
(145)
(39)
(25)
-
(332)
34
(574)
(135)
(40)
(30)
53
-
(25)
Total provision for income taxes
$
1,744
$
1,405
$
1,083
The deferred income tax provision of $793,000 in 2016, $859,000 in 2015, and $299,000 in 2014 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 $332,000
recognized in 2015 due to I.R.S. Revenue Procedures 2015-13 and 2015-14 released in January 2015.
44
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015
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
Unrealized loss on securities available-for sale
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
Trust preferred fair value adjustment
Other
Total deferred tax liabilities
Net deferred tax assets
(in thousands)
2016
2015
$
$
1,156
512
627
598
153
5
134
161
709
446
86
708
5,295
-
849
424
75
2,679
200
12
4,239
1,056
$
$
1,319
534
793
321
144
319
131
160
919
-
53
751
5,443
720
849
402
88
2,471
211
21
4,760
683
Net deferred tax assets at December 31, 2016 and 2015 are included in other assets in the consolidated balance sheets. At December 31, 2016, the Corporation
had $627,000 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 OSB, 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 $2.1 million of these losses is reflected in deferred tax assets at December 31, 2016.
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, 2016 and 2015.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Reductions due to the statute of limitation
Balance at December 31
45
(in thousands)
2016
2015
$
$
20
(20)
-
$
$
43
(23)
20
The Corporation had an unrecognized tax benefit of $20,000 at December 31, 2015, which was fully recognized in 2016. The Corporation is not aware of any
unrecognized tax benefits at December 31, 2016.
The amount of accrued interest, net of federal tax, related to the Corporation’s uncertain tax positions was $1,700 at December 31, 2015.
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 2013. There are no current federal examinations of the Corporation’s open tax years.
46
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 $632,000, $617,000 and $542,000, in 2016, 2015, and 2014, respectively. At December 31, 2016, the Plan owned 337,203 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 $1,506,000 and $1,571,000 at December 31, 2016 and 2015, 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 $17,351,000 and $16,834,000 at December 31, 2016 and 2015, 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 843 shares in 2016, 715 shares in
2015, and 684 shares in 2014 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, 2016 and 2015:
Commitments to extend credit
Letters of credit
(in thousands)
Contract amount
2016
2015
$
$
90,713
310
$
$
84,069
325
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Corporation evaluates each customer’s
credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on
management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party and are reviewed for
renewal at expiration. All of the letters of credit outstanding at December 31, 2016 expire 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.
47
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, 2016 and 2015, 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, 2016, 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.
48
The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2016 and 2015 are presented in the following table:
Actual
Amount
Ratio
Minimum
capital
requirement
Amount
Ratio
(Dollars in thousands)
Minimum to be
well capitalized
under prompt
corrective
action provisions
Amount
Ratio
As of December 31, 2016
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, 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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
*CET1 is effective as of January 1, 2016
75,273
73,559
78,618
76,959
75,273
73,559
75,273
73,559
72,202
70,428
75,517
74,307
72,202
70,428
72,202
70,428
16.2% $
15.9% $
16.9% $
16.6% $
16.2% $
15.9% $
12.5% $
12.0% $
16.3% $
15.9% $
17.0% $
16.8% $
16.3% $
15.9% $
11.7% $
11.8% $
20,912
20,878
37,177
37,116
27,882
27,837
24,147
24,461
19,951
19,905
35,469
35,386
26,602
26,540
24,704
23,978
≥ 4.5%
≥ 4.5% $
≥ 8.0%
≥ 8.0% $
≥ 6.0%
≥ 6.0% $
≥ 4.0%
≥ 4.0% $
≥ 4.5%
≥ 4.5% $
≥ 8.0%
≥ 8.0% $
≥ 6.0%
≥ 6.0%
≥ 4.0%
≥ 4.0% $
N/A
30,157
N/A
46,395
N/A
37,116
N/A
30,576
N/A
28,751
N/A
44,233
N/A
35,386
N/A
29,972
N/A
6.5%
N/A
10.0%
N/A
8.0%
N/A
5.0%
N/A
6.5%
N/A
10.0%
N/A
8.0%
N/A
5.0%
On a parent company only basis, the Corporation’s primary source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to
limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the
Bank may declare dividends without the approval of the ODFI, unless the total dividends in a calendar year exceed the total of the Bank’s net profits for the year
combined with its retained profits of the two preceding years.
49
NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2016 and 2015 and for each of the years in the three-year period ended
December 31, 2016, is as follows:
Condensed Balance Sheets
Assets:
Cash
Investment in bank subsidiary
Premises and equipment, net of accumulated depreciation
Other assets
Total assets
Liabilities:
Junior subordinated deferrable interest debentures
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders’ equity
(in thousands)
2016
2015
$
$
$
$
$
$
$
294
83,950
-
1,222
85,466
12,806
102
12,908
72,558
85,466
$
Condensed Statements of Income
Income – dividends from bank subsidiary
Expenses – interest expense, professional fees and other expenses, net of federal income
tax benefit
Income before equity in undistributed net income of bank subsidiary
Equity in undistributed net income of bank subsidiaries
Net income
$
$
2016
(in thousands)
2015
2014
2,575
$
3,000
$
(703)
1,872
3,649
5,521
$
(577)
2,423
3,494
5,917
$
50
334
82,564
267
1,239
84,404
12,773
70
12,843
71,561
84,404
3,200
(587)
2,613
1,699
4,311
Condensed Statements of Cash Flows
Cash flows from operating activities:
2016
(in thousands)
2015
2014
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
5,521
$
5,917
$
Equity in undistributed net income of bank subsidiary
Depreciation and amortization
Loss on disposal of premises
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Payment for acquisition
Proceeds from sale of premises
Net cash provided by (used in) investing activities
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
(3,649)
39
91
17
33
2,052
-
170
170
(833)
18
(1,446)
(2,261)
(39)
334
295
$
(3,494)
59
-
(53)
(101)
2,328
-
-
-
(927)
14
(1,200)
(2,113)
215
119
334
$
$
4,311
(1,699)
27
-
(4)
(71)
2,564
(1,197)
-
(1,197)
(1,136)
12
(1,194)
(2,318)
(951)
1,070
119
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 43,665 shares in 2016, 59,111 shares in 2015 and
75,000 shares in 2014 under the program.
51
NOTE 17 - FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair
value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value
of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to
the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.
FASB ASC 820-10, Fair Value Measurements (ASC 820-10) requires the use of valuation techniques that are consistent with the market approach, the income
approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or
comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present
amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement
cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing
the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard,
ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other
than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the
Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information
available in the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow
methodologies, as well as instruments for which the fair value determination requires significant management judgment.
The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2016 and 2015, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
2016
Recurring:
Securities available-for-sale:
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
(in thousands)
$
$
$
$
-
-
984
-
984
-
-
-
$
$
$
$
52
68,386
118,595
2
-
186,983
-
-
-
$
$
$
$
2,238
-
-
1,247
3,485
1,899
578
2,477
$
$
$
$
70,624
118,595
986
1,247
191,452
1,899
578
2,477
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
Level 1 inputs
Level 2 inputs
Level 3 inputs
Total fair value
(in thousands)
$
$
$
$
-
-
-
999
-
999
-
-
-
$
$
$
$
3,966
71,093
104,480
2
-
179,541
-
-
-
$
$
$
$
-
2,389
-
-
1,181
3,570
4,641
173
4,814
$
$
$
$
3,966
73,482
104,480
1,001
1,181
184,110
4,641
173
4,814
There was one security measured at fair value included in the Level 3 hierarchy during 2016 and 2015 due to the lack of observable quotes in inactive markets for
the instrument.
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, 2016, 2015 and 2014:
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
$
$
2016
(in thousands)
2015
2014
1,181
$
1,218
$
273
(195)
(12)
1,247
$
$
$
252
(552)
263
1,181
$
(in thousands)
2016
2015
2,389
(151)
-
2,238
$
$
1,399
134
(168)
(147)
1,218
2,536
(145)
(2)
2,389
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.
53
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.
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 10% and 40% 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, 2016.
54
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2016 and 2015 are as follows:
FINANCIAL ASSETS
Cash and cash equivalents
Securities, including FHLB stock
Certificates of deposit
Loans held for sale
Net loans and leases
Mortgage servicing rights
FINANCIAL LIABILITIES
Deposits
Maturity
Non-maturity
Other borrowings
Junior subordinated deferrable interest debentures
(in thousands)
2016
2015
Carrying
Amount
Estimated
Value
Carrying
Amount
Estimated
Value
Input
Level
14,186
195,035
1,494
1,510
372,741
1,247
586,213
$
$
14,186
195,035
1,494
1,510
371,493
1,247
584,965
$
$
22,922
187,759
1,992
347
350,416
1,181
564,617
$
$
22,922
187,759
1,992
347
350,374
1,181
564,575
1
2,3
2
3
3
3
(in thousands)
2016
2015
Carrying
Amount
Estimated
Value
Carrying
Amount
Estimated
Value
Input
Level
129,460
395,220
18,774
12,806
556,260
$
$
128,592
395,220
18,774
9,295
551,881
$
$
148,485
369,934
2,118
12,773
533,310
$
$
147,164
369,934
2,118
8,265
527,481
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, 2016 and 2015 which relate to commitments to extend credit and letters of credit. The contract
amount of such financial instruments amounts to $91,023,000 at December 31, 2016 and $84,394,000 at December 31, 2015. Such amounts are also considered to
be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent
cash or mature in 90 days or less and do not represent unanticipated credit concerns.
Securities:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically
include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted
prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the
valuation hierarchy, include municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less
transparency around inputs to the valuation, securities may be classified within Level 3 of the valuation hierarchy. The Corporation had one security that was
classified as Level 3 at December 31, 2016 and 2015.
55
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.
NOTE 19 - LEASING ARRANGEMENTS
In September 2016, the Corporation entered into a lease for its Marion facility. The lease expires in January 2022 and provides a renewal option for four
successive five-year periods under similar terms.
The following is a schedule of future minimum rental payments required under the above operating lease as of December 31, 2016:
Year ending December 31
2017
2018
2019
2020
2021
2022
Total
56
Amount
(in thousands)
32
35
35
35
35
3
175
$
$
NOTE 20 - STOCK-BASED COMPENSATION
At the 2016 Annual Shareholders Meeting, the shareholders of the Corporation adopted the United Bancshares, Inc. 2016 Stock Option Plan (the “Plan”), which
permits the Corporation to award non-qualified stock options to eligible participants. A total of 250,000 shares are available for issuance pursuant to the Plan.
The Corporation issued 33,352 options during 2016 at an exercise price of $19.32 under the Plan. Following is a summary of activity for stock options for the
year ended December 31, 2016, there were no options awarded or exercised in 2015.
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
-
33,352
-
33,352
The options vest over a three-year period on the anniversary of the date of grant. At December 31, 2016, no options were exercisable and outstanding options had
a weighted average remaining contractual term of 7 years.
The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. Following are assumptions used in calculating the
fair value of the options granted in 2016:
Weighted-average fair value of options granted
$
Average dividend yield
Expected volatility
Risk-free interest rate
Expected term
6.27
2.31%
40.00%
1.58%
7
The total compensation expense related to the stock options granted in 2016 will be $209,000 and will be expensed ratably over the 36 month period beginning
January, 2017.
NOTE 21 - CONTINGENT LIABILITIES
In the normal course of business, the Corporation and its subsidiary may be involved in various legal actions, but in the opinion of management and legal counsel,
the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.
57
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of selected unaudited quarterly financial data for 2016 and 2015:
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
(in thousands, except share data)
Interest
Income
Net
Interest
Income
Net
Income
Net Income
Per Share
Basic
Diluted
$
$
$
$
$
$
$
$
5,245
5,303
5,541
5,538
5,711
5,670
5,755
5,701
$
$
$
$
$
$
$
$
58
4,731
4,746
4,961
4,958
5,156
5,143
5,259
5,201
$
$
$
$
$
$
$
$
1,307
1,336
1,378
1,500
1,122
1,903
1,503
1,389
$
$
$
$
$
$
$
$
0.40
0.40
0.42
0.46
0.33
0.57
0.45
0.42
$
$
$
$
$
$
$
$
0.40
0.40
0.42
0.46
0.33
0.57
0.45
0.42
OFFICERS – UNITED BANCSHARES, INC.
Brian D. Young – President / Chief Executive Officer
Daniel J. Lucke – Chief Financial Officer
Heather M. Oatman – Secretary
OFFICERS – THE UNION BANK COMPANY
Brian D. Young – President/CEO/Chairman
Curtis E. Shepherd – Executive Vice President
Teresa M. Deitering
Senior Vice President
Heather M. Oatman
Senior Vice President, Sec.
John P. Miller
Senior Vice President
Norman V. Schnipke
Senior Vice President
Janice C. Acerro
Dan M. Best
Donna J. Brown
Paul M. Cira
Vicky K. Gilbert
Erin W. Hardesty
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Mark G. Honigford
Vice President
Max E. Long
Daniel J. Lucke
Karen M. Maag
Vice President
Vice President, CFO
Vice President
Doris A. Neumeier
Vice President
Brent D. Nussbaum
Vice President
C. Christopher Ramsey
Vice President
Amy E. Reese
Ricardo Rosado
Vice President
Vice President
Thomas J. Sansone
Vice President
David E. Stuthard
J. Kevin Taylor
Jason R. Thornell
Paul A. Walker
Vice President
Vice President
Vice President
Vice President
Kathi J. Amstutz
Assistant Vice President
Susan A. Hojnacki
Assistant Vice President
Nancianne Carroll
Assistant Vice President
Sarah E. Klausing
Assistant Vice President
Elizabeth J. Cooper
Assistant Vice President
Bart H. Mills
Assistant Vice President
David M. Cornwell
Assistant Vice President
Ellen M. Neiling
Assistant Vice President
Thomas M. Cox
Assistant Vice President
Peter J. Rafaniello
Assistant Vice President
Chase H. Doll
Assistant Vice President
Jason A. Recker
Assistant Vice President
Adina S. Fugate
Assistant Vice President
Craig R. Stechschulte
Assistant Vice President
Deborah A. Gaines
Assistant Vice President
Theresa A. Stein-Moenter
Assistant Vice President
Jason D. Goldsmith
Assistant Vice President
Stacia R. Thompson
Assistant Vice President
Teresa J. Hawkey
Assistant Vice President
Matthew J. Tway
Assistant Vice President
Christina J. Hegemier
Assistant Vice President
Kimberly S. Verhoff
Assistant Vice President
Machiel K. Hindall
Assistant Vice President
Vikki L. Williams
Assistant Vice President
Pamela J. Workman
Assistant Vice President
Mary Jo Horstman
Assistant Controller, Officer
Zachary P. Nycz
Trainer, Officer
59
UNITED BANCSHARES, INC.
Columbus Grove, Ohio
DIRECTORS – UNITED BANCSHARES, INC.
AGE
54
79
74
66
DIRECTOR
SINCE
2003
2000
2000
2001
NAME
Daniel W. Schutt
Vice Chairman, Retired Banker
R. Steven Unverferth
Chairman, Unverferth Manufacturing
Corporation, Inc.
Brian D. Young
President/CEO
NAME
Robert L. Benroth
Putnam County Auditor
James N. Reynolds
Chairman, Retired Banker
H. Edward Rigel
Farmer, Rigel Farms, Inc.
David P. Roach
Vice-President/GM, First Family
Broadcasting of Ohio
NAME
Robert L. Benroth
Putnam County Auditor
AGE
Anthony M.V. Eramo
Vice-President/Acct Relationship Mgr,
McGuire Performance Solutions
Herbert H. Huffman
Retired - Educator
Kevin L. Lammon
Village Administrator, Village of Leipsic
William R. Perry
Farmer
James N. Reynolds
Retired Banker
DIRECTORS – THE UNION BANK COMPANY
DIRECTOR
SINCE (a)
2001
2016
1993
1996
1990
1966
54
51
66
62
58
79
NAME
H. Edward Rigel
Farmer, Rigel Farms, Inc.
David P. Roach
Vice-President/GM, First Family
Broadcasting of Ohio
Robert M. Schulte, Sr.
Businessman/Spherion Services
Daniel W. Schutt
Retired Banker
R. Steven Unverferth
Chairman, Unverferth Manufacturing
Corporation, Inc.
Brian D. Young
President/CEO/Chairman
AGE
AGE
69
64
50
74
66
84
69
64
50
DIRECTOR
SINCE
2005
2005
2012
DIRECTOR
SINCE (a)
1979
1997
1994
2005
1993
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
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 OSB 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
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
2, 2017, relating to the consolidated balance sheets of United Bancshares, Inc. and subsidiaries as of December 31, 2016 and 2015 and the related consolidated
statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016, which
report is incorporated by reference in the December 31, 2016 Annual Report on Form 10-K of United Bancshares, Inc.
Toledo, Ohio
March 2, 2017
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, 2016, 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 2, 2017
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, 2016, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Daniel J. Lucke, 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/ Daniel J. Lucke
Daniel J. Lucke
Chief Financial Officer
March 2, 2017
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, 2016, 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 2, 2017
*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.
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, 2016, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel J. Lucke, 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/ Daniel J. Lucke
Daniel J. Lucke
Chief Financial Officer
Date: March 2, 2017
*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.
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, 2016, 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.