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
                                                            Months Ended
                                                              March 31,
                                                          2009        2008
SIGNIFICANT RATIOS (Unaudited)
Net income to:                                               0.93%       0.68%
    Average assets (a)                                      11.06%       7.66%
    Average shareholders' equity (a)
Net interest margin (a)                                      3.66%       3.62%
Efficiency ratio (b)                                        56.96%      68.67%
Average shareholders' equity to average assets               8.41%       8.81%
Loans to deposits (end of period) (c)                       89.41%      93.57%
Allowance for loan losses to loans (end of period) (d)       0.87%       0.62%
Cash dividends to net income                                36.07%      54.63%


Book value per share                                      $  15.36    $  14.49

(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. Union has 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 March 31, 2009, the Corporation reported net income of $1,432,000, or $0.42 basic earnings per share. This compares to first quarter 2008 net income of $945,000, or $0.27 basic earnings per share. Compared with the same period in 2008, first quarter 2009 net income increased $487,000 or 51.5%. The $487,000 increase for the quarter was primarily the result of a $426,000 increase in non-interest income, a decrease of $807,000 in interest expense, and a decrease of $58,000 in non-interest expenses offset by a decrease of $266,000 in interest income, an increase of $325,000 in the provision for loan losses and an increase in the provision for income taxes of $213,000.

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 $5,040,000 for the first quarter of 2009, compared to $4,499,000 for the same period of 2008, an increase of $541,000 (12.0%). This increase was mostly due to a $55 million increase in average interest-earning assets for the first quarter of 2009 as compared to the same period in 2008, as well as a slight increase in the net interest margin. The increase in average interest-earnings assets included a $46 million increase in loans.

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 months ended March 31, 2009, the net interest margin (on a taxable equivalent basis) was 3.66% compared with 3.62% for the same period of 2008. The increase in the net interest margin for the first quarter of 2009 as compared to the first quarter of 2008 primarily resulted from the decrease in the cost of interest bearing deposits (2.58% in 2009 compared to 3.57% in 2008) having a greater impact on the net interest margin than the decrease in the yield of interest-earning assets (5.98% in 2009 compared to 6.80% in 2008).

Provision for Loan Losses

The provision for loan losses is determined based upon management's calculation of the allowance for loan losses and is reflective of management's assessment of the quality 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, collateral position, portfolio risks and general economic conditions in the Corporation's lending markets. A $600,000 provision for loan losses was made for the first quarter of 2009 compared to a $275,000 provision for the same period in 2008. The increase in the provision for loan losses for the first quarter of 2009 as compared to the first quarter of 2008 is attributable to an increase in problem and potential problem loans as well as Union's charge-off experience. During the quarter ended March 31, 2009, Union recorded a $183,000 provision for loan losses relating to impaired loans and a $103,000 provision for potential problem loans.
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 largely generated from activities related to the 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 are more volume or transaction related and consequently can vary from quarter to quarter.

Gain on sales of loans amounted to $417,000 for the quarter ended March 31, 2009, compared to $93,000 for the first quarter of 2008, an increase of $324,000. The quarterly gains included capitalized servicing rights of $181,000 and $21,000 on $20.8 million and $2.5 million of originated loan sales during the quarters ended March 31, 2009 and 2008, respectively. The balance of the gain on sales of loans represented cash gains. The significant increase in loan sales activity for the first quarter of 2009 as compared to 2008 is attributable to the significant decline in mortgage interest rates during the fourth quarter of 2008 and first quarter of 2009. Despite the significant loan sales activity experienced during the first quarter of 2009, Union's serviced portfolio remained essentially unchanged increasing only $1.5 million to $189.0 million at March 31, 2009.

The fair value of mortgage servicing rights decreased $56,000 for the quarter ended March 31, 2009 compared to $251,000 for the quarter ended March 31, 2008. Amortization of mortgage servicing rights, which is reported as a reduction of servicing income (other non-interest income in the accompanying condensed consolidated statements of income), amounted to $73,000 for the quarter ended March 31, 2009 compared to $80,000 for the quarter ended March 31, 2008.

Other non-interest income decreased $77,000 (11.1%) to $617,000 for the quarter ended March 31, 2009 compared to the same period in 2008. The decrease was the result of an $80,000 decrease in NSF and Overdraft charges.

Non-Interest Expenses

For the quarter ended March 31, 2009, non-interest expenses were $3,575,000, compared to $3,633,000 for the first quarter of 2008, a $58,000 (1.6%) decrease.

Non-interest expenses for the quarter ended March 31, 2009 included a $65,000 increase in the Corporation's FDIC assessment and a $79,000 decrease in the write downs on other real estate owned ($25,000 in 2009 compared to $104,000 in 2008), compared to the same quarter in 2008. In addition to the Corporation's ongoing commitment to the improvement of internal controls and the overall operational environment, the Corporation has and will continue to identify and implement cost saving strategies.

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 March 31, 2009, the Corporation's efficiency ratio improved to 56.96% compared to 68.67% for the same period of 2008.

Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC insures payment of deposits up to insured limits from the Deposit Insurance Fund. In late 2008, the FDIC announced an increase in insurance premium rates of seven basis points for the first quarter of 2009. On February 27, 2009, the FDIC announced its adoption of an interim final rule imposing a one-time special assessment of up to 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums due from each financial institution. On March 5, 2009, the FDIC announced its plan to reduce the special assessment to 10 basis points.
Although at the time of this filing it was unclear to management the precise amount of the special assessment, management expects that the special assessment and the changes in the premium calculation will significantly increase the Corporation's FDIC insurance expense for the remainder of 2009 and possibly thereafter.

Provision for Income Taxes

The provision for income taxes for the quarter ended March 31, 2009 was $416,000, or 22.5% of income before income taxes, compared to $203,000, or 17.7%, for the comparable 2008 period. The increase in the effective tax rate is attributable to tax-exempt interest income comprising a smaller portion of income before income taxes in 2009 than 2008.

Return on Assets

Return on average assets was 0.93% for the first quarter of 2009, compared to 0.68% for the comparable quarter of 2008. The increase resulted from a 51.5% increase in net income with only a slight increase in the Corporation's average assets.

Return on Equity

Return on average equity for the first quarter of 2009 was 11.06% compared to 7.66% for the same period of 2008. This increase was the result of the increase in net income. The Corporation and Union met all regulatory capital requirements as of March 31, 2009, 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 $623.0 million at March 31, 2009 compared to $616.0 million at December 31, 2008, an increase of $7.0 million, or 1.1%. The increase in assets was the result of an increase in total cash and cash equivalents of $4.4 million (17.0%), and an increase of $2.6 million (0.6%) in gross loans. Deposits during this same period increased $6.1 million (1.3%) and other borrowings (consisting of Federal Home Loan Bank borrowings, securities sold under agreements to repurchase, customer repurchase agreements, and junior subordinated deferrable debentures) decreased $2.4 million (2.8%).

Shareholders' equity increased from $50.7 million at December 31, 2008 to $52.9 million at March 31, 2009. This increase was the result of net income ($1,432,000), the issuance of 1,116 treasury shares ($16,000) under the Corporation's Employee Stock Purchase Plan and a $1,300,000 increase in unrealized securities gains, net of tax, offset by the payment of dividends ($516,000). The increase in unrealized securities gains from January 1, 2009 to March 31, 2009, was the result of customary and expected changes in the bond market. Unrealized gains on securities are reported as accumulated other comprehensive income in the consolidated balance sheet.

Cash and Cash Equivalents

Cash and cash equivalents totaled $30.0 million at March 31, 2009 compared to $25.6 million at December 31, 2008. Cash and cash equivalents at March 31, 2009 includes interest-bearing deposits in other banks of $22.7 million compared to $6.9 million at December 31, 2008. Management believes the current level of cash and cash equivalents is sufficient to meet the Corporation's present liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs.
Management believes the 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 March 31, 2009, available-for-sale securities totaled $136.4 million, a decrease of $51,000 from December 31, 2008. Management believes classifying securities as available-for-sale provides the Corporation flexibility and facilitates greater interest rate risk management opportunities. At March 31, 2009, the amortized cost of the Corporation's securities totaled $135.1 million, resulting in net unrealized gains of approximately $1.3 million and a corresponding after tax increase in shareholders' equity of $888,000.

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

On February 5, 2009, the Corporation received preliminary approval to participate in the United States Department of the Treasury ("Treasury") Troubled Asset Relief Program Capital Purchase Program. The Corporation's participation in the program was contingent upon the Corporation's shareholders authorizing the issuance of the preferred stock required to be issued to Treasury under the program. At the Corporation's annual meeting of shareholders held on April 22, 2009, the proposal to authorize such preferred stock did not receive the requisite approval of the holders of two-thirds of the Corporation's outstanding shares of Common Stock necessary for passage. As a result, on April 27, 2009, the Corporation requested that Treasury withdraw its application from consideration for participation in the Capital Purchase Program. The Corporation's request to Treasury was disclosed in its Current Report on Form 8-K dated April 27, 2009 which is hereby incorporated by reference.

Loans

The Corporation's lending is primarily centered in Northwestern and West Central Ohio. Gross loans (including loans held for sale) totaled $421.0 million at March 31, 2009 compared to $418.4 million at December 31, 2008, an increase of $2.6 million (0.6%).

Allowance for Loan Losses

The allowance for loan losses as a percentage of loans (excluding loans held for sale) was 0.87% at March 31, 2009 and 0.76% at December 31, 2008. 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 three months ended March 31, 2009 and 2008, respectively:

                                    2009        2008
Balance, beginning of period      $3,198      $2,233

Charge offs                        (205)       (202)
Recoveries                            74          87
Net charge offs                    (131)       (115)

Provision for loan losses            600         275
Balance, end of period            $3,667      $2,393
                                   =====       =====

Loans on non-accrual status as a percentage of outstanding loans were 1.57% at March 31, 2009, compared to 0.74% at December 31, 2008. Non-accrual loans totaled $6,621,000 and $3,074,000 at March 31, 2009 and December 31, 2008, respectively. Management continues to closely monitor non-accrual loans and actively pursue collection. See "Provision for Loan Losses" under Results of Operations for related discussion.

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 $470.9 million, or 82.6% of the Corporation's funding sources at March 31, 2009. Total deposits increased $6.1 million (1.3%) during the quarter ended March 31, 2009.

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 8.1% of total deposits at March 31, 2009 compared to 9.2% at March 31, 2008.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. These borrowings consisted of FHLB borrowings totaling $71.4 million and $75.7 million at March 31, 2009 and December 31, 2008, respectively; securities sold under agreement to repurchase and customer repurchase agreements totaling $12.4 million and $10.6 million at March 31, 2009 and December 31, 2008, respectively; and junior subordinated deferrable interest debentures of $10.3 million at March 31, 2009 and 2008.
Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Shareholders' Equity

For the three month period ended March 31, 2009, the Corporation had net income of $1.4 million and declared dividends of $516,000, resulting in a dividend payout ratio of 36.07% of net income. Management believes the overall equity level supports this payout ratio. During the three month periods ended March 31, 2009 and 2008, the Corporation issued 1,116 and 3,723 shares respectively of treasury stock to participants under the Corporation's Employee Stock Purchase Plan. In addition, during the three month period ended March 31, 2008, the Corporation purchased 50,000 shares of its common stock through its share repurchase program.

The increase in net unrealized gains on available-for-sale securities, net of income taxes, was $1,300,000 for the three months ended March 31, 2009. Since all of 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.
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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