UNITED BANCSHARES INC/OH - Quarter Report: 2020 March (Form 10-Q)

 

  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

Commission file number 333-86453

 

UNITED BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

Ohio

(State or other jurisdiction of incorporation or organization)

 

105 Progressive Drive, Columbus Grove, Ohio

(Address of principal executive offices)

 

34-1516518

(I.R.S. Employer Identification Number)

 

45830

(Zip Code)

 

(419) 659-2141

(Registrant’s telephone number, including area code)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of Each Exchange
Common Stock, No Par Value	UBOH	NASDAQ Global Market

 

 

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

 

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

 

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

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2020: 3,270,399.

 

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

 

 

 

 

 

UNITED BANCSHARES, INC.

 

Table of Contents

  

		Page
Part I – Financial Information
	Item 1 – Financial Statements	3
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk	34
	Item 4 – Controls and Procedures	35
Part II – Other Information
	Item 1 – Legal Proceedings	36
	Item 1A – Risk Factors	36
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3 – Defaults Upon Senior Securities	36
	Item 4 – Mine Safety Disclosures	37
	Item 5 – Other Information	37
	Item 6 – Exhibits	37

 

 

  

 

		(in thousands except share data)
		March 31,				December 31,
		2020				2019
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks		$	11,485			$	9,167
Interest-bearing deposits in other banks			33,287				17,245
Total cash and cash equivalents			44,772				26,412
SECURITIES, available-for-sale			187,700				183,611
FEDERAL HOME LOAN BANK STOCK, at cost			5,598				5,302
LOANS HELD FOR SALE			19,613				15,301
LOANS AND LEASES			573,981				576,424
Less allowance for loan and lease losses			4,687				4,131
Net loans and leases			569,294				572,293
PREMISES AND EQUIPMENT, net			18,638				18,789
GOODWILL			28,616				28,616
CORE DEPOSIT INTANGIBLE ASSETS, net			756				794
CASH SURRENDER VALUE OF LIFE INSURANCE			18,709				18,613
OTHER ASSETS, including accrued interest receivable			8,761				10,283
TOTAL ASSETS		$	902,457			$	880,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest-bearing		$	120,469			$	116,360
Interest-bearing			604,667				590,774
Total deposits			725,136				707,134
Other borrowings			58,500				58,750
Junior subordinated deferrable interest debentures			12,916				12,908
Other liabilities			7,423				6,441
Total liabilities			803,975				785,233
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares			3,761				3,761
Surplus			15,337				15,251
Retained earnings			81,259				80,629
Accumulated other comprehensive income			5,821				2,872
Treasury stock, at cost, 490,158 shares at March 31, 2020 and 492,462 shares at December 31, 2019			(7,696	)			(7,732	)
Total shareholders’ equity			98,482				94,781
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	902,457			$	880,014

 

		(in thousands except share data)
		2020				2019
INTEREST INCOME
Loans and leases, including fees		$	7,945			$	7,783
Securities:
Taxable			612				662
Tax-exempt			498				413
Other			177				128
Total interest income			9,232				8,986
INTEREST EXPENSE
Deposits			1,535				1,410
Other borrowings			573				641
Total interest expense			2,108				2,051
Net interest income			7,124				6,935
PROVISION FOR LOAN AND LEASE LOSSES			550				100
Net interest income after provision for loan and lease losses			6,574				6,835
NON-INTEREST INCOME
Gain on sale of loans			2,583				1,438
Other non-interest income			251				1,070
Total non-interest income			2,834				2,508
NON-INTEREST EXPENSES			8,210				7,222
INCOME BEFORE INCOME TAXES			1,198				2,121
PROVISION FOR INCOME TAXES			110				307
NET INCOME		$	1,088			$	1,814
NET INCOME PER SHARE (basic and diluted)		$	0.33			$	0.55
Weighted average common shares outstanding (basic)			3,270,066				3,270,408
Weighted average common shares outstanding (diluted)			3,270,066				3,277,717

 

		(in thousands)
		2020				2019
NET INCOME		$	1,088			$	1,814
OTHER COMPREHENSIVE INCOME
Unrealized gain on securities:
Unrealized holding gains during period			3,733				2,552
Reclassification adjustments for gains included in net income			-				-
Other comprehensive income, before income taxes			3,733				2,552
Income tax expense related to items of other comprehensive income			784				536
Other comprehensive income			2,949				2,016
COMPREHENSIVE INCOME		$	4,037			$	3,830

 

		Common stock				Surplus				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total
BALANCE AT DECEMBER 31, 2019		$	3,761			$	15,251			$	80,629			$	2,872			$	(7,732	)		$	94,781
Comprehensive income:
Net income			-				-				1,088				-				-				1,088
Other comprehensive income			-				-				-				2,949				-				2,949
2,304 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan			-				26				-				-				36				62
Stock option expense			-				60				-				-				-				60
Cash dividends declared, $0.14 per share			-				-				(458	)			-				-				(458	)
BALANCE AT MARCH 31, 2020		$	3,761			$	15,337			$	81,259			$	5,821			$	(7,696	)		$	98,482
BALANCE AT DECEMBER 31, 2018		$	3,761			$	14,960			$	71,670			$	(1,764	)		$	(7,683	)		$	80,944
Comprehensive income:
Net income			-				-				1,814				-				-				1,814
Other comprehensive income			-				-				-				2,016				-				2,016
1,277 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan			-				10				-				-				20				30
Stock option expense			-				55				-				-				-				55
Cash dividends declared, $0.13 per share			-				-				(426	)			-				-				(426	)
BALANCE AT MARCH 31, 2019		$	3,761			$	15,025			$	73,058			$	252			$	(7,663	)		$	84,433

 

		(in thousands)
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES		$	(1,474	)		$	(1,818	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and maturities of available-for-sale securities			6,908				3,788
Purchases of available-for-sale securities			(7,494	)			(3,575	)
Purchases of FHLB stock			(296	)			-
Net increase in loans and leases			3,385				(4,222	)
Purchases of premises and equipment			(14	)			(83	)
Net cash provided by (used in) investing activities			2,489				(4,092	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			17,991				23,040
Repayments of other borrowings			(250	)			(5,943	)
Proceeds from sale of treasury shares			62				30
Cash dividends paid			(458	)			(426	)
Net cash provided by financing activities			17,345				16,701
NET INCREASE IN CASH AND CASH EQUIVALENTS			18,360				10,791
CASH AND CASH EQUIVALENTS
At beginning of period			26,412				16,475
At end of period		$	44,772			$	27,266
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest		$	2,153			$	2,012
Federal income taxes		$	-			$	-
Non-cash investing activities:
Change in net unrealized gain on available-for-sale securities		$	3,733			$	2,552

 

NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS

 

The consolidated financial statements of United Bancshares, Inc. and subsidiaries (the “Corporation”) have been prepared without audit and in the opinion of management reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated. Since the unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q, they do not contain all information and footnotes typically included in financial statements prepared in conformity with generally accepted accounting principles. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 is derived from completed audited consolidated financial statements with footnotes, which are included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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

  

 

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update is effective for interim and annual periods beginning after December 15, 2019. The Corporation adopted ASU 2017-04 effective January 1, 2020 but the new guidance did not have any impact on the March 31, 2020 consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.  This ASU eliminates, adds, and modifies certain disclosure requirements for estimated fair value measurements.  Among the changes, entities will no longer be required to disclose the amount of and reasons for transfer between Level 1 and Level 2 of the estimated fair value hierarchy, but will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 estimated fair value measurements.  ASU 2018-13 is effective for all entities for interim and annual reporting periods beginning after December 15, 2019.  The Corporation adopted ASU 2018-13 effective January 1, 2020.  The revised disclosure requirements did not have a significant impact on the Corporation's March 31, 2020 consolidated financial statements.

 

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

 

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

 

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

 

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

 

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

 

 

 

 

NOTE 3 - SECURITIES

 

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

 

 

 

  

  

 

NOTE 4 – LOANS AND LEASES

 

The following tables present the activity in the allowance for loan and lease losses by portfolio segment for the three month periods ended March 31, 2020 and 2019:

 

  

 

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 March 31, 2020 and December 31, 2019:

  

 

 

 

  

The average recorded investment in impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) for the three month period ended March 31, 2020 was $2,847,000 compared to $1,307,000 for the three month period ended March 31, 2019. There was $400,000 of allowance for loan and lease losses specifically reserved as of March 31, 2020 for impaired loans compared to $100,000 as of March 31, 2019. Additionally, there was approximately $12,000 in interest income recognized by the Corporation on impaired loans and leases on an accrual or cash basis for the three month period ended March 31, 2020 and $24,000 for the three month period ended March 31, 2019.

 

The following table presents the recorded investment in nonaccrual loans and leases, loans and leases past due over 90 days still on accrual and troubled debt restructurings by class of loans as of March 31, 2020 and December 31, 2019. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.

 

 

 

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

 

 

  

Credit Quality Indicators:

 

The Corporation categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt, such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Corporation analyzes loans and leases individually by classifying the loans and leases as to the credit risk.  This analysis generally includes non-homogenous loans and leases, such as commercial and commercial real estate loans and leases. The Corporation uses the following definitions for risk ratings:

 

●	Pass: Loans and leases not meeting the previous criteria that are analyzed individually as part of the above described process are considered to be pass rated loans and leases.

 

●

Special Mention: Loans and leases which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans and leases pose unwarranted financial risk that, if not corrected, could weaken the loan or lease and increase risk in the future. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered "potential", versus "defined", impairments to the primary source of loan repayment.

 

●

Substandard: These loans and leases are inadequately protected by the current sound net worth and paying ability of the borrower. Loans and leases of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow. These loans and leases may also have historic and/or severe delinquency problems, and Corporation management may depend on secondary repayment sources to liquidate these loans and leases. The Corporation could sustain some degree of loss in these loans and leases if the weaknesses remain uncorrected.

 

●

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

 

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

 

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

 

 

 

The Corporation considers the performance of the loan and lease portfolio and its impact on the allowance for loan and lease losses. For all loan classes that are not rated, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Generally, all loans and leases not rated that are 90 days past due or are classified as nonaccrual and collectively evaluated for impairment, are considered nonperforming. The following table presents the recorded investment in all loans and leases that are not risk rated, based on payment activity as of March 31, 2020 and December 31, 2019:

 

  

Modifications:

 

The Corporation’s loan and lease portfolio also includes certain loans and leases that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. All TDRs are also classified as impaired loans and leases.

 

When the Corporation modifies a loan or lease, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, except when the sole (remaining) source of repayment for the loan or lease is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan or lease is less than the recorded investment in the loan or lease (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down of the loan or lease balance if collection is not expected.

  

There were no modifications for TDR loans and leases for which there was a payment default during the three month period ended March 31, 2020. 

 

The Corporation acquired The Ohio State Bank (“OSB”) in November 2014 and Benchmark Bank in September 2017. As a result of these acquisitions, the Corporation has loans and leases, for which there was at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition, that all contractually required payments would not be collected.

  

 

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

 

 

 

 

There was no provision for loan and lease losses recognized during the three month periods ended March 31, 2020 and 2019 related to the acquired loans as there was no significant change to the credit quality of the loans during the period.

 

 

 

NOTE 5 – OTHER BORROWINGS

 

Other borrowings consists of the following at March 31, 2020 and December 31, 2019: 

 

  

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $163,896,000 and $186,076,000 at March 31, 2020 and December 31, 2019 respectively.

 

Future maturities of other borrowings are as follows: 2020: $6,750,000; 2021, $30,000,000; and 2022, $21,750,000.

 

 

 

NOTE 6 – JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

 

The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (“United Trust”) which is not consolidated by the Corporation. United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation. The debentures have a stated maturity date of March 26, 2033. As of March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option. Interest is payable quarterly at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR, amounting to 4.38% at March 31, 2020 and 5.10% at December 31, 2019. The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.

 

The Corporation assumed $3,093,000 of trust preferred securities through the OSB acquisition with $3,000,000 of the liability guaranteed by the Corporation and the remaining $93,000 secured by an investment in the trust preferred securities. The trust preferred securities carrying value as of March 31, 2020 and December 31, 2019 was $2,616,000 and $2,608,000, respectively. The difference between the principal owed and the carrying value is due to the below-market interest rate on the debentures. The debentures have a stated maturity date of April 23, 2034. Interest is at a floating rate adjustable quarterly and equal to 285 basis points over the 3-month LIBOR, amounting to 4.66% at March 31, 2020 and 4.78% at December 31, 2019.

 

Each issue of the trust preferred securities carries an interest rate identical to that of the related debenture. The securities have been structured to qualify as Tier I capital for regulatory purposes and the dividends paid on such are tax deductible. However, under Federal Reserve Board guidelines, the securities cannot be used to constitute more than 25% of the Corporation’s core Tier I capital inclusive of these securities.

 

Interest expense on the debentures amounted to $161,000 and $191,000 for the three month periods ended March 31, 2020 and 2019, respectively, and is included in other borrowings interest expense in the accompanying consolidated statements of income.  

 

 

 

NOTE 7 - FAIR VALUE MEASUREMENTS

 

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.

 

ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

 

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

 

Financial assets (there were no financial liabilities) measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 include available-for-sale securities, which are valued using Level 1 and Level 2 inputs, as well as mortgage servicing rights, amounting to $825,000 at March 31, 2020 and $1,061,000 at December 31, 2019, which are valued using Level 3 inputs. Financial assets measured at fair value on a nonrecurring basis at March 31, 2020 include loans classified as impaired totaling $1,732,000 compared to $1,495,000 at December 31, 2019. 

 

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during the period ended March 31, 2020, due to the lack of observable quotes in inactive markets for those instruments at March 31, 2020.

 

  

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

 

  

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, and disclosure of unobservable inputs follows.

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

Securities Available-for-Sale

 

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government and agencies securities, municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

 

  

Impaired Loans

 

The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral less estimated cost to sell, if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs, including recent appraisals or evaluations as well as Level 3 inputs based on customized discounting criteria such as additional appraisal adjustments to consider deterioration of value subsequent to appraisal date and estimated cost to sell. Additional appraisal adjustments range between 15% and 35% of appraised value, and estimated selling cost ranges between 10% and 20% of the adjusted appraised value.  Due to the significance of the Level 3 inputs, impaired loans fair values have been classified as Level 3.

 

Mortgage Servicing Rights

 

The Corporation records mortgage servicing rights at estimated fair value based on a discounted cash flow model which includes discount rates between 11% and 13%, in addition to prepayment, internal rate of return, servicing costs, inflation rate of servicing costs and earnings rate assumptions that are considered to be unobservable inputs. Due to the significance of the Level 3 inputs, mortgage servicing rights have been classified as Level 3.

 

Other Real Estate Owned

 

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

 

Certain other financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. Financial assets and financial liabilities, excluding impaired loans and other real estate owned, measured at fair value on a nonrecurring basis were not significant at March 31, 2020 and December 31, 2019.

  

  

 

NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

 

The above summary does not include accrued interest receivable or cash surrender value of life insurance, which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amounts.

 

There are also unrecognized financial instruments at March 31, 2020 and December 31, 2019 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounted to $141,005,000 at March 31, 2020 and $133,220,000 at December 31, 2019. Such amounts are also considered to be the estimated fair values.

 

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

 

Cash and cash equivalents:

 

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

 

Securities:

 

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

 

Loans held for sale:

 

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

 

 

Loans and leases:

 

Fair value for loans and leases was estimated for portfolios of loans and leases with similar financial characteristics. For adjustable rate loans, which re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For fixed rate loans, the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows.

 

Mortgage servicing rights:

 

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

 

Deposit liabilities:

 

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

 

Other borrowings and junior subordinated deferrable interest debentures:

 

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

 

Other financial instruments:

 

The fair value of commitments to extend credit and letters of credit is determined to be the contract amount, since these financial instruments generally represent commitments at existing rates. The fair value of other borrowings is determined based on a discounted cash flow analysis using current interest rates. The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement. The fair value of the contract is determined based on a discounted cash flow analysis using a current interest rate for a similar instrument.

 

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

  

 

 

NOTE 9 – STOCK OPTIONS

 

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

 

The Corporation has issued 30,151 options during 2017 at an exercise price of $21.70, 31,267 options during 2018 at an exercise price of $23.30, and 33,853 options during 2019 at an exercise price of $22.97 under the Plan. Following is a summary of activity for stock options for the three month periods ended March 31, 2020 and March 31, 2019: 

 

 

The options vest over a three-year period on the anniversary of the date of grant. At March 31, 2020, 57,033 options were vested compared to 31,718 options vested at March 31, 2019 and outstanding options had a weighted average remaining contractual term of 7.9 years.

 

The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. Following are assumptions used in calculating the fair value of the options granted that are still vesting:

 

 

Total compensation expense related to the stock options granted in 2017, net of forfeitures, is expected to be $192,000 and is being recognized ratably over the 36 month period beginning August 1, 2017. Total compensation expense related to the stock options granted in 2018, net of forfeitures, is expected to be $213,000 and is being recognized ratably over the 36 month period beginning September 1, 2018. Total compensation expense related to the stock options granted in 2019 is expected to be $263,000 and is being recognized ratably over the 36 month period beginning July 1, 2019. Stock option expense for outstanding awards amounted to $60,000 for the three months ended March 31, 2020 and $55,000 for the three months ended March 31, 2019

 

   

 

 NOTE 10 – NON-INTEREST INCOME

 

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

 

Service charges on deposit accounts: 

 

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

 

Interchange fee income: 

 

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

 

Wealth management income: 

 

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

 

The following table presents the Company’s non-interest income for the three months ended March 31, 2020 and 2019.  Items outside the scope of ASC 606 are noted as such.

 

 

(1) Not within the scope of ASC 606

 

 

NOTE 11 – SUBSEQUENT EVENTS 

 

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after March 31, 2020 but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at March 31, 2020 have been recognized in the consolidated financial statements for the period ended March 31, 2020. Events or transactions that provided evidence about conditions that did not exist at March 31, 2020 but arose before the financial statements were issued have not been recognized in the consolidated financial statements for the period ended March 31, 2020.

 

On April 2, 2020, the U.S. Small Business Administration (“SBA”) issued an interim final rule (“the Initial Rule”) announcing the implementation of sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act or the Act”). Section 1102 of the Act temporarily adds a new program, titled the “Paycheck Protection Program” (“PPP”), to the SBA’s 7(a) Loan Program. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. The PPP and loan forgiveness are intended to provide economic relief to small business nationwide adversely impacted by the Coronavirus Disease 2019 (“COVID-19”).

 

As an SBA-Certified Preferred lender we are delegated the authority as part of the CARES Act to make Paycheck Protection Program SBA-guaranteed financing available to eligible borrowers. The SBA will pay a processing fee based on the balance of the financing outstanding at the time of final disbursement. The processing fees is as follows: 5% for loans of not more than $350,000, 3% for loans of more than $350,000 and less than $2 million, and 1% for loans of at least $2 million. As of April 28, 2020, we are assisting over 1,100 clients to secure approximately $106 million of PPP financing, which is being issued by the SBA on a first come first served basis.

 

On April 7, 2020, the Board of Governors of the Federal Reserve System (“FRB”) authorized each of the Federal Reserve Banks to establish the Payment Protection Program Lending Facility (“PPPL Facility”), pursuant to section 13(3) of the Federal Reserve Act. Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the SBA under the PPP established by the CARES Act.

 

 

On April 28, 2020, the Corporation's Board of Directors approved a cash dividend of $0.07 per common share payable June 15, 2020 to shareholders of record at the close of business on May 29, 2020.