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:


                                                       As of or for the Three   As of or for the Nine
                                                            Months Ended            Months Ended
                                                            September 30,           September 30,
                                                          2008        2007        2008        2007
SIGNIFICANT RATIOS (Unaudited)
Net income to:                                               0.71%       0.69%      0.86%        0.81%
    Average assets (a)                                       9.07%       7.92%     10.27%        9.57%
    Average shareholders' equity (a)
Net interest margin (a)                                      3.62%       3.73%      3.65%        3.59%
Efficiency ratio (b)                                        62.93%      69.93%     61.60%       66.35%
Average shareholders' equity to average assets               7.79%       8.73%      8.33%        8.50%
Loans to deposits (end of period) (c)                       89.09%      88.70%     89.09%       88.70%
Allowance for loan losses to loans (end of period) (d)       0.71%       0.59%      0.71%        0.59%
Cash dividends to net income                                45.82%      52.60%     40.53%       43.95%


Book value per share                                      $  14.48    $  13.57   $  14.48    $   13.57

(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.

Introduction

United Bancshares, Inc. (the "Corporation"), 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 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 is a one-bank holding company, as that term is defined by the Federal Reserve Board.

The Union Bank Company ("Union"), a wholly-owned subsidiary of the Corporation, 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 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. Effective February 1, 2007, Union formed UBC Investments, Inc. ("UBC") to hold and manage its securities portfolio. The operations of UBC are located in Wilmington, Delaware.

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 Corporation is registered as a Securities Exchange Act of 1934 reporting company.

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.

RESULTS OF OPERATIONS

Overview of the Income Statement

For the quarter ended September 30, 2008, the Corporation reported net income of $1,127,000, or $0.33 basic earnings per share. This compares to third quarter 2007 net income of $935,000, or $0.27 basic earnings per share. Compared with the same period in 2007, third quarter 2008 net income increased $192,000 or 20.5%. The $192,000 increase for the quarter was primarily the result of a $700,000 increase in net interest income and a $224,000 increase in non-interest income, offset by a $425,000 increase in the provision for loan losses, a $231,000 increase in non-interest expenses, and a $76,000 increase in the provision for income taxes.

Net income for the nine-months ended September 30, 2008, totaled $3,821,000, or $1.11 basic earnings per share compared to net income of $3,367,000, or $0.95 basic earnings per share for the same period in 2007. Compared with the same period in 2007, net income increased $454,000 or 13.5%. The $454,000 increase for the nine-month period ended September 30, 2008 was primarily the result of a $1,624,000 increase in net interest income, and an increase of $308,000 in non-interest income, offset by an increase of $845,000 in the provision for loan losses, an increase of $445,000 in non-interest expenses, and an increase in the provision for income taxes of $188,000.

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 $5,048,000 for the third quarter of 2008, compared to $4,348,000 for the same period of 2007. Net interest income was $14,494,000 for the nine months ended September 30, 2008 compared to $12,870,000 for the same period of 2007, an increase of $1,624,000 (12.6%).

Net interest margin is calculated by dividing net interest income (adjusted to reflect tax-exempt interest income on a taxable equivalent basis) by average interest-earning assets. The resulting percentage serves as a measurement for the Corporation in comparing its results with those of past periods as well as those of peer institutions. For the three and nine months ended September 30, 2008, the net interest margin (on a taxable equivalent basis) was 3.62% and 3.65%, respectively, compared to 3.73% and 3.59% for the same period of 2007.
The increase in the net interest margin for the nine months ended September 30, 2008 as compared to the same period in 2007 primarily resulted from a change in the composition of interest-earning assets. Union has continued to experience loan demand, including an increase of $47.7 million (13.3%) in gross loans from December 31, 2007 to September 30, 2008. Proceeds from the sale or maturity of lower-yielding securities have been used to partially fund this loan growth.

Provision for Loan Losses

The provision for loan losses is determined based upon management's periodic 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 of the loan portfolio. Changes in the provision for loan losses are dependent, among other things, on loan delinquencies, portfolio growth, collateral position, portfolio risks and general economic conditions in the Corporation's markets. A $600,000 provision for loan losses was made for the third quarter of 2008 compared to a $175,000 provision for the same period in 2007. A $1,245,000 provision for loan losses was made for the nine month period ended September 30, 2008, compared to a $400,000 provision for loan losses for the nine month period ended September 30, 2007. See "Allowance for Loan Losses" under Financial Condition for further discussion of the provision for loan losses.

Non-Interest Income

The Corporation's non-interest income is generated from various sources including origination, servicing and gain on sales of fixed rate mortgage loans; customer deposit account fees; earnings on life insurance policies; income arising from sales of investment products to customers; and occasional security sale transactions. Income related to customer deposit accounts and bank-owned life insurance provides a relatively steady flow of income while the other sources of non-interest income tend to be more volatile.

For the quarter ended September 30, 2008, non-interest income was $756,000, compared to $532,000 for the third quarter of 2007, a $224,000 (42.1%) increase.
For the quarter ended September 30, 2008, there was a decrease in the fair value of mortgage servicing rights of $70,000, compared to a decrease in fair value of mortgage servicing rights of $338,000 for the third quarter of 2007.
The fair value of mortgage servicing rights decreased during the quarter primarily due to the increase in repayment speeds. Gain on sales of loans amounted to $62,000 for the quarter ended September 30, 2008, compared to $81,000 for the comparable 2007 period, a decrease of $19,000 (23.5%). The quarterly gain included capitalized servicing rights of $26,000 and $22,000 on $500,000 and $2.1 million of originated loan sales during the quarters ended September 30, 2008 and 2007, respectively. The balance of the gain on sales of loans represented cash gains. During the quarter ended September 30, 2008, the Corporation realized $6,000 of gains on the sale or call of securities.

For the nine-month period ended September 30, 2008, non-interest income was $2,620,000, compared to $2,312,000 for the nine-month period ended September 30, 2007, a $308,000 (13.3%) increase. For the nine-month period ended September 30, 2008, there was an increase in fair value of mortgage servicing rights of $52,000, compared to a decrease in fair value of mortgage servicing rights of $188,000 for the nine months ended September 30, 2007. Non-interest income for the nine months ended September 30, 2008 included securities gains of $51,000 compared to security losses of $224,000 for the comparable 2007 period, and gain on sale of loans of $308,000 compared to $242,000. The loss on sale of securities in 2007 resulted from Union's Board approving management's plan to restructure its balance sheet, including selling approximately $15.5 million in available-for-sale securities on June 21, 2007. Non-interest income for the nine-month period ended September 30, 2007 also included a $355,000 one-time gain on sale of the credit card portfolio.

Other non-interest income decreased $31,000 (3.9%) to $758,000 for the quarter ended September 30, 2008 and increased $82,000 (3.9%) to $2,209,000 for the nine-month period ended September 30, 2008. Other non-interest income decreased in the third quarter of 2008 compared to the third quarter of 2007 due to a $34,000 gain on other real estate owned recorded in 2007.

Non-Interest Expenses

For the quarter ended September 30, 2008, non-interest expenses were $3,809,000, compared to $3,578,000 for the comparable period in 2007, a $231,000 (6.5%) increase. For the nine-month period ended September 30, 2008, non-interest expenses totaled $10,992,000 compared to $10,547,000 for the comparable period of 2007, an increase of $445,000 (4.2%).

Non-interest expenses for the nine month period ended September 30, 2008 included a $104,000 write down on other real estate owned from the first quarter of 2008 and an impairment of $235,000 on the Bank's branch located in downtown Lima, Ohio which was written down to the estimated selling price of the property.

Maintaining acceptable levels of non-interest expenses and operating efficiencies 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.
The Corporation's efficiency ratio improved for the three and nine months ended September 30, 2008. For the quarter ended September 30, 2008, the Corporation's efficiency ratio was 62.93% compared to 69.93% for the same period of 2007. For the nine month period ended September 30, 2008, the Corporation's efficiency ratio was 61.60% compared to 66.35% for the same period of 2007.

Provision for Income Taxes

The provision for income taxes for the quarter ended September 30, 2008 was $268,000, or 19.2% of income before income taxes, compared to $192,000, or 17.0%, for the comparable 2007 period. The provision for income taxes for the nine month period ended September 30, 2008 was $1,056,000, or 21.7% of income before income taxes, compared to $868,000, or 20.5%, for the comparable 2007 period.

Return on Assets

Return on average assets was 0.71% for the third quarter of 2008, compared to 0.69% for the third quarter of 2007. Return on average assets for the nine months ended September 30, 2008 was 0.86% compared to 0.81% for the same period of 2007. The increase in return on average assets resulted from the Corporation's net income increase more than offsetting the increase in the Corporation's average assets.

Return on Equity

Return on average equity for the third quarter of 2008 was 9.07% compared to 7.92% for the same period of 2007. Return on average equity for the nine months ended September 30, 2008 was 10.27% compared to 9.57% for the same period in 2007. This increase was the result of an increase in net income offset by an increase in average equity as more fully explained in the Shareholders' Equity section under Financial Condition. The Corporation and Union met all regulatory capital requirements as of September 30, 2008, and Union is considered "well capitalized" under regulatory and industry standards of risk-based capital.

FINANCIAL CONDITION

Overview of Balance Sheet

Total assets amounted to $619.8 million at September 30, 2008 compared to $548.0 million at December 31, 2007, an increase of $71.8 million, or 13.1%. The increase in assets was the result of an increase of $47.7 million in gross loans and an increase in total cash and cash equivalents of $34.0 million offset by a decrease of $10.8 million in available-for-sale securities. Deposits during this same period increased $63.8 million (16.2%) primarily related to increases in brokered certificates and public deposits. Other borrowings, consisting of Federal Home Loan Bank borrowings, securities sold under agreements to repurchase, and customer repurchase agreements, increased $6.9 million (7.5%).

Shareholders' equity increased from $48.8 million at December 31, 2007 to $49.8 million at September 30, 2008. This increase was the result of net income ($3,821,000), and the issuance of 7,258 treasury shares under the Corporation's Employee Stock Purchase Plan ($99,000), offset by a $576,000 increase in unrealized securities losses, net of income taxes, the payment of dividends ($1,548,000), and the repurchase of 55,000 common shares ($775,000) held in treasury. The increase in unrealized securities losses from January 1, 2008 to September 30, 2008, was the result of customary and expected changes in the bond market. Unrealized losses on securities are reported as accumulated other comprehensive income in the consolidated balance sheet.

Cash and Cash Equivalents

Cash and cash equivalents totaled $49.1 million at September 30, 2008 compared to $15.1 million at December 31, 2007. Cash and cash equivalents at September 30, 2008 includes Federal funds sold of $10.9 million compared to $161,000 at December 31, 2007, and interest bearing deposits in other banks of $29.5 million compared to $3.3 million at December 31, 2007. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation's present liquidity and performance needs, which has increased due to the recent volatility in the market. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs. Management believes the Corporation's liquidity needs in the near term will be 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 will 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, 2008, available-for-sale securities totaled $127.1 million, a decrease of $10.8 million (7.8%) from December 31, 2007. As a result of continued loan demand, proceeds from the sale, call or maturity of securities during the nine months ended September 30, 2008 were primarily used to fund loan growth rather than being re-invested in the securities portfolio. Management believes classifying securities as available-for-sale provides the Corporation flexibility and facilitates greater interest rate risk management opportunities.
At September 30, 2008, the amortized cost of the Corporation's securities totaled $128.9 million, resulting in net unrealized losses of approximately $1.7 million and a corresponding after tax decrease in shareholders' equity of $1,153,000.

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. Gross loans (including loans held for sale) totaled $407.2 million at September 30, 2008 compared to $359.6 million at December 31, 2007, an increase of $47.6 million (13.2%). Most of this increase has been in the commercial and commercial real estate loan categories.

Allowance for Loan Losses

The allowance for loan losses as a percentage of loans (excluding loans held for sale) was 0.71% at September 30, 2008 compared to 0.62% at December 31, 2007.
Management believes the allowance is adequate given the composition of and risk inherent in the loan portfolio of Union. Management will continue to monitor the risk of credit loss associated with the loan portfolio, and will adjust the allowance accordingly.

The following table presents changes in the allowance for loan losses for the nine months ended September 30, 2008 and 2007, respectively:

                                    2008        2007
Balance, beginning of period      $2,233      $2,275
Provision for loan losses          1,245         400

Charge offs                        (814)       (798)
Recoveries                           233         202
Net charge offs                    (581)       (596)

Balance, end of period            $2,897      $2,079
                                   =====       =====

Loans on non-accrual status as a percentage of outstanding loans were 0.88% at September 30, 2008, compared to 0.73% at December 31, 2007. Non-accrual loans totaled $3,570,000 and $2,613,000 at September 30, 2008 and December 31, 2007, respectively. Two credits made up most of the increase in non-accrual loans from December 31, 2007 to September 30, 2008. Management believes the current level of non-accrual loans is manageable 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. Deposits, including customer deposits, brokered certificates of deposit, and public funds deposits, continue to be the most significant source of funds for the Corporation, totaling $457.0 million, or 80.7% of the Corporation's funding sources at September 30, 2008. Total deposits increased $63.8 million (16.2%) during the nine months ended September 30, 2008, primarily related to increases of brokered deposits ($32.6 million) and public deposits ($28.0 million), acquired to fund the aforementioned loan growth.

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 8.4% of total deposits at September 30, 2008 compared to 9.0% at September 30, 2007.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. These borrowings consisted of FHLB borrowings totaling $88.5 million and $67.3 million at September 30, 2008 and December 31, 2007, respectively; securities sold under agreement to repurchase and customer repurchase agreements totaling $10.3 million and $24.6 million at September 30, 2008 and December 31, 2007, respectively; and junior subordinated deferrable interest debentures of $10.3 million at September 30, 2008 and 2007.
Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Shareholders' Equity

For the nine month period ended September 30, 2008, the Corporation had net income of $3,821,000 and declared dividends of $1,548,000, resulting in a dividend payout ratio of 40.53% of net income. Management believes the overall equity level supports this payout ratio. During the nine month periods ended September 30, 2008 and 2007, the Corporation issued 7,258 and 7,856 shares respectively of treasury stock to participants of the Corporation's Employee Stock Purchase Plan. In addition, during the nine month period ended September 30, 2008 and 2007, the Corporation purchased 55,000 and 54,000 shares respectively through its share repurchase program.

The increase in net unrealized losses on available-for-sale securities, net of income taxes, was $576,000 for the nine months ended September 30, 2008. 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.

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. . . .