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,~~September 30, 2020

Commission file number 333-86453

UNITED BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

Ohio

(State or other jurisdiction of incorporation or organization)

105 Progressive Drive, Columbus Grove, Ohio

(Address of principal executive offices)

34-1516518

(I.R.S. Employer Identification Number)

45830

(Zip Code)

(419) 659-2141

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of ~~March 31,~~September 30, 2020: ~~3,270,399~~.3,271,651.

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

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

United Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

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

	(in thousands except share data)						(in thousands except share data)
	March 31,			December 31,			September 30,			December 31,
	2020			2019			2020			2019
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	11,485		$	9,167		$	10,462		$	9,167
Interest-bearing deposits in other banks		33,287			17,245			19,314			17,245
Total cash and cash equivalents		44,772			26,412			29,776			26,412
SECURITIES, available-for-sale		187,700			183,611			182,972			183,611
FEDERAL HOME LOAN BANK STOCK, at cost		5,598			5,302			5,598			5,302
LOANS HELD FOR SALE		19,613			15,301			32,117			15,301
LOANS AND LEASES		573,981			576,424			671,479			576,424
Less allowance for loan and lease losses		4,687			4,131			8,451			4,131
Net loans and leases		569,294			572,293			663,028			572,293
PREMISES AND EQUIPMENT, net		18,638			18,789			18,790			18,789
GOODWILL		28,616			28,616			28,616			28,616
CORE DEPOSIT INTANGIBLE ASSETS, net		756			794			680			794
CASH SURRENDER VALUE OF LIFE INSURANCE		18,709			18,613			18,896			18,613
OTHER ASSETS, including accrued interest receivable		8,761			10,283			12,908			10,283
TOTAL ASSETS	$	902,457		$	880,014		$	993,381		$	880,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest-bearing	$	120,469		$	116,360		$	169,590		$	116,360
Interest-bearing		604,667			590,774			651,408			590,774
Total deposits		725,136			707,134			820,998			707,134
Other borrowings		58,500			58,750			43,000			58,750
Junior subordinated deferrable interest debentures		12,916			12,908			12,933			12,908
Other liabilities		7,423			6,441			7,041			6,441
Total liabilities		803,975			785,233			883,972			785,233
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares		3,761			3,761			3,761			3,761
Surplus		15,337			15,251			15,403			15,251
Retained earnings		81,259			80,629			91,490			80,629
Accumulated other comprehensive income		5,821			2,872			6,431			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	)
Treasury stock, at cost, 488,906 shares at September 30, 2020 and 492,462 shares at December 31, 2019								(7,676	)		(7,732	)
Total shareholders’ equity		98,482			94,781			109,409			94,781
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	902,457		$	880,014		$	993,381		$	880,014

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

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

Three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)

					(in thousands except share data)
	(in thousands except share data)				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2020		2019
INTEREST INCOME
Loans and leases, including fees	$	7,945	$	7,783	$	9,110	$	8,392	$	26,106	$	24,385
Securities:
Taxable		612		662		435		656		1,533		1,973
Tax-exempt		498		413		539		416		1,548		1,232
Other		177		128		16		131		223		461
Total interest income		9,232		8,986		10,100		9,595		29,410		28,051
INTEREST EXPENSE
Deposits		1,535		1,410		789		1,703		3,282		4,712
Other borrowings		573		641		913		621		2,020		1,888
Total interest expense		2,108		2,051		1,702		2,324		5,302		6,600
Net interest income		7,124		6,935		8,398		7,271		24,108		21,451
PROVISION FOR LOAN AND LEASE LOSSES		550		100		3,000		150		4,450		400
Net interest income after provision for loan and lease losses		6,574		6,835		5,398		7,121		19,658		21,051
NON-INTEREST INCOME
Gain on sale of loans		2,583		1,438		8,484		2,785		17,032		6,409
Net securities gains						1		2		288		2
Other non-interest income		251		1,070		2,659		1,046		4,779		3,063
Total non-interest income		2,834		2,508		11,144		3,833		22,099		9,474
NON-INTEREST EXPENSES		8,210		7,222		10,084		8,070		27,099		22,784
INCOME BEFORE INCOME TAXES		1,198		2,121		6,458		2,884		14,658		7,741
PROVISION FOR INCOME TAXES		110		307		1,208		466		2,652		1,224
NET INCOME	$	1,088	$	1,814	$	5,250	$	2,418	$	12,006	$	6,517
NET INCOME PER SHARE (basic and diluted)	$	0.33	$	0.55
NET INCOME PER SHARE
Basic					$	1.61	$	0.74	$	3.67	$	1.99
Diluted					$	1.60	$	0.74	$	3.67	$	1.99
Weighted average common shares outstanding (basic)		3,270,066		3,270,408		3,271,402		3,272,023		3,270,705		3,271,028
Weighted average common shares outstanding (diluted)		3,270,066		3,277,717		3,274,784		3,273,189		3,274,087		3,272,194

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

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)

(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

	(in thousands)
	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

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

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain on securities:
Unrealized holding gains (losses) during period		(248	)		1,295			4,793			6,005
Reclassification adjustments for gains included in net income		(1	)		(2	)		(288	)		(2	)
Other comprehensive income (loss), before income taxes		(249	)		1,293			4,505			6,003
Income tax expense (benefit) related to items of other comprehensive income		(52	)		272			946			1,261
Other comprehensive income (loss)		(197	)		1,021			3,559			4,742
COMPREHENSIVE INCOME	$	5,053		$	3,439		$	15,565		$	11,259

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

United Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands except share data)

~~Three~~Nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)

	Common stock		Surplus		Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total			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		$	3,761	$	15,251	$	80,629		$	2,872		$	(7,732	)	$	94,781
Comprehensive income:
Net income		-		-		1,088			-			-			1,088			-		-		12,006			-			-			12,006
Other comprehensive income		-		-		-			2,949			-			2,949			-		-		-			3,559			-			3,559
2,304 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan		-		26		-			-			36			62
3,556 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan																		-		33		-			-			56			89
Stock option expense		-		60		-			-			-			60			-		119		-			-			-			119
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
Cash dividends declared, $0.35 per share																		-		-		(1,145	)		-			-			(1,145	)
BALANCE AT SEPTEMBER 30, 2020																	$	3,761	$	15,403	$	91,490		$	6,431		$	(7,676	)	$	109,409

BALANCE AT DECEMBER 31, 2018	$	3,761	$	14,960	$	71,670		$	(1,764	)	$	(7,683	)	$	80,944		$	3,761	$	14,960	$	71,670		$	(1,764	)	$	(7,683	)	$	80,944
Comprehensive income:
Net income		-		-		1,814			-			-			1,814			-		-		6,517			-			-			6,517
Other comprehensive income		-		-		-			2,016			-			2,016			-		-		-			4,742			-			4,742
1,277 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan		-		10		-			-			20			30
2,957 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan																		-		25		-			-			46			71
Stock option expense		-		55		-			-			-			55			-		188		-			-			-			188
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
Cash dividends declared, $0.39 per share																		-		-		(1,277	)		-			-			(1,277	)
BALANCE AT SEPTEMBER 30, 2019																	$	3,761	$	15,173	$	76,910		$	2,978		$	(7,637	)	$	91,185

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

	Common stock		Surplus		Retained earnings			Accumulated other comprehensive income			Treasury stock			Total
BALANCE AT JUNE 30, 2020	$	3,761	$	15,396	$	86,698		$	6,628		$	(7,689	)	$	104,794
Comprehensive income:
Net income		-		-		5,250			-			-			5,250
Other comprehensive loss		-		-		-			(197	)		-			(197	)
837 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan		-		7		-			-			13			20
Stock option expense		-		-		-			-			-			-
Cash dividends declared, $0.14 per share		-		-		(458	)		-			-			(458	)
BALANCE AT SEPTEMBER 30, 2020	$	3,761	$	15,403	$	91,490		$	6,431		$	(7,676	)	$	109,409

BALANCE AT JUNE 30, 2019	$	3,761	$	15,080	$	74,919		$	1,957		$	(7,663	)	$	88,054
Comprehensive income:
Net income		-		-		2,418			-			-			2,418
Other comprehensive income		-		-		-			1,021			-			1,021
1,680 shares issued from treasury in connection with the Corporation's Employee Stock Purchase Plan		-		16		-			-			26			42
Stock option expense		-		77		-			-			-			77
Cash dividends declared, $0.13 per share		-		-		(427	)		-			-			(427	)
BALANCE AT SEPTEMBER 30, 2019	$	3,761	$	15,173	$	76,910		$	2,978		$	(7,637	)	$	91,185

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

United Bancshares, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

~~Three~~Nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)

							(in thousands)
	(in thousands)						Nine months ended September 30,
	2020			2019			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES	$	(1,474	)	$	(1,818	)	$	(10,662	)	$	(2,330	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and maturities of available-for-sale securities		6,908			3,788			44,277			34,830
Purchases of available-for-sale securities		(7,494	)		(3,575	)		(39,569	)		(42,029	)
Purchases of FHLB stock		(296	)		-			(296	)		-
Proceeds from sale of other real estate owned								-			68
Net increase in loans and leases		3,385			(4,222	)		(86,903	)		(11,252	)
Purchases of premises and equipment		(14	)		(83	)		(510	)		(495	)
Net cash provided by (used in) investing activities		2,489			(4,092	)
Net cash used in investing activities								(83,001	)		(18,878	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		17,991			23,040			113,833			40,032
Repayments of other borrowings		(250	)		(5,943	)		(15,750	)		(6,443	)
Proceeds from sale of treasury shares		62			30			89			71
Cash dividends paid		(458	)		(426	)		(1,145	)		(1,277	)
Net cash provided by financing activities		17,345			16,701			97,027			32,383
NET INCREASE IN CASH AND CASH EQUIVALENTS		18,360			10,791			3,364			11,175
CASH AND CASH EQUIVALENTS
At beginning of period		26,412			16,475			26,412			16,475
At end of period	$	44,772		$	27,266		$	29,776		$	27,650
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest	$	2,153		$	2,012		$	5,525		$	6,652
Federal income taxes	$	-		$	-		$	1,450		$	600
Non-cash investing activities:
Change in net unrealized gain on available-for-sale securities	$	3,733		$	2,552
Change in net unrealized gain or loss on available-for-sale securities							$	4,505		$	6,003

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

United Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

~~March 31,~~September 30, 2020

NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of United Bancshares, Inc. and subsidiaries (the “Corporation”) have been prepared without audit and in the opinion of management reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated. Since the unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q, they do not contain all information and footnotes typically included in financial statements prepared in conformity with generally accepted accounting principles. Operating results for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 is derived from completed audited consolidated financial statements with footnotes, which are included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

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

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

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

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update is effective for interim and annual periods beginning after December 15, 2019. The Corporation adopted ASU 2017-04 effective January 1, 2020 but the new guidance did not have ~~any~~a material 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,~~September 30, 2020 and December 31, 2019 are as follows:

	(in thousands)								(in thousands)
March 31, 2020	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
September 30, 2020									Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Available-for-sale:
Obligations of states and political subdivisions	$	72,019	$	3,289	$	44	$	75,264	$	85,986		5,150	$	166	$	90,970
Mortgage-backed		107,289		4,117		-		111,406		87,805		3,140		-		90,945
Other		1,023		7		-		1,030		1,040		17		-		1,057

Total	$	180,331	$	7,413	$	44	$	187,700	$	174,831	$	8,307	$	166	$	182,972

	(in thousands)
December 31, 2019	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Available-for-sale:
Obligations of states and political subdivisions	$	70,043	$	2,593	$	82	$	72,554
Mortgage-backed		108,907		1,292		158		110,041
Other		1,025		-		9		1,016

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

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~~nine month periods ended ~~March 31,~~September 30, 2020 and 2019:

	(in thousands)														(in thousands)
	Residential 1 – 4 family real estate			Commercial and multi-family real estate		Commercial			Consumer			Total			Residential 1 – 4 family real estate			Commercial and multi-family real estate			Commercial			Consumer			Total
Balance at December 31, 2019	$	592		$	2,536	$	939		$	64		$	4,131		$	592		$	2,536		$	939		$	64		$	4,131
Provision charged to expenses		109			422		9			10			550			919			2,977			482			72			4,450
Losses charged off		-			-		(4	)		(5	)		(9	)		(97	)		(45	)		(4	)		(19	)		(165	)
Recoveries		3			3		9			-			15			8			14			13			-			35
Balance at March 31, 2020	$	704		$	2,961	$	953		$	69		$	4,687
Balance at September 30, 2020															$	1,422		$	5,482		$	1,430		$	117		$	8,451

Balance at December 31, 2018	$	576		$	2,355	$	534		$	62		$	3,527		$	534		$	2,355		$	576		$	62		$	3,527
Provision charged to expenses		33			59		5			3			100			368			(6	)		29			9			400
Losses charged off		(25	)		-		-			(3	)		(28	)		(98	)		(23	)		(31	)		(5	)		(157	)
Recoveries		3			6		36			-			45			32			128			23			1			184
Balance at March 31, 2019	$	587		$	2,420	$	575		$	62		$	3,644
Balance at September 30, 2019															$	836		$	2,454		$	597		$	67		$	3,954

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,~~September 30, 2020 and December 31, 2019:

	(in thousands)										(in thousands)
March 31, 2020	Residential 1 – 4 family real estate		Commercial and multi-family real estate		Commercial		Consumer		Total
September 30, 2020											Residential 1 – 4 family real estate		Commercial and multi-family real estate		Commercial		Consumer		Total
Allowance for loan and lease losses:
Attributable to loans and leases individually evaluated for impairment	$	-	$	89	$	311	$	-	$	400	$	-	$	76	$	270	$	-	$	346
Collectively evaluated for impairment		704		2,872		642		69		4,287		1,422		5,406		1,160		117		8,105
Total allowance for loan and lease losses	$	704	$	2,961	$	953	$	69	$	4,687	$	1,422	$	5,482	$	1,430	$	117	$	8,451

Loans and leases:
Individually evaluated for impairment	$	-	$	1,644	$	1,276	$	-	$	2,920	$	-	$	1,547	$	788	$	-	$	2,335
Acquired with deteriorated credit quality		60		104				-		164		58		116		-		-		174
Collectively evaluated for impairment		120,266		371,598		71,057		7,976		570,897		110,047		363,155		188,515		7,253		668,970
Total ending loans and leases balance	$	120,326	$	373,346	$	72,333	$	7,976	$	573,981	$	110,105	$	364,818	$	189,303	$	7,253	$	671,479

December 31, 2019	Residential 1 – 4 family real estate		Commercial and multi-family real estate		Commercial		Consumer		Total
Allowance for loan and lease losses:
Attributable to loans and leases individually evaluated for impairment	$	-	$	93	$	342	$	-	$	435
Collectively evaluated for impairment		592		2,443		597		64		3,696
Total allowance for loan and lease losses	$	592	$	2,536	$	939	$	64	$	4,131

Loans and leases:
Individually evaluated for impairment	$	-	$	1,499	$	1,279	$	-	$	2,778
Acquired with deteriorated credit quality		61		127		-		-		188
Collectively evaluated for impairment		122,844		365,988		76,379		8,247		573,458
Total ending loans and leases balance	$	122,905	$	367,614	$	77,658	$	8,247	$	576,424

The average recorded investment in impaired loans and leases (excluding loans and leases acquired with deteriorated credit quality) for the ~~three~~nine month period ended ~~March 31,~~September 30, 2020 was ~~$2,847,000~~$2,710,000 compared to ~~$1,307,000~~$2,258,000 for the ~~three~~nine month period ended ~~March 31, 2019.~~September 30, 2019. There was ~~$400~~$346,000 of allowance for loan and lease losses specifically reserved as of ~~March 31,~~September 30, 2020 for impaired loans compared to ~~$100,000~~$369,000 as of ~~March 31,~~September 30, 2019. Additionally, there was approximately ~~$12,000~~$34,000 in interest income recognized by the Corporation on impaired loans and leases on an accrual or cash basis for the ~~three~~nine month period ended ~~March 31,~~September 30, 2020 and ~~$24,000~~$169,000 for the ~~three~~nine month period ended ~~March 31,~~September 30, 2019.

The following table presents the recorded investment in nonaccrual loans and leases, loans and leases past due over 90 days still on accrual and troubled debt restructurings by class of loans as of ~~March 31,~~September 30, 2020 and December 31, 2019. Nonaccrual loans primarily consist of smaller dollar homogenous loans that are collectively evaluated for impairment.

	(in thousands)						(in thousands)
March 31, 2020	Nonaccrual		Loans and leases past due over 90 days still accruing		Accruing Troubled Debt Restructurings
September 30, 2020							Nonaccrual		Loans and leases past due over 90 days still accruing		Accruing Troubled Debt Restructurings
Residential 1-4 family real estate	$	503	$	97	$	218	$	420	$	39	$	201
Commercial and multi family real estate		1,294		-		600		793		-		547
Agricultural real estate		4		-		-		13		-		-
Commercial		-		-		771		19		-		770
Agriculture		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	1,801	$	97	$	1,589	$	1,245	$	39	$	1,518

December 31, 2019
Residential 1-4 family real estate	$	414	$	138	$	223	$	414	$	138	$	223
Commercial and multi family real estate		545		-		623		545		-		623
Agricultural real estate		4		-		-		4		-		-
Commercial		-		-		772		-		-		772
Agriculture		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	963	$	138	$	1,618	$	963	$	138	$	1,618

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

	(in thousands)												(in thousands)
March 31, 2020	30 – 59 days past due		60 – 89 days past due		Greater than 90 days past due		Total past due		Loans and leases not past due		Total
September 30, 2020													30 – 59 days past due		60 – 89 days past due		Greater than 90 days past due		Total past due		Loans and leases not past due		Total
Residential 1-4 family real estate	$	1,072	$	473	$	281	$	1,826	$	118,500	$	120,326	$	886	$	93	$	299	$	1,278	$	108,827	$	110,105
Commercial and multi family real estate		245		30		606		881		334,309		335,190		67		-		521		588		325,145		325,733
Agricultural real estate		16		-		-		16		38,140		38,156		-		92		-		92		38,993		39,085
Commercial		27		27		1		55		61,367		61,422		547		-		19		566		178,643		179,209
Agriculture		81		-		-		81		10,830		10,911		-		-		-		-		10,094		10,094
Consumer		2		-		-		2		7,974		7,976		17		-		-		17		7,236		7,253
Total	$	1,443	$	530	$	888	$	2,861	$	571,120	$	573,981	$	1,517	$	185	$	839	$	2,541	$	668,938	$	671,479

December 31, 2019
Residential 1-4 family real estate	$	2,709	$	99	$	322	$	3,130	$	119,775	$	122,905	$	2,709	$	99	$	322	$	3,130	$	119,775	$	122,905
Commercial and multi family real estate		177		302		15		494		332,161		332,655		177		302		15		494		332,161		332,655
Agricultural real estate		-		-		-		-		34,959		34,959		-		-		-		-		34,959		34,959
Commercial		-		57		5		62		67,826		67,888		-		57		5		62		67,826		67,888
Agriculture		-		-		-		-		9,770		9,770		-		-		-		-		9,770		9,770
Consumer		2		-		-		2		8,245		8,247		2		-		-		2		8,245		8,247
Total	$	2,888	$	458	$	342	$	3,688	$	572,736	$	576,424	$	2,888	$	458	$	342	$	3,688	$	572,736	$	576,424

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,~~September 30, 2020 and December 31, 2019. The Corporation risk rates all commercial and commercial real estate loans.

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

	(in thousands)										(in thousands)
March 31, 2020	Pass		Special Mention		Substandard		Doubtful		Not rated
September 30, 2020											Pass		Special Mention		Substandard		Doubtful		Not rated
Residential 1 - 4 family	$	8,512	$	-	$	-	$	-	$	111,814	$	7,207	$	-	$	-	$	-	$	102,898
Commercial and multi- family real estate		361,947		1,762		3,432		-		6,205		358,171		3,894		2,711		-		42
Commercial		69,807		863		1,662		-		1		60,350		897		2,276		-		125,780
Consumer		40		-		-		-		7,936		122		-		-		-		7,131
Total	$	440,306	$	2,625	$	5,094	$	-	$	125,956	$	425,850	$	4,791	$	4,987	$	-	$	235,851

December 31, 2019
Residential 1 - 4 family	$	9,219	$	-	$	-	$	-	$	113,686	$	9,219	$	-	$	-	$	-	$	113,686
Commercial and multi- family real estate		362,519		1,797		3,258		-		40		362,519		1,797		3,258		-		40
Commercial		75,559		410		1,688		-		1		75,559		410		1,688		-		1
Consumer		45		-		-		-		8,202		45		-		-		-		8,202
Total	$	447,342	$	2,207	$	4,946	$	-	$	121,929	$	447,342	$	2,207	$	4,946	$	-	$	121,929

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,~~September 30, 2020 and December 31, 2019:

	(in thousands)										(in thousands)
March 31, 2020	Residential 1-4 family		Commercial and multi-family real estate		Commercial		Consumer		Total
September 30, 2020											Residential 1-4 family		Commercial and multi-family real estate		Commercial		Consumer		Total

Performing	$	111,533	$	6,190	$	-	$	7,936	$	125,659	$	102,599	$	26	$	125,780	$	7,131	$	235,536
Nonperforming		281		15		1		-		297		299		16		-		-		315
Total	$	111,814	$	6,205	$	1	$	7,936	$	125,956	$	102,898	$	42	$	125,780	$	7,131	$	235,851

December 31, 2019

Performing	$	113,364	$	24	$	-	$	8,202	$	121,590	$	113,364	$	24	$	-	$	8,202	$	121,590
Nonperforming		322		16		1		-		339		322		16		1		-		339
Total	$	113,686	$	40	$	1	$	8,202	$	121,929	$	113,686	$	40	$	1	$	8,202	$	121,929

Modifications:

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

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

There were no modifications for TDR loans and leases for which there was a payment default during the ~~three~~nine month period ended ~~March 31,~~September 30, 2020. As a result of the COVID-19 pandemic, payment deferrals and interest only payment options for consumer, small business, and commercial customers for up to 90 days were offered. Payment extensions of up to 90 days for mortgage customers were also offered. Through September 30, 2020, 155 loans were modified or extended, approximating $60.8 million. These modifications and extensions were made under the CARES act and are not considered TDR's.

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

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

	The Ohio State Bank									The Ohio State Bank
	(in thousands)									(in thousands)
	Contractual									Contractual
	Principal			Accretable			Carrying			Principal			Accretable			Carrying
	Receivable			Difference			Amount			Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2019	$	13,047		$	(430	)	$	12,617		$	13,047		$	(430	)	$	12,617
Change due to payments received		(657	)		27			(630	)		(2,569	)		82			(2,487	)
Transfer to foreclosed real estate		-			-			-			-			-			-
Change due to loan charge-off		-			-			-			-			-			-
Balance at March 31, 2020	$	12,390		$	(403	)	$	11,987
Balance at September 30, 2020										$	10,478		$	(348	)	$	10,130

Purchased Impaired Loans and Leases
Balance at December 31, 2019	$	160		$	(134	)	$	26		$	160		$	(134	)	$	26
Change due to payments received		(9	)		2			(7	)		(48	)		71			23
Transfer to foreclosed real estate		-			-			-			-			-			-
Change due to loan charge-off		-			-			-			-			-			-
Balance at March 31, 2020	$	151		$	(132	)	$	19
Balance at September 30, 2020										$	112		$	(63	)	$	49

	Benchmark Bank									Benchmark Bank
	(in thousands)									(in thousands)
	Contractual									Contractual
	Principal			Accretable			Carrying			Principal			Accretable			Carrying
	Receivable			Difference			Amount			Receivable			Difference			Amount
Purchased Performing Loans and Leases
Balance at December 31, 2019	$	58,953		$	(1,177	)	$	57,776		$	58,953		$	(1,177	)	$	57,776
Change due to payments received		(5,132	)		117			(5,015	)		(17,716	)		449			(17,267	)
Transfer to foreclosed real estate		-			-			-			-			-			-
Change due to loan charge-off		-			-			-			-			-			-
Balance at March 31, 2020	$	53,821		$	(1,060	)	$	52,761
Balance at September 30, 2020										$	41,237		$	(728	)	$	40,509

Purchased Impaired Loans and Leases
Balance at December 31, 2019	$	354		$	(192	)	$	162		$	354		$	(192	)	$	162
Change due to payments received		(36	)		19			(17	)		(56	)		19			(37	)
Transfer to foreclosed real estate		-			-			-			-			-			-
Change due to loan charge-off		-			-			-			-			-			-
Balance at March 31, 2020	$	318		$	(173	)	$	145
Balance at September 30, 2020										$	298		$	(173	)	$	125

There was no provision for loan and lease losses recognized during the ~~three~~nine month periods ended ~~March 31,~~September 30, 2020 and 2019 related to the acquired loans as there was no significant change to the credit quality of the loans during the period.

NOTE 5 – OTHER BORROWINGS

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

	(in thousands)				(in thousands)
	March 31,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Federal Home Loan Bank borrowings:
Secured note, with interest at 1.72%, due September, 2020	$	6,000	$	6,000	$	-	$	6,000
Secured note, with interest at 2.90%, due June, 2021		8,000		8,000		8,000		8,000
Secured note, with variable interest, at 1.55% at March 31, 2020 and 2.13% at December 31, 2019, due September, 2021		7,000		7,000
Secured note, with variable interest, at 0.49% at September 30, 2020 and 2.13% at December 31, 2019, due September, 2021						7,000		7,000
Secured note, with interest at 1.86%, due September, 2021		6,000		6,000		6,000		6,000
Secured note, with interest at 2.94%, due December, 2021		8,000		8,000		8,000		8,000
Secured note, with interest at 2.98%, due June, 2022		9,000		9,000		-		9,000
Secured note, with interest at 1.97%, due September, 2022		6,000		6,000		6,000		6,000
United Bankers Bank
Note payable, with interest at 4.875% and $250,000 principal payments payable quarterly with any remaining unpaid principal, due September 1, 2022. All Union Bank stock is held as collateral.		8,500		8,750		8,000		8,750
Total other borrowings	$	58,500	$	58,750	$	43,000	$	58,750

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating ~~$163,896,000~~$178,723,000 and $186,076,000 at ~~March 31,~~September 30, 2020 and December 31, 2019 respectively.

Future maturities of other borrowings are as follows: ~~2020: $6,750,000;~~2020, $250,000; 2021, $30,000,000; and 2022, ~~$21,750,000.~~$12,750,000.

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

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~~amounting to ~~4.38% at~~3.38% at ~~March 31,~~September 30, 2020 and 5.10% at December 31, 2019. The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.

The Corporation assumed $3,093,000 of trust preferred securities through the OSB acquisition with $3,000,000 of the liability guaranteed by the Corporation and the remaining $93,000 secured by an investment in the trust preferred securities. The trust preferred securities carrying value as of ~~March 31,~~September 30, 2020 and December 31, 2019 was ~~$2,616,000~~$2,633,000 and $2,608,000, respectively. The difference between the principal owed and the carrying value is due to the below-market interest rate on the debentures. The debentures have a stated maturity date of April 23, 2034. Interest is at a floating rate adjustable quarterly and equal to 285 basis points over the 3-month LIBOR, ~~amounting~~amounting to ~~4.66% at~~3.11% at ~~March 31,~~September 30, 2020 and 4.78% at December 31, 2019.

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

Interest expense on the debentures amounted to ~~$161,000~~ $405,000 and ~~$191,000~~$557,000 for the ~~three~~nine month periods ended ~~March 31,~~September 30, 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,~~September 30, 2020 and December 31, 2019 include available-for-sale securities, which are valued using Level 1 and Level 2 inputs, as well as mortgage servicing rights, amounting to ~~$825,000~~$965,000 at ~~March 31,~~September 30, 2020 and $1,061,000 at December 31, 2019, which are valued using Level 3 inputs. Financial assets measured at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2020 include loans classified as impaired totaling ~~$1,732,000 compared~~$1,651,000 compared to $1,495,000 at December 31, 2019.

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during the period ended ~~March 31,~~September 30, 2020, due to the lack of observable quotes in inactive markets for those instruments at ~~March 31,~~September 30, 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~~nine month period ended ~~March 31,~~September 30, 2020 and for the year ended December 31, 2019:

	(in thousands)						(in thousands)
	March 31,			December 31,			September 30,			December 31,
	2020			2019			2020			2019
Mortgage Servicing Rights
Balance at beginning of period	$	1,061		$	1,313		$	1,061		$	1,313
Gains or losses, including realized and unrealized:
Purchases, issuances, and settlements		53			192			544			192
Disposals - amortization based on loan payments and payoffs		(46	)		(186	)		(253	)		(186	)
Changes in fair value		(243	)		(258	)		(387	)		(258	)
Balance at end of period	$	825		$	1,061		$	965		$	1,061

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

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

Securities Available-for-Sale

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

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,~~September 30, 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,~~September 30, 2020 and December 31, 2019 were as follows:

	(in thousands)										(in thousands)
	March 31, 2020				December 31, 2019						September 30, 2020				December 31, 2019
	Carrying amount		Estimated value		Carrying amount		Estimated value		Input Level		Carrying amount		Estimated value		Carrying amount		Estimated value		Input Level

FINANCIAL ASSETS
Cash and cash equivalents	$	44,772	$	44,772	$	26,412	$	26,412		1	$	29,776	$	29,776	$	26,412	$	26,412		1
Securities, including FHLB stock		193,298		193,298		188,913		188,913		2,3		188,570		188,570		188,913		188,913		2,3
Loans held for sale		19,613		19,613		15,301		15,301		3		32,117		32,117		15,301		15,301		3
Net loans and leases		569,294		570,267		572,293		572,936		3		663,028		664,241		572,293		572,936		3
Mortgage servicing rights		825		825		1,061		1,061		3		965		965		1,061		1,061		3
Hedging assets		1,960		1,960		970		970		3
Derivative assets												5,961		5,961		970		970		3
Total Financial Assets	$	829,762	$	830,735	$	804,950	$	805,593			$	920,417	$	921,630	$	804,950	$	805,593

FINANCIAL LIABILITIES
Deposits
Maturity	$	183,971	$	185,705	$	197,391	$	197,428		3	$	158,480	$	159,716	$	197,391	$	197,428		3
Non-maturity		541,165		541,165		509,743		509,743		1		662,518		662,518		509,743		509,743		1
Other borrowings		58,500		58,427		58,750		58,692		3		43,000		43,221		58,750		58,692		3
Junior subordinated deferrable interest debentures		12,916		6,307		12,908		11,067		3		12,933		9,037		12,908		11,067		3
Hedging liabilities		1,123		1,123		27		27		3
Derivative liabilities												377		377		27		27		3
Total Financial Liabilities	$	797,675	$	792,727	$	778,819	$	776,957			$	877,308	$	874,869	$	778,819	$	776,957

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

There are also unrecognized financial instruments at ~~March 31,~~September 30, 2020 and December 31, 2019 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounted to ~~$141,005,000~~$155,454,000 at ~~March 31,~~September 30, 2020 and $133,220,000 at December 31, 2019. Such amounts are also considered to be the estimated fair values.

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

Cash and cash equivalents:

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

Securities:

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

Loans held for sale:

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

Loans and leases:

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

Mortgage servicing rights:

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

Derivative assets and liabilities:

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

Deposit liabilities:

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

Other borrowings and junior subordinated deferrable interest debentures:

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

Other financial instruments:

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

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

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, and 63,858 options during 2020 at an average exercise price of $16.77 under the Plan. Following is a summary of activity for stock options for the ~~three~~nine month periods ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019:

	March 31,		March 31,		September 30,			September 30,
	2020		2019		2020			2019
Outstanding, beginning of period		117,647		93,069		117,647			93,069
Granted		-		-		63,858			33,853
Exercised		-		-		-			-
Forfeited		-		-		(20,733	)		-
Outstanding, end of period		117,647		93,069		160,772			126,922
Weighted average exercise price at end of quarter	$	21.81	$	21.39	$	19.82		$	21.81

~~The options~~Options vest over a three-year period on the anniversary of the date of grant. At ~~March 31,~~September 30, 2020, ~~57,033~~71,224 options were vested compared to ~~31,718~~51,624 options vested at ~~March 31,~~September 30, 2019 and outstanding options had a weighted average remaining contractual term of ~~7.9~~8.4 years.

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

	2019			2018			2017			2020			2019			2018			2017
Weighted-average fair value of options granted	$	7.77		$	7.87		$	7.35		$	4.83		$	7.77		$	7.87		$	7.35
Average dividend yield		2.26	%		2.18	%		2.23	%		2.93	%		2.26	%		2.18	%		2.23	%
Expected volatility		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%
Risk-free interest rate		1.93	%		2.81	%		2.06	%		0.49	%		1.93	%		2.81	%		2.06	%
Expected term (years)		7			7			7			7			7			7			7

Total compensation expense related to the stock options granted in ~~2017~~2019, 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~~$183,000 and is being recognized ratably over the 36 month period beginning July 1, 2019. Total compensation expense related to the stock options granted in 2020 is expected to be $308,000 and is being recognized ratably over the 36 month period beginning July 1, 2020. Stock option expense for outstanding awards amounted to ~~$60,000~~$119,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and ~~$55,000~~$77,000 and $188,000 for the ~~three~~quarter and nine months ended ~~March 31,~~September 30, 2019

. No option expense was recognized for the quarter ended September 30, 2020 as the impact of forfeited options offset the vesting of issued options.

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

Interchange fee income:

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

Wealth management income:

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

The following table presents the ~~Company’s~~Corporation’s non-interest income for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and ~~2019.~~2019. Items outside the scope of ASC 606 are noted as such.

	Three Months ended March 31,						Nine Months ended September 30,
	2020			2019			2020			2019
Service charges on deposit accounts	$	350		$	346		$	827		$	1,110
Gain on sale of mortgage and government loans (1)		2,583			1,438
Gain on sale of loans (1)								17,032			6,409
Net securities gains (1)								288			2
Change in fair value of mortgage servicing rights (1)		(243	)		(111	)		(387	)		(295	)
Increase in cash surrender value of life insurance (1)		96			98			283			292
Other
Credit and debit card interchange fees		332			321			1,113			1,086
Wealth management		85			78			237			229
Net loan servicing fees (1)		85			95			171			255
Other non-interest income (1)		(454	)		243
Other non-interest income								2,535			386
Total non-interest income	$	2,834		$	2,508		$	22,099		$	9,474

(1) Not within the scope of ASC 606

NOTE 11 – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after ~~March 31,~~September 30, 2020 but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at ~~March 31,~~September 30, 2020 have been recognized in the consolidated financial statements for the period ended ~~March 31,~~September 30, 2020. Events or transactions that provided evidence about conditions that did not exist at ~~March 31,~~September 30, 2020 but arose before the financial statements were issued have not been recognized in the consolidated financial statements for the period ended ~~March 31,~~September 30, 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.

OnO ~~April 28,~~n October 20, 2020, the Corporation's Board of Directors approved a cash dividend of $~~0.07~~$0.16 per common share payable ~~June~~December 15, 2020 to shareholders of record at the close of business on ~~May 29,~~November 30, 2020.

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

SELECTED FINANCIAL DATA

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

	As of or for the three months ended March 31,						As of or for the three months ended September 30,						As of or for the nine months ended September 30,
	2020			2019			2020			2019			2020			2019
SIGNIFICANT RATIOS (Unaudited)
Net income to:
Average assets (a)		0.49	%		0.87	%		2.09	%		1.12	%		1.66	%		1.02	%
Average tangible shareholders’ equity (non-GAAP) (a)		6.41	%		13.86	%		26.96	%		16.12	%		22.16	%		15.50	%
Net interest margin (a)		3.61	%		3.81	%		3.65	%		3.74	%		3.72	%		3.77	%
Efficiency ratio ~~(b)~~(a)		81.14	%		74.76	%		51.39	%		72.29	%		58.10	%		72.84	%
Average shareholders’ equity to average assets		10.98	%		9.83	%		10.65	%		10.35	%		10.58	%		10.04	%
Loans to deposits (end of period) ~~(c)~~(b)		81.86	%		83.63	%		85.70	%		83.67	%		85.70	%		83.67	%
Allowance for loan losses to loans (end of period)		0.82	%		0.63	%		1.26	%		0.69	%		1.26	%		0.69	%

Book value per share	$	30.11		$	25.82		$	33.44		$	27.87		$	33.44		$	27.87

(a)

~~Net income to average assets, net income to~~Some of the financial measures included in this table are not measures of financial performance recognized by U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures include tangible book value, return on average tangible ~~shareholders’~~ equity, ~~and~~ net interest margin (tax-equivalent), and the efficiency ratio. Management uses these non-GAAP financial measures in its analysis of its performance, and believes financial analysts and investors frequently use these measures, and other similar measures, to evaluate capital adequacy. Reconciliations of non-GAAP disclosures used in this table to the comparable GAAP measures are ~~presented on an annualized basis. Net interest margin is calculated using fully-tax equivalent net interest income~~provided in the accompanying table. Management, as well as regulators, financial analysts and other investors may use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions.

These non-GAAP financial measures should not be considered in isolation or as a ~~percentage~~substitute for total shareholders’ equity, total assets, book value per share, return on average assets, return on average equity, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of ~~average interest earning assets.~~other companies reporting measures with similar names.

(b)	~~Efficiency ratio is a ratio of non-interest expense as a percentage of fully tax equivalent net interest income plus non-interest income.~~

~~(c)~~

Includes loans held for sale


Reconciliation of common shareholders' equity to tangible common equity					September 30, 2020			September 30, 2019
	March 31, 2020		March 31, 2019
Shareholders' equity	$	98,482	$	84,433	$	109,409		$	91,185
Less goodwill and other intangibles		29,372		29,529		29,296			29,450
Tangible common equity	$	69,110	$	54,904	$	80,113		$	61,735
Average shareholders' equity	$	97,336	$	81,900	$	101,598		$	85,566
Less average goodwill and other intangibles		29,386		29,546		29,347			29,504
Average tangible common equity	$	67,950	$	52,354	$	72,251		$	56,062

Tangible Book Value per Common Share
Tangible common equity (a)					$	80,113		$	61,735
Total common shares issued and outstanding (b)						3,271,651			3,272,315
Tangible book value per common share (a)/(b)					$	24.49		$	18.87

Return on Average Tangible Equity
Net income, annualized ( c )					$	16,008		$	8,689
Average tangible common equity (d)					$	72,251		$	56,062
Return on average tangible common equity (c/d)						22.16	%		15.50	%

Net Interest Margin, Tax- Equivalent
Net interest income, annualized					$	32,144		$	28,601
Tax-equivalent adjustment						579			473
Tax-equivalent net interest income, annualized (e)					$	32,723		$	29,074
Average earning assets (f)					$	880,496		$	770,819
Net interest margin, tax equivalent (e)/(f)						3.72	%		3.77	%

Efficiency Ratio, Tax-Equivalent
Non-interest expense (g)					$	27,099		$	22,784
Tax-equivalent net interest income						24,543			21,806
Non-interest income						22,099			9,474
Total revenue (h)					$	46,642		$	31,280
Efficiency ratio (g)/(h)						58.10	%		72.84	%

Introduction

United Bancshares, Inc. (the “Corporation”), an Ohio 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 105 Progressive Drive, Columbus Grove, Ohio 45830. The Corporation is a one-bank holding company, as that term is defined by the Federal Reserve Board.

The Union Bank Company (the “Bank”), a wholly-owned subsidiary of the Corporation, is a full service community bank offering a full range of commercial and consumer banking services. The Bank is an Ohio state-chartered bank, which serves Allen, Delaware, Franklin, Hancock, Huron, Marion, Putnam, Sandusky, Van Wert and Wood counties in Ohio, with office locations in Bowling Green, Columbus Grove, Delaware, Delphos, Findlay, Gahanna, Gibsonburg, Kalida, Leipsic, Lima, Marion, Ottawa, Pemberville, Plymouth, Westerville and Worthington, Ohio.

Deposit services include checking accounts, savings and money market accounts; certificates of deposit and individual retirement accounts. Additional supportive services include online banking, bill pay, mobile banking, Zelle payment service, ATM’s and safe deposit box rentals. Treasury management and remote deposit capture products are also available to commercial deposit customers. Deposits of Union Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC.

Loan products offered include commercial and residential real estate loans, agricultural loans, commercial and industrial loans, home equity loans, various types of consumer loans and small business administration loans. Union Bank’s residential loan activities consist primarily of loans for purchasing or refinancing personal residences. The majority of these loans are sold to the secondary market.

Wealth management services are offered by Union Bank through an arrangement with LPL Financial LLC, a registered broker/dealer. Licensed representatives offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities and life insurance.

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.

When or if used in the Corporation’s Securities and Exchange Commission filings or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases: “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to the risks and uncertainties that include but are not limited to: changes in regional and national economic conditions, ~~in the Corporation’s market area,~~ changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation’s market area, credit and other risks associated with lending and investing activities and competition. All or some of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

The Corporation cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in the levels of market interest rates, credit and other risks associated with lending and investing activities, and competitive and regulatory factors could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected.made. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

The Corporation is registered as a Securities Exchange Act of 1934 reporting company.

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of the financial results.

Recent Developments

The progression of the COVID-19 pandemic in the United States began to have an adverse impact on ~~our financial condition~~the local and ~~results~~national economy during the latter part of ~~operations as~~the first quarter of ~~and for the three months ended March 31,~~ 2020 and ~~is expected to~~will likely have a complex and significant adverse impact on the economy, the banking industry and our Corporation in future fiscal periods, all subject to a high degree of uncertainty.

Our primary banking market area is Northwestern and Central Ohio. In Ohio, the Governor ~~recently~~ ordered individuals to stay at home and non-essential businesses to cease all activities, in each case subject to limited exceptions. This order went into effect on March 15, 2020, and ~~is currently~~was effective through May 1, 2020. In response to this order, the Bank ~~has been serving~~continued to serve its customers through its drive-up windows at various branch locations and through online and mobile banking. ~~The Bank is also permitting certain visits~~Beginning July 13, 2020 all branch locations reopened to ~~its branches on a limited basis and by appointment only.~~customers with protective measures in place. However, many of the Corporation's employees continue to work remotely.

Like most states, Ohio ~~has~~ experienced a dramatic and sudden increase in unemployment levels as a result of the curtailment of business activities in mid-March 2020, with unemployment rising from an average of 4.1% in January 2020 to an average of ~~5.5%~~17.6 % in ~~Mar~~Aprilch 2020, before gradually dropping back down to 8.9% in August 2020, according to the U.S. Bureau of Labor ~~Statistics, which expects~~Statistics. While unemployment rates have returned to lower levels in recent months, it is very possible a repeat of the high unemployment rates could be experienced especially if there is another shutdown similar to ~~rise further. To date,~~what was experienced in March and April of 2020. While many of the public health and economic effects of COVID-19 have been concentrated in the largest U.S. cities, ~~such as New York, but it~~there has been a recent rise in COVID-19 cases in many rural areas throughout the Country including some of the Corporation's market area. It is still not possible ~~that similar~~to fully determine what effects this will ~~occur on a more delayed basis in~~have within the smaller cities and communities where many of our banking operations are focused.

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

●

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%.

●

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the paycheck protection program, or PPP program. Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals ~~may~~could apply for loans from existing SBA lenders and other approved regulated lenders ~~that enroll~~who enrolled in the program, subject to ~~numerous~~ limitations and eligibility criteria. The Bank ~~is participating~~has participated as a lender in the PPP ~~program. As of this writing, a second round of funding under the PPP has become available and the Bank is working with small business customers~~program, originating $125.7 million in loans to ~~submit applications.~~over 1,600 borrowers through September 30, 2020. In addition, the CARES Act provides financial institutions the option to ~~temporarily~~ suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.

●

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

●

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The ~~combined size of the program will be up to $600 billion. The~~ program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP ~~will be able to~~can exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility ~~will make~~makes short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope of its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. ~~This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020~~

We ~~currently expect that~~believe the COVID-19 pandemic and the specific developments referred to above ~~will~~could have a significant adverse impact on our ~~business.~~business in the near future. In particular, we anticipate that a significant portion of the Bank’s borrowers in the retail, restaurants, and hospitality industries ~~will continue to~~may endure significant economic distress, ~~which will cause~~causing them to draw on their existing lines of credit, ~~and could~~ adversely ~~affect~~affecting their ability and willingness to repay existing indebtedness, and ~~is expected to~~ adversely ~~impact~~impacting the value of collateral. These developments, together with general economic conditions ~~generally, are~~may also ~~expected to~~ impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. ~~In addition, we expect to see a decrease in mortgage loan originations. As a result, we~~We anticipate that our financial condition, capital levels and results of operations ~~will~~could be ~~significantly~~ adversely affected ~~as described~~going forward. The low interest rate environment during the second and third quarters of 2020 enabled the Corporation to originate a record number of mortgage loans resulting in ~~further detail below.~~

$17.0 million of gains on sale of loans during the nine month period ended September 30, 2020. The Corporation's year to date results were also bolstered by the aforementioned PPP loan origination activity, including amortization into interest income $851,000 of PPP loan origination fees.

We have taken numerous steps in response to the COVID-19 pandemic, including the following:

●

We ~~are offering~~offered 90 day payment deferrals and interest only payment options for consumer, small business, and commercial ~~customers for~~customers. We also offered payment extensions of up to 90 ~~days. We are offering payment extensions~~days for mortgage ~~customers for up to 90 days.~~customers. Through September 30, 2020, we have modified or extended 155 loans, approximating $60.8 million through these programs.

●

~~The~~We formed a Business Continuity Planning COVID-19 Response team which meets regularly to manage the Corporation’s response to the pandemic and the effect on our business. In addition, cross functional task force teams meet as needed to address specific issues such as employee and client communications, facilities, and branch services and to discuss the effect on our business.

●

We ~~are participating~~participated in the SBA’s Paycheck Protection Program. ~~As of April 28,~~Through September 30, 2020 ~~2020,~~, we ~~have secured funding for~~originated $125.7 million in loans to over ~~1,100 customers for approximately $106 million and have continued participation as a result of additional funding for the program which was made available April 27, 2020.~~1,600 borrowers.

●

In response to the outbreak and business disruption, first and foremost, we have prioritized the safety, health and well-being of our employees, customers, and communities. We have implemented a work from home policy, we have ~~restricted lobby~~implemented protective measures for customers who choose branch access ~~at our branches~~ and we continue to serve ~~clients~~customers through our drive-up locations and digital platforms.

RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended ~~March 31,~~September 30, 2020,, the Corporation reported net income of ~~$1,088,000,~~$5,250,000, or ~~$0.33~~$1.61 basic earnings per share. This compares to the ~~first~~third quarter of 2019 net income of ~~$1,814,000,~~$2,418,000, or ~~$0.55~~$0.74 basic earnings per share. The ~~decrease~~increase in operating results for the ~~first~~third quarter of 2020 as compared to the same period in 2019 was primarily attributable to ~~increases~~an increase in net interest income of $1,125,000, and an increase in non-interest income of $7,311,000, offset by an increase in the provision for loan losses of ~~$450,000~~$2,850,000, an increase in non-interest expenses of $2,014,000, and ~~non-interest expense of $988,000, offset by increases in net interest income of $189,000, non-interest income of $326,000, and a decrease~~an increase in the provision for income taxes of ~~$197,000.~~$742,000. The increase in net interest income resulted from Paycheck Protection Program (PPP) loans, including fees of $465,000 as well as a decrease in deposit interest rates. The increase in the provision for loan losses was due to an increase in qualitative factors applied to the outstanding loan balances in response to uncertainties related to COVID-19.

Net income for the nine months ended September 30, 2020 totaled $12,006,000, or $3.67 basic earnings per share, compared to $6,517,000, or $1.99 basic earnings per share for the same period in 2019, an increase of $5,489,000 (84.2%). The increase in operating results for the nine month period ended September 30, 2020 as compared to the nine month period ended September 30, 2019 was primarily attributable to increases in net interest income of $2,657,000, and non-interest income of $12,625,000, offset by an increase in the provision for loan losses of $4,050,000, an increase in non-interest expenses of $4,315,000, and an increase in the provision for income taxes of $1,428,000. Similar to the third quarter results, the increase in net interest income for the nine month period resulted from PPP loans including fees of $807,000 and lower deposit interest rates. The increase in the provision for loan losses was attributable to an increase in qualitative factors in response to the COVID-19 uncertainties.

Net Interest Income

Net interest income is the amount by which income from interest-earning assets exceeds interest incurred on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities while interest-bearing liabilities include interest-bearing deposit accounts and borrowed funds. Net interest income remains the primary source of revenue for the Corporation. Changes in market interest rates, as well as changes in the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income. Net interest income was ~~$7,124,000~~$8,398,000 for the ~~first~~third quarter of 2020, compared to ~~$6,935,000~~$7,271,000 for the same period of 2019, an increase of ~~$189,000 (2.7%~~$1.1 million (15.5%). Net interest income was $24,108,000 for the nine months ended September 30, 2020 compared to $21,451,000 for the same period of 2019, an increase of $2.7 million (12.4%).

The increase in net interest income for the quarter ended September 30, 2020 was due to an increase in interest income of $505,000 and a $622,000 decrease in interest expense. The increase in net interest income for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 was attributable to an increase in interest income of ~~$246,000, offset by~~$1,359,000 and a ~~$57,000 increase~~$1,298,000 decrease in interest expense. ~~This increase~~Interest income increased $515,000 for the quarter ended September 30, 2020 and $851,000 for the nine month period ended September 30, 2020 in loan fees generated through PPP loan originations. The remaining $3.4 million of fees received from the SBA have been deferred and are being amortized into interest ~~was attributable~~income over the two year life of the loans. The bulk of the income resulting from PPP loans is from the SBA fees payable in connection with the origination of the loans, and not from interest to ~~moderate~~be paid on such loans from the borrower, as management expects most of its PPP loan ~~growth from March 2019~~portfolio to ~~March 2020, which more than offset the slight decline in rates.~~be forgiven. The average loan balance was ~~$585.2~~$656.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 compared to ~~$571.1~~$579.4 million for the same period of 2019. The yield on average earning assets was ~~4.66%~~4.53% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 compared to ~~4.91%~~4.93% for the same period of 2019.

In response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds rate by a total of 150 basis points (1.5%) in March 2020. This decrease impacts the comparability of net interest income between 2019 and ~~2020. We anticipate that our~~2020, especially for the second and third quarters. Our interest income ~~will~~could be significantly adversely affected in future periods as a result of the COVID-19 pandemic, including the impact of decreases in the size of our loan portfolio, ~~and~~ the effects of lower interest ~~rates.~~rates and possible increases of non-accrual loans.

The ~~increase~~decrease in interest ~~expense for~~rates by the ~~period was attributable to~~Federal Reserve resulted in a ~~$61.7 million increase~~decrease in ~~interest bearing deposits which more than offset~~ the ~~reduction in deposit rates for the comparable periods. The~~ cost of ~~funds on~~ average interest bearing liabilities ~~was 1.25%~~to 1.00% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 compared to ~~1.37%~~1.35% for the same period of 2019. This decrease more than offset the $59.9 million increase in average interest bearing deposits for the period ended September 30, 2020 compared to the period ended September 30, 2019as well as a $450,000 prepayment penalty incurred in the third quarter of 2020 for early payoff of a secured note with the Federal Home Loan Bank due June 2022.

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the ~~three~~quarter and nine months ended ~~March 31,~~September 30, 2020 the net interest margin (on a taxable equivalent basis) was ~~3.61%~~3.65% and 3.72% compared with ~~3.81%~~3.74% and 3.77% for the same period in 2019. Loans and leases comprised ~~72.6%~~ 76.4% of interest-earning assets at September 30, 2020 compared to 74.7% of interest-earning assets at ~~March 31, 2020~~ ~~compared to 76.0% of interest-earning assets at~~ ~~March 31, 2020~~September 30, 2019. Interest-bearing deposits comprised ~~89.4%~~90.9% of average interest-bearing liabilities for the three months ended ~~March 31,~~September 30, 2020, compared to ~~89.3%~~88.7% for the same period in 2019.

As a result of the recent reductions in the target federal funds interest rate, as well as the impact of the COVID-19 pandemic and related future loan charge-offs ~~that~~and increases in non-accrual loans which we ~~expect to incur,~~believe may occur, we expect that our net interest income and net interest margin will decrease in future periods. These decreases will be offset to some degree ~~by the processing~~through recognition of deferred loan fees received from the SBA for PPP loan financing, but we cannot determine at this time what the scope of such losses or offsets might be. The ~~processing~~SBA loan fees ~~will be~~are deferred and being recognized as an adjustment to interest income over the life of the loans. The timing of such will be impacted by the timing and level of loan forgiveness granted by the SBA.

Provision for Loan and Lease Losses

The Corporation’s provision for loan and lease losses is determined based upon management’s calculation of the allowance for loan and lease losses and is reflective of management’s assessment of the quality of the portfolio and overall management of the inherent credit risk of the loan and lease portfolio. Changes in the provision for loan and lease losses are dependent, among other things, on loan and lease delinquencies, collateral position, portfolio risks and general economic conditions in the Corporation’s lending markets. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

A ~~$550,000~~ provision for loan and lease losses ~~was~~of $3,000,000 and $4,450,000was recognized during the quarter and ~~three~~nine month period ended ~~March 31,~~September 30, 2020 respectively, compared to a ~~$100,000~~ provision of $150,000 and $400,000 during the quarter and ~~three~~nine month period ended ~~March 31,~~September 30, 2019 due to ~~the economic uncertainty~~an increase in qualitative factors in response to uncertainties related to COVID-19.

~~We are preparing for the~~There is a possibility that the provision for loan losses ~~will~~could further increase in future periods based on ~~our belief that~~the significant potential for the credit quality of our loan portfolio ~~will~~to decline and loan defaults ~~will~~to increase as a result of economic conditions created by the COVID-19 pandemic. See “Allowance for Loan and Lease Losses” under Financial Condition for further discussion relating to the provision for loan and lease losses.

Non-Interest Income

The Corporation’s non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgage loans; customer deposit account fees; earnings on life insurance policies; income arising from sales of investment products to customers; and occasional security sale transactions. Income related to customer deposit accounts and life insurance policies provides a relatively steady flow of income while the other sources are more volume or transaction related and consequently can vary from quarter to quarter.

For the quarter ended ~~March 31,~~September 30, 2020, non-interest income was ~~$2,834,000,~~$11,144,000, compared to ~~$2,508,000~~$3,833,000 for the ~~first~~third quarter of 2019, a ~~$326,000 (13.0%~~$7,311,000 (190.7%) increase, which was attributable to increases in gain on sales of loans of ~~$1,145,000 (79.6%), offset by decreases in~~$5,699,000, and other non-interest income of ~~$819,000 (76.5%~~$1,614,000 (154.4%)., offset by a $1,000 decrease in gain on sale of securities.

For the nine months ended September 30, 2020, non-interest income was $22,099,000 compared to $9,474,000 for the same period in 2019, an increase of $12,625,000 (133.3%), which was attributable to increases in gain on sales of loans of $10,623,000, gain on sales of securities of $286,000, and other non-interest income of $1,716,000.

The significant increase in gain on sale of loans was attributable to increased loan origination and sales activities within the residential mortgage and governmental lending ~~operations.~~operations along with an increase in the average gain on sale per loan. Loan sales for the ~~first~~third quarter of 2020 ~~approximated $63.1~~ were 576 loans closed totaling $153.7 million compared to ~~$41.0~~315 loans closed totaling $78.2 million for the ~~first~~third quarter of 2019,, resulting in gains on sale of loans of ~~$2,583,000~~$8,484,000 for the quarter ended ~~March 31,~~September 30, 2020, compared to ~~$1,438,000~~$2,785,000 for the ~~first~~quarter ofended September 30, 2019.

~~The decrease~~Loan sales year to date in other non-interest income resulted from a $799,000 decrease in mortgage banking hedging income and a $132,000 decrease in the fair value of mortgage servicing rights, offset by increases in other non-interest income. The decrease in mortgage banking hedging activity resulted from a decrease in rates in the Bank’s hedged portfolio due2020 were 1,360 loans closed totaling $355.0 million compared to ~~market volatility. The Company recognized a $670,000 loss in hedging~~700 loans closed totaling $168 million for the same period in 2019, resulting in gains on sale of loans of $17,032,000 for the nine months ended September 30, 2020 compared to $6,409,000 for the nine months ended September 30, 2019. The average loan sale gain approximated $12,500 per loan during the first ~~three~~nine months of 2020 compared to approximately $9,200 for the same period of 2019. Much of the increases for the quarterly and nine months periods are attributable to the extremely low mortgage rate interest environment created by the Federal Reserve's lowering of Federal funds target rates in March 2020. As a ~~$129,000 gain~~consequence, this level of mortgage banking activity or profitability is not likely sustainable in the ~~comparable period of 2019.~~

long-term. We also anticipate that our non-interest income may be adversely affected in future periods as a result of the COVID-19 pandemic. Increased unemployment and recessionary concerns may adversely affect mortgage originations and mortgage banking revenue in future periods.

Gain on sales of securities amounted to $1,000 for the quarter ended September 30, 2020. There were $2,000 gains for the quarter and nine month period ended September 30, 2019. In response to possible liquidity concerns at the time, the Corporation sold certain investment securities during the second quarter of 2020 resulting in the year to date increase of $286,000.

Other non-interest income was $2,659,000 for the quarter ended September 30, 2020 compared to $1,046,000 for the comparable period in 2019, an increase of $1,613,000. For the nine months ended September 30, 2020 other non-interest income was $4,779,000 compared to $3,063,000 in 2019, an increase of $1,716,000. The quarter and year to date increases are related to fluctuations in the loan hedging program.

Non-Interest Expenses

For the quarter ended ~~March 31,~~September 30, 2020, non-interest expenses were ~~$8,210,000,~~$10,084,000, compared to ~~$7,222,000~~$8,070,000 for the ~~first~~third quarter of 2019, a ~~$988,000 (13.7%~~$2,014,000 (25.0%) increase. The significant quarter-over-quarter increases included salaries and benefits expense of ~~$651,000 (15.6%~~$1,079,000 (21.2%), ~~expenses related to premises and equipment of $56,000,~~ loan fees of ~~$95,000 (43.2%)~~$192,000, data processing expenses of $105,000, and FDIC assessment of $141,000.

For the nine month period ended September 30, 2020, ~~and advertising expense~~non-interest expenses were $27,099,000 compared to $22,784,000 for the same period of ~~$68,000 (15.2%~~2019, a $4,315,000 (18.9%)~~. The~~ increase, which was attributable to increases in salaries and benefits expense ~~included the impact~~ of ~~normal inflationary wage increases coupled with a 3.9% increase in full-time equivalent employees.~~$2,574,000, loan fees of $504,000, data processing expenses of $248,000, and consultant fees of $218,000.

Maintaining acceptable levels of non-interest expenses and operating efficiency are key performance indicators for the Corporation in its strategic initiatives. The financial services industry uses the efficiency ratio (total non-interest expense as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance. For the quarter ended ~~March 31,~~September 30, 2020, the Corporation’s efficiency ratio was ~~81.14%~~51.39%, compared to ~~74.76%~~72.29% for the same period of 2019. For the nine months ended September 30, 2020 the Corporation's efficiency ratio was 58.10% compared to 72.84% for the same period of 2019. A lower efficiency ratio generally indicates that a bank is spending less to generate every dollar of income.

Provision for Income Taxes

The provision for income taxes for the quarter ended ~~March 31,~~September 30, 2020 was ~~$110,000~~$1,208,000 (effective rate of ~~9.2%~~18.7%), compared to ~~$307,000~~$466,000 (effective rate of ~~14.5%~~16.2%) for the comparable 2019 period. The ~~decrease in the effective tax rate was largely due to tax-exempt securities interest comprising 41.6% of pre-tax income~~provision for the ~~three-month~~nine month period ended ~~March 31,~~September 30, 2020 was $2,652,000 (effective rate of 18.1%) compared to ~~19.5%~~$1,224,000 (effective rate of 15.8%) for the comparable ~~period in 2019.~~

2019 period.

FINANCIAL CONDITION

Overview of Balance Sheet

Total assets amounted to ~~$902.5~~$993.4 million at ~~March 31,~~September 30, 2020, compared to $880.0 million at December 31, 2019, an increase of ~~$22.5~~$113.4 million ~~(2.5%~~(12.9%). The increase in total assets was primarily the result of increases of ~~$18.4~~$90.7 million (15.9%) in ~~cash and cash equivalents due to deposit growth, $4.3~~net loans, $16.8 million ~~(28.2%~~(109.9%) in loans held for sale, ~~and $4.1~~an increase of $3.4 million ~~(2.2%~~(12.7%) in ~~securities available-for-sale, offset by a $3.0~~cash and cash equivalents, and an increase of $2.6 million ~~decrease in net loans, and a $1.5 million (14.8%~~(25.5%) ~~decrease~~ in other assets (including accrued interest receivable). Total liabilities were $884.0 million at September 30, 2020, compared to $785.2 million at December 31, 2019. Deposits ~~during this same period~~ increased ~~$18.0~~$113.9 million ~~(2.5%~~(16.1%) while other borrowings decreased $15.8 million (26.8%).

Shareholders’ equity increased from $94.8 million at December 31, 2019 to ~~$98.5~~$109.4 million at ~~March 31, 2020.~~September 30, 2020. This increase was primarily the result of net income during the ~~quarter~~nine month period ended ~~March 31,~~September 30, 2020 of ~~$1,088,000~~$12,006,000 and an increase in unrealized securities gains, net of tax of ~~$2,949,000,~~$3,559,000, offset by dividends paid of ~~$458,000.~~$1,145,000. The increase in unrealized securities gains during the ~~quarter~~nine month period ended ~~March 31,~~September 30, 2020, was largely attributable to the ~~expected result of the recent~~ Federal Reserve ~~lowering~~decreasing the ~~federal funds rate~~Federal Funds Target Rate by 150 basis points ~~as well as other economic reactions~~(1.50%) during March 2020, in response to the COVID-19 pandemic. Net unrealized gains and losses on securities are reported as accumulated other comprehensive income ~~(loss)~~ in the consolidated balance sheets.

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$44.8~~$29.8 million at ~~March 31,~~September 30, 2020 and $26.4 million at December 31, 2019, including interest-bearing deposits in other banks of ~~$33.3~~$19.3 million at ~~March 31,~~September 30, 2020 and $17.2 million at December 31, 2019. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation’s present liquidity and performance needs especially considering the availability of other funding sources, as described below. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and corresponding liquidity sources and uses. Management believes the Corporation’s liquidity needs in the near term will be satisfied by the current level of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that will mature within one year. These sources of funds should enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.

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 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 incomes taxes.

The amortized cost and fair value of available-for-sale securities as of ~~March 31,~~September 30, 2020 totaled ~~$180.3~~$174.8 million and ~~$187.7~~$183.0 million, respectively, resulting in net unrealized gain before tax of ~~$7.4~~$8.1 million and a corresponding after-tax increase in shareholders’ equity of ~~$5.9~~ $6.4 million.

Loans and Leases

The Corporation’s primary lending areas are Northwestern, West Central, and Central Ohio. Gross loans and leases totaled ~~$574.0~~$671.5 million at ~~March 31,~~September 30, 2020, compared to $576.4 million at December 31, 2019, ~~a decrease~~an increase of ~~$2.4~~$95.1 million ~~(0.4%~~(16.5%). As compared to December 31, 2019, commercial loans increased $111.6 million due to PPP loan originations, commercial and multi-family real estate loans ~~increased $5.7~~decreased $2.8 million, residential 1-4 family real estate loans decreased $12.8 million and consumer loans decreased 1.0 million. ~~All other~~Excluding the impact of PPP loan ~~categories experienced decreases aggregating $8.1~~originations, loans and leases decreased $30.6 million ~~with the largest decrease of $4.3 million coming from the commercial loan portfolio.~~at September 30, 2020 as compared to December 31, 2019.

There are also unrecognized financial instruments at ~~March 31,~~September 30, 2020 and December 31, 2019 which relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments approximated ~~$141.0~~$159.5 million at ~~March 31,~~September 30, 2020 and $133.2 million at December 31, 2019.

~~It's likely that~~Excluding PPP loans, loan demand ~~will~~has been relatively soft the first nine months of 2020 and may decline further for the remainder of ~~the~~ 2020 ~~fiscal year~~ and into 2021 as a result of ~~COVID-19 and the related decline~~COVID-19. Resulting uncertainties in economic conditions in our market areas ~~leading~~may lead to reductions in the growth of ~~for~~ our commercial and industrial loan, commercial real estate loan, residential real estate loan and consumer loan portfolios. PPP loan balances could decrease significantly over the next six months to a year as forgiveness guidelines have been formalized and the process has commenced. We are also anticipating that we could see increased line of credit utilization and a reduction in our unused commitments.

Allowance for Loan and Lease Losses

The following table presents a summary of activity in the allowance for loan and lease losses for the ~~three~~nine month periods ended ~~March 31,~~September 30, 2020 and 2019:

	(in thousands)						(in thousands)
	Three months ended March 31,						Nine months ended September 30,
	2020			2019			2020			2019
Balance, beginning of period	$	4,131		$	3,527		$	4,131		$	3,527
Provision for loan and lease losses		550			100			4,450			400
Charge offs		(9	)		(28	)		(165	)		(157	)
Recoveries		15			45			35			184
Net recoveries		6			17			(130	)		27
Balance, end of period	$	4,687		$	3,644		$	8,451		$	3,954

The allowance for loan and lease losses as a percentage of gross loans and leases was ~~0.82%~~1.26% at ~~March 31,~~September 30, 2020, 0.72% at December 31, 2019, and ~~0.63%~~0.69% at ~~March 31,~~September 30, 2019. Excluding PPP loans and the related allocation of allowance, the allowance for loan losses as a percentage of gross loans and leases was 1.55% at September 30, 2020. Based on current economic indicators, the Corporation increased the economic factors within the allowance for loan losses evaluation. We expect that the allowance for loan losses as a percent of total loans may increase further in future periods based on our belief that the credit quality of our loan portfolio may decline, and loan defaults may increase as a result of COVID-19.

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan and lease 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 and lease 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 and leases based upon the information available to them at the time of their examinations.

Loans and leases on non-accrual status amounted to ~~$1.8 million and~~ $1.0 million at both ~~March 31,~~September 30, 2020 and December 31, 2019~~, respectively.~~. Non-accrual loans and leases as a percentage of outstanding loans amounted to ~~0.31%~~0.16% at ~~March 31,~~September 30, 2020 and 0.17% at December 31, 2019.

The Corporation considers a loan or lease to be impaired when it becomes probable that the Corporation will be unable to collect under the contractual terms of the loan or lease, as the case may be, based on current information and events. The Corporation had impaired loans totaling ~~$2.1~~$2.0 million with ~~$400,000~~$346,000 of specific reserves at ~~March 31,~~September 30, 2020 and impaired loans of $1.9 million with $435,000 of specific reserves as of December 31, 2019. The Corporation had ~~$788,000~~$337,000 and $848,000, respectively, of impaired loans without specific reserves at ~~March 31,~~September 30, 2020 and December 31, 2019.

The Corporation had other potential problem credits, consisting of loans graded substandard or special mention, as well as loans over 90 days past due, loans on non-accrual, and TDR loans, amounting to ~~of $5.3 million~~ $5.2 million at ~~March 31,~~September 30, 2020 and $4.9 million at December 31, 2019. The Corporation’s credit administration department continues to closely monitor these ~~credits.~~credits. Through September 30, 2020 the Corporation has also modified or extended 155 loans, approximating $60.8 million in response to the COVID-19 pandemic. As indicated above, the CARES Act and guidance issued by the Federal Bank Regulatory agencies provides relief from classifying COVID-19 related loan modifications as TDR loans.

The Corporation provides pooled reserves for potential problem loans and leases using loss rates calculated considering historic net loan charge-off experience, as well as other environmental and qualitative factors. The Corporation experienced ~~$9,000~~$165,000 of loan charge-offs during the first ~~three~~nine months of 2020 compared to ~~$28,000~~$157,000 during the first ~~three~~nine months of 2019 with the charge-offs coming from the residential 1-4 family, commercial and multi-family real estate and consumer loan portfolios. The Corporation also provides pooled general reserves for the remaining portion of its loan portfolio not considered to be problem or potential problem loans. These general reserves are also calculated considering, among other things, the historic net charge-off experience for the ~~relative~~related loan type.

Funding Sources

The Corporation considers a number of alternatives, including but not limited to, deposits, as well as short-term and long-term borrowings when evaluating funding sources. Deposits, including customer deposits, brokered certificates of deposit, and public funds deposits continue to be the most significant source of funds for the Corporation, totaling ~~$725.1~~$821.0 million, or ~~90.2%~~92.9% of the Corporation’s outstanding funding sources at ~~March~~September 30, 2020, compared to $707.1 million at December 31, ~~2020~~.

~~Non-interest bearing~~2019. The significant increase in deposits ~~remain a smaller portion of~~during the ~~funding source for the Corporation than for most of its peers.~~ nine month period is somewhat attributable to customer deposits from PPP loan proceeds.

Non-interest bearing deposits comprised ~~16.6%~~20.7% of total deposits at ~~March 31,~~September 30, 2020~~, compared to~~ and 16.5% at December 31, 2019. We expect that deposit levels ~~will generally~~may decrease in future periods ~~as a result of~~if the ~~distressed economic~~ conditions in our market areas become distressed relating to the COVID-19 pandemic.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. Other borrowings consisted of FHLB borrowings totaling $35.0 million at September 30, 2020 and $50.0 million at~~March 31, 2020~~ ~~and~~ December 31, 2019, as well as ~~$8,500,000~~$8,000,000 and $8,750,000 of term borrowings from the United Bankers’ Bank (UBB) at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. The Corporation also has outstanding junior subordinated deferrable interest debentures of ~~$12,916,000~~$12,933,000 and $12,908,000 at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Regulatory Capital

The Corporation and Bank met all regulatory capital requirements as of ~~March 31,~~September 30, 2020, and the Bank is considered “well capitalized” under regulatory and industry standards of risk-based capital.

Cash Flow from Operations

As part of the Bank's hedging program, loans held for sale are ~~now~~ accumulated into larger blocks before being sold. Depending on the timing of the sales of these blocks, there could be a positive or negative impact to net income and cash flow from operations. As of ~~March 31,~~September 30, 2020, loans held for sale amounted to ~~$19,613,000~~$32,117,000 compared to $15,301,000 as of December 31, 2019 resulting in a negative impact to cash flow from operations for the ~~three~~nine month period ended ~~March 31,~~September 30, 2020 of ~~$4,312,000.~~$16,816,000. Similarly, there was a negative impact on cash flow from operations for the ~~three~~nine month period ended ~~March 31,~~September 30, 2019 of ~~$2,760,000~~$10,064,000 from the increase in loans held for sale. Excluding these changes in loans held for sale, cash flow from operations for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 would have been a positive ~~$2,838,000~~$6,154,000 and ~~$942,000,~~$7,734,000, respectively.

Liquidity and Interest Rate Sensitivity

The objective of the Corporation’s asset/liability management function is to maintain consistent growth in net interest income through management of the Corporation’s balance sheet liquidity and interest rate exposure based on changes in economic conditions, interest rate levels, and customer preferences.

The Corporation manages interest rate risk to minimize the impact of fluctuating interest rates on earnings. The Corporation uses simulation techniques that attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns. The primary method of measuring the sensitivity of earnings of changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit re-pricing to more accurately reflect anticipated pricing behavior. These simulations include adjustments for the lag in prime loan re-pricing and the spread and volume elasticity of interest-bearing deposit accounts, regular savings and money market deposit accounts.

The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The Corporation closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or re-price within a designated time frame.

Management believes the Corporation’s current mix of assets and liabilities provides a reasonable level of risk related to significant fluctuations in net interest income and the resulting volatility of the Corporation’s earning base. The Corporation’s management reviews interest rate risk in relation to its effect on net interest income, net interest margin, and the volatility of the earnings base of the Corporation.

Effects of Inflation on Financial Statements

All of the Corporation’s assets relate to commercial banking operations and are generally monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss of purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the commercial banking industry, monetary assets typically exceed monetary liabilities. The Corporation has not experienced a significant level of inflation or deflation during the ~~three~~nine month period ended ~~March 31,~~September 30, 2020. However, because of the depressed national real estate market and sluggish local economy, the Corporation has experienced declines in the value of collateral securing commercial and non-commercial real estate loans. Management continues to closely monitor these trends in calculating the Corporation’s allowance for loan and lease losses.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Corporation’s Annual Report on Form 10-K for the fiscal year ended ~~December 31, 2019~~.Not applicable to Smaller Reporting Companies.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures.

With the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")); as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on 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 as of ~~March 31,~~September 30, 2020.

Changes in Internal Control over Financial Reporting.

There were no significant changes during the period covered by this Quarterly Report on Form 10-Q in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – Other Information

Item 1: Legal Proceedings.

There are no pending legal proceedings to which the Corporation or its subsidiaries are a party or to which any of their property is subject except routine legal proceedings to which the Corporation or its subsidiaries are a party incident to the banking business. None of such proceedings are considered by the Corporation to be material.

Item 1A: Risk Factors

In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 31, 2019, the following risk factor applies to the Corporation

The outbreak of Coronavirus Disease 2019 (“COVID-19”), or an outbreak of other highly infectious or contagious diseases, could adversely impact certain industries in which the Corporation’s customers operate and impair their abilityCOVID-19 continues to fulfill their obligations to the Corporation. Further, the spread of the outbreak could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Corporation operates and could potentially create widespread business continuity issues for the Corporation.

~~COVID-19 has caused severe~~cause significant disruptions in the U.S. economy at large, and for small businesses in particular, which ~~has disrupted~~continues to impact the Corporation’s operations. We are starting to see the impact from COVID-19 on our business, and we believe that it will be significant, adverse and potentially material. Currently, COVID-19 ~~is spreading~~infections continue throughout the United ~~States.~~States, with rates anticipated to rise through the fourth quarter. The ~~resulting~~ongoing concerns on the part of the U.S. have created acontinued risk of afurther recession, reduced economic activity and ~~caused a~~ significant ~~correction~~volatility in the U.S. stock markets. We expect that we will experience significant disruption across our business due to these effects, leading to decreased earnings and significant slowdowns in our loan collections or loan defaults. Increased unemployment and recessionary concerns will adversely affect mortgage originations and mortgage banking revenue in future periods.

COVID-19 may impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. We expect continued disruption across our business due to these effects, very likely leading to decreased earnings, increased loan defaults and significant slowdowns in our loan collections. Continued high rates of unemployment and recessionary concerns will also likely adversely affect mortgage originations and mortgage banking revenue in future periods.

In addition, certain of our borrowers are in or have exposure to the retail, restaurants, and hospitality industries and/or are located in areas that are ~~quarantined~~mandating reduced capacity requirements or ~~under stay-at-home orders,~~other types of operating restrictions, and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. AAny additional prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

The Corporation relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Corporation with these services, it could negatively impact the Corporation’s ability to serve its customers. Furthermore, the continued outbreak could negatively impact the ability of the Corporation’s employees and customers to engage in banking and other financial transactions in the geographic area in which the Corporation operates and could create widespread business continuity issues for the Corporation. The Corporation also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market area. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

We continue to believe that the extended economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and that it could result in significant losses in our loan portfolio in future periods, all of which would adversely and materially impact our earnings and capital.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

The Corporation has not sold any of its securities which were not registered under the Securities Act during the period covered by this report. The table below includes certain information regarding the Corporation’s purchase of United Bancshares, Inc. common stock during the quarterly period ended ~~March 31,~~September 30, 2020:

Period	Total number of shares purchased		Weighted Average price paid per share		Total number of shares purchased as part of a publicly announced plan or program (a)		Maximum number of shares that may yet be purchased under the plan or program (a)
~~01/~~07/01/20 - ~~01/~~07/31/20		-	$	-		-		198,446

~~02/~~08/01/20 - ~~02/29/~~08/31/20		-	$	-		-		198,446

~~03/~~09/01/20 - ~~03/31/~~09/30/20		-	$	-		-		198,446

(a) A stock repurchase program (“Plan”) was adopted by the Corporation’s Board of Directors and originally announced on July 29, 2005. The Plan, which was subsequently amended on December 23, 2005, March 20, 2007 and December 17, 2013, 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.

Item 3: Defaults upon Senior Securities.

None

Item 4: Mine Safety Disclosures

Not applicable

Item 5: Other Information.

None

Item 6: Exhibits

Exhibit Number	Description	Exhibit Location
3.1	Amended and Restated Articles of Incorporation	Incorporated herein by reference to the Corporation's Form 10Q for the quarter ended June 30, 2006.
3.2	Amended and Restated Code of Regulations	Incorporated herein by reference to the Corporation’s Form 10Q for the quarter ended June 30, 2007.
4	Description of Registrant's Common Stock	Incorporated herein by reference to the Corporation's Form 10K for the year ended December 31, 2019
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO	Filed herewith
32.1	Section 1350 CEO’s Certification	Filed herewith
32.2	Section 1350 CFO’s Certification	Filed herewith
99.1	Safe Harbor under the Private Securities Litigation Reform Act of 1995	Filed herewith
101.INS	XBRL Instance Document	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation	Filed herewith
101.DEF	XBRL Taxonomy Extension Definition	Filed herewith
101.LAB	XBRL Taxonomy Extension Label	Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation	Filed herewith

SIGNATURES

Pursuant to the requirements 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.

		UNITED BANCSHARES, INC.

Date: ~~May 8,~~October 30, 2020		By: /s/ Stacy A. Cox
		Stacy A. Cox
		Chief Financial Officer