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 Six
                                                            Months Ended           Months Ended
                                                              June 30,               June 30,
                                                          2009        2008        2009       2008
SIGNIFICANT RATIOS (Unaudited)
Net income to:
    Average assets (a)                                       0.87%       1.12%      0.90%      0.93%
    Average shareholders' equity (a)                        10.10%      14.06%     10.58%     10.87%
Net interest margin (a)                                      3.78%       3.71%      3.72%      3.66%
Efficiency ratio (b)                                        55.46%      54.59%     56.17%     60.91%
Average shareholders' equity to average assets               8.62%       7.98%      8.51%      8.53%
Loans to deposits (end of period) (c)                       91.81%      91.07%     91.81%     91.07%
Allowance for loan losses to loans (end of period) (d)       0.90%       0.60%      0.90%      0.60%
Cash dividends to net income                                38.68%      29.49%     37.33%     38.31%


Book value per share                                      $  15.52    $  14.43   $  15.52   $  14.43

(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 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 June 30, 2009, the Corporation reported net income of $1,335,000, or $0.39 basic earnings per share. This compares to second quarter 2008 net income of $1,749,000, or $0.51 basic earnings per share. Compared with the same period in 2008, second quarter 2009 net income decreased $414,000 or 23.7%. The decrease for the quarter, as compared to the quarter ended June 30, 2008, resulted from increases in the provision for loan losses of $805,000 and non-interest expenses of $324,000, offset by increases in net interest income of $194,000 and non-interest income of $281,000, and a $240,000 decrease in the provision for income taxes.

Net income for the six-months ended June 30, 2009, totaled $2,767,000, or $0.80 basic earnings per share compared to $2,694,000, or $0.78 basic earnings per share for the same period in 2008. Compared with the same period in 2008, net income increased $73,000 or 2.7%. The increase for the six-month period ended June 30, 2009, as compared to the quarter ended June 30, 2008, was the result of increases in net interest income of $735,000 and non-interest income of $706,000, and a decrease in the provision for income taxes of $27,000, offset by increases in the provision for loan losses of $1,130,000, and non-interest expenses of $265,000.

Net Interest Income

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 $5,141,000 for the second quarter of 2009, compared to $4,947,000 for the same period of 2008, an increase of $194,000 (3.9%). Net interest income was $10,181,000 for the first six months of 2009 compared to $9,446,000 for the same period of 2008, an increase of $735,000 (7.8%).

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 quarterly and six month periods ended June 30, 2009, the net interest margin (on a taxable equivalent basis) was 3.78% and 3.72%, respectively, compared with 3.71% and 3.66% for the same periods in 2008.

Deposits comprised 82% of average interest-bearing liabilities for the six-month period ended June 30, 2009, compared to 78% for the same period in 2008. As a result of this change in the composition of interest-bearing liabilities, as well as the lower overall interest rate environment, the Corporation's cost of funds was 2.53% for the first six months of 2009 compared to 3.32% for the same period in 2008. This decrease in cost of funds more than offset the impact on the net interest margin of the decrease in the yield of interest-earning assets (5.98% for the first six months of 2009 compared to 6.65% for the same period of 2008).

Provision for Loan Losses

The Corporation's 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 $1,175,000 provision for loan losses was made for the second quarter of 2009 compared to a $370,000 provision for the same period in 2008. A $1,775,000 provision for loan losses was made for the six month period ended June 30, 2009, compared to a $645,000 provision for loan losses for the six month period ended June 30, 2008. The increase in the provision for loan losses for the quarterly and six-month periods ended June 30, 2009, as compared to June 30, 2008, is largely attributable to Union's net loan charge-off experience, as well as an increase in the level of problem and potential problem loans. See "Allowance for Loan Losses" under Financial Condition for further discussion relating to 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.

For the quarter ended June 30, 2009, non-interest income was $1,587,000, compared to $1,306,000 for the second quarter of 2008, a $281,000 (21.5%) increase. For the six-month period ended June 30, 2009, non-interest income was $2,570,000, compared to $1,864,000 for the six-month period ended June 30, 2008, a $706,000 (37.9%) increase. Gain on sales of loans amounted to $555,000 for the quarter ended June 30, 2009, compared to $152,000 for the second quarter of 2008, an increase of $403,000. Quarterly gains on sale of loans included capitalized servicing rights of $261,000 in 2009 and $88,000 in 2008. Gain on sales of loans amounted to $972,000 for the six months ended June 30, 2009 compared to $246,000 for the comparable period in 2008, an increase of $726,000.
Gain on sale of loans for the six month period included capitalized servicing rights of $442,000 in 2009 (on loan sales of $43.9 million) and $109,000 (on loan sales of $11.2 million). The significant increase in loan sales activity in 2009 as compared to 2008 is attributable to the significant decline in mortgage interest rates during the fourth quarter of 2008 and first half of 2009 which resulted in significant refinancing by borrowers. Despite the significant loan sales activity experienced during the first half of 2009, Union's serviced portfolio remained relatively unchanged increasing only $2.4 million to $190.0 million at June 30, 2009.

The fair value of mortgage servicing rights increased $225,000 for the quarter ended June 30, 2009, compared to a $374,000 increase for the quarter ended June 30, 2008. For the six-month period ended June 30, 2009, there was an increase in fair value of mortgage servicing rights of $169,000, compared to an increase in fair value of mortgage servicing rights of $122,000 for the six months ended June 30, 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 $159,000 for the six months ended June 30, 2009 compared to $161,000 for the six months ended June 30, 2008.

Other non-interest income decreased $76,000 (10.0%) to $682,000 for the quarter ended June 30, 2009 and decreased $153,000 (10.5%) to $1,298,000 for the six-month period ended June 30, 2009. The decreases were principally due to decreases in NSF and overdraft charges of $50,000 for the quarter ended June 30, 2009 and $130,000 for the six months ended June 30, 2009.

Non-Interest Expenses

For the quarter ended June 30, 2009, non-interest expenses were $3,873,000, compared to $3,549,000 for the comparable period in 2008, a $324,000 (9.1%) increase. For the six-month period ended June 30, 2009, non-interest expenses totaled $7,448,000, compared to $7,183,000 for the comparable period of 2008, an increase of $265,000 (3.7%).

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. Non-interest expenses for the quarter ended June 30, 2009 included a $510,000 increase in the Corporation's FDIC insurance expense. This increase was due to increased deposit premium rates and a FDIC Special Assessment, both of which were industry-wide increases implemented by the FDIC. The FDIC Special Assessment ruling was issued May 22, 2009 and requires institutions to pay premiums equal to the lesser of a 5 basis point assessment on total assets less Tier One capital, or 10 basis points on total deposits. The Corporation's special assessment, amounting to $285,000, must be fully accrued by June 30, 2009 and will be payable on September 30, 2009. Future special assessments may also be legislated which could have a further negative impact on the Corporation's net income. Conversely, the Corporation experienced a decrease in several non-interest expense categories during the second quarter of 2009 as compared to 2008, including dealer reserve ($52,000), ATM processing fees ($55,000), and miscellaneous branch expenses ($25,000). Non-interest expenses for the six months ended June 30, 2009 included a $575,000 increase in FDIC insurance expense and decreases in dealer reserves of $96,000, internet banking expenses of $55,000, and write-down in OREO expense of $79,000 ($25,000 in 2009 compared to $104,000 in 2008).

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 June 30, 2009, the Corporation's efficiency ratio was 55.46% compared to 54.59% for the same period of 2008. For the six month period ended June 30, 2009, the Corporation's efficiency ratio was 56.17% compared to 60.91% for the same period of 2008.

Provision for Income Taxes

The provision for income taxes for the quarter ended June 30, 2009 was $345,000, or 20.5% of income before income taxes, compared to $585,000, or 25.1%, for the comparable 2008 period. The provision for income taxes for the six month period ended June 30, 2009 was $761,000, or 21.6% of income before income taxes, compared to $788,000, or 22.6%, for the comparable 2008 period.

Return on Assets

Return on average assets was 0.87% for the second quarter of 2009, compared to 1.12% for the second quarter of 2008. The decrease in return on average assets resulted from a 23.7% decrease in net income for the second quarter of 2009 as compared to 2008, offset by a $10,000,000 decrease in the Corporation's average assets. Return on average assets was 0.90% for the six month period ended June 30, 2009, compared to 0.93% for the same period of 2008.

Return on Equity

Return on average shareholders' equity for the second quarter of 2009 was 10.10%, compared to 14.06% for the same period of 2008. This decrease was attributable to both the 23.7% decrease in net income for the quarter and an increase in average shareholder's equity, partially due to the recovery of securities in an unrealized loss position in 2008. Return on average equity for the six months ended June 30, 2009 was 10.58% compared to 10.87% for the same period in 2008. This decrease was attributable to the increase in average shareholder's equity.

The Corporation and Union met all regulatory capital requirements as of June 30, 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 $608.9 million at June 30, 2009, compared to $616.1 million at December 31, 2008, a decrease of $7.2 million, or 1.2%. The decrease in total assets was the result of decreases in total cash and cash equivalents of $6.5 million (25.2%), and available-for-sale securities of $3.9 million (2.9%), offset by an increase of $3.3 million in gross loans. Deposits during this same period decreased $5.3 million (1.2%) 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 $3.7 million (3.8%).

Shareholders' equity increased from $50.7 million at December 31, 2008 to $53.4 million at June 30, 2009. This increase was the result of net income ($2,767,000), the issuance of 1,116 treasury shares under the Corporation's Employee Stock Purchase Plan ($16,000), and a $1,009,000 increase in unrealized securities gains, net of tax, offset by the payment of dividends ($1,033,000).
The increase in unrealized securities gains from January 1, 2009 to June 30, 2009, was the result of customary and expected changes in the bond market. Net 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 $19.2 million at June 30, 2009, compared to $25.6 million at December 31, 2008. Cash and cash equivalents at June 30, 2009 includes interest-bearing deposits in other banks of $11.2 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 corresponding liquidity sources and uses. Management believes the Corporation's liquidity needs in the near term will be satisfied by the current level 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 June 30, 2009, available-for-sale securities totaled $132.6 million, a decrease of $3,891,000 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 June 30, 2009, the amortized cost of the Corporation's securities totaled $131.7 million, resulting in net unrealized gains of approximately $763,000 and a corresponding after tax increase in shareholders' equity of $597,000. Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through its Asset/Liability Committee.

Loans

The Corporation's lending is primarily centered in Northwestern and West Central Ohio. Gross loans (including loans held for sale) totaled $421.8 million at June 30, 2009, compared to $418.4 million at December 31, 2008, an increase of $3.4 million (0.8%).

Allowance for Loan Losses

The allowance for loan losses as a percentage of loans (excluding loans held for sale) was 0.90% at June 30, 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 six months ended June 30, 2009 and 2008, respectively:

                                     2009        2008
Balance, beginning of period       $3,198      $2,233
Provision for loan losses           1,775         645

Charge offs                       (1,339)       (508)
Recoveries                            163         143
Net charge offs                   (1,176)       (365)

Balance, end of period             $3,797      $2,513
                                    =====       =====

As shown in the preceding table, Union experienced a significant increase in loan charge-offs for the six-month period ended June 30, 2009 as compared to June 30, 2008. Net charge-offs for the six month period ended June 30, 2009 included $726,000 of charge-offs related to one commercial real estate relationship.

In addition to the increase in the level of loan charge-offs, Union has experienced a significant increase in the level of potential problem loans (defined as non-impaired loans which have been classified as special mention or substandard). Potential problem loans amounted to $25.9 million at June 30, 2009, compared to $15.7 million at December 31, 2008 and $12.1 million at June 30, 2008. Union provides pooled reserves for these loans using loss rates calculated considering historic net loan-charge off experience for the past four years. Union also provides general reserves for the remaining portion of its loan portfolio not considered to be problem or potential problem loans. These general reserves are also calculated considering, among other things, the historic loss rate experience for the relative loan type. Consequently, the loss rates applied to these loans have increased as a result of the increase in Union's net loan charge-offs. Despite the significant loan charge-offs experienced during the six-month period ended June 30, 2009, Union's calculated allowance for loan losses represents .90% of total loans at June 30, 2009, compared to .60% of total loans at June 30, 2008.

Loans on non-accrual status amounted to $9,300,000 and $3,074,000 at June 30, 2009 and December 31, 2008, respectively. Non-accrual loans as a percentage of outstanding loans amounted to 2.21% at June 30, 2009, compared to 0.74% at December 31, 2008. Of the loans on non-accrual status at June 30, 2009, $4.5 million are considered by Union to be impaired and have been individually evaluated for impairment with specific reserves provided for any expected losses. In addition, Union has two borrowing relationships on non-accrual at June 30, 2009 with outstanding borrowings totaling $3.5 million for which management has been actively working with the customers and expects the loans to either be brought current or to be restructured improving Union's position. The remaining loans on non-accrual at June 30, 2009 generally represent smaller balance homogenous loans which are collectively evaluated by management for impairment.

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 $459.5 million, or 83.2% of the Corporation's funding sources at June 30, 2009. Total deposits decreased $5.3 million (1.2%) during the six months ended June 30, 2009, primarily related to decreases in brokered deposits ($5 million).

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 9.0% of total deposits at June 30, 2009 and December 31, 2008, compared to 8.6% at June 30, 2008.

In addition to traditional deposits, the Corporation maintains both short-term and long-term borrowing arrangements. These borrowings consisted of FHLB borrowings totaling $71.2 million and $75.7 million at June 30, 2009 and December 31, 2008, respectively; securities sold under agreement to repurchase and customer repurchase agreements totaling $11.4 million and $10.6 million at June 30, 2009 and December 31, 2008, respectively; and junior subordinated deferrable interest debentures of $10.3 million at June 30, 2009 and December 31, 2008. Management plans to maintain access to various borrowing alternatives as an appropriate funding source.

Shareholders' Equity

For the six month period ended June 30, 2009, the Corporation had net income of $2,767,000 and declared dividends of $1,033,000, resulting in a dividend payout ratio of 37.33% of net income. Management believes the overall equity level supports this payout ratio. During the six month periods ended June 30, 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.

The increase in net unrealized gains on available-for-sale securities, net of income taxes, was $1,009,000 for the six months ended June 30, 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% . . .