UNITED BANCSHARES INC/OH - Quarter Report: 2005 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, 2005

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 by check mark whether the registrant is shell company (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 October 12, 2005: 3,631,449

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UNITED BANCSHARES, INC.

Table of Contents

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PART 1 - FINANCIAL INFORMATION

ITEM 1

United Bancshares, Inc. and Subsidiary

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 Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

For the period ended September 30, 2005

Note 1 – Consolidated Financial Statements

The consolidated financial statements of United Bancshares, Inc. and subsidiary (the “Corporation”) 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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.  Complete audited consolidated financial statements with footnotes thereto are included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004.

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

The Corporation does not believe the adoption of any recently issued pronouncements by the Financial Accounting Standards Board will have a significant impact on its consolidated financial statements.

Note 2 – Junior Subordinated Deferrable Interest Debentures

The Corporation has formed and invested $300,000 in a business trust, United (OH) Statutory Trust (United Trust) which is not consolidated by the Corporation.  United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures.  United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation.  The debentures mature on March 26, 2033, which date may be shorten 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 Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.  Interest expense on the debentures amounted to $160,000 and $480,000 for the quarterly and nine-month periods ended September 30, 2005 and 2004, respectively, and is included in interest expense-other borrowings in the accompanying consolidated statements of income.

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 Corporation’s core tax Tier I capital under Federal Reserve Board guidelines inclusive of these securities.  

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NOTE 3 - Securities

The amortized cost and fair value of available-for-sale securities as of September 30, 2005 and December 31, 2004 are as follows (dollars in thousands):

A summary of unrealized gains and losses on available-for-sale securities at September 30, 2005 and December 31, 2004 follows (dollars in thousands):

NOTE 4 – 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, 2005 and 2004 (dollars in thousands):

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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 and net interest margin 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.

(c) Includes loans held for sale.

(d) Excludes loans held for sale.

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Introduction

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

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

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

United Bancshares, Inc. (the “Corporation”), an Ohio corporation, is a bank holding Corporation registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Corporation was incorporated and organized in 1985.  The executive offices of the Corporation are located at 100 S. High Street, Columbus Grove, Ohio 45830.  The Corporation’s subsidiary bank, The Union Bank Company (“Union”) is engaged in the business of commercial banking.  Union is an Ohio state-chartered bank headquartered in Columbus Grove, Ohio.  Union 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.

Union offers a full range of commercial banking services, including checking, 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 Corporation 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, 2005, United Bancshares, Inc. reported net income of $1,146,000, or $0.31 basic earnings per share.  This compares to third quarter 2004 net income of $1,097,000, or $0.30 basic earnings per share.  Compared with the same period in 2004, third quarter 2005 net income increased $49,000 or 4.5%.  The net income increase was the result of an increase of $215,000 in net interest income and a decrease in the provision for income taxes of $71,000, offset by a decrease in non-interest income of $99,000 and an increase in the provision for loan losses of $137,000.   

Net income for the nine months ended September 30, 2005, totaled $3,362,000, or $0.91 basic earnings per share compared to net income of $2,705,000, or $0.74 basic earnings per share for the same period in 2004.  Compared with the same period in 2004, net income for the nine-month period ending September 30, 2005 increased $657,000 or 24.3%.  The increase in net income for the nine-month period was largely the result of an increase of $1,743,000 in net interest income.  This increase was offset by increases in non-interest expenses of $244,000, provision for loan losses of $237,000 and the provision for income taxes of $377,000, and a decrease of $228,000 in non-interest income.  

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 Corporation.  Changes in market interest rates and the mix and volume of interest-bearing assets and interest-bearing liabilities impact net interest income.  Net interest income was $4,531,000 in the third quarter of 2005 compared to $4,316,000 for the same period of 2004, a $215,000 (5.0%) increase.  Net interest income was $13,560,000 for the nine-month period ending September 30, 2005 compared to $11,817,000 for the same period of 2004, a $1,743,000 (14.7%) increase.  

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 Corporation 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, 2005, the net interest margin (on a tax equivalent basis) was 3.72% and 3.64%, respectively, compared with 3.54% and 3.50% for the same periods of 2004.  Management believes that the Corporation’s loan growth and its ability to control funding costs during six interest rate increases totaling 150 basis points by the Federal Reserve Open Market Committee since January 1, 2005, was primarily the reason for the net interest margin improvement.

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 management’s assessment of the loan portfolio’s quality 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 Corporation’s markets.  As a result of management’s analysis, a $187,000 provision for loan losses was made for the third quarter of 2005, and a $512,000 provision was made for the nine months ended

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September 30, 2005, compared to provisions for loan losses of $50,000 for the three month and $275,000 for the nine month periods ended September 30, 2004.

Non-Interest Income

The Corporation’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 $93,000 for the quarter ended September 30, 2005 compared to $178,000 for the comparable 2004 period, a decrease of $85,000 (47.8%).  Such gains included capitalized servicing rights of $59,000 and $94,000, respectively, on $6.9 and $10.7 million originated loan sales during the respective quarters.  The balance of the gain on sales of loans represented cash gains.  Management believes that the decrease in gain on sale of loans is largely attributable to reductions in refinancing activity, increasing mortgage loan rates and increased competition.  Additionally, during the quarter ended September 30, 2004, the Corporation realized net gain on the sale of securities of $142,000, compared to none for the same period in 2005.  

Gain on sales of loans amounted to $288,000 for the nine-month period ended September 30, 2005 compared to $621,000 for the comparable 2004 period, a decrease of $333,000 (53.6%).  Such gains included capitalized servicing rights of $165,000 and $326,000 on $18.9 million and $35.7 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, 2005, the Corporation realized a net gain on the sale of securities of $120,000, compared to $427,000 for the same period in 2004, a decrease of $307,000 (71.9%).

Non-Interest Expenses

For the quarter ended September 30, 2005, non-interest expenses totaled $3,559,000 compared to $3,558,000 for the comparable period of 2004.  For the nine-month period ended September 30, 2005, non-interest expenses totaled $10,714,000 compared to $10,470,000 for the comparable period of 2004, an increase of $244,000 (2.3%).  

Although costs have only increased slightly, the Corporation remains committed to the improvement of internal controls and the overall operational environment. The operating results for the three and nine month periods included an adjustment to the provision for stock options based on the Corporation’s closing stock price as of September 30, 2005.  As a result of this adjustment, non-interest expenses increased $45,000 for the three-month period and decreased $39,000 for the nine-month period, each ended September 30, 2005 (there was no such adjustment in 2004).  Management believes that the 2.3% increase in non-interest expenses for the nine-month period ending September 30, 2005 compared to the same period in 2004, is very acceptable considering increases in costs of conducting business and the costs associated with various additional regulatory compliance, including compliance efforts regarding Section 404 of the Sarbanes-Oxley Act of 2002, for which the Corporation has incurred approximately $135,000 in direct costs in 2005, through September 30.

Maintaining acceptable levels of non-interest expenses and operating efficiency are key performance indicators for the Corporation in its strategic initiatives.  The financial services industry uses the efficiency ratio (total non-interest expense as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance.  

For the quarter ended September 30, 2005, the Corporation’s efficiency ratio was 66.06% compared to 66.98% for the same period of 2004.  Although the Corporation’s non-interest expenses remained essentially the same for the third quarter of 2005 compared to 2004, the efficiency ratio for 2005 improved primarily due to the aforementioned increase in net interest income compared to 2004.  For the nine- month period ended September 30, 2005, the Corporation’s efficiency ratio was 66.09% compared to 71.28% for the same period of 2004.  The 2005 year-to-date improvement was the primarily the result of the significant increase in the Corporation’s net interest income for the nine-month period ending September 30, 2005 compared to the same period in 2004.  

Provision for Income Taxes

The provision for income taxes for the quarter ended September 30, 2005 was $310,000 or 21.3% of income before income taxes, compared to $381,000, or 25.8%, for the comparable 2004 period.  The provision for income taxes for the nine-month period ended September 30, 2005 was $1,010,000, or 23.1% of income before income taxes, compared to $633,000, or 19.0%, for the comparable 2004 period.  The increase in the effective tax rate for the nine-month period ended September 30, 2005 compared to the same period in 2004 was the result of tax-exempt income comprising a smaller portion of pre-tax income for the 2005 period.

Return on Assets

Return on average assets was 0.84% for the third quarter of 2005, compared to 0.80% for the comparable quarter of 2004.  Return on average assets for the nine-month period ended September 30, 2005 was 0.81% compared to 0.70% for the same period in 2004.  Such increases reflect the improved 2005 earnings performance.

Return on Equity

Return on average shareholders’ equity for the third quarter of 2005 and 2004 was 10.26%.  Return on average equity for the nine months ended September 30, 2005 was 10.12% compared to 8.42% for the same period in 2004.  The Corporation and Union met all regulatory capital requirements and Union is considered “well capitalized” under regulatory and industry standards of risk-based capital.

FINANCIAL CONDITION

Overview of Balance Sheet

Loans at September 30, 2005, net of the allowance for loan losses, increased $8.2 million (2.7%) from December 31, 2004.  Securities available-for-sale decreased $29.0 million (13.6%) during this nine-month period.  Deposits during this same period decreased $12.2 million (3.3%).  Long-term debt decreased $4.8 million (3.7%) during the nine-month period.  

Shareholders’ equity decreased from $44.2 million at December 31, 2004 to $44.0 million at September 30, 2005.  This net decrease was primarily the result of decreases in net unrealized gain on securities, net of tax ($1.4 million), the payment of dividends ($1.3 million) and the repurchase of shares by the Corporation ($1.3 million), offset by net income ($3.4 million), the exercise of stock options ($224,000), and the sale of treasury shares ($136,000)

The aforementioned $1.4 million net of tax decrease in unrealized securities gains from December 31, 2004, was primarily the result of customary and expected changes in the bond market.  At the present, it is management’s belief that the Corporation has both the ability and intent to hold securities in a loss position until such time as the market conditions change or the respective securities mature.  

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Consequently, such losses are considered to be temporary and have not been reflected in the Corporation’s earnings results.  

Cash and Cash Equivalents

Cash and cash equivalents totaled $9.7 million at September 30, 2005 compared to $14.6 million at December 31, 2004, including Federal funds sold at December 31, 2004 of $4.5 million.

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 Corporation 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 Corporation to meet cash obligations and off-balance sheet commitments as they come due.  In addition, the Corporation has access to various sources of additional borrowings by virtue of long-term assets that can be used as collateral for such borrowings.

Securities

At September 30, 2005, available-for-sale securities totaled $184.6 million, a decrease of $29.0 million from December 31, 2004.  All of the Corporation’s securities are classified as available-for-sale.  Management believes the available-for-sale classification provides flexibility for the Corporation in terms of selling securities as well as interest rate risk management opportunities.  At September 30, 2005, the amortized cost of the Corporation’s securities totaled $185.6 million, resulting in net unrealized losses of approximately $1 million and a corresponding after tax decrease in shareholders’ equity of $647,000.

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

Loans

The Corporation’s lending is primarily centered in northwestern and west central Ohio.  The primary focus in these markets is Commercial, agribusiness, and residential mortgage lending.  Gross loans (including loans held for sale) totaled $314.3 million at September 30, 2005 compared to $306.6 million at December 31, 2004, an increase of $7.7 million (2.5%).  

Allowance for Loan Losses

Union’s comprehensive loan policy provides guidelines for managing credit risk and asset quality. The policy details acceptable lending practices, establishes loan-grading classifications, and stipulates the use of a loan review process.  Union has also assigned certain employees to the credit analysis function to aid in facilitating the early identification of problem loans, to help ensure sound credit decisions, and to assist in the determination of the allowance for loan losses.  Union also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process.  Union’s loan policy, loan review process, and credit analysis staff facilitate management’s evaluation of the credit risk inherent to the lending function.

The allowance for loan losses as a percentage of loans (excluding loans held for sale) was 0.83% at September 30, 2005 and 0.90% as of December 31, 2004.  Management believes the level of allowance is adequate given the composition of and risk inherent in the loan portfolio.  Throughout 2005, 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, 2005 and 2004, respectively:

(a) Amount of provision allocated to other liabilities for unfunded commitments.

Loans on non-accrual status as a percentage of outstanding loans were 0.78% at September 30, 2005, compared to 0.70% at December 31, 2004.  Non-accrual loans totaled $2,462,000 and $2,135,000 at September 30, 2005 and December 31, 2004, 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 the collection of these credits.

Funding Sources

The Corporation considers a number of alternatives, including but not limited to, deposits, as well as short-term and long-term borrowings when evaluating funding sources.  Traditional deposits continue to be the most significant source of funds for the Corporation, totaling $357.5 million, or 72.2% of the Corporation’s funding sources at September 30, 2005.

Non-interest bearing deposits remain a smaller portion of the funding source for the Corporation than for most of its peers.  Non-interest bearing deposits comprised 9.4% of total deposits at September 30, 2005 compared to 10.1% at December 31, 2004.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements.  These borrowings consisted of FHLB borrowings totaling $68.1 million and $68.0 million at September 30, 2005 and December 31, 2004, respectively, and repurchase agreements totaling $59.0 million at September 30, 2005 and $64.0 million December 31, 2004.  Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Shareholders’ Equity

For the nine-month period ended September 30, 2005, the Corporation had net income of $3.4 million from traditional operations and paid dividends of $1.3 million, resulting in a dividend payout ratio of 39.43% 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.  During the first nine months of 2005 and 2004, the Corporation issued 9,809 and 7,167, shares respectively, of treasury stock to participants of the Corporation’s Employee Stock Purchase Plan.  During the third

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quarter of 2005, the Corporation repurchased 79,381 shares of stock at an approximate cost of $1.3 million, and is maintaining such shares in treasury stock at September 30, 2005.

The change in net unrealized gain (loss) on available-for-sale securities, net of income taxes, was ($1.4 million) for the nine-month period ended September 30, 2005.  Since all the securities in the Corporation’s portfolio are classified as available-for-sale, both the securities and equity sections of the consolidated balance sheet are sensitive to the changing market values of securities.  

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

The Corporation manages interest rate risk to minimize the impact of fluctuating interest rates on earnings.  The Corporation uses simulation techniques that attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns.  The primary method of measuring the sensitivity of earnings of changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit 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 Corporation closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin.  Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or reprice within a designated time frame.  The difference between rate sensitive assets and rate sensitive liabilities for a specified period of time is known as “gap.”

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

Effects of Inflation on Financial Statements

Substantially all of the Corporation’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.

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures.

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

(a)

information required to be disclosed by the Corporation in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Corporation’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 Corporation 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 Corporation’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 Corporation and its consolidated subsidiary 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.

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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 Corporation or its subsidiary are a party to or to which any of their property is subject except routine legal proceedings to which the Corporation or its subsidiary are a party incident to the banking business.  None of such proceedings are considered by the Corporation to be material.

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

The table below includes certain information regarding the Corporation’s repurchase of United Bancshares, Inc. common stock during the quarterly period ended September 30, 2005:

(a) All share purchases were part of a publicly announced plan and all were open-market transactions.

(b) A stock repurchase program (“Plan”) was announced on July 29, 2005.  The Plan authorized the Corporation to make up to 100,000 repurchases of the Corporation’s shares from time to time in a program of market purchases or in privately negotiated transactions as the securities laws and market conditions permit.

(c) Exclude related brokerage fees.

Item 3:  Defaults upon Senior Securities.

None

Item 4:  Submission of Matters to a Vote of Security Holders.

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None

Item 5:  Other Information.

None

Item 6:  Exhibits

(a) 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, 2005

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Exhibit 31.1

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

I, Daniel W. Schutt, 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 subsidiary, 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/ Daniel W. Schutt

Daniel W. Schutt

President and Chief Executive Officer

October 28, 2005

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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 subsidiary, 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

October 28, 2005

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Exhibit 32.1

SECTION 1350 CERTIFICATION

In connection with the Quarterly Report of United Bancshares, Inc. (the "Corporation") on Form 10-Q for the quarterly period ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel W. Schutt, President and 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 Corporation.

/s/ Daniel W. Schutt

Daniel W. Schutt

President and Chief Executive Officer

Date: October 28, 2005

*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 States 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 "Corporation") on Form 10-Q for the quarterly period ended September 30, 2005, 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 Corporation.

/s/ Brian D. Young

Brian D. Young

Chief Financial Officer

Date: October 28, 2005

*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 States 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, 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

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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.

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 Corporation 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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