UNITED BANCSHARES INC/OH - Quarter Report: 2004 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes       No   X 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of November 1, 2004: 3,679,660

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UNITED BANCSHARES, INC.

Table of Contents

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PART 1 - FINANCIAL INFORMATION

ITEM 1

United Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

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4

See notes to consolidated financial statements

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United Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

For the period ended September 30, 2004

Note 1 - Consolidated Financial Statements

The consolidated financial statements 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 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 nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.  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, 2003.

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 - Branch Acquisitions

In December 2002, the Company’s wholly-owned subsidiary, The Union Bank Company “Union”, entered into a purchase and assumption agreement to purchase certain assets and assume certain liabilities assigned to the branch offices of RFC Banking Company “RFCBC” in Pemberville and Gibsonburg, Ohio. The acquisition received approval from regulatory authorities, and was completed on March 28, 2003.  The acquisition was accounted for as a business combination since the Company acquired substantially all operating assets and liabilities of the branches and retained most of the branch employees.  Consequently, assets acquired and liabilities assumed in connection with the acquisition were recorded at fair value and included the following: Cash ($5,749,000), loans ($56,006,000), premises and equipment ($1,033,000), and deposits ($71,955,000).  Based on the negotiated purchase price, the transaction resulted in the recording of a deposit base premium of $1,778,000 and goodwill of $7,282,000.  The results of operations of the branches have been included for the period subsequent to the acquisition.

In accordance with Statement No. 142, “Goodwill and Other Intangible Assets”, issued by the Financial Accounting Standards Board, the goodwill arising from the RFCBC acquisition is not amortized but is subject to an annual impairment test.  The deposit base premium is being amortized over a period of 7 years.

NOTE 3 - Securities

The amortized cost and fair value of available-for-sale securities as of September 30, 2004 and December 31, 2003 are as follows (dollars in thousands):

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A summary of unrealized gains and losses on available-for-sale securities at September 30, 2004 and December 31, 2003 follows (dollars in thousands):

Note 4 - Junior Subordinated Deferrable Interest Debentures

During the first quarter of 2003, the Company formed a business trust, United (OH) Statutory Trust (United Trust) and invested $300,000. Effective March 26, 2003, United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Company, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Company’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Company. The debentures mature on March 26, 2033, which date may be shortened to March 26, 2008, if certain conditions are met, as well as quarterly thereafter. The interest rate of the debentures is fixed at 6.40% for a five-year period through March 2008. Thereafter, interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR.  Interest is payable quarterly. The Company has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.  Each issue of the trust preferred securities carries an interest rate identical to that of the related debenture. The securities have been structured to qualify as Tier I capital for regulatory purposes and the dividends paid on such are tax deductible. However, the securities cannot be used to constitute more than 25% of the Company’s core Tier I capital under Federal Reserve Board guidelines inclusive of these securities. The Company utilized the proceeds of these issuances to inject capital into Union to facilitate the branch acquisitions described in Note 2.  

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NOTE 5 - Securities Sold Under Repurchase Agreements

During the second quarter of 2004, Union entered into various repurchase agreements with the proceeds used to purchase securities, principally mortgage-backed securities with 7-year rate reset .  Following is a summary of repurchase agreements outstanding at September 30, 2004 (dollars in thousands):

Such repurchase agreements are secured by mortgage-backed securities with an amortized cost approximating $64,300,000 at September 30, 2004.

NOTE 6 - Other Comprehensive Income (Loss)

The components of other comprehensive income (loss) and related tax effects are as follows for the nine-month periods ended September 30, 2004 and 2003 (dollars in thousands):

NOTE 7 - Subsequent Events

During its October 19, 2004 meeting, the Board of Directors approved through April 2005 the use of any of three alternative payment options for the exercise of outstanding stock options issued to the directors of the former Citizens Bancshares, Inc (Citizens).  Under one of the approved payment options, “pyramiding transaction”, the holder of the options can exercise their option and purchase one share, then tender the share back to the Company as payment for a greater number of options.  This process is repeated until such time as the holder has exercised all options.  As a result of approval of this form of payment option the Company expects to recognize compensation expense during the fourth quarter of 2004 of approximately $479,000, based on the Company’s closing price per share of $15.80 on November 10, 2004 (reduction of net income of $316,000, or $0.09 per share).

The Board of Directors of the Company is currently in negotiations with the Company's current CEO regarding his early retirement from the Company.  While the terms of an agreement with the CEO have not yet been finalized, it is currently expected the Company will recognize compensation expense related to his retirement of approximately $600,000 (net income effect of $400,000 or $.11 per share) during the fourth quarter of 2004.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

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

(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.  

(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. (the “Company”), an Ohio corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Company was incorporated and organized in 1985.  The executive offices of the Company are located at 100 S. High Street, Columbus Grove, Ohio 45830.  Following the merger of the Company’s other two bank subsidiaries into The Union Bank Company (Columbus Grove, Ohio) in March 2003, the Company is now a one-bank holding company, as that term is defined by the Federal Reserve Board.

The Union Bank Company (“Union”) is engaged in the business of commercial banking.  Union is an Ohio state-chartered bank, which serves Allen, Putnam, Sandusky, Van Wert and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delphos, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville.

As described in Note 2 of the consolidated financial statements, Union acquired certain branches from RFC Banking Company (“RFCBC”), effective March 28, 2003.  Since the acquisition was accounted for as a purchase, only the operations of the branches subsequent to March 28, 2003 are included in the Company’s consolidated financial information.

Union offers a full range of commercial banking services, including checking and NOW accounts, 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.

The Company is registered as a Securities Exchange Act of 1934 (defined as Exchange Act later) reporting company.  

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RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended September 30, 2004, United Bancshares, Inc. reported net income of $1,097,000, or $0.30 basic earnings per share.  This compares to third quarter 2003 net income of $748,000, or $0.21 basic earnings per share.  Compared with the same period in 2003, third quarter 2004 net income increased $349,000 or 47%.  The net income increase was the result of an increase of $656,000 in net interest income and a decrease of $400,000 in the provision for loan losses, offset by a $252,000 decrease in non-interest income and increases in non-interest expenses and the provision for income taxes of $218,000 and $237,000, respectively.   

Net income for the nine months ended September 30, 2004, totaled $2,705,000, or $0.74 basic earnings per share compared to net income of $2,724,000, or $0.75 basic earnings per share for the same period in 2003.  Although net income was relatively the same for the two periods, the sources of the income and expenses were noticeably different.  For the period ended September 30, 2004 compared to the same period in 2003, net income was increased by a $801,000 increase in net interest income, a $175,000 decrease in the provision for loan losses and a $252,000 decrease in the provision for income taxes.  These were offset by a $707,000 decrease in non-interest income and a $540,000 increase in non-interest expenses.  The increase in net interest income was primarily the result of the $60.0 million leverage program put in place on June 24^th, 2004, offset by sales or maturity of securities.   The decrease in gains on sale of loans resulted from market conditions as mortgage loan interest rates have increased steadily since reaching the low during the second quarter of 2003.  The provision for loan losses is based on management’s continued assessment of the loan portfolio as described under the “Provision for Loan Losses” section. The increase in non-interest expenses is largely the result of the RFCBC branch acquisition operations for the period subsequent to the March 28, 2003 acquisition as described in Note 2 to the consolidated financial statements.  Included in the purchase was approximately $72 million in deposits, $56 million in loans and $1 million in premises and equipment.

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 $4,316,000 in the third quarter of 2004 compared to $3,660,000 for the same period of 2003, a $656,000 increase.  Net interest income was $11,817,000 for the nine-month period ended September 30, 2004 compared to $11,016,000 for the same period of 2003.  

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 and nine month periods ended September 30, 2004, the net interest margin (on a tax equivalent basis) was 3.54% and 3.50% compared with 3.43% and 3.50% for the same periods of 2003.

Provision for Loan Losses

The provision for loan losses is determined 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

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things, on loan delinquencies, portfolio risk, and general economic conditions in the Company’s markets.  As a

 result of management’s analysis, a $50,000 provision for loan losses was made for the third quarter of 2004,

resulting in a $275,000 provision for the nine months ended September 30, 2004.  There was a $450,000 provision during the third quarter of 2003, with no provision for the first and second quarters of 2003.

Non-Interest Income

The Company’s non-interest income is largely generated from activities related to the origination and servicing of fixed rate mortgages, sales of security investments, customer deposit account fees, 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 volatile and can vary from quarter to quarter.  

Gain on sales of loans amounted to $178,000 for the quarter ended September 30, 2004 compared to $697,000 for the comparable 2003 period, a decrease of $519,000 (74.5%).  Such gains included capitalized servicing rights of $94,000 and $356,000, respectively, on $10.7 and $37.2 million originated loan sales during respective quarters. The balance of the gain on sales of loans represented cash gains.  Additionally, during the quarter ended September 30, 2004, the Company realized a net gain on the sale of securities of $142,000, compared to $202,000 for the quarter ended September 30, 2003.

Gain on sales of loans amounted to $621,000 for the nine-month period ended September 30, 2004 compared to $2,130,000 for the comparable 2003 period, a decrease of $1,509,000 (70.8%).  Such gains included capitalized servicing rights of $326,000 and $856,000 on $35.7 and $105.0 million originated loan sales during the respective periods. The balance of the gain on sales of loans represented cash gains.  Additionally, during the nine-month period ended September 30, 2004, the Company realized a net gain on the sale of securities of $427,000, compared to $323,000 for the same period in 2003, an increase of $104,000.

Other non-interest income for the nine-month period ended September 30, 2004 was $1.2 million compared to $520,000 for the same period in 2003.  A significant factor contributing to this increase was net service fees on loans sold.  Service fees on loans sold, net of amortization of mortgage loan servicing rights, was $418,000 for the nine months ended September 30, 2004 compared to ($66,000) for the comparable period in 2003, an increase of $484,000.  This increase was largely due to the rapid amortization of mortgage loan servicing rights during the first nine months of 2003 when the Company’s bank subsidiary experienced significant loan refinancing activity.

Non-Interest Expenses

For the quarter ended September 30, 2004, non-interest expenses totaled $3,558,000 compared to $3,340,000 for the comparable period of 2003, an increase of $218,000 (6.5%).  The Company remains committed to the improvement of internal controls and the overall operational environment.

For the nine-month period ended September 30, 2004, non-interest expenses totaled $10,470,000 compared to $9,930,000 for the comparable period of 2003, an increase of $540,000 (5.4%).  The additional expenses were derived from the acquisition of the three branches purchased on March 28, 2003, the Company’s continued commitment to the improvement of internal controls and the specialization of its work force.   The Company anticipates that the higher level of expenses will continue since additional staff has been added to accommodate the additional volume of activity.

For the quarter ended September 30, 2004, the Company’s efficiency ratio was 66.98% compared to 75.04% for the same period of 2003.  Although the Company’s non-interest expenses increased $218,000 for the period in 2004 compared to 2003, the efficiency ratio for 2004 decreased primarily due to the factors

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 previously discussed in the “Overview of the Income Statement”.  For the nine-month period ended September 30, 2004, the Company’s efficiency ratio was 71.28% compared to 70.05% for the same period of 2003.  The 2004 increase was the primarily due to the factors previously discussed in the “Overview of the Income Statement”.  

Maintaining acceptable levels of non-interest expenses 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 expenses as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance.  

Provision for Income Taxes

The provision for income taxes for the quarter ended September 30, 2004 was $381,000, or 25.8% of income before income taxes, compared to $144,000, or 16.1%, for the comparable 2003 period.  The provision for income taxes for the nine-month period ended September 30, 2004 was $633,000, or 19.0% of income before income taxes, compared to $885,000, or 24.5%, for the comparable 2003 period.  The changes in the effective tax rates were generally due to the change in tax-exempt earning assets as a percentage of total pre-tax income for the stated periods.

Return on Assets

Return on average assets was 0.80% for the third quarter of 2004, compared to 0.62% for the comparable quarter of 2003.  Return on average assets for the nine months ended September 30, 2003 was 0.70% compared to 0.77% for the same period in 2003.

Return on Equity

Return on average equity for the third quarter of 2004 was 10.26% compared to 7.04% for the same period of 2003.  Return on average equity for the nine months ended September 30, 2004 was 8.42% compared to 8.67% for the same period in 2003.  The Company and its bank subsidiary met all regulatory risk-based capital requirements at September 30, 2004.

FINANCIAL CONDITION

Overview of Balance Sheet

Loans at September 30, 2004, net of the allowance for loan losses, increased $13.4 million (4.7%) from December 31, 2003.  Securities available-for-sale increased $30.0 million (17.6%) from December 31, 2003, primarily as a result of a $60.0 million leverage program put in place on June 24^th, 2004, as described in Note 5.  Under the program, the Company originally obtained $60 million in fixed-rate funding through a repurchase agreement, consisting of various term fixed-rate agreements, collateralized by available-for-sale securities.  Deposits during this same period decreased $20.5 million (5.3%), including a $21.0 million decrease in interest-bearing deposits, offset by a $505,000 increase in non-interest bearing deposits.  The shrinkage in deposits was funded primarily through Federal Home Loan Bank borrowings, which increased $5.4 million during the nine-month period, as well as proceeds from the sale of investment securities.  Total borrowings increased by $59.4 million, reflecting the $5.4 million increase in Federal Home Loan Bank borrowings and $54 million balance in new borrowings under the repurchase agreement as described above.  The new borrowings were part of the aforementioned leveraging strategy executed on June 24, 2004, whereas the Company obtained $60 million in fixed-rate funding through a repurchase agreement, consisting of various term fixed-rate agreements, collateralized by investment securities.

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Shareholders’ equity increased from $42.7 million at December 31, 2003 to $44.8 million at September 30, 2004.  This increase was the result of net income ($2.7 million), the exercise of stock options ($98,000), the sale of treasury stock ($99,000) and change in unrealized gain on securities, net of tax ($401,000) offset by the payment of dividends ($1.2 million).

Cash and Cash Equivalents

Cash and cash equivalents totaled $10.8 million at September 30, 2004 compared to $11.1 million at December 31, 2003.  The 2004 and 2003 balances include Federal funds sold of $160,000 and $531,000, respectively.

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, 2004, available-for-sale securities totaled $200.6 million, an increase of $30.0 million from December 31, 2003.  This increase was primarily the result of the $60.0 million leverage program put in place on June 24^th, 2004, offset by sales or maturity of securities.  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.  At September 30, 2004, the amortized cost of the Company’s securities totaled $198.3 million, resulting in net unrealized gains of $2.2 million and a corresponding after tax addition to shareholders’ equity of $1.5 million.

Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee 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 (including loans held for sale) totaled $303.4 million at September 30, 2004 compared to $292.2 million at December 31, 2003, an increase of  $11.2 million.  

Allowance for Loan Losses

The allowance for loan losses as a percentage of loans was 0.86% at September 30, 2004 compared to 0.95% at December 31, 2003.  Management believes the level of the allowance is adequate given the composition of and risk inherent in the loan portfolio of Union.  Throughout 2004, management will continue to monitor the risk of credit loss associated with the loan portfolio, and will adjust the allowance accordingly.

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The following table presents changes in the allowance for loan losses for the nine months ended September 30, 2004 and 2003, respectively:

Loans on non-accrual status as a percentage of outstanding loans were 0.59% at September 30, 2004, compared to 0.56% at December 31, 2003.  Non-accrual loans totaled $1,783,000 and $1,625,000 at September 30, 2004 and December 31, 2003, respectively.  Management believes the current level of non-accrual loans is acceptable and is a reflection of the quality of Union’s loan portfolio as well as the adequacy of 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, as well as short-term and long-term borrowings when evaluating funding sources.  Traditional deposits continue to be the most significant source of funds for the Company, totaling $367.8 million, or 74.8% of the Company’s funding sources at September 30, 2004.

Non-interest bearing deposits remain a smaller portion of the funding source for the Company than for most of its peers.  Non-interest bearing deposits comprised 8.9% and 8.3% of total deposits at September 30, 2004 and December 31, 2003, respectively.

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 $59.9 million and $54.4 million at September 30, 2004 and December 31, 2003, respectively.  Management plans to maintain access to long-term FHLB borrowings as an appropriate funding source.  As part of the leveraging strategy executed on June 24, 2004, the Company originally obtained $60 million in fixed-rate funding through a repurchase agreement, consisting of various term fixed-rate agreements, collateralized by investment securities, as of September 30, 2004 the balance outstanding on the funding was $54 million.

During the first quarter of 2003, the Company formed a business trust, United (OH) Statutory Trust (United Trust) and invested $300,000. Effective March 26, 2003, United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Company, and are subject to mandatory redemption upon payment of the debentures. United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Company’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Company, as more fully described in Note 4 of the consolidated financial statements.

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Shareholders’ Equity

For the nine-month period ended September 30, 2004, the Company had net income of $2.7 million from operations and dividends of $1.2 million, resulting in a dividend payout ratio of 44.8% of net income.  Management believes the overall equity level supports this payout ratio but feels that the ratio to net income will eventually decrease to more traditional industry standards.  The intention is to maintain the per share dividend while earnings increase which will more normalize the payout ratio.  During the nine-month period ended September 30, 2004, the Company sold 7,167 shares of treasury stock to participants of the Company’s Employee Stock Purchase Plan and received proceeds from the exercise of 20,089 options, each representing one share of common stock.

The adjustment for the change in net unrealized gain on available-for-sale securities, net of income taxes, totaled $401,000 for the nine-month period ended September 30, 2004.  Since all securities in the Company’s

 portfolio are classified as available-for-sale, both the assets and equity sections of the consolidated balance sheet are sensitive to the changing market values of securities.  

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 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.  

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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 most significant market risk to which the Company is exposed is interest rate risk.  The business of the Company, through its wholly-owned bank subsidiary, 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 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.  

There have been no significant changes in the quantitative and qualitative information about market risk provided in the December 31, 2003 Form 10-K

ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures.

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

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this Quarterly Report on Form 10-Q. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that:

(a)

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure;

(b)

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

(c)

the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period for which our periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.

Changes in Internal Control over Financial Reporting.

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

PART II

Item 1:  Legal Proceedings.

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

Item 2: Unregistered Sales of Equity 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

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Item 6:  Exhibits

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO

Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO

 Exhibit 32.1 Section 1350 CEO’s Certification

 Exhibit 32.2 Section 1350 CFO’s Certification

 Exhibit 99.1 Safe Harbor under The Private Securities Litigation Reform Act of 1995

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.

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EXHIBIT INDEX

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

FOR PERIOD ENDED SEPTEMBER 30, 2004

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Exhibit 31.1

Rule 13a–14(a)/15d–14(a) CERTIFICATION

I, E. Eugene Lehman, President and Chief Executive Officer of United Bancshares, Inc., 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 report;

(3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ E. Eugene Lehman

E. Eugene Lehman

President and Chief Executive Officer

November 15, 2004

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Exhibit 31.2

Rule 13a–14(a)/15d–14(a) CERTIFICATION

I, Brian D. Young, Chief Financial Officer of United Bancshares, Inc., 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 report;

(3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Brian D. Young

Brian D. Young

Chief Financial Officer

November 15, 2004

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Exhibit 32.1

SECTION 1350 CERTIFICATION

In connection with the Quarterly Report of United Bancshares, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, E. Eugene Lehman, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ E. Eugene Lehman

E. Eugene Lehman

Chief Executive Officer

Date: November 15, 2004

*This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United State Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

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Exhibit 32.2

SECTION 1350 CERTIFICATION

In connection with the Quarterly Report of United Bancshares, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Brian D. Young

Brian D. Young

Chief Financial Officer

Date: November 15, 2004

*This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United State Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

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Exhibit 99.1

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. United Bancshares, Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, is forward-looking. In some cases, information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appears together with such statement. In addition, forward-looking statements are subject to other risks and uncertainties affecting the financial institutions industry, including, but not limited to, the following:

Interest Rate Risk

The Corporation’s operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The interest income and interest expense of the Corporation change as the interest rates on interest-earning assets and interest-bearing liabilities change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond the Corporation's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect the Corporation's income.

Possible Inadequacy of the Allowance for Loan Losses

The Corporation maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of non-performing assets and classified loans, current economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans and changes in the composition of the loan portfolio. While the Board of Directors of the Corporation believe that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final determination.

Loans not secured by one to four family residential real estate are generally considered to involve greater risk of loss than loans secured by one- to four-family residential real estate due, in part, to the effects of general economic conditions. The repayment of multifamily residential, nonresidential real estate and commercial loans generally depends upon the cash flow from the operation of the property or business, which may be negatively affected by national and local economic conditions. Construction loans may also be negatively affected by such economic conditions, particularly loans made to developers who do not have a buyer for a property before the loan is made. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more likely to pay mortgage loans than consumer loans. In addition, the collateral securing such loans, if any, may decrease in value more rapidly than the outstanding balance of the loan.

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Competition

The Corporation competes for deposits with other savings associations, commercial banks and credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The size of financial institutions competing with the Corporation are likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Corporation.

Legislation and Regulation that may Adversely Affect the Corporation's Earnings

The Corporation is subject to extensive regulation by the State of Ohio, Division of Financial Institutions (the “ODFI”), the Federal Reserve Bank (the “FED”), and the Federal Deposit Insurance Corporation (the "FDIC") and is periodically examined by such regulatory agencies to test compliance with various regulatory requirements. As a bank holding company, the Corporation is also subject to regulation and examination by the FED. Such supervision and regulation of the Corporation and the bank are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of the company to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on The Corporation's net earnings.

The FDIC is authorized to establish separate annual assessment rates for deposit insurance of members of the Bank Insurance fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under such system, assessments may vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined by reference to the institution's capital level and the FDIC's level of supervisory concern about the bank.

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