Exhibit 13​

Table of Contents

Shareholders, Clients, and Employees:

I am proud to report that as a direct result of the ongoing efforts of the Company’s dedicated team members in implementing our Strategic Plan, your Company experienced another prosperous year in 2017.

A significant part of this year’s successes was the completion of the acquisition of Benchmark on September 8, 2017. This acquisition gave your Company a larger income-earning asset base, income accretion, and provides a larger geographic presence in Ohio’s fastest growing region. The impact of this transaction and organic growth were the primary drivers of the fourth quarter’s improved financial performance.

While the Company experienced year over year organic growth, the impact of the acquisition noticeably improved profitability. For the fourth quarter of 2017 and excluding the tax expense of $1,136,000 for the deferred tax asset revaluation, your Company reported return on average assets (1.03%) and return on tangible equity (15.75%). The Company also reported net interest margin (3.98%) and a 35% increase in pre-tax income, as compared to the fourth quarter of 2016. The company also reported an increase in total assets (19%), loans (35%), deposits (20%) and net interest income (17%) during 2017, including the impact of the Benchmark acquisition. Pre-tax income, excluding acquisition costs, increased (10%) in 2017 as compared to 2016.

Additionally, we continue to make investments in technology to create internal efficiencies, reduce fraud, and enhance customer tools and resources. Such efforts have yielded positive results in our customers’ use of technology-based products. We believe that effectively implementing technology will remain not only vital for attracting and retaining new customers, reducing fraud, and controlling our core operations costs, but also for providing the best possible support for our growing business footprint.

Although uncertainty still remains in our markets, we continue to believe the driver of our success is, and will continue to be, our strong corporate values of respect for our shareholders, clients, colleagues, and communities. As always, we greatly appreciate your continued support and the trust you have placed in us.

Respectfully,

Brian D. Young
President & CEO

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UNITED BANCSHARES, INC.

DESCRIPTION OF THE CORPORATION

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

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

MARKET PRICE AND DIVIDENDS ON COMMON STOCK

United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001. As of December 31, 2017, the common stock was held by 1,164 shareholders of record. Below are the trading highs and lows for the periods noted.

Dividends declared by United Bancshares, Inc. on its common stock during the past two years were as follows:

AVAILABILITY OF MORE INFORMATION

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

Heather Oatman, Secretary
United Bancshares, Inc.
105 Progressive Drive
Columbus Grove, Ohio 45830
800-837-8111

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UNITED BANCSHARES, INC.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

Notes:

(1)

Includes loans held for sale.

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(2)

Includes Restricted Bank Stock.

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(3)

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

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(4)

Financial data for 2014 and subsequent years includes the impact of The Ohio State Bank acquisition.

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(5)

Financial data for 2017 includes the impact of the Benchmark Bancorp acquisition.

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Forward-looking Statements

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

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

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

Overview

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

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

Financial Condition

Consolidated assets for the Corporation and the Bank totaled $780.5 million at December 31, 2017, compared to $633.1 million at December 31, 2016, representing an increase of  $147.4 million or 23.3%, which reflects the impact of the Benchmark acquisition, completed on September 8, 2017. The fair value of assets acquired in the transaction was $129.0 million. Excluding the impact of the transaction, total assets increased $18.4 million, with loans increasing $32.0 million, net premises and equipment increasing $3.4 million, and available-for-sale securities decreasing $20.8 million. Deposits during the same period increased $10.4 million, excluding the impact of deposits assumed in the Benchmark acquisition. The decrease in securities was largely due to sales and maturities of securities during the year ended December 31, 2017, including the $2.2 million redemption of the Corporation’s only level 3 available-for-sale security. Cash flow from the securities sales and maturities was used to fund loan growth and the Benchmark acquisition. The increase in premises and equipment includes the impact of the Corporation’s new operations center located in Columbus Grove, which was completed in May 2017.

Other borrowings increased $38.4 million during this same period, including a $10.0 million term loan which was used to partially fund the Benchmark transaction, as well as $28.4 million of Federal Home Loan Bank borrowings, which were used to provide the liquidity needed to complete the Benchmark transaction, as well as for the aforementioned loan growth.

Loans and Leases

At December 31, 2017, total loans and leases, including loans and leases held for sale, amounted to $508.8 million compared to $377.6 million at December 31, 2016, an increase of  $131.2 million (34.7%). This increase includes the fair value of loans acquired in the Benchmark acquisition of  $98.8 million. The following categories within the loan and lease portfolio represent the majority of the change during 2017: residential real estate increased $31.3 million (34.6%), commercial loans increased $93.9 million (38.5%), agriculture loans increased $5.4 million (13.8%), and consumer loans increased $0.7 million (16.2%).

Securities

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

Securities, including FHLB stock, totaled $174.7 million at December 31, 2017 compared to $195.0 million at December 31, 2016, a decrease of  $20.3 million (10.4%). The amortized cost of the securities portfolio decreased $21.9 million in 2017, and the Corporation experienced a reduction in net unrealized losses on securities of  $1.1 million during 2017.

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The Corporation is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB. FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment. The FHLB stock balance increased $472,000 during 2017 as a result of additional FHLB stock acquired through the Benchmark acquisition.

At December 31, 2017, the Corporation’s investment securities portfolio included $68.0 million in U.S. states and political subdivisions securities, which is 10.2% lower than shareholders’ equity as of that date. The largest exposure to any one state is $13.1 million, or 19%, issued within the state of Wisconsin. The Corporation’s procedures for evaluating investments in securities issued by states, municipalities and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.

At December 31, 2017 net unrealized losses on available-for-sale securities amounted to $188,000 while at December 31, 2016, net unrealized losses on available-for-sale securities amounted to $1.3 million. At December 31, 2017, the Corporation held 102 securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $92.3 million and $1.5 million, respectively. Management has considered the current interest rate environment, typical volatilities in the bond market, and the Corporation’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.

Other Assets

The total cost of the Benchmark transaction was $30.8 million and resulted in additional goodwill of $15.1 million, as well as a core deposit intangible asset of  $493,000. During 2017, other real estate owned (OREO) decreased $419,000 to $159,000 at December 31, 2017, compared to $578,000 at December 31, 2016. During 2017, $241,000 was transferred from loans to OREO. Throughout 2017, the Corporation evaluated its OREO portfolio and sold properties generating proceeds of  $823,000 resulting in net OREO gains of  $22,000.

Deposits

Total deposits at December 31, 2017 amounted to $630.5 million, an increase of  $105.9 million (20.2%) compared with total deposits of  $524.7 million at December 31, 2016. The increase in deposits includes a $98.2 million increase in interest bearing deposits and a $7.7 million increase in non-interest bearing deposits.

Other Borrowings

In addition to customer deposits, the Corporation also utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth and periodic deposit shrinkage. Other borrowings, consisting of FHLB advances, amounted to $47.1 million at December 31, 2017 and $18.8 million at December 31, 2016. Other borrowings at December 31, 2017 also includes the $10.0 million term loan used to facilitate the Benchmark transaction.

Results of Operation — 2017 Compared to 2016

Performance Summary

Consolidated net income for the Corporation was $3.8 million in 2017 compared to $5.5 million in 2016 and $5.9 million in 2015.

Net income in 2017, as compared to 2016 was unfavorably impacted by increases of  $4.7 million (26.3%) in non-interest expenses and $1.1 million (65.1%) in the provision for income taxes, offset by increases in net interest income of  $3.3 million (15.1%) and non-interest expenses of  $1.3 million (25.9%). The significant increase in non-interest expenses included $1.2 million relating to acquisition costs incurred

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in connection with the Benchmark transaction. The increase in net interest income was attributable to organic loan growth, increased yield on interest-earning assets, and Benchmark operations subsequent to the merger somewhat offset by an increase in interest expense due to increase in interest-bearing deposits resulting from the Benchmark acquisition coupled with an increase in deposit interest rates. The increase in non-interest income was also largely attributable to the Benchmark operations subsequent to the transaction. The increase in the provision for income taxes was attributable to the income tax reform signed into law in December 2017.

The Corporation’s return on average assets was .56% in 2017, compared to .90% in 2016, and .94% in 2015. The Corporation’s return on average shareholders’ equity was 5.09% in 2017, 7.45% in 2016, and 8.46% in 2015. Basic net income per share was $1.18 per share in 2017, a decrease of  $0.50 per share from $1.68 in 2016. Basic net income per share of  $1.68 in 2016 represented a decrease of  $0.09 per share from $1.77 in 2015. Changes in these amounts from year to year were generally reflective of changes in the level of net income.

Net Interest Income

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

Net interest income for 2017 was $22.7 million, an increase of  $3.3 million (16.8%) from 2016. The increase in net interest income was primarily due to an increase in loan interest income. The net interest yield on average interest-earning assets, on a tax-equivalent basis, increased in 2017 to 4.31% from 3.98% in 2016.

A majority of this increase was a result of the average yield on loans for 2017 increasing to 5.05% compared to 4.83% in 2016 coupled with loans comprising 68.2% of interest-earning assets in 2017 compared to 64.0% in 2016. Additionally, the average rate on interest-bearing liabilities increased to 0.62% in 2017 from 0.50% in 2016. The $3.3 million increase in net interest income included a $2.5 million volume increase and an $800,000 rate increase which is indicative of the growth in the interest-earning asset base from both organic loan growth, as well as the Benchmark transaction, as well as the aforementioned increase in market interest rates.

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

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

As mentioned, ongoing reviews are performed to identify potential problem and nonperforming loans and also provide in-depth analysis with respect to the quarterly allowance for loan losses calculation. Part of this analysis involves assessing the need for specific reserves relative to impaired loans. This evaluation typically includes a review of the recent performance history of the credit, a comparison of the estimated collateral value in relation to the outstanding loan balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future financial performance. Loans are considered to be impaired when, based upon the most current information available, it appears probable that the borrower will not be able to make payments according to the contractual terms of the loan agreement. Impaired loans are recorded at the observable market price of

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the loan, the fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan’s effective interest rate. Given that the Corporation’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of individual impaired loans is most often based upon the underlying collateral value net of estimated selling costs. Large groups of smaller balance homogenous loans are collectively evaluated for impairment.

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

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

The allowance for loan and lease losses at December 31, 2017 was $2.8 million, or 0.56% of total loans, compared to $3.3 million, or 0.89% of total loans at December 31, 2016. The change in the allowance for loan and lease losses during 2017 included a $350,000 credit for loan losses and loan charge offs, net of recoveries of  $160,000.

The provision or credit for loan and lease losses is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors. Favorable settlements of impaired or potential problem loans can also result in a reduction in the required allowance for loan and lease losses and a negative provision, or credit, being reflected in current operations. The credit for loan and lease losses of $350,000 in 2017 compares to a credit of  $750,000 in 2016.

There were no impaired loans at December 31, 2017 compared to $2.9 million of impaired loans at December 31, 2016. Impaired loans at December 31, 2016 included $2.9 million in loans with specific reserves of  $1.0 million (no impaired loans without any specific reserves) included in the Corporation’s allowance for loan and lease losses at December 31, 2016.

In addition to impaired loans, the Corporation had other potential problem credits of  $8.0 million at December 31, 2017 compared to $9.7 million at December 31, 2016, a decrease of  $1.7 million (17.5%). The Corporation’s credit administration department continues to closely monitor these credits.

Non-Interest Income

Total non-interest income increased $1.3 million (25.9%) to $6.2 million in 2017 from $4.9 million in 2016, which was attributable to increases in gain on sale of loans of  $1.2 million and other operating income of  $207,000, offset by the impact of the change in gain (loss) on sale of securities of  $160,000.

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance. Service charges on deposit accounts increased $30,000 (1.8%) to $1.7 million in 2017 compared to $1.68 million in 2016.

The Corporation has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and typically retains the servicing rights relating to such loans. During 2017, gain on sale of loans was $1.8 million, including $183,000 of capitalized servicing rights. Gain on sale of loans was

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$618,000 in 2016, including $273,000 of capitalized servicing rights. A significant contributing factor to the increase in gain on sale of loans was the Benchmark acquisition which included the addition of their Loan One program. The Corporation’s serviced portfolio increased $2.5 million during 2017 to $174.7 million at December 31, 2017.

The Corporation reports its mortgage servicing rights using the fair value measurement method. As a result, the Corporation recognized a $31,000 decrease in the fair value of mortgage servicing rights during 2017, compared to a $12,000 decrease in the fair value of mortgage servicing rights in 2016. Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights. While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period. The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model. At December 31, 2017 the PSA factor was 159 compared to 148 at December 31, 2016.

Other operating income increased $191,000 (9.3%) to $2.3 million in 2017 from $2.1 million in 2016. The increase in non-interest income for the year ended December 31, 2017 was primarily attributable to a $96,000 increase in service fees on loans sold and a $49,000 increase in debit card fee income.

Non-Interest Expenses

Total non-interest expenses amounted to $22.5 million in 2017, compared to $17.8 million in 2016, an increase of  $4.7 million (26.3%). The increase in non-interest expenses for the year ended December 31, 2017, excluding the aforementioned impact of the Benchmark acquisition costs, was primarily attributable to increases in salary and benefits, premises and equipment, data processing and advertising and promotion expenses.

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

Provision for Income Taxes

The provision for income taxes for 2017 was $2.9 million an effective tax rate of 42.8%, compared to $1.7 million in 2016, an effective rate of 24.0%. The increase in the effective tax rate in 2017 as compared to 2016 resulted from a one-time $1,136,000 tax provision recognized in 2017 due to the tax reform signed into law by President Trump on December 22, 2017 and more fully described in Note 12 to the consolidated financial statements. As a result of this tax law change, the Corporation’s effective tax rate was reduced from the federal statutory rate of 34% to 21% resulting in a reduction of deferred tax assets. At December 31, 2017, the Corporation has available alternative minimum tax credits of  $847,000, substantially all of which are expected to be recovered by 2022 through either reduction of the regular tax liability or refund.

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Results of Operation — 2016 Compared to 2015

Performance Summary

Consolidated net income for the Corporation and the Bank was $5.5 million in 2016 compared to $5.9 million in 2015.

Net income in 2016 as compared to 2015 was unfavorably impacted by a decrease in net interest income of  $1,363,000, an increase in non-interest expenses of  $92,000 and an increase in income taxes of $339,000, offset by an increase in non-interest income of  $266,000, as well as a credit for loan losses of $750,000 in 2016 compared to a $382,000 provision in 2015. The change in the provision (credit) for loan losses is more fully explained in the “Provision for Loan Losses and the Allowance for Loan Losses” section.

The Corporation’s return on average assets was .90% in 2016, compared to .94% in 2015. The Corporation’s return on average shareholders’ equity was 7.45% in 2016 and 8.46% in 2015. Basic net income per share was $1.68 per share in 2016, a decrease of  $0.09 per share from $1.77 in 2015. The change in this amounts from year to year was generally reflective of changes in the level of net income.

Net Interest Income

Net interest income for 2016 was $19.4 million, a decrease of  $1,363,000 (6.6%) from 2015. The decrease in net interest income was primarily due to a decrease in the net interest margin. The net interest yield on average interest-earning assets, on a tax-equivalent basis, decreased in 2016 to 3.98% from 4.11% in 2015.

A majority of this decrease was a result of the average yield on loans for 2016 decreasing to 4.83% compared to 5.11% in 2015 as a result of a significant reduction in loan discount accretion from the 2014 OSB acquisition. Additionally, the average rate on interest-bearing liabilities increased to 0.50% in 2016 from 0.45% in 2015.

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

The allowance for loan and lease losses at December 31, 2016 was $3.3 million, or 0.89% of total loans, compared to $3.8 million, or 1.08% of total loans at December 31, 2015. The change in the allowance for loan losses during 2016 included a $750,000 credit for loan losses and loan recoveries, net of charge offs, of $261,000.

The provision or credit for loan and lease losses is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors. The credit for loan losses of  $750,000 in 2016 compares to a provision of  $382,000 in 2015.

Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $2.9 million at December 31, 2016 compared to $6.0 million at December 31, 2015, a decrease of $3.1 million. Impaired loans at December 31, 2016 included $2.9 million in loans with specific reserves of $1.0 million (no impaired loans without any specific reserves) included in the Corporation’s allowance for loan losses at December 31, 2016. Impaired loans at December 31, 2015 included $6.0 million in loans with specific reserves of  $1.4 million (no impaired loans without any specific reserves) included in the Corporation’s allowance for loan and lease losses at December 31, 2015.

In addition to impaired loans, the Corporation had other potential problem credits of  $9.7 million at December 31, 2016 compared to $15.0 million at December 31, 2015, a decrease of  $5.3 million (35.5%). The Corporation’s credit administration department continues to closely monitor these credits.

Non-Interest Income

Total non-interest income increased $266,000 (5.7%) to $4.9 million in 2016 from $4.6 million in 2015. With the exception of net securities gains, most of the components of non-interest income are recurring, although certain components are more susceptible to change than others. Net securities gains increased in 2016 to $158,000 compared to $116,000 in 2015.

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Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance. Service charges on deposit accounts increased $166,000 (11.0%) to $1,681,000 in 2016 compared to $1,515,000 in 2015.

During 2016, gain on sale of loans was $618,000, including $273,000 of capitalized servicing rights. Gain on sale of loans was $586,000 in 2015, including $252,000 of capitalized servicing rights. The increase in gain on sale of loans occurred despite a slight decrease in loan demand during 2016 with loan sales in 2016 amounting to $27.4 million compared to $28.4 million in 2015. The Corporation’s serviced portfolio decreased $1.3 million during 2016 to $172.2 million at December 31, 2016.

The Corporation recognized a $12,000 decrease in the fair value of mortgage servicing rights during 2016, compared to a $263,000 increase in the fair value of mortgage servicing rights in 2015. At December 31, 2016 the PSA factor was 148 compared to 170 at December 31, 2015.

Other operating income increased $335,000 (19.4%) to $2.1 million in 2016 from $1.7 million in 2015. The increase in non-interest income for the year ended December 31, 2016 was primarily attributable to a $353,000 increase in service fees on loans sold and a $44,000 increase in debit card fee income offset by losses on sale of OREO.

Non-Interest Expenses

Total non-interest expenses amounted to $17,784,000 in 2016, compared to $17,692,000 in 2015, an increase of  $92,000 (0.5%). The increase in non-interest expenses for the year ended December 31, 2016 was primarily attributed to increases in salary & benefits expense, premises and equipment expense, advertising & promotion, media, loan closing fees, ATM processing fees, and IT expense offset by decreases in data processing expense, FDIC Assessment, consultant fees, Ohio financial institutions and franchise taxes, other real estate owned expense and asset management legal expense.

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

Provision for Income Taxes

The provision for income taxes for 2016 was $1,744,000, an effective tax rate of 24.0%, compared to $1,405,000 in 2015, an effective rate of 19.2%. The increase in the effective tax rate in 2016 as compared to 2015 resulted from a one-time $332,000 tax benefit recognized in 2015 due to a tax law change. The Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income (7.7%) and life insurance contracts (1.8%). At December 31, 2016, the Corporation had available alternative minimum tax credits of  $627,000 as well as federal income tax loss carryforwards, with a recognized tax benefit of  $2.1 million resulting from the 2014 OSB acquisition, as more fully described in Note 12 to the consolidated financial statements.

Liquidity

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

The consolidated statements of cash flows for the years presented provide an indication of the Corporation’s sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of cash flows for 2017, 2016, and 2015 follows.

The Corporation generated cash from operating activities of  $5.9 million in 2017, $6.6 million in 2016, and $6.9 million in 2015.

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Net cash flows provided by (used in) investing activities amounted to $(39.9) million in 2017, $(35.9) million in 2016, and $30.7 million in 2015. Significant investing cash flow activities in 2017 included $21.1 million of net cash inflows resulting from securities purchases, net of proceeds received from sales and maturities, $34.3 million of net cash outflow resulting from an increase in loans, and a $24.7 million cash outflow for the acquisition of Benchmark. Significant investing cash flow activities in 2016 included $11.4 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities as well as a $23.0 million increase in loans. Significant investing cash flow activities in 2015 included $22.7 million of net cash inflows resulting from securities purchases, net of proceeds received from sales and maturities. Significant investing cash outflow activities in 2015 included a $7.3 million decrease in loans.

Net cash flows provided by (used in) financing activities amounted to $47.1 million in 2017, $20.5 million in 2016, and $(47.1) million in 2015. Net cash provided by financing activities in 2017 primarily resulted from an increase in other borrowings of  $38.4 million and deposits of  $10.4 million, offset by $1,569,000 in cash dividends paid. Net cash provided by financing activities in 2016 primarily resulted from an increase in other borrowings of  $16.7 million and a $6.3 million increase in deposits, offset by $833,000 of treasury stock purchases and $1,446,000 million in cash dividends paid. Net cash used in financing activities in 2015 primarily resulted from a decrease in deposits of  $47.0 million, $927,000 of treasury stock purchases, and a $1.2 million in cash dividends paid. Net cash provided by financing activities included an increase of  $2.1 million in borrowings from the FHLB.

Asset Liability Management

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

The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”. An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”. This generally means that, when interest rates increase, an institution’s net interest income will increase and, when interest rates decrease, the institution’s net interest income will decrease. An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “negative gap”. This generally means that, when interest rates increase, the institution’s net interest income will decrease and, when interest rates decrease, the institution’s net interest income will increase. The Corporation’s one year cumulative gap (ratio of risk-sensitive assets to risk-sensitive liabilities) at December 31, 2017 is approximately 84% which means the Corporation has more liabilities than assets re-pricing within one year. Under the current low interest rate environment, the Corporation’s liabilities do not have the ability to reprice down the full 100 bps which is why the margin decreases in a 100 bps down shock scenario.

Effects of Inflation

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

12

Significant Accounting Policies

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

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

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

Management considers the valuation of goodwill from various past acquisitions through an annual impairment test which considers, among other things, the assets and equity of the Corporation as well as price multiples for sales transactions involving other local financial institutions. Management engaged an independent valuation specialist to perform a goodwill impairment evaluation as of September 30, 2017, which supported management’s assessment that no impairment adjustments to goodwill were warranted. To date, none of the goodwill evaluations have revealed the need for an impairment charge. Management does not believe that any significant conditions have changed relating to the goodwill assessment through December 31, 2017.

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

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

Impact of Recent Accounting Pronouncements

A summary of new accounting standards adopted or subject to adoption in 2017, as well as newly-issued but not effective accounting standards at December 31, 2017, is presented in Note 2 to the consolidated financial statements.

13

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

The following table summarizes loan commitments, including letters of credit, as of December 31, 2017:

As indicated in the preceding table, the Corporation had $127.1 million in total loan commitments at December 31, 2017, with $49.0 million of that amount expiring within one year. All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters-of-credit are also included in the amounts noted in the table since the Corporation requires that each letter-of-credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages in residential and nonresidential property. Many of the commercial lines are due on a demand basis, and are established for seasonal operating purposes. It is anticipated that a significant portion of these lines will expire without being drawn upon.

The following table summarizes the Corporation’s contractual obligations as of December 31, 2017:

Long-term debt presented in the preceding table consists of Federal Home Loan Bank borrowings of $47.1 million; $12.8 million of junior subordinated deferrable interest debentures, including $10.3 million issued by the Corporation and $2.5 million assumed from the November 2014 OSB acquisition; and $10.0 million borrowed in connection with the Benchmark acquisition.

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

14

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

The future deferred compensation payments, including interest, as noted in the preceding table, includes the Corporation’s agreement with its current Chairman of the Board of Directors to provide for retirement compensation benefits. A deferred compensation liability was also assumed with The OSB acquisition for the benefit of its retired president, with payment that began on May 1, 2010. At December 31, 2017, the net present value of future deferred compensation payments amounted to $782,000, which is included in other liabilities in the December 31, 2017 consolidated balance sheet.

As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2017. The Corporation also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of  $670,000 at December 31, 2017 for supplemental retirement benefits.

Quantitative and Qualitative Disclosures about Market Risk

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

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

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

The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2017:

15

Quantitative and Qualitative Disclosures about Market Risk — Continued

Given a linear 100bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 3.0% and net income would decrease by 6.7%. A 100bp decrease in interest rates would decrease net interest income by 5.7% and decrease net income by 12.8%. Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 6.2% and net income would decrease by 13.7%. A 200bp decrease in interest rates would decrease net interest income by 10.7% and decrease net income by 24.3%. Given a linear 300bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 9.5% and net income would decrease by 21.0%. A 300bp decrease in interest rates cannot be simulated at this time due to the historically low interest rate environment and a 400bp increase in interest rates would decrease net interest income by 12.9% and decrease net income by 28.6%. Management does not expect any significant adverse effect to net interest income in 2017 based on the composition of the portfolio and anticipated trends in rates.

Other Information

The Dodd-Frank Act, enacted in 2010, is complex and several of its provisions are still being implemented. The Dodd-Frank Act established the Consumer Financial Protection Bureau, which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also required the issuance of numerous regulations, many of which have not yet been issued. The regulations will continue to take effect over several more years, continuing to make it difficult to anticipate the overall impact.

16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
United Bancshares, Inc.
Columbus Grove, Ohio

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and subsidiaries (the “Corporation”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

CliftonLarsonAllen LLP

We have served as the Corporation’s auditors since 2000.

Toledo, Ohio
March 2, 2018

17

UNITED BANCSHARES, INC.
 
CONSOLIDATED BALANCE SHEETS

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

18

UNITED BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2017, 2016 and 2015

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

19

UNITED BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2017, 2016 and 2015

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

20

UNITED BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2017, 2016 and 2015

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

21

UNITED BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2017, 2016 and 2015

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

22

UNITED BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2017, 2016 and 2015 — (Continued)

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

23

UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

United Bancshares, Inc. (the “Corporation”) was incorporated in 1985 in the state of Ohio as a single-bank holding company for The Union Bank Company (the “Bank”). The Bank has formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio. The operations of UBC are located in Wilmington, Delaware. The Bank has also formed a wholly-owned subsidiary, UBC Property, Inc. to hold and manage certain property that is acquired in lieu of foreclosure.

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

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

Significant accounting policies followed by the Corporation are presented below.

Use of Estimates in Preparing Financial Statements

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

Principles of Consolidation

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

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

Restrictions on Cash

The Corporation was required to maintain cash on hand or on deposit with the Federal Reserve Bank of approximately $1.2 million and $1.1 million at December 31, 2017 and 2016, respectively, to meet regulatory reserve and clearing requirements.

Securities, Federal Home Loan Bank Stock and Certificates of Deposits

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

The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in fair value of securities below their cost that are deemed to be other-than-temporary are reflected in income as realized losses. In estimating other-than-temporary

 

24

UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

impairment losses, management considers (1) the intent to sell the securities and the more likely than not requirement that the Corporation will be required to sell the securities prior to recovery, (2) the length of time and the extent to which the fair value has been less than cost, and (3) the financial condition and near-term prospects of the issuer. Gains and losses on the sale of securities are recorded on the trade date, using the specific identification method, and are included in non-interest income.

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

Investments in certificates of deposit are carried at cost and evaluated for impairment annually or when circumstances change that may have a significant effect on fair value.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Estimated fair value is determined based on quoted market prices in the secondary market. Any net unrealized losses are recognized through a valuation allowance by charges to income. The Corporation had no unrealized losses at December 31, 2017 and 2016.

Loans and Leases

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

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

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

Allowance for Loan and Lease Losses

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

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

 

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UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

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

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

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

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

Acquired Loans

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

•

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

​

•

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

​

•

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

​

 

26

UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

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

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

Other Real Estate Owned

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

Loan Sales and Servicing

Certain mortgage loans are sold with mortgage servicing rights retained or released by the Corporation. The value of mortgage loans sold with servicing rights retained is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. The Corporation generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions — credit losses, prepayment speeds, servicing costs, earnings rate, and discount rates commensurate with the risks involved.

Capitalized servicing rights are reported at fair value and changes in fair value are reported in net income for the period the change occurs.

Servicing fee income is recorded for servicing loans, based on a contractual percentage of the outstanding principal, and is reported as other operating income. Amortization of mortgage servicing rights is charged against loan servicing fee income.

Premises and Equipment

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

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

 

27

UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

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

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. At December 31, 2017, the Corporation believes the Bank does not have any indicators of potential impairment based on the estimated fair value of its reporting unit.

The core deposit intangible asset resulting from the March 2010 Findlay branch acquisition was determined to have a definite life and was amortized on a straight-line basis over seven years through March 2017. The core deposit intangible asset resulting from the November 2014 Ohio State Bank (“OSB”) acquisition was also determined to have a definite life and is being amortized on a straight-line basis over ten years through October 2024. The core deposit intangible asset resulting from the September 2017 Benchmark Bancorp, Inc. and its wholly owned subsidiary, Benchmark Bank (collectively referred to as “Benchmark”) acquisition was also determined to have a definite life and is being amortized on an accelerated basis over ten years through 2027. Amortization of core deposit intangible assets amounted to $124,000, $96,000 and $96,000 for the years ended December 31, 2017, 2016 and 2015. Future amortization of core deposit intangible assets for the years 2018 thru 2022 are $173,000, $158,000, $151,000, $143,000, and $140,000, respectively.

Supplemental Retirement Benefits

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

Advertising Costs

All advertising costs are expensed as incurred.

Income Taxes

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

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

 

28

UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

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

Transfers of Financial Assets

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

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

Comprehensive Income (Loss)

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

Per Share Data

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

The weighted average number of shares used for the years ended December 31, 2017, 2016 and 2015:

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

Rate Lock Commitments

Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale are accounted for as derivative instruments. The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are to be recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. At December 31, 2017 and 2016, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 

Fair Values of Financial Instruments

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

Subsequent Events

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2017, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2017, have been recognized in the financial statements for the year ended December 31, 2017. Events or transactions that provided evidence about conditions that did not exist at December 31, 2017 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2017.

On January 18, 2018, United Bancshares, Inc. issued a release announcing that its Board of Directors approved a cash dividend of  $0.12 per common share payable March 15, 2018 to shareholders of record at the close of business on February 28, 2018.

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs — Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. The Corporation has determined that the first quarter adoption of Topic 606-2018 will not have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, amending ASU Subtopic 825-10. The amendments in this update make targeted improvements to generally accepted accounting principles (GAAP) as follows: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and 8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The Corporation has determined that this guidance will not have a material impact on its consolidated financial statements.

 

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UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS (Continued)
 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Corporation’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either assets or liabilities and classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. Management has begun gathering data and evaluating the process for calculating the allowance for loan losses under the requirements of ASU 2016-13, but has not yet determined the expected impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Corporation does not expect the guidance to have a material impact on the consolidated financial statements.

NOTE 3 — ACQUISITION

On September 8, 2017, after receiving full board of director and regulatory approval, the Corporation completed the acquisition of Benchmark in an all cash transaction. Under the terms of the merger agreement, shareholders of Benchmark received approximately $8.59 per share for each outstanding common share. Immediately following the merger of Benchmark with and into the Corporation, Benchmark merged with and into the Bank.

As a result of the acquisition, the two full-service banking centers of Benchmark located in Gahanna and Westerville, Ohio, became full service offices of the Bank, and one mortgage loan production office located in Gahanna Ohio, became a mortgage loan production office of the Bank. The acquisition expands the geographical footprint of the Corporation in Ohio’s fastest growing market and is expected to provide certain cost synergies with the existing Central Ohio operations, as well as income accretion through a

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 3 — ACQUISITION (Continued)
 

larger asset base. Acquisition related costs amounted to $1,271,000 in 2017 and $65,000 in 2016, and are included in other non-interest expenses.

Goodwill of  $15.1 million arising from the acquisition consists largely of synergies and the cost savings expected to result from the combining of operations and is not deductible for income tax purposes.

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

NOTE 4 — SECURITIES

The amortized cost and fair value of securities as of December 31, 2017 and 2016 are as follows:

A summary of unrealized gains and losses on securities at December 31, 2017 and 2016 follows:

 

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UNITED BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 4 — SECURITIES (Continued)
 

The amortized cost and fair value of securities at December 31, 2017, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities with a carrying value of  $27.7 million at December 31, 2017 and $26.5 million at December 31, 2016 were pledged to secure public deposits and for other purposes as required or permitted by law.

The following table presents gross unrealized losses and fair value of debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016: