UNITED BANCSHARES INC/OH - Quarter Report: 2002 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

or

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

For the transition period from _______ to _______

Commission file number 000-29283

UNITED BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

Ohio

(State or other jurisdiction of incorporation or organization)

100 S. High Street, 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)

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes         X      

No  ___________

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of October 31, 2002: 3,603,610.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Consolidated Financial Statements

The accompanying unaudited Condensed Consolidated Balance Sheets, Statements of Income, Statements of Cash Flows, and Statement of Shareholder’s Equity of United Bancshares, Inc. and subsidiaries (the “Company”) reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated.  Since the condensed unaudited financial statements have been prepared in accordance with 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 and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.  Complete audited consolidated financial statements with footnotes thereto are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Significant inter-company accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies of the Company conform to generally accepted practices within the banking industry.  The Company considers all of its principal activities to be banking related.

Note 2 – Acquisition of Delphos Citizens Bancorp

Effective March 1, 2001, the Company joined the Delphos Citizens Bancorp, Inc. (Delphos) through a merger whereby the Company survived.  Delphos’ wholly-owned subsidiary, Citizens Bank of Delphos, is an Ohio banking corporation with offices in Delphos, Ohio.

Under the terms of the Merger Agreement, shareholders of Delphos received .8749 shares of the Company, cash in lieu of fractional shares, and $5.41 in cash for each share of Delphos stock held.  Cash paid, including acquisition costs, totaled $8,893,248.  The total purchase price approximated $22,313,000, including the issuance of 1,367,344 shares of the Company’s common stock.  The transaction was accounted for as a purchase and, accordingly, the results of operations of Delphos have been included in the consolidated results of the Company from the date of acquisition.

The fair value of the assets and liabilities acquired approximated $143,282,000 and $116,816,000, respectively.  The major asset acquired was loans of $127,156,000 and the major liabilities assumed were deposits of $85,257,000 and Federal Home Loan Bank borrowings of $30,500,000.  The purchase price, including direct acquisition costs of $311,937, was $4,153,171 less than the fair value of assets acquired (after write-down of premises and equipment to zero), resulting in a deferred credit (liability).  The deferred credit was amortized to income using a 10-year straight-line method prior to the adoption of the new accounting pronouncement as described in Note 3.  

Note 3 – New Accounting Pronouncement

In June 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations” (Statement 141), which addresses financial accounting and reporting for business combinations.  Under the provisions of Statement 141, any unamortized deferred credit resulting from a business combination occurring before July 1, 2001 shall be written-off and reported as the cumulative effect of a change in accounting principle.  Consequently, as a result of the adoption of Statement 141 effective January 1, 2002, the Company ceased amortizing the deferred credit relating to the Delphos acquisition and recognized as income from a change in accounting principle the unamortized deferred credit, amounting to $3,807,000.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

SELECTED FINANCIAL DATA

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

For the Three

For the Nine

Months Ended

Months Ended

September 30,

September 30,

2002

2001

2002

2001

SIGNIFICANT RATIOS (Unaudited)

Net income to:

Average assets  (a)

0.87%

1.29%

0.68%

0.93%

Average shareholders’ equity (a)

9.20%

14.91%

7.23%

10.87%

Net interest margin (a)

3.53%

3.47%

3.47%

3.47%

Efficiency ratio (a)(b)

61.67%

54.75%

71.11%

63.10%

Average shareholders’ equity to average assets

9.52%

8.63%

9.48%

8.55%

Loans to deposits (end of period)

75.8%

79.76%

75.8%

79.76%

Allowance for loan losses to loans (end of period)

1.14%

1.13%

1.14%

1.13%

Cash dividends to net income (a)

43.76%

31.57%

55.57%

41.41%

PER SHARE DATA

Book value per share

$11.29

$9.65

$11.29

$9.65

(a)

Net income to average assets, net income to average shareholders’ equity, net interest margin, and efficiency ratio are presented on an annualized basis.  Net interest margin is calculated using fully tax equivalent net interest income as a percentage of average interest earning assets.  For purposes of these calculations, as well as cash dividends to net income, net income excludes the impact of the change in accounting principle in 2002.

(b)

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

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Introduction

When or if used in the Company’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 economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, 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 Company 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 Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.  The Company 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 following discussion and analysis of the consolidated financial statements of the Company is presented to provide insight into management’s assessment of the financial results.  

United Bancshares, Inc., an Ohio corporation (the “Company”), 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 Company was incorporated and organized in 1985.  The executive offices of the Company are located at 100 S. High Street, Columbus Grove, Ohio 45830.

Through its subsidiaries, The Union Bank Company, Columbus Grove, Ohio; The Bank of Leipsic Company, Leipsic, Ohio; Citizens Bank of Delphos, Delphos, Ohio; and BancServices United, Inc., Columbus Grove, Ohio, the Company is engaged in the business of commercial banking.

The Union Bank Company is an Ohio state-chartered bank, with its main office located in Columbus Grove, Ohio.  The Union Bank Company presently operates two branch offices in Putnam County, Ohio (one in the village of Kalida and one in the village of Ottawa) and three branch offices in Allen County, Ohio (all in the city of Lima).  

The Bank of Leipsic Company is an Ohio state-chartered bank, with its only office located in the village of Leipsic, Putnam County, Ohio.  

As described in Note 2 of the consolidated financial statements, the Company acquired Delphos Citizens Bancorp, Inc. through a merger and its wholly owned subsidiary, Citizens Bank of Delphos (Citizens) by operation of law became a wholly-owned subsidiary of the Company, effective March 1, 2001.  Citizens is a Federally-chartered savings bank with its only office located in the city of Delphos, Allen County, Ohio.

The acquisition was accounted for as a purchase and resulted in a deferred credit (negative goodwill) of $4.2 million, which for 2001 was amortized over a ten-year period on a straight-line basis.  As described in Note 3, as a result of a new accounting pronouncement, the amortization of the deferred credit ceased January 1, 2002 and the remaining unamortized deferred credit of $3.8 million was recognized as income from a change in accounting principle in the first quarter of 2002.

Since the acquisition was accounted for as a purchase, only the operations of Citizens subsequent to March 1, 2001 are recorded in the Company’s consolidated financial information.

The Union Bank Company, The Bank of Leipsic Company, and Citizens Bank of Delphos all offer a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial, consumer, agricultural, residential mortgage loans and home equity loans; credit card services; safe deposit box rentals; and other personalized banking services.

BancServices United, Inc., which had no operations activity through September 30, 2002, is an Ohio corporation, its main, and only, office will be located in the village of Columbus Grove, Ohio.  Once operational, BancServices United, Inc. will provide mortgage servicing support to the Company’s depository institution subsidiaries as well as other administrative support and processing services that are currently handled by the Company’s holding company employees.

The Company is registered as a Securities Exchange Act of 1934 (the “1934 Act”) reporting company.  

RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended September 30, 2002, United Bancshares, Inc. reported net income of $906,000, or $0.25 basic earnings per share. This compares to third quarter 2001 net income of $1,250,000, or $0.35 basic earnings per share, a $344,000 decrease.  The decrease was primarily the result of an increase in non-interest expenses and provision for loan losses of $165,000 and $94,000, respectively, and a $207,000 decrease in non-interest income.  These differences were offset by an increase in net interest income of $133,000, all net of tax.  The additional expenses were derived from the Company’s continued commitment to the improvement of internal controls and the specialization of its work force.  The increased net interest income was the result of improved net interest margin and growing earning asset base.  The decrease in non-interest income was primarily the result of a decrease in the gain on sale of mortgage loans.  During the third quarter of 2001, approximately $45 million of fixed-rate mortgage loans previously originated by Citizens Bank of Delphos were sold to FHLMC in two separate sales, resulting in the significant gains.  Net income for the nine months ended September 30, 2002, totaled $5,944,000, or $1.65 basic earnings per share, which includes $3,807,000 ($1.06 per share), as a result of a change in accounting principle and $2,137,000 ($0.59 per share) from traditional operations compared with net income of $2,502,000, or $0.76 basic earnings per share for the same period in 2001.  

Interest Income and Expense

Net interest income is the amount by which interest 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 Company.  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 $3,295,000 in the third quarter of 2002 compared to $3,093,000 for the same period of 2001.  Net interest income was $9,301,000 for the first nine months of 2002 compared to $8,515,000 for the same period of 2001.  

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt municipal income on a taxable equivalent basis) by average interest-earning assets.  The resultant percentage serves as a measurement for the Company in comparing its results with those of past periods as well as those of peer companies.  For the three months ended September 30, 2002, the net interest margin (on a taxable equivalent basis) was 3.53% compared with 3.47% for the same period of 2001.  For the nine months ended September 30, 2002, the net interest margin (on a taxable equivalent basis) was 3.47% compared with 3.47% for the same period of 2001.  

Provision for Loan Losses

The provision for loan losses is based upon management’s continuing calculation of the allowance for loan losses and is reflective of the quality of management’s assessment of the portfolio and overall management of the inherent credit risk.  Changes in the provision for loan losses are dependent, among other things, on loan delinquencies, portfolio risk, and general economic conditions in the Company’s markets.

Non-Interest Income

The Company’s non-interest income is largely generated from fees related to customer deposit accounts, gains on sale of fixed rate mortgages and income arising from sales of products such as investments to customers.  The income related to deposit accounts provides a relatively steady flow of income while the other sources are more volume-related and can vary from quarter to quarter.  Gain on sale of loans, which amounted to $209,000 for the quarter ended September 30, 2002 compared to $760,000 for the comparable 2001 period.  During the third quarter of 2001, approximately $45 million of fixed-rate mortgage loans previously originated by Citizens Bank of Delphos were sold to FHLMC in two separate sales, resulting in the significant gains.  Gains on sales of loans for the nine-month period ended September 30, 2002 was $693,000 compared to $1,047,000 for the comparable 2001 period.  

Non-Interest Expense

For the three-month period ended September 30, 2002, non-interest expenses totaled $2,670,000 compared to $2,419,000 for the equivalent period of 2001.  The Company’s non-interest expense has been relatively constant throughout 2002 and management believes that this will continue throughout the remainder of the calendar year.

For the nine-month period ended September 30, 2002, non-interest expenses totaled $8,160,000 compared to $6,925,000 for the comparable period of 2001.  The additional expenses were derived from the Company’s continued commitment to the improvement of internal controls and the specialization of its work force.  Additionally, since Citizens was acquired in March 1, 2001 in accordance with purchase accounting, the Company did not record any income or expenses related to Citizens for the first two months of 2001.

Maintaining acceptable levels of non-interest expense and operating efficiency are key performance indicators for the Company 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 third quarter of 2002, the Company’s efficiency ratio was 61.67% compared to 54.75% for the same period of 2001.  For the nine-month period ended September 30, 2002, the Company’s efficiency ratio was 71.11% compared to 63.10% for the same period of 2001.  These increases are the result of the aforementioned additional expenses derived from the Company’s continued commitment to the improvement of internal controls and the specialization of its work force and reduction of offsetting non-interest income.

Return on Assets

Return on average assets was 0.87% for the third quarter of 2002, compared to 1.29% for the comparable quarter of 2001. Excluding the impact of the change in accounting principle in 2002, return on average assets for the nine months ended September 30, 2002 was 0.68% compared to 0.93% for the same period in 2001.  

Return on Equity

Return on average equity for the third quarter of 2002 was 9.20% compared to 14.91% for the same period of 2001. Excluding the impact of the change in accounting principle in 2002, return on average equity for the nine months ended September 30, 2002 was 7.23% compared to 10.87% for the same period in 2001.  The return on average equity for the nine month period ending September 30, 2002 has been adversely impacted by the $1,462,000 increase in unrealized gain on securities available-for-sale, net of tax.

The Company’s bank subsidiaries are considered well-capitalized under regulatory and industry standards of risk-based capital.

FINANCIAL CONDITION

Overview of Balance Sheet

Loans at September 30, 2002, net of the allowance for loan losses, decreased $3.8 million from the balance at December 31, 2001.  Securities have increased $44.7 million during this nine-month period.  Deposits during this same period have increased $8.8 million.  Federal Home Loan Bank borrowings increased $26.5 million during the nine-month period, largely due to the leverage program initiated at Citizens.

Shareholders’ equity increased from $34.7 million at December 31, 2001 to $40.9 million at September 30, 2002.  

Cash and Cash Equivalents

Cash and cash equivalents totaled $23.6 million at September 30, 2002 compared to $25.9 million at December 31, 2001, including Federal funds sold at September 30, 2002 of $10.9 million and $9.8 million at December 31, 2001.

Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and performance needs.  Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs.  Management believes the liquidity needs of the Company are satisfied by the current balance 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 mature within one year.  These sources of funds should enable the Company to meet cash obligations and off-balance sheet commitments as they come due.  In addition, the Company has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.

Securities

At September 30, 2002, securities totaled $146.6 million, an increase of $44.7 million from December 31, 2001.  All of the Company’s securities are classified as available-for-sale.  Management believes the available-for-sale classification provides flexibility for the Company in terms of selling securities as well as interest rate risk management opportunities.  This increase of $44.7 million was primarily the result of a $27.6 million leverage program that was put in place during April and May of 2002 at Citizens.  The remaining increase was the result of the investment of the aforementioned loan sale and deposit increases, as well as, a redirection of the Company’s cash balances.  At September 30, 2002, the amortized cost of the Company’s securities totaled $144.1 million, resulting in unrealized appreciation of $2.5 million and a corresponding after tax increase in the Company’s equity of $1.6 million.

Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee (“ALCO”) meetings.

Loans

The Company’s lending is primarily centered in northwestern and west central Ohio.  These are principally retail lending markets, which include single-family residential and other consumer lending.  A primary focus in these markets is the agribusiness industry.  Gross loans totaled $233.9 million at September 30, 2002 compared to $237.6 million at December 31, 2001.  In June 2002, the Bank of Leipsic hired a Chief Executive Officer and senior lender. Because of these additions, as well as the anticipated increases in loan volumes at the other banks, the Company experienced loan growth of $3.4 million in the third quarter of 2002 and anticipates additional growth throughout the fourth quarter.

Allowance for Loan Losses

The allowance for loan losses as a percentage of loans was 1.14% at September 30, 2002 compared to 1.09% at December 31, 2001.  Management believes the level of allowance is adequate given the composition of and risk inherent in the loan portfolios of the Company’s bank subsidiaries.

The following table presents changes in the Company’s consolidated allowance for loan losses for the nine months ended September 30, 2002, and 2001, respectively:

($ in thousands)

2002

2001

Balance, beginning of period

$

2,592

$

1,936

Acquired upon acquisition of Citizens

0

868

Charge offs

(430)

(320)

Recoveries

86

40

Net charge offs

(344)

(280)

Provision for loan losses

422

223

Balance, end of period

$

2,670

$

2,747

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Loans on non-accrual status as a percentage of outstanding loans were 0.61% at September 30, 2002, compared to 0.16% at December 31, 2001.  Non-accrual loans totaled $1,423,000 and $390,000 at September 30, 2002 and December 31, 2001, respectively.  Management believes the current level of non-accrual loans is acceptable and is a reflection of the quality of the Company’s loan portfolio as well as increased staffing levels devoted to monitoring and pursuing this area of credits.

Funding Sources

The Company considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources.  Traditional deposits continue to be the most significant source of funds for the Company, totaling $319.7 million, or 82.8% of the Company’s funding sources at September 30, 2002.

Non-interest bearing deposits remain a smaller portion of the funding source for the Company than for most of its peers.  These balances comprised only 7.5% of total deposits at September 30, 2002.

In addition to traditional deposits, the Company maintains both short-term and long-term borrowing arrangements with the Federal Home Loan Bank.  FHLB borrowings totaled $61.3 million at September 30, 2002, including $27.6 million related to the Citizens leveraging program, compared to $34.8 million at December 31, 2001.  Long-term borrowings reprice after their initial fixed rate period (at the discretion of the FHLB), and the Company has the option to prepay any repriced advance without penalty, or allow the borrowing to reprice to a LIBOR based, variable product.  Management plans to maintain access to long-term FHLB borrowings as an appropriate funding source.

Shareholders’ Equity

For the nine months ended September 30, 2002, the Company had net income of $5,944,000, which included $3,807,000 from a change in accounting principle and $2,137,000 from traditional operations.  The Company paid dividends of $1,187,000, resulting in a dividend payout ratio of 55.57% of net income, excluding the change in accounting principle.  Two employees also exercised 10,046 share options at $4.86 per share during the second and third quarters of 2002. Management feels the overall equity level supports this payout ratio but feels that the ratio to net income will eventually drop to more traditional industry standards.  The intention is to maintain the per share dividend while earnings increase which will more normalize the payout ratio.

At September 30, 2002, the adjustment for the net unrealized gain on available-for-sale securities, net of income taxes, totaled $1,631,000.  Since all the securities in the Company’s portfolio are classified as available-for-sale, both the investment and equity sections of the Company’s balance sheet are sensitive to the changing market values of investments.  

The Company has also complied with the standards of capital adequacy mandated by the banking industry.  Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy.  Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios.  A weight category of either 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets) is assigned to each asset on the balance sheet and to certain off-balance sheet commitments.

Liquidity and Interest Rate Sensitivity

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

The Company manages interest rate risk to minimize the impact of fluctuating interest rates on earnings.  The Company 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 repricing to more accurately reflect anticipated pricing behavior.  These simulations include adjustments for the lag in prime loan repricing 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 Company 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 reprice within a designated time frame.  The difference between rate sensitive assets and rate sensitive liabilities for a specified period of time is know as “gap”.

Management believes the Company’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 Company’s earning base.  The Company’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 Company.  With the acquisition of Citizens, the Company has accepted additional levels of fixed-rate assets in the form of residential mortgages.  

Effects of Inflation on Financial Statements

Substantially all of the Company’s assets relate to banking and are 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 in purchasing power and conversely a net monetary liability position results in an increase in purchasing power.  In the banking industry, typically monetary assets exceed monetary liabilities.  Therefore, as prices have recently increased, financial institutions experienced a decline in the purchasing power of their net assets.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The only significant market risk to which the Company and its subsidiaries are exposed is interest rate risk.  The business of the Company 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 Company’s financial instruments are held for trading purposes.

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

The Company monitors its interest rate risk through a sensitivity analysis, whereby it measures potential changes in future earnings and the fair values of 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 financial instruments using interest rates in effect at year-end.  For the fair value estimates, cash flows are then discounted to year-end to arrive at an estimated present value of the Company’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.  

ITEM 4

CONTROLS AND PROCEDURES

The Chief Executive Officer and the Chief Financial Officer have reviewed, as of a date within 90 days of this filing, the disclosure controls and procedures that ensure that information relating to the Company required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely and proper manner.  Based upon this review, the Company believes that there are adequate controls and procedures in place.  There are no significant changes in the controls or other factors that could affect the controls after the date of the evaluation.

PART II

Item 1:

Legal Proceedings.

None

Item 2:

Changes in Securities and Use of Proceeds.

None

Item 3:

Defaults upon Senior Securities.

None

Item 4:

Submission of Matters to a Vote of Security Holders

None

Item 5:

Other Information

None

Item 6:

Exhibits and Reports on Form 8-K.

(a)

Exhibit 11

Computation of Earnings Per Share

(b)

Exhibit 99

Certification Pursuant to 18 U.S.C. Section 1350

(c)

Form 8-K was filed on July 24, 2002, the Company announced its plans for a market expansion into Bowling Green, Ohio, third quarter dividends and the release of its second quarter net basic earnings of 19¢ per share.

(d)

Form 8-K was filed on August 1, 2002, announcing that on or about July 30, 2002 the Company mailed the following information to its shareholders of record describing the recently approved “Automatic Dividend Reinvestment and Stock Purchase Plan.”  

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.

Chief Executive Officer

I, E. Eugene Lehman, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of United Bancshares, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ E. Eugene Lehman

E. Eugene Lehman

Chief Executive Officer

Chief Financial Officer

I, Brian D. Young, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of United Bancshares, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ Brian D. Young

Brian D. Young

Chief Financial Officer

EXHIBIT INDEX

UNITED BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q

FOR PERIOD ENDED SEPTEMBER 30, 2002

Exhibit

Number

Description

Exhibit Location

11

Computation of Earnings Per Share.

Filed herewith

99

Certification Pursuant to 18 U.S.C. Section 1350

Filed herewith