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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of April 20, 2005: 3,707,274

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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)

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4

United Bancshares, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

See notes to consolidated financial statements

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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 March 31, 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 three months ended March 31, 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.

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 for the quarters ended March 31, 2005 and 2004 and is included in interest expense-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 March 31, 2005 and December 31, 2004 are as follows (dollars in thousands):

A summary of gross unrealized gains and losses on available-for-sale securities at March 31, 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 three-month periods ended March 31, 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 marke t 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.  Following the merger of the Corporation’s other two bank subsidiaries into The Union Bank Company (Columbus Grove, Ohio) in March 2003, the Corporation 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.

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

RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended March 31, 2005, the Corporation reported net income of $1,083,000, or $0.29 basic earnings per share. This compares to first quarter 2004 net earnings of $844,000, or $0.23 basic earnings per share.  Compared with the same period in 2004, first quarter 2005 net income increased $239,000 or 28.2%.  The $239,000 increase was primarily the result of a $791,000 increase in the Corporation’s net interest income, offset by a decrease of $124,000 in gain on sales of loans, a decrease of $160,000 in gain on sales of securities, and increases of $89,000 and $75,000 in non-interest expenses and the provision for loan losses, respectively.  

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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, 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 $4,445,000 for the first quarter of 2005, compared to $3,653,000 for the same period of 2004.   

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 months ended March 31, 2005, the net interest yield (on a taxable equivalent basis) was 3.57% compared with 3.50% for the same period of 2004.  Management believes that this increase was primarily the result of its interest rate pricing strategies.

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 things, on loan delinquencies, collateral position, portfolio risk and general economic conditions in the Corporation’s markets.  As a result of management’s analysis, a $150,000 provision for loan losses was made for the first quarter of 2005, compared to a $75,000 provision for the same period in 2004.  

Non-Interest Income

The Corporation’s non-interest income is largely generated from activities related to the origination, servicing and gain on sales of fixed rate mortgages, gain on 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 volume-related and can vary from quarter to quarter.  

Gain on sales of loans amounted to $84,000 for the quarter ended March 31, 2005, compared to $208,000 for the comparable 2004 period.  The quarterly gain included capitalized servicing rights of $56,000 and $107,000 on $5.5 million and $12.9 million originated loan sales during the quarters ended March 31, 2005 and 2004, respectively. The balance of the gain on sales of loans represented cash gains.  Additionally, during the quarter ended March 31, 2005, the Corporation realized a gain on the sales of securities of $46,000, compared to $206,000 for the quarter ended March 31, 2004.

Non-Interest Expenses

For the quarter ended March 31, 2005, non-interest expenses totaled $3,521,000, compared to $3,432,000 for the comparable period of 2004, an $89,000 increase (2.6%).  Management believes that the $89,000 increase is acceptable considering the increases in costs of conducting business and the asset growth that the Corporation has experienced over the past year.  In addition, the first quarter operating results included an adjustment to the provision for stock options based on the Corporation’s closing stock price as of March 31, 2005.  As a result of this adjustment, non-interest expenses were reduced by $75,000. The Corporation’s efficiency ratio for the first quarter of 2005 was 66.12%, compared to 70.88% for the same period of 2004.  

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.  

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Provision for Income Taxes

The provision for income taxes for the quarter ended March 31, 2005 was $354,000, or 24.6% of income before income taxes, compared to $172,000, or 16.9%, for the comparable 2004 period.  The increase in the effective tax rate was due to tax-exempt interest comprising a smaller portion of pre-tax income for the 2005 period.

Return on Assets

Return on average assets was 0.78% for the first quarter of 2005, compared to 0.68% for the comparable quarter of 2004.   The increase in average return on assets was due to a larger proportionate increase in net income, compared to the increase in asset base.

Return on Equity

Return on average equity for the first quarter of 2005 was 9.88% compared to 7.80% for the same period of 2004.  This increase was partly due to the decrease in the Corporation’s equity as the result of a reduction in the unrealized  loss for the investment securities portfolio as of March 31, 2005.  The Corporation and Union met all regulatory capital requirements and Union is considered “well capitalized” under regulatory and industry standards of risk-based capital.