Exhibit 13

Table of Contents

	Page
President’s Letter	1
Market Price and Dividends on Common Stock	2
Five-Year Summary of Selected Financial Data	3
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Report of Independent Registered Public Accounting Firm	23
Financial Statements
Consolidated Balance Sheets	24
Consolidated Statements of Income	25
Consolidated Statements of Shareholders’ Equity	26
Consolidated Statements of Cash Flows	27
Notes to Consolidated Financial Statements	29
Directors and Officers	70
Employee Anniversaries	72

Dear Shareholder:

Despite ongoing economic challenges, we are pleased to report that your company's net income increased in 2011 when compared to the previous two years.  Earnings per share were $0.85, $0.82 and $0.84 for the years ended December 31, 2011, 2010 and 2009, respectively.  Because a significant amount of the bank's revenues are derived from loan interest, the decreases in loan balances and net interest margin had a notable negative impact on the Bank's overall profitability. The decrease in loan balances was primarily the result of continued soft loan demand, while the decrease in margin was mostly the result of a flattened yield curve.  These factors contributed to a $2.2 million decrease of net interest income.  However, this was offset by improvements in allocations to the provision for loan losses of $2.2 million.  Non-interest income also improved slightly year over year (3.0%), while non-interest expenses were controlled with a very minimal increase (0.2%).

Management continues to work diligently on identifying and managing loans with increased risk characteristics.  This is an area that has required a great amount of effort and has had a positive impact on improving your company's risk profile.  Another area that continues to show improvement is equity, which has increased to $59.8 million as of December 31, 2011.  We believe that a firm financial position is important to the future of our organization.

As a community bank, we realize the importance of being involved in our communities.  Not only is the organization involved through financial support, but staff members are encouraged and many have decided to become individually involved in these worthwhile endeavors.  I assure you that shareholders' value is always considered, and is important to the Board and management of your organization.  We will continue to work at increasing profitability in an effort to enhance shareholders' value.  As always, we do appreciate and thank you for your current and continued support.

Respectfully,

Daniel W. Schutt

President & CEO

UNITED BANCSHARES, INC.

DESCRIPTION OF THE CORPORATION

United Bancshares, Inc., an Ohio corporation (the “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.  Following the merger of the Company’s other two bank subsidiaries into The Union Bank Company, Columbus Grove, Ohio (“Bank”) in March 2003, the Company is now a one-bank holding company, as that term is defined by the Federal Reserve Board.  Effective February 1, 2007, the Bank formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio.  The operations of UBC are located in Wilmington, Delaware. Effective, December 4, 2009, the Bank formed a wholly-owned subsidiary UBC Property, Inc. to hold and manage certain property that was acquired in lieu of foreclosure.  Through its subsidiary, the Bank, the Corporation is engaged in the business of commercial banking and offers a full range of commercial banking services.

Union is an Ohio state-chartered bank, which serves Allen, Hancock, Putnam, Sandusky, Van Wert and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville, Ohio.

MARKET PRICE AND DIVIDENDS ON COMMON STOCK

United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001.  From January 2000 to March 2001, the Corporation’s common stock was traded on the Nasdaq Over-The-Counter Bulletin Board.  Prior to January 2000, there was no established public trading market for United Bancshares, Inc. common stock.  As of February 28, 2012, the common stock was held by 1453 shareholders of record.  Below are the trading highs and lows for the periods noted.

Year 2011	High		Low
First Quarter	$	10.65	$	8.86
Second Quarter	$	9.25	$	8.41
Third Quarter	$	9.53	$	8.31
Fourth Quarter	$	8.62	$	6.73

Year 2010	High		Low
First Quarter	$	10.60	$	8.81
Second Quarter	$	10.55	$	9.35
Third Quarter	$	10.11	$	8.82
Fourth Quarter	$	10.42	$	8.80

Dividends declared by United Bancshares, Inc. on its common stock during the past two years were as follows:

	2011		2010
First Quarter	$	-	$	.15
Second Quarter		-		.15
Third Quarter		-		.15
Fourth Quarter		-		-
Total	$	-	$	.45

AVAILABILITY OF MORE INFORMATION

To obtain a copy, without charge, of the United Bancshares, Inc.’s annual report (Form 10-K) filed with the Securities and Exchange Commission, please write to:

Heather Oatman, Secretary

United Bancshares, Inc.

100 S. High Street

Columbus Grove, Ohio 45830

800-837-8111

UNITED BANCSHARES, INC.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

	Years ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands, except per share data)
Statements of income:
Total interest income	$	26,461		$	30,264		$	32,867		$	35,208		$	34,849
Total interest expense		7,326			8,959			12,317			15,795			17,431
Net interest income		19,135			21,305			20,550			19,413			17,418
Provision for loan losses		4,375			6,550			7,525			2,195			625
Net interest income after provision for loan losses		14,760			14,755			13,025			17,218			16,793
Total non-interest income		3,831			3,718			4,492			2,674			2,965
Total non-interest expenses		15,546			15,522			14,478			14,462			14,018
Income before federal income taxes		3,045			2,951			3,039			5,430			5,740
Federal income taxes		102			143			156			1,011			1,161
Net income	$	2,943		$	2,808		$	2,883		$	4,419		$	4,579
Per share of common stock:
Net income - basic	$	0.85		$	0.82		$	0.84		$	1.28		$	1.30
Dividends		-			0.45			0.60			0.60			0.56
Book value	$	17.34		$	15.97		$	15.76		$	14.72		$	13.99
Average shares outstanding – basic		3,445,469			3,444,703			3,443,093			3,447,536			3,527,093
Year end balances:
Loans (1)	$	340,700		$	383,907		$	407,815		$	418,385		$	359,560
Securities (2)		156,850			145,334			143,480			141,392			142,607
Total assets		587,045			612,617			616,405			616,064			547,975
Deposits		480,486			488,651			469,668			464,792			393,203
Shareholders' equity		59,748			55,005			54,279			50,660			48,819
Average balances:
Loans (1)		360,669			398,378			417,913			400,823			345,532
Securities (2)		151,736			149,748			139,373			133,409			155,773
Total assets		593,465			625,281			612,943			600,749			549,694
Deposits		481,600			493,089			462,742			443,174			386,572
Shareholders' equity		57,429			55,846			52,862			49,795			47,270
Selected ratios:
Net yield on average interest-earning assets (3)		3.64	%		3.85	%		3.75	%		3.64	%		3.61	%
Return on average assets		0.50	%		0.45	%		0.47	%		0.74	%		0.83	%
Return on average shareholders equity		5.12	%		5.03	%		5.45	%		8.87	%		9.69	%
Net loan charge-offs as a percentage of average outstanding net loans		1.07	%		0.84	%		1.42	%		0.31	%		0.19	%
Allowance for loan losses as a percentage of year end loans		2.51	%		2.09	%		1.18	%		0.76	%		0.62	%
Shareholders' equity as a percentage of total assets		10.18	%		8.98	%		8.81	%		8.22	%		8.91	%

Notes:
	1)	Includes loans held for sale.
	2)	Includes Federal Home Loan Bank Stock.
	3)	Net yield on average interest-earning assets was computed on a tax-equivalent basis.
	4)	Financial data for 2010 includes the impact of the March 2010 Findlay branch acquisition.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides additional information relating to the financial condition and results of operations of United Bancshares, Inc.

PERFORMANCE SUMMARY

Consolidated net income for United Bancshares, Inc. (the “Corporation”) and its wholly-owned subsidiary, The Union Bank Company (the “Bank”), was $2.9 million in 2011 compared to $2.8 million in 2010 and $2.9 million in 2009.

Net income in 2011 as compared to 2010 was favorably impacted by a $2.2 million decrease in the provision for loan losses, a $113,000 increase in non-interest income and a $41,000 decrease in the provision for income taxes, and unfavorably impacted by a $2.2 million decrease in net interest income, and a $25,000 increase in non-interest expenses.  The decrease in the provision for loan losses is more fully explained in the “Provision for Loan Losses and the Allowance for Loan Losses” section.  The decrease in net interest income is due to a decline in the Corporation’s net interest margin from 3.85% in 2010 to 3.64% in 2011, as well as a decrease in the level of average interest-earning assets in 2011 as compared to 2010.

The Corporation’s return on average assets was .50% in 2011, compared to .45% in 2010, and .47% in 2009.  The Corporation’s return on average shareholders’ equity was 5.12% in 2011, 5.07% in 2010, and 5.45% in 2009.  Basic net income per share was $0.85 in 2011, an increase of $0.03 per share from $0.82 in 2010.  Basic net income per share was $0.82 in 2010, a decrease of $0.02 per share from $0.84 in 2009.  Changes in these amounts from year to year were generally reflective of changes in the level of net income.

The Corporation’s assets decreased to $587 million at December 31, 2011, compared to $612.6 million at December 31, 2010.  Loans decreased $43.2 million, or 11.2%, to $340.7 million at December 31, 2011, compared to $383.9 million at December 31, 2010.  The decrease in loans resulted from continued soft loan demand in the Corporation’s market area, and $3.8 million of net loan charge-offs recognized in 2011.  Deposits decreased $8.2 million, or 1.7%, to $480.5 million at December 31, 2011, from $488.7 million at December 31, 2010.  Shareholders' equity at December 31, 2011 was $59.7 million, an 8.6% increase compared to $55.0 million at December 31, 2010.

RESULTS OF OPERATIONS – 2011 Compared to 2010

Net Interest Income

Net interest income, which represents the revenue generated from interest-earning assets in excess of the interest cost of funding those assets, is the Corporation's principal source of income.  Net interest income is influenced by market interest rate conditions and the volume and mix of interest-earning assets and interest-bearing liabilities.  Many external factors affect net interest income and typically include the strength of client loan demand, client preference for individual deposit account products, competitors’ loan and deposit product offerings, the national and local economic climates, and Federal Reserve monetary policy.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2011 Compared to 2010 (CONTINUED)

Net Interest Income, Continued

Net interest income for 2011 was $19.1 million, a decrease of $2.2 million (10.2%) from 2010.  The decrease in net interest income was primarily due to a decrease in the Corporation’s net interest margin.  The average yield on loans for 2011 decreased to 5.87% compared to 6.09% in 2010, and the average rate on interest-bearing liabilities decreased to 1.53% in 2011 from 1.73% in 2010.  The effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, decreasing in 2011 to 3.64% from 3.85% in 2010.

Provision for Loan Losses and the Allowance for Loan Losses

The Corporation’s loan policy provides guidelines for managing both credit risk and asset quality.  The policy details acceptable lending practices, establishes loan-grading classifications, and prescribes the use of a loan review process.  The Bank has a credit administration department that performs regular credit file reviews which facilitate the timely identification of problem or potential problem credits, ensure sound credit decisions, and assist in the determination of the allowance for loan losses.  The Bank also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process.  The loan policy, loan review process, and credit analysis function facilitate management's evaluation of the credit risk inherent in the lending function.

As mentioned, ongoing reviews are performed to identify potential problem and nonperforming loans and also provide in-depth analysis with respect to the quarterly allowance for loan losses calculation.  Part of this analysis involves accessing the need for specific reserves relative to impaired loans.  This evaluation typically includes a review of the recent performance history of the credit, a comparison of the estimated collateral value in relation to the outstanding loan balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future financial performance.  Loans are considered impaired when, based upon the most current information available, it appears probable that the borrower will not be able to make payments according to the contractual terms of the loan agreement.  Impaired loans are recorded at the observable market price of the loan, the fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan's effective interest rate.  Given that the Bank’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of individual impaired loans is most often based upon the underlying collateral value net of estimated selling costs.  Large groups of smaller balance homogenous loans are collectively evaluated for impairment.

To determine the allowance for loan losses, the Bank prepares a detailed analysis that focuses on delinquency trends, the status of nonperforming loans (i.e., impaired, nonaccrual, restructured, and past due 90 days or more), current and historical trends of charged-off loans within each loan category (i.e., commercial, real estate, and consumer), existing local and national economic conditions, and changes within the volume and mix in each loan category.  Higher loss rates are applied in calculating the allowance for loan losses relating to potential problem loans.  Loss rates are periodically evaluated considering historic loss rates in the respective potential problem loan categories (i.e., special mention, substandard, doubtful) and current trends.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2011 Compared to 2010 (CONTINUED)

Provision for Loan Losses and the Allowance for Loan Losses, Continued

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the portfolio.  Even though management uses all available information to assess possible loan losses, future additions or reductions to the allowance may be required as changes occur in economic conditions and specific borrower circumstances.  The regulatory agencies that periodically review the Bank’s allowance for loan losses may also require additions to the allowance or the charge-off of specific loans based upon the information available to them at the time of their examinations.

The allowance for loan losses at December 31, 2011 was $8.5 million, or 2.53% of total loans, compared to $8 million, or 2.09% of total loans at December 31, 2010.  The change in the allowance for loan losses during 2011 included a $4.4 million provision for loan losses charged to operations and  loan charge-offs, net of recoveries, of $3.8 million.

The provision for loan losses charged to operations is determined by management after considering the amount of net losses incurred as well as management’s estimation of losses inherent in the portfolio based on an evaluation of loan portfolio risk and current economic factors.  The provision for loan losses of $4.4 million in 2011 compares to a provision of $6.6 million in 2010.

The Bank considers a loan to be impaired when it becomes probable that the Bank will be unable to collect under the contractual terms of the loan, based on current information and events.  Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $21 million at December 31, 2011 compared to $15.7 million at December 31, 2010, an increase of $5.3 million.  Impaired loans at December 31, 2011, included $7.7 million of loans with no specific reserves included in the allowance for loan losses and $13.4 million of loans with specific reserves of $2 million included in the Bank’s December 31, 2011 allowance for loan losses.  Impaired loans at December 31, 2011 with no specific reserves include $2.3 million of loans which were charged down during 2011.  Impaired loans at December 31, 2010, included $9.6 million of loans with no specific reserves included in the allowance for loan losses and $6.1 million of loans with specific reserves of $692,000 included in the Bank’s December 31, 2010 allowance for loan losses.  Impaired loans at December 31, 2010 with no specific reserves include $7.8 million of loans which were charged down during 2010.

In addition to impaired loans, the Bank had other potential problem credits of $22.6 million at December 31, 2011 compared to $30.4 million at December 31, 2010, a decrease of $7.8 million (25.6%).  The Bank’s credit administration department continues to closely monitor these credits.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2011 Compared to 2010 (CONTINUED)

Non-Interest Income

Total non-interest income increased $113,000 (3.0%) to $3.8 million in 2011 from $3.7 million in 2010.  With the exception of net securities gains, most of the components of non-interest income are recurring, although certain components are more susceptible to change than others.  Net securities gains increased in 2011 to $897,000 compared to $278,000 in 2010.

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance.  Service charges on deposit accounts decreased $89,000 (7.5%) to $1,099,000 in 2011 compared to $1,188,000 in 2010.  This decrease appears to be largely attributable to changes in customer overdraft behaviors.

The Bank has elected to sell in the secondary market substantially all fixed rate residential real estate loans originated, and typically retains the servicing rights relating to such loans.  During 2011, gain on sale of loans was $493,000, including $168,000 of capitalized servicing rights.  Gain on sale of loans was $867,000 in 2010, including $315,000 of capitalized servicing rights.  The significant decrease in gain on sale of loans was attributable to the decrease in loan sales activities in the first quarters of 2011 with loan sales in 2011 amounting to $26.7 million compared to $35.5 million in 2010.  The Bank’s serviced portfolio decreased $11.4 million during 2011 to $164.6 million at December 31, 2011.

The Bank reports its mortgage servicing rights using the fair value measurement method.  As a result, the Corporation recognized a $315,000 decrease in the fair value of mortgage servicing rights during 2011, compared to a $142,000 decrease in the fair value of mortgage servicing rights in 2010, a comparative $173,000 adverse impact on income before income taxes.  Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights.  While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period.  The prepayment assumptions used in determining the fair value of servicing are based on the Public Securities Association (PSA) Standard Prepayment Model.  At December 31, 2011 the PSA factor was 465 compared to 321 at December 31, 2010.

Non-Interest Expenses

Total non-interest expenses amounted to $15,546,000 in 2011, compared to $15,522,000 in 2010, an increase of $24,000 (0.2%).  The Corporation experienced fluctuations in several non-interest expense categories in 2011 as compared to 2010.  Salaries, wages, and employee benefits increased $215,000, or 2.8%, primarily due to normal salary increases and increased health care costs.  There was essentially no change in the level of FTE’s during the year.  FDIC insurance premiums increased $189,000 or 23.4%.  Conversely, asset management expenses, primarily relating to legal costs decreased $181,000 or 34.3%, and miscellaneous losses and recoveries decreased $105,000 or 88.4%.

The significant components of other operating expenses are summarized in Note 12 to the consolidated financial statements.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2011 Compared to 2010 (CONTINUED)

Provision for Income Taxes

The provision for income taxes for 2011 was $102,000, an effective tax rate of 3.4%, compared to $143,000 in 2010, an effective rate of 4.8%.  The Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income (22.0%), life insurance contracts (5.1%), and a reduction in the reserve for uncertain tax positions (3.8%).  At December 31, 2011, the Corporation has available alternative minimum tax credits of $395,000 which can be used in the future to the extent regular tax exceeds the alternative minimum tax.

FINANCIAL POSITION – 2011 Compared to 2010

Securities

Management monitors the earnings performance and liquidity of the securities portfolio on a regular basis through Asset/Liability Committee (“ALCO”) meetings.  As a result, all securities, except Federal Home Loan Bank of Cincinnati (FHLB) stock, have been designated as available-for-sale and may be sold if needed for liquidity, asset-liability management or other reasons.  Such securities are reported at fair value, with any net unrealized gains or losses reported as a separate component of shareholders’ equity, net of related income taxes.

Securities, including FHLB stock, totaled $156.8 million at December 31, 2011 compared to $145.3 million at December 31, 2010, an increase of $11.5 million (7.9%).  The amortized cost of the securities portfolio increased $8.8 million in 2011, and the Bank experienced net unrealized gains on securities of $2.7 million during 2011.

The Bank is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB.  FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment.  There were no purchases or sales of FHLB stock during 2011.

At December 31, 2011, net unrealized gains on available-for-sale securities, net of income taxes, amounted to $3.6 million compared to net unrealized gains on available for sale securities, net of income taxes, of $1.8 million at December 31, 2010.  At December 31, 2011, the Bank held five securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $5.5 million and $14,000, respectively.  Management has considered the current interest rate environment, typical volatilities in the bond market, and the Bank’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL POSITION – 2011 Compared to 2010 (CONTINUED)

Loans

At December 31, 2011, total loans, including loans held for sale,  amounted to $340.7 million compared to $383.9 million at December 31, 2010, a decrease of $43.2 million (11.3%).  All categories within the loan portfolio decreased during 2011, with residential real estate decreasing $5.4 million (7.7%), commercial loans decreasing $18.8 million (7.8%), agriculture loans decreasing $16.4 million (26.0%), and consumer loans decreasing $2.6 million (32.3%).  The overall decrease in the loan portfolio is attributable to continued slow economic conditions experienced throughout the Corporation’s market area.  The decrease in consumer loans is partially due to the continued residual effect of the Corporation’s decision to cease indirect automobile lending in June 2008.

Other Assets

During 2011, other real estate owned (OREO) decreased $1.7 million to $2.8 million at December 31, 2011, compared to $4.5 million at December 31, 2010.  During 2011, $498,000 of loans was transferred to OREO.  Throughout 2011, the Bank evaluated its OREO portfolio and made $351,000 of impairment adjustments.  The Bank also sold several properties from OREO and received net proceeds of $1.8 million resulting in net gain on sales of $16,000.

Under the requirements of the FDIC’s Notice of Proposed Rulemaking (NPR), the Bank prepaid their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009 and for all of years 2010 through 2012 on December 30, 2009. The assessments were made to address the FDIC’s short-term liquidity needs.  Under the NPR, depository institutions record a prepaid asset for the upfront payment and subsequently amortize the asset based on calculated quarterly assessments.  As a result, as of December 31, 2011, the Bank had prepaid FDIC assessments of $947,000 compared with $1.9 million at December 31, 2010.

Deposits

Total deposits at December 31, 2011 amounted to $480.5 million, a decrease of $8.2 million (1.7%) compared with total deposits of $488.7 million at December 31, 2010.  The decrease in deposits includes a $24.2 million decrease in interest bearing deposits offset by a $16 million increase in non-interest bearing deposits.

Other Borrowings

The Bank also utilizes other borrowings as an alternative source of funding, as necessary, to support asset growth and periodic deposit shrinkage.  Other borrowings, consisting of FHLB advances and customer repurchase agreements, amounted to $32.8 million at December 31, 2011, compared to $55.8 million at December 31, 2010, a decrease of $23 million (41.2%).  The decrease in other borrowings included $17 million of repayments of FHLB borrowings, and a $6 million decrease in customer repurchase agreements.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2010 Compared to 2009

Net interest income for 2010 was $21.3 million, an increase of $755,000 (3.7%) from 2009.  The increase in net interest income was primarily due to an increase in the Corporation’s net interest margin.  The average yield on loans for 2010 increased to 6.09% compared to 6.04% in 2009, and the average rate on interest-bearing liabilities decreased to 1.73% in 2010 from 2.41% in 2009.  The effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, increasing in 2010 to 3.85% from 3.75% in 2009.

The allowance for loan losses at December 31, 2010 was $8 million, or 2.09% of total loans, compared to $4.8 million, or 1.18% of total loans at December 31, 2009.  The change in the allowance for loan losses during 2010 included a $6.6 million provision for loan losses charged to operations and  loan charge-offs, net of recoveries, of $3.3 million.

Impaired loans, principally consisting of commercial and commercial real estate credits, amounted to $15.7 million at December 31, 2010 compared to $13.2 million at December 31, 2009, an increase of $2.5 million.  Impaired loans at December 31, 2010, included $9.6 million of loans with no specific reserves included in the allowance for loan losses and $6.1 million of loans with specific reserves of $692,000 included in the Bank’s December 31, 2010 allowance for loan losses.  Impaired loans at December 31, 2010 with no specific reserves include $7.8 million of loans which were charged down during 2010.  Impaired loans at December 31, 2009 with no specific reserve, includes $3.5 million of loans which were charged down during 2009.  The $13.2 million of impaired loans at December 31, 2009 included $5 million of loans with $1.2 million of specific reserves included in the December 31, 2009 allowance for loan losses.

In addition to impaired loans, the Bank had other potential problem credits of $30.4 million at December 31, 2010 compared to $28.0 million at December 31, 2009, an increase of $2.4 million (8.6%).  The Bank’s credit administration department continues to closely monitor these credits.

Total non-interest income decreased $774,000 (17.2%) to $3.7 million in 2010 from $4.5 million in 2009.  With the exception of net securities gains, most of the components of non-interest income are recurring, although certain components are more susceptible to change than others.  Net securities gains increased in 2010 to $278,000 compared to $129,000 in 2009.

Significant recurring components of non-interest income include service charges on deposit accounts, secondary market lending activities, and increases in the cash surrender value of life insurance.  Service charges on deposit accounts decreased $143,000 (10.7%) to $1,188,000 in 2010 compared to $1,331,000 in 2009.  This decrease appears to be largely attributable to changes in customer overdraft behaviors.

During 2010, gain on sale of loans was $867,000, including $315,000 of capitalized servicing rights.  Gain on sale of loans was $1,376,000 in 2009, including $612,000 of capitalized servicing rights.  The significant decrease in gain on sale of loans was attributable to the dramatic decrease in loan sales activities between the two years with loan sales in 2010 amounting to $35.5 million compared to $65.6 million in 2009.  Much of the 2009 activity occurred during the first and second quarters and resulted from the significant decline in long-term mortgage interest rates that occurred during the latter part of the fourth quarter of 2008.  The Bank’s serviced portfolio decreased $12.8 million during 2010 to $175.9 million at December 31, 2010.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS – 2010 Compared to 2009 (CONTINUED)

The Corporation recognized a $142,000 decrease in the fair value of mortgage servicing rights during 2010, compared to a $195,000 increase in the fair value of mortgage servicing rights in 2009, a comparative $337,000 adverse impact on income before income taxes.  Prepayment assumptions are a key valuation input used in determining the fair value of mortgage servicing rights.  While prepayment assumptions are constantly subject to change, such changes typically occur within a relatively small parameter from period to period.  The prepayment assumptions used in determining the fair value of servicing at December 31, 2010 was 321 compared to 300 at December 31, 2009.

Total non-interest expenses amounted to $15,522,000 in 2010, compared to $14,479,000 in 2009, an increase of $1,043,000 (7.2%).  The Corporation experienced increases in several non-interest expense categories in 2010 as compared to 2009.  Salaries, wages, and employee benefits increased $287,000, or 3.9%, primarily due to normal salary increases and increased health care costs.  There was essentially no change in the level of FTE’s during the year.  Advertising expense increased $207,000, or 61.1%, as the Bank made the decision to roll out additional product lines. OREO expense, including impairment adjustments and net loss from sales, increased $374,000, primarily due to the significant increase in OREO activity that occurred during the fourth quarter of 2009 and continued throughout much of 2010.  See additional explanation in the “Other Assets” discussion under financial condition section. Asset management expenses, primarily relating to legal costs increased $219,000 as the Bank’s volume of criticized assets remained well above traditional levels.  Conversely, the Corporation experienced a decrease in FDIC premium assessments of $344,000 and deposit premium amortization of $160,000.  The decrease in the FDIC premiums is attributable to the special assessments levied on all commercial banks in 2009.

The provision for income taxes for 2010 was $143,000, an effective tax rate of 4.8%, compared to $156,000 in 2009, an effective rate of 5.1%.  The Corporation’s effective tax rate was reduced from the federal statutory rate of 34% as a result of tax-exempt securities and loan interest income (23.6%) and life insurance contracts (5.7%).  At December 31, 2010, the Corporation has available alternative minimum tax credits of $268,000 which can be used in the future to the extent regular tax exceeds the alternative minimum tax.

 UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL POSITION – 2010 Compared to 2009

In March 2010, the Bank completed the acquisition of a branch in Findlay, Ohio which expanded the Bank’s market in Findlay and the surrounding area.  Through the acquisition, the Bank received $26.6 million of assets, including $22.3 million of cash, $1.8 million of loans, and assumed $26.6 million of deposits.  The operations of the branch subsequent to the acquisition are included in the Corporation’s consolidated results.  The cash proceeds from the branch acquisition were used to fund the repayment of FHLB advances and maturing brokered certificates of deposit.

Securities, including FHLB stock, totaled $145.3 million at December 31, 2010 compared to $143.5 million at December 31, 2009, an increase of $1.8 million (1.3%).  The amortized cost of the securities portfolio increased $2.7 million in 2010.  However, the Bank experienced net unrealized losses on securities of $832,000 during 2010.

The Bank is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB.  FHLB stock is considered a restricted security which is carried at cost and evaluated periodically for impairment.  There were no purchases or sales of FHLB stock during 2010.

At December 31, 2010, net unrealized gains on available-for-sale securities, net of income taxes, amounted to $1.8 million compared to net unrealized gains on available for sale securities, net of income taxes, of $2.4 million at December 31, 2009.  At December 31, 2010, the Bank held 39 securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $38.1 million and $783,000, respectively.  Management has considered the current interest rate environment, typical volatilities in the bond market, and the Bank’s liquidity needs in the near term in concluding that the impairment on these securities is temporary.

At December 31, 2010, total loans amounted to $383.9 million compared to $407.8 million at December 31, 2009, a decrease of $23.9 million (5.9%).  Most categories within the loan portfolio decreased during 2010, with commercial loans decreasing $17.4 million (8.1%), agriculture loans decreasing $5.2 million (7.3%), and consumer loans decreasing $5.3 million (38.4%).  Residential real estate loans increased $4 million (3.8%).  The overall decrease in the loan portfolio is attributable to continued slow economic conditions experienced throughout the Corporation’s market area.  The decrease in consumer loans is partially due to the continued residual effect of the Corporation’s decision to cease indirect automobile lending in June 2008.

During 2010, other real estate owned (OREO) decreased $646,000 to $4.5 million at December 31, 2010, compared to $5.2 million at December 31, 2009.  During 2010, $2.3 million of loans were transferred to OREO.  Throughout 2010, the Bank evaluated its OREO portfolio and made $211,000 of impairment adjustments.  The Bank also sold several properties from OREO and received net proceeds of $2.7 million resulting in net loss on sales of $44,000.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL POSITION – 2010 Compared to 2009 (CONTINUED)

Total deposits at December 31, 2010 amounted to $488.7 million, an increase of $19 million (4.0%) compared with total deposits of $469.7 million at December 31, 2009.  Of this increase, $4.7 million was related to non-interest bearing deposits.  The increase in deposits includes the impact of the $26.6 million of deposits assumed through the Findlay branch acquisition in March 2010, which is summarized in Note 3 to the consolidated financial statements.

Other borrowings, consisting of FHLB advances and customer repurchase agreements, amounted to $55.8 million at December 31, 2010, compared to $77.9 million at December 31, 2009, a decrease of $22.1 million (28.4%).  The decrease in other borrowings included $21.5 million of repayments of FHLB borrowings, and a $578,000 decrease in customer repurchase agreements.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY

Liquidity relates primarily to the Corporation’s ability to fund loan demand, meet the withdrawal requirements of deposit customers, and provide for operating expenses.  Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available-for-sale, and loans held for sale.  A large portion of liquidity is provided by the ability to sell or pledge securities.  Accordingly, the Corporation has designated all securities other than FHLB stock as available-for-sale.  A secondary source of liquidity is provided by various lines of credit facilities available through correspondent banks and the Federal Reserve.  Another source of liquidity is represented by loans that are available to be sold.  Certain other loans within the Bank’s loan portfolio are also available to collateralize borrowings.

The consolidated statements of cash flows for the years presented provide an indication of the Corporation’s sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity.  A discussion of cash flows for 2011, 2010, and 2009 follows.

The Corporation generated cash from operating activities of $9.6 million in 2011, $10.3 million in 2010, and $5.6 million in 2009.

Net cash flows from investing activities amounted to $30.2 million in 2011, $41.9 million in 2010, and $1.7 million in 2009.  Significant investing cash outflow activities in 2011 included $8.6 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities, and $1.7 million resulting from the purchase of certificates of deposit.  Investing cash inflows of $38.9 million resulted from a decrease in loans and $1.9 million from the sale of other real estate owned.  The only significant investing cash outflow activity in 2010 was $2.8 million of net cash outflows resulting from securities purchases, net of proceeds received from sales and maturities.  Significant investing cash inflow activities in 2010 included $22.3 million in proceeds from the branch acquisition, $20 million decrease in loans, and $2.7 million in proceeds from the sale of other real estate owned.  The only significant investing cash flow activities in 2009 included $2.3 million of net cash inflows from securities proceeds (sales and maturities) net of purchases, and $710,000 to fund net loan growth.

Net cash flows from financing activities amounted to $(31.1) million in 2011, $(31) million in 2010, and $(5.5) million in 2009.  Net cash used in financing activities in 2011 primarily resulted from $17 million of repayment on FHLB borrowings, $8.1 million decrease in deposits, and $6 million decrease in customer repurchase agreements.  Net cash used in financing activities in 2010 primarily resulted from $21.6 million of repayments on FHLB borrowings, $7.3 million decrease in deposits (excluding the impact of deposits assumed from the Findlay branch acquisition), including $15 million repayment of brokered deposits, and the payment of $1.6 million ($.45 per share) of cash dividends.  Net cash used in financing activities in 2009 primarily resulted from an $8.3 million net reduction in other borrowings and the payment of $2.1 million ($.60 per share) of cash dividends, offset by customer deposit growth of $4.9 million.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASSET LIABILITY MANAGEMENT

Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities.  The Corporation manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.

The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”.  An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”.  This generally means that, when interest rates increase, an institution’s net interest income will increase and, when interest rates decrease, the institution’s net interest income will decrease.  An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “negative gap”.  This generally means that, when interest rates increase, the institution’s net interest income will decrease and, when interest rates decrease, the institution’s net interest income will increase. The Corporation’s one year cumulative gap at December 31, 2011 is approximately 98% which means the Bank has more liabilities than it does assets re-pricing within one year.

EFFECTS OF INFLATION

The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by fluctuations in interest rates than inflation.  Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies.  Interest rates and inflation do not necessarily move with the same velocity or within the same period; therefore, a direct relationship to the inflation rate cannot be shown.  The financial information presented in the Corporation’s consolidated financial statements has been presented in accordance with accounting principles generally accepted in the United States, which require that the Corporation measure financial position and operating results primarily in terms of historical dollars.

SIGNIFICANT ACCOUNTING POLICIES

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the commercial banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements.  These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.

The Corporation’s most significant accounting policies are presented in Note 1 to the consolidated financial statements.  These policies, along with other disclosures presented in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined.  Management has identified the determination of the allowance for loan losses, valuation of goodwill and mortgage servicing rights, and fair value of securities and other financial instruments as the areas that require the most subjective and complex estimates, assumptions and judgments and, as such, could be the most subjective to revision as new information becomes available.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

As previously noted, a detailed analysis to assess the adequacy of the allowance for loan losses is performed.  This analysis encompasses a variety of factors including the potential loss exposure for individually reviewed loans, the historical loss experience for each loan category, the volume of non-performing loans, the volume of loans past due 30 days or more, a segmentation of each loan category by internally-assigned risk grades, an evaluation of current local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.

Management considers the valuation of goodwill resulting from the 2003 Gibsonburg and Pemberville and the 2010 Findlay branch acquisitions through an annual impairment test which considers, among other things, the assets and equity of the Corporation as well as price multiples for sales transactions involving other local financial institutions.  Management engaged an independent valuation specialist to perform a goodwill impairment evaluation as of September 30, 2011, which supported management’s assessment that no impairment adjustments to goodwill were warranted.  To date, none of the goodwill evaluations have revealed the need for an impairment charge.  Management does not believe that any significant conditions have changed relating to the goodwill assessment through December 31, 2011.

Mortgage servicing rights are recognized when acquired through sale of mortgage loans and are reported at fair value.  Changes in fair value are reported in net income for the period the changes occur.  The Bank generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, and discount rates commensurate with the risks involved. The Bank has engaged an independent consultant to calculate the fair value of mortgage servicing rights on a quarterly basis.  Management regularly reviews the calculation, including assumptions used in making the calculation, and discusses with the consultant.  Management also reconciles information used by the consultant, with respect to the Bank’s serviced portfolio, to the Bank’s accounting records.

The Corporation reviews securities prices and fair value estimates of other financial instruments supplied by independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.  The Corporation’s securities portfolio primarily consists of U.S. Government agencies and political subdivision obligations.  Pricing for such instruments in typically based on models with observable inputs.  From time to time, the Corporation will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other third-party sources or derived using internal models.  The Corporation also considers the reasonableness of inputs for financial instruments that are priced using unobservable inputs.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

A summary of new accounting standards adopted or subject to adoption in 2011, as well as newly-issued but not effective accounting standards at December 31, 2011, is presented in Note 2 to the consolidated financial statements.  In addition, the Corporation has provided in Note 5 to the consolidated financial statements, the expanded disclosure requirements about the credit quality of loans and the allowance for loan losses for 2011 and 2010 as required by Accounting Standards Update 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Loss.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS

The following table summarizes loan commitments, including letters of credit, as of December 31, 2011:

	Total  Amount		Less than  1 year		1 – 3  years		4 – 5  years		Over  5 years
	(Dollars in thousands)
Type of commitment
Commercial lines-of-credit	$	34,259	$	34,110	$	144	$	5	$	-
Real estate lines-of-credit		32,749		5,170		7,241		4,806		15,532
Consumer lines-of-credit		2		2		-		-		-
Letters of Credit		2,388		2,388		-		-		-
Total commitments	$	69,398	$	41,670	$	7,385	$	4,811	$	15,532

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)

As indicated in the preceding table, the Corporation had $69.4 million in total loan commitments at December 31, 2011, with $41.7 million of that amount expiring within one year.  All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted.  Letters-of-credit are also included in the amounts noted in the table since the Corporation requires that each letter-of-credit be supported by a loan agreement.  The commercial and consumer lines represent both unsecured and secured obligations.  The real estate lines are secured by mortgages in residential and nonresidential property.  Many of the commercial lines are due on a demand basis, and are established for seasonal operating purposes.  It is anticipated that a significant portion of these lines will expire without being drawn upon.

The following table summarizes the Corporation’s contractual obligations as of December 31, 2011:

	Payments due by period
	Total Amount		Less than 1 year		1 – 3 years		4 – 5 years		Over 5 years
	(Dollars in thousands)
Contractual obligations
Long-term debt	$	37,865	$	10,019	$	24	$	14	$	27,808
Capital leases		-		-		-		-		-
Operating leases		-		-		-		-		-
Unconditional purchaseobligations		-		-		-		-		-
Other long-term liabilities reflected under GAAP		290		16		38		49		187
Total obligations	$	38,155	$	10,035	$	62	$	63	$	27,995

Long-term debt presented in the preceding table is comprised of $27.6 million in borrowings from the FHLB, and $10.3 million from the issuance of junior subordinated deferrable interest debentures.

FHLB borrowings include notes that require monthly interest payments, with principal on most issues due at maturity.  The remaining FHLB issues require monthly principal payments as disclosed in Note 10 to the consolidated financial statements. All outstanding FHLB borrowings at December 31, 2011 consist of advances with fixed interest rates.  Certain fixed rate obligations have variable options that stipulate a prepayment penalty if the note’s interest rate exceeds the current market rate for similar borrowings at the time of repayment.  As a note matures, the Bank evaluates the liquidity and interest-rate circumstances at that point in time to determine whether to pay-off or renew the note.  The evaluation process typically includes the strength of current and projected customer loan demand, the current federal funds sold or purchased position, projected cash flows from maturing securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for deposit product offerings.  Fixed rate advances at December 31, 2011 include $22.5 million in advances that can be put back at the option of the FHLB.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)

The other long-term liabilities reflected under GAAP, as noted in the preceding table, represents the Bank’s agreement with its current Chairman of the Board of Directors to provide for retirement compensation benefits as more fully described in Note 15 of the consolidated financial statements.  At December 31, 2011, the net present value of future deferred compensation payments amounted to $290,000, which is included in other liabilities in the December 31, 2011 consolidated balance sheet.

As indicated in the table, the Corporation had no capital lease obligations as of December 31, 2011.  The Bank also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $588,000 at December 31, 2011 for supplemental retirement benefits.  Since substantially all participants under the plan are still active, it is not possible to determine the terms of the contractual obligations and, consequently, such liability is not included in the table.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)

The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2011:

Change in Interest Rates (basis points)	Percentage Change in Net Interest Income	Percentage Change in Net Income
+200	1.1%	6.5%
-200	-5.2%	-23.8%
+300	-0.1%	2.1%
-300	-5.1%	-23.6%

Given a linear 200bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would increase by 1.1% and net income would increase by 6.5%.  A 200bp decrease in interest rates would decrease net interest income by 5.2% and decrease net income by 23.8%.  Given a linear 300bp increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would decrease by 0.1% and net income would increase by 2.1%.  A 300bp decrease in interest rates would decrease net interest income by 5.1% and decrease net income by 23.6%.  Management does not expect any significant adverse effect to net interest income in 2012 based on the composition of the portfolio and anticipated trends in rates.

OTHER INFORMATION

The global and U.S. economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past several years.  Dramatic declines in the housing market, along with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

Reflecting concern about the stability of the financial markets, many national and regional lenders have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions.  The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result.  Volatility and disruption in the capital and credit markets have reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength.

UNITED BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OTHER INFORMATION (CONTINUED)

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008.  The EESA authorized the U.S. Treasury Department (“Treasury”) to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law, which brings significant financial reform.  Compliance with the Act’s provisions may curtail the Corporation’s revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Corporation’s business or financial results in the future.

FORWARD-LOOKING STATEMENTS

This report includes certain forward-looking statements by the Corporation relating to such matters as anticipated operating results, prospects for new lines of business, technological developments, economic trends (including interest rates), and similar matters.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions.  While the Corporation believes that the assumptions underlying the forward looking statements contained herein and in other public documents are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements.  Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to:  economic conditions, volatility and direction of market interest rates, governmental legislation and regulation, material unforeseen changes in the financial condition or results of operations of the Corporation’s customers, customer reaction to and unforeseen complications with respect to the integration of acquisition, product design initiative, and other risks identified, from time-to-time in the Corporation’s other public documents on file with the Securities and Exchange Commission.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

United Bancshares, Inc.

Columbus Grove, Ohio

We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011.  These consolidated financial statements are the responsibility of the Corporation’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancshares, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

Toledo, Ohio

March 28, 2012

UNITED BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

ASSETS	2011			2010
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	8,865,206		$	8,253,990
Interest-bearing deposits in other banks		48,389,046			40,349,646
Federal funds sold		32,722			-
Total cash and cash equivalents		57,286,974			48,603,636
SECURITIES, available-for-sale		151,955,957			140,440,361
FEDERAL HOME LOAN BANK STOCK, at cost		4,893,800			4,893,800
CERTIFICATES OF DEPOSIT, at cost		1,743,000			-
LOANS HELD FOR SALE		2,753,505			259,900
LOANS		337,946,708			383,647,487
Less allowance for loan losses		8,543,367			8,016,786
Net loans		329,403,341			375,630,701
PREMISES AND EQUIPMENT, net		9,581,311			9,933,432
GOODWILL		8,554,979			8,554,979
CORE DEPOSIT INTANGIBLE ASSETS, net		214,500			255,357
CASH SURRENDER VALUE OF LIFE INSURANCE		13,335,587			12,894,671
OTHER REAL ESTATE OWNED		2,833,500			4,524,729
OTHER ASSETS, including accrued interest receivable		4,488,210			6,624,989
TOTAL ASSETS	$	587,044,664		$	612,616,555
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing	$	66,399,124		$	50,404,847
Interest-bearing		414,086,441			438,245,779
Total deposits		480,485,565			488,650,626
Other borrowings		32,780,963			55,777,834
Junior subordinated deferrable interest debentures		10,300,000			10,300,000
Other liabilities		3,730,422			2,883,032
Total liabilities		527,296,950			557,611,492
SHAREHOLDERS’ EQUITY
Common stock, stated value $1.00, authorized 10,000,000 shares; issued 3,760,557 shares		3,760,557			3,760,557
Surplus		14,660,579			14,660,000
Retained earnings		42,543,363			39,600,718
Accumulated other comprehensive income		3,598,031			1,810,684
Treasury stock, at cost, 314,878 shares in 2011 and 315,668 shares in 2010		(4,814,816	)		(4,826,896	)
Total shareholders’ equity		59,747,714			55,005,063
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	587,044,664		$	612,616,555

The accompanying notes are an integral part of the consolidated financial statements.

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
INTEREST INCOME
Loans, including fees	$	21,169,719		$	24,268,758		$	26,567,451
Securities:
Taxable		3,018,435			3,930,341			4,259,284
Tax-exempt		1,935,623			1,987,585			1,997,099
Other		337,218			77,537			43,241
Total interest income		26,460,995			30,264,221			32,867,075
INTEREST EXPENSE
Deposits		5,540,060			6,238,475			8,801,736
Borrowings		1,785,806			2,720,852			3,515,156
Total interest expense		7,325,866			8,959,327			12,316,892
Net interest income		19,135,129			21,304,894			20,550,183
PROVISION FOR LOAN LOSSES		4,375,000			6,550,000			7,525,000
Net interest income after provision for loan losses		14,760,129			14,754,894			13,025,183
NON-INTEREST INCOME
Service charges on deposit accounts		1,099,424			1,187,987			1,331,379
Gain on sale of loans		492,747			866,562			1,375,729
Net securities gains		896,764			278,242			129,493
Change in fair value of mortgage servicing rights		(314,566	)		(141,587	)		195,101
Increase in cash surrender value of life insurance		456,584			492,687			512,152
Other operating income		1,199,969			1,033,802			948,121
Total non-interest income		3,830,922			3,717,693			4,491,975
NON-INTEREST EXPENSES
Salaries, wages and employee benefits		7,932,975			7,718,080			7,430,903
Occupancy expenses		1,505,033			1,511,765			1,435,041
Other operating expenses		6,108,398			6,292,060			5,612,618
Total non-interest expenses		15,546,406			15,521,905			14,478,562
Income before income taxes		3,044,645			2,950,682			3,038,596
PROVISION FOR INCOME TAXES		102,000			143,000			156,000
NET INCOME	$	2,942,645		$	2,807,682		$	2,882,596
NET INCOME PER SHARE (basic and diluted)	$	.85		$	.82		$	.84

The accompanying notes are an integral part of the consolidated financial statements.

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2011, 2010 and 2009

	Common stock		Surplus		Retained earnings			Accumulated other compre- hensive income (loss)			Treasury stock			Total
BALANCE AT DECEMBER 31, 2008	$	3,760,557	$	14,659,661	$	37,528,026		$	(412,304	)	$	(4,876,225	)	$	50,659,715
Comprehensive income:
Net income		-		-		2,882,596			-			-			2,882,596
Change in net unrealized gain (loss), net of reclassification adjustments and income taxes		-		-		-			2,772,125			-			2,772,125
Total comprehensive income															5,654,721
Sale of 2,103 treasury shares		-		-		(1,525	)		-			32,157			30,632
Cash dividends declared, $0.60 per share		-		-		(2,065,963	)		-			-			(2,065,963	)
BALANCE AT DECEMBER 31, 2009		3,760,557		14,659,661		38,343,134			2,359,821			(4,844,068	)		54,279,105
Comprehensive income:
Net income		-		-		2,807,682			-			-			2,807,682
Change in net unrealized gain (loss), net of reclassification adjustments and income taxes		-		-		-			(549,137	)		-			(549,137	)
Total comprehensive income															2,258,545
Sale of 1,123 treasury shares		-		339		-			-			17,172			17,511
Cash dividends declared, $0.45 per share		-		-		(1,550,098	)		-			-			(1,550,098	)
BALANCE AT DECEMBER 31, 2010		3,760,557		14,660,000		39,600,718			1,810,684			(4,826,896	)		55,005,063
Comprehensive income:
Net income		-		-		2,942,645			-			-			2,942,645
Change in net unrealized gain (loss), net of reclassification adjustments and income taxes		-		-		-			1,787,347			-			1,787,347
Total comprehensive income															4,729,992
Sale of 790 treasury shares		-		579		-			-			12,080			12,659
BALANCE AT DECEMBER 31, 2011	$	3,760,557	$	14,660,579	$	42,543,363		$	3,598,031		$	(4,814,816	)	$	59,747,714

The accompanying notes are an integral part of the consolidated financial statements.

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,942,645		$	2,807,682		$	2,882,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		697,967			647,006			984,573
Deferred income taxes		(232,354	)		(865,711	)		(280,565	)
Provision for loan losses		4,375,000			6,550,000			7,525,000
Gain on sale of loans		(492,747	)		(866,562	)		(1,375,729	)
Net securities gains		(896,764	)		(278,242	)		(129,493	)
Change in fair value of mortgage servicing rights		314,566			141,587			(195,101	)
Loss on sale or write-down of other real estate owned		334,840			255,044			29,911
Increase in cash surrender value of life insurance		(456,584	)		(492,687	)		(512,152	)
Net amortization (accretion) of security premiums and discounts		679,290			382,312			(21,986	)
Provision for deferred compensation		25,396			25,085			107,371
Loss (gain) on disposal or write-down of premises and equipment and other assets		-			1,550			(2,472	)
Proceeds from sale of loans held-for-sale		26,963,182			36,038,510			66,651,013
Originations of loans held-for-sale		(26,638,777	)		(35,486,987	)		(65,645,945	)
Decrease (increase) in other assets		1,765,560			1,846,312			(3,411,864	)
Increase (decrease) in other liabilities		208,695			(361,507	)		(1,045,014	)
Net cash provided by operating activities		9,589,915			10,343,392			5,560,143
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities		18,370,945			9,399,659			3,228,921
Proceeds from maturities of available-for-sale securities, including paydowns on mortgage-backed securities		38,561,926			41,493,304			29,800,007
Purchases of available-for-sale securities		(65,522,891	)		(53,683,058	)		(30,765,319	)
Proceeds from branch acquisition		-			22,260,144			-
Purchase of certificates of deposit		(1,743,000	)		-			-
Net decrease (increase) in loans		38,855,755			20,017,232			(710,284	)
Purchases of premises and equipment		(168,327	)		(313,671	)		(371,339	)
Proceeds from sale of premises and equipment		-			-			39,471
Proceeds from sale of other real estate owned		1,854,389			2,733,862			168,650
Proceeds from sale of former branch		-			-			187,240
Insurance proceeds from casualty loss		-			-			145,000
Net cash provided by investing activities		30,208,797			41,907,472			1,722,347

The accompanying notes are an integral part of the consolidated financial statements.

UNITED BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	(8,056,061	)	$	(7,335,473	)	$	4,876,840
Other borrowings:
Proceeds		-			-			5,000,000
Repayments		(17,035,212	)		(21,550,300	)		(19,513,729	)
Change in customer repurchase agreements		(5,961,659	)		(578,454	)		6,167,934
Proceeds from sale of treasury shares		12,659			17,511			30,632
Payments of deferred compensation		(75,101	)		(30,303	)		(20,608	)
Cash dividends paid		-			(1,550,098	)		(2,065,963	)
Net cash used in financing activities		(31,115,374	)		(31,027,117	)		(5,524,894	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,683,338			21,223,747			1,757,596
CASH AND CASH EQUIVALENTS
At beginning of year		48,603,636			27,379,889			25,622,293
At end of year	$	57,286,974		$	48,603,636		$	27,379,889
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest	$	7,436,939		$	9,563,566		$	12,909,515
Federal income taxes	$	-		$	1,075,000		$	1,500,000
Non-cash operating activity:
Change in deferred income taxes on net unrealized gain or loss on available-for-sale securities	$	920,755		$	282,889		$	(1,428,065	)
Non-cash investing activities:
Transfer of loans to other real estate owned	$	498,000		$	2,343,000		$	5,119,196
Change in net unrealized gain or loss on available-for-sale securities	$	(2,708,102	)	$	(832,026	)	$	4,200,190

The accompanying notes are an integral part of the consolidated financial statements.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

United Bancshares, Inc. (the “Corporation”) was incorporated in 1985 in the state of Ohio as a single-bank holding company for The Union Bank Company (the “Bank”).  The Corporation subsequently acquired the Bank of Leipsic Company (“Leipsic”) in 2000 and Citizens Bank of Delphos (“Citizens”) in 2001.  The Bank acquired the Gibsonburg and Pemberville, Ohio branch offices of RFC Banking Company in 2003.  Effective February 1, 2007, the Bank formed a wholly-owned subsidiary, UBC Investments, Inc. (“UBC”) to hold and manage its securities portfolio.  The operations of UBC are located in Wilmington, Delaware.  Effective December 4, 2009, the Bank formed a wholly-owned subsidiary, UBC Property, Inc. to hold and manage certain other real estate owned.  The Bank acquired the Findlay, Ohio branch of The Home Savings and Loan Company in March 2010, as more fully described in Note 3.  The operating results of the branch subsequent to the acquisition are included in the Corporation’s consolidated financial statements.

The Corporation, through its wholly-owned subsidiary, the Bank, operates in one industry segment, the commercial banking industry.  The Bank, organized in 1904 as an Ohio-chartered bank, is headquartered in Columbus Grove, Ohio, with branch offices in Bowling Green, Delphos, Findlay, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville Ohio.

The primary source of revenue of the Bank is providing loans to customers primarily located in Northwestern and West Central Ohio.  Such customers are predominately small and middle-market businesses and individuals.

Significant accounting policies followed by the Corporation are presented below.

Use of Estimates in Preparing Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period.  Actual results could differ from those estimates.  The estimates most susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of servicing assets and goodwill, and fair value of securities and other financial instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within four days.

Restrictions on Cash

The Bank was required to maintain cash on hand or on deposit with the Federal Reserve Bank in the amount of $508,000 and $410,000 at December 31, 2011 and 2010, respectively, to meet regulatory reserve and clearing requirements.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Securities, Federal Home Loan Bank Stock and Certificates of Deposits

Securities are classified as available-for-sale and recorded at fair value, with unrealized gains and losses, net of applicable income taxes, excluded from income and reported as accumulated other comprehensive income (loss).

The cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Declines in fair value of securities below their cost that are deemed to be other-than-temporary are reflected in income as realized losses.  In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the securities and the more likely than not requirement that the Corporation will be required to sell the securities prior to recovery, (2) the length of time and the extent to which the fair value has been less than cost, and (3) the financial condition and near-term prospects of the issuer.  Gains and losses on the sale of securities are recorded on the trade date, using the specific identification method, and are included in non-interest income.

Investment in Federal Home Loan Bank of Cincinnati stock is classified as a restricted security, carried at cost, and evaluated for impairment.

Investment in certificates of deposit are carried at cost and evaluated for impairment annually or when circumstances change that may have a significant effect on fair value.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate.  Estimated fair value is determined based on quoted market prices in the secondary market.  Any net unrealized losses are recognized through a valuation allowance by charges to income.  The Bank had no unrealized losses at December 31, 2011 and 2010.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally stated at its outstanding principal amount adjusted for charge-offs and the allowance for loan losses.  Interest is accrued as earned based upon the daily outstanding principal balance.  Loan origination fees and certain direct obligation costs are capitalized and recognized as an adjustment of the yield of the related loan.

The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Personal loans are typically charged-off no later than when they become 150 days past due.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income.  Interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  Due to potential changes in conditions, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Corporation’s consolidated financial statements.

The allowance consists of specific, general and unallocated components.  The specific component relates to impaired loans when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component covers classified loans (substandard or special mention) without specific reserves, as well as non-classified loans, and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Under certain circumstances, the Bank will provide borrowers relief through loan restructurings.  A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Bank for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider.  Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDRs are considered impaired and measured for impairment as described above.  TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and fair value adjustments are included in other operating expenses.

Loan Sales and Servicing

Certain mortgage loans are sold with mortgage servicing rights retained or released by the Bank.  The carrying value of mortgage loans sold with servicing rights retained is reduced by the cost allocated to the associated mortgage servicing rights.  Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.  The Bank generally estimates fair value for servicing rights based on the present value of future expected cash flows, using management’s best estimates of the key assumptions – credit losses, prepayment speeds, servicing costs, and discount rates commensurate with the risks involved.

Capitalized servicing rights are reported at fair value and changes in fair value are reported in net income for the period the change occurs.

Servicing fee income is recorded for servicing loans, based on a contractual percentage of the outstanding principal, and is reported as other operating income.  Amortization of mortgage servicing rights is charged against loan servicing fee income.

Premises and Equipment

Premises and equipment is stated at cost, less accumulated depreciation.  Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income.  Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed primarily using the straight-line method.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Premises and equipment is reviewed for impairment when events indicate the carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, premises and equipment is recorded at fair value and any corresponding write-downs are charged against current year earnings.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under commercial letters of credit, and standby letters of credit.  Such financial instruments are recorded when they are funded.

Goodwill and Core Deposit Intangible Assets

Goodwill arising from the Gibsonburg, Pemberville and Findlay branch acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred.  The core deposit intangible asset, resulting from the Gibsonburg and Pemberville branch acquisitions, was determined to have a definite life and was amortized on a straight-line basis over seven years through March 2010.  The core deposit intangible asset resulting from the Findlay branch acquisition was also determined to have a definite life and is being amortized on a straight-line basis over seven years through March 2017.  Future amortization of the core deposit intangible asset is $40,857 annually for years 2012 through 2016 and $10,215 in 2017.

Supplemental Retirement Benefits

Annual provisions are made for the estimated liability for accumulated supplemental retirement benefits under agreements with certain officers and directors.  These provisions are determined based on the terms of the agreements, as well as certain assumptions, including estimated service periods and discount rates.

Advertising Costs

All advertising costs are expensed as incurred.

Income Taxes

Deferred income taxes are provided on temporary differences between financial statement and income tax reporting.  Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and its tax bases.  Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards.  Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized.  Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.

Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon examination by a taxing authority is considered to be 50% or less.  The Corporation has adopted the policy of classifying any interest and penalties resulting from the filing of its income tax returns in the provision for income taxes.

The Corporation is not currently subject to state or local income taxes.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest.  A participating interest in a financial asset has all of the following characteristics:  (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.

Per Share Data

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year.  Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.

The weighted average number of shares used for the years ended December 31, 2011, 2010 and 2009:

	2011		2010		2009
Basic		3,445,469		3,444,703		3,443,093
Diluted		3,445,469		3,444,703		3,443,283

Dividends per share are based on the number of shares outstanding at the declaration date.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Rate Lock Commitments

Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale are accounted for as derivative instruments.  The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments).  Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives.  Accordingly, such commitments, along with any related fees received from potential borrowers, are to be recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans.  Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.  At December 31, 2011 and 2010, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial statements.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 21.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

Subsequent Events

Management evaluated subsequent events through the date the consolidated financial statements were issued.  Events or transactions occurring after December 31, 2011, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2011, have been recognized in the financial statements for the year ended December 31, 2011.  Events or transactions that provided evidence about conditions that did not exist at December 31, 2011 but arose before the financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2011.

Reclassifications

Certain reclassifications of 2010 amounts have been made to conform to the 2011 presentation.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures, which provides amendments to ASC 820-10. This standard enhanced information reported to users of the financial statements by providing additional disclosures about the fair value measurements.  This standard was effective for the Company as of January 1, 2010; except for the purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have an impact on the Corporation’s financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The new guidance increased disclosures made about the credit quality of loans and the allowance for credit losses.  The disclosures provide additional information about the nature of credit risk inherent in the Corporation’s loans, how credit risk is analyzed and assessed, and the reasons for the change in the allowance for loan losses.  The requirements were generally effective for the Corporation’s year ended December 31, 2010 and the appropriate required disclosures were made in the consolidated financial statements. In January 2011, the FASB issued ASU 2011-01 delaying the effective date of the disclosures in ASU 2010-20 related to troubled debt restructuring until the second quarter of 2011 when FASB issued ASU 2011-02 A Creditors Determination of whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 provided clarification when a loan modification or restructuring is considered a troubled debt restructuring and required reconsideration based on the clarification for loan modifications and restructuring occurring after January 1, 2011. The adoption of ASU 2011-02 did not have a material impact on the Corporation’s consolidated financial statements.

In April 2011, The FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreement, amending ASC topic 860 to improve accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity by removing, from the assessment of effective control, the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Consequently, the amendments in this Update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this standard is not expected to have an impact on the Corporation’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement; amending ASC topic 820 which eliminates terminology difference between U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) on the measurement of fair value and the related fair value disclosures. While largely consistent with existing fair value measurement principles and disclosures, the changes were made as part of the continuing efforts to converge GAAP and IFRS. The adoption of this guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In June 2011, the FASB issued ASU 2011-05 Comprehensive Income, amending ASC topic 220 to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. In December 2011, the FASB issued ASU 2011-12 to defer changes in ASU 2011-05 that relate to the presentation of reclassification adjustments until FASB has time to reconsider the presentation of such adjustments, The remaining portion of ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, amending topic 350 to provide the option of a qualitative approach to test goodwill for impairment. The amendment allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC topic 350. The entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted for annual or interim periods that were not yet issued. The Corporation does not expect the adoption of this standard to have any impact on the Corporation’s financial statements.

NOTE 3 - BRANCH ACQUISITION

On November 30, 2009, the Bank entered into an agreement to purchase the Findlay, Ohio branch of The Home Savings and Loan Company. Under the terms of the agreement, the Bank assumed all deposits and purchased the related branch premises and certain loans. The transaction was completed in March 2010 with assets acquired and deposits assumed being recorded at their estimated fair values as follows:

Cash	$	22,260,144
Loans		1,804,505
Bank premises		1,021,000
Goodwill		1,272,966
Core deposit intangible asset		286,000
Total assets acquired	$	26,644,615
Deposits assumed	$	26,644,615

Cash proceeds from the branch acquisition were used to fund $10 million of brokered certificates of deposit and $16.5 million of FHLB borrowings that matured during the second quarter of 2010.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – SECURITIES

The amortized cost and fair value of securities as of December 31, 2011 and 2010 are as follows:

	2011				2010
	Amortized cost		Fair value		Amortized cost		Fair value
Available-for-sale:
U.S. Government and agencies	$	7,506,147	$	7,520,670	$	-	$	-
Obligations of states and political subdivisions		46,459,322		49,310,795		46,547,112		47,298,232
Mortgage-backed		92,037,038		94,599,469		90,647,900		92,632,687
Other		501,888		525,023		501,888		509,442
Total	$	146,504,395	$	151,955,957	$	137,696,900	$	140,440,361

A summary of unrealized gains and losses on securities at December 31, 2011 and 2010 follows:

	2011				2010
	Gross unrealized gains		Gross unrealized losses		Gross unrealized gains		Gross unrealized losses
Available-for-sale:
U.S. Government and agencies	$	16,318	$	1,795	$	-	$	-
Obligations of states and political subdivisions		2,855,507		4,034		989,596		238,476
Mortgage-backed		2,570,111		7,680		2,529,120		544,333
Other		23,135		-		7,554		-
Total	$	5,465,071	$	13,509	$	3,526,270	$	782,809

The amortized cost and fair value of securities at December 31, 2011, by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
Due in one year or less	$	845,916	$	868,686
Due after one year through five years		11,312,586		11,514,873
Due after five years through ten years		17,843,616		18,972,817
Due after ten years		116,000,389		120,074,558
Other securities having no maturity date		501,888		525,023
Total	$	146,504,395	$	151,955,957

Securities with a carrying value of approximately $51,780,000 at December 31, 2011 and $92,860,000 at December 31, 2010 were pledged to secure public deposits and for other purposes as required or permitted by law.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - SECURITIES (CONTINUED)

The following table presents gross unrealized losses and fair value of debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:

	Securities in a continuous unrealized loss position
	Less than 12 months				12 months or more				Total
2011	Unrealized losses		Fair value		Unrealized Losses		Fair value		Unrealized losses		Fair value
U.S. Government and agencies	$	1,795	$	997,970	$	-	$	-	$	1,795	$	997,970
Obligations of states and political subdivisions		4,034		1,594,949		-		-		4,034		1,594,949
Mortgage-backed		7,680		2,925,922		-		-		7,680		2,925,922
Total temporarily impaired securities	$	13,509	$	5,518,841	$	-	$	-	$	13,509	$	5,518,841

2010
Obligations of states and political subdivisions	$	238,476	$	14,114,225	$	-	$	-	$	238,476	$	14,114,225
Mortgage-backed		544,333		23,998,771		-		-		544,333		23,998,771
Total temporarily impaired securities	$	782,809	$	38,112,996	$	-	$	-	$	782,809	$	38,112,996

There were five securities in an unrealized loss position at December 31, 2011, none of which were in a continuous unrealized loss position for twelve months or more.  Management has considered industry analyst reports, whether downgrades by bond rating agencies have occurred, sector credit reports, issuer’s financial condition, the Corporation’s ability to hold securities to maturity, and volatility in the bond market, in concluding that the unrealized losses as of December 31, 2011 were primarily the result of customary and expected fluctuations in the bond market.  As a result, all security impairments as of December 31, 2011 are considered to be temporary.

Gross realized gains from sale of securities, including securities calls, amounted to $897,086 in 2011, $278,242 in 2010, and $130,600 in 2009, with the income tax provision applicable to such gains amounting to $305,009 in 2011, $94,602 in 2010, and $44,404 in 2009.  Gross realized losses from sale of securities amounted to $322 in 2011 and $1,107 in 2009 (none in 2010), with related income tax effect of $109 in 2011, and $376 in 2009.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS

Loans at December 31, 2011 and 2010 consist of the following:

	2011		2010
Residential real estate	$	62,134,624	$	70,070,938
Commercial		223,734,858		242,535,050
Agriculture		46,719,505		63,122,110
Consumer		5,357,721		7,919,389
Total loans	$	337,946,708	$	383,647,487

Fixed rate loans approximated $61,115,000 at December 31, 2011 and $70,000,000 at December 31, 2010.  Certain commercial and agricultural loans are secured by real estate.

Most of the Bank’s lending activities are with customers located in Northwestern and West Central Ohio.  As of December 31, 2011 and 2010, the Bank’s loans from borrowers in the agriculture industry represent the single largest industry and amounted to $46,719,505 and $63,122,110 respectively.  Agriculture loans are generally secured by property and equipment.  Repayment is primarily expected from cash flow generated through the harvest and sale of crops or milk production for dairy products.  Agriculture customers are subject to various risks and uncertainties which can adversely impact the cash flow generated from their operations, including weather conditions; milk production; health and stability of livestock; costs of key operating items such as fertilizer, fuel, seed, or animal feed; and market prices for crops, milk, and livestock.  Credit losses arising from the Bank’s lending experience in the agriculture industry compare favorably with the Bank’s loss experience on their loan portfolio as a whole.  Credit evaluation of agricultural lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received.

The Bank originates 1-4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1-4 family loans are generally in accordance with FHLMC manual underwriting guidelines.  Properties securing 1-4 four-family real estate loans are appraised by fee appraisers, which is independent of the loan origination function and has been approved by the Board of Directors and the Loan Policy Committee  The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance.  The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan.  To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis.  The Bank’s 1-4 family real estate loans are secured primarily by properties located in its primary market area.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – LOANS (CONTINUED)

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Loan to value is generally 75% of the cost or value of the assets.  Appraisals on properties securing these loans are performed by fee appraisers approved by the Board of Directors.  Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.  Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank may require guarantees on these loans.  The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.  This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and/or hail insurance may be required for agricultural borrowers.  Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is primarily in its primary market area.

The Bank maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2011, 2010, and 2009:

	2011			2010			2009
Balance at beginning of year	$	8,016,786		$	4,803,595		$	3,198,130
Provision charged to operations		4,375,000			6,550,000			7,525,000
Loans charged-off		(4,238,203	)		(3,823,427	)		(6,276,801	)
Recoveries of loans charged-off		389,784			486,618			357,266
Total	$	8,543,367		$	8,016,786		$	4,803,595

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – LOANS (CONTINUED)

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2011:

				Commercial
				and			Residential
	Commercial			multi-family real estate			1 – 4 family real estate			Consumer			Total
Balance at December 31, 2010	$	2,886,467		$	3,915,323		$	886,879		$	328,117		$	8,016,786
Provision charged to expenses		195,588			3,918,741			485,876			(225,205	)		4,375,000
Losses charged off		(503,218	)		(3,131,582	)		(515,469	)		(87,934	)		(4,238,203	)
Recoveries		17,792			144,752			141,655			85,585			389,784
Balance at December 31, 2011	$	2,596,629		$	4,847,234		$	998,941		$	100,563		$	8,543,367

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011 and 2010:

			Commercial
			and		Residential
	Commercial		multi-family real estate		1 – 4 family real estate		Consumer		Total
2011
Allowance for loan losses:
Attributable to loans individually evaluated for impairment	$	754,874	$	1,235,351	$	-	$	-	$	1,990,225
Collectively evaluated for impairment		1,841,755		3,611,883		998,941		100,563		6,553,142
Total allowance for loan losses	$	2,596,629	$	4,847,234	$	998,941	$	100,563	$	8,543,367
Loans:
Individually evaluated for impairment	$	3,972,618	$	16,842,092	$	172,494	$	-	$	20,987,204
Collectively evaluated for impairment		58,349,383		191,290,270		61,962,130		5,357,721		316,959,504
Total ending loans balance	$	62,322,001	$	208,132,362	$	62,134,624	$	5,357,721	$	337,946,708

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

			Commercial
			and		Residential
	Commercial		multi-family  real estate		1 – 4 family real estate		Consumer		Total
2010
Allowance for loan losses:
Attributable to loans individually evaluated for impairment	$	252,263	$	439,517	$	-	$	-	$	691,780
Collectively evaluated for impairment		2,634,204		3,543,396		886,879		260,527		7,325,006
Total allowance for loan losses	$	2,886,467	$	3,982,913	$	886,879	$	260,527	$	8,016,786
Loans:
Individually evaluated for impairment	$	3,663,669	$	11,834,092	$	190,864	$	-	$	15,688,625
Collectively evaluated for impairment		75,462,368		214,697,031		69,880,074		7,919,389		367,958,862
Total ending loans balance	$	79,126,037	$	226,531,123	$	70,070,938	$	7,919,389	$	383,647,487

Impaired loans were as follows as of December 31, 2011 and 2010:

	2011		2010
Loans with no allowance for loan losses allocated	$	7,660,276	$	9,612,896
Loans with allowance for loan losses allocated		13,326,928		6,075,729
Total impaired loans	$	20,987,204	$	15,688,625
Amount of the allowance allocated to impaired loans	$	1,990,225	$	691,780

The following is a summary of the activity in the allowance for loan losses of impaired loans, which is a part of the Bank’s overall allowance for loan losses for the years ended December 31, 2011, 2010, and 2009:

	2011			2010			2009
Balance at beginning of year	$	691,780		$	1,228,814		$	1,054,518
Provision charged to operations		4,409,468			2,157,658			5,640,681
Loans charged-off		(3,111,023	)		(2,694,692	)		(5,466,385	)
Balance at end of year	$	1,990,225		$	691,780		$	1,228,814

No additional funds are committed to be advanced in connection with impaired loans.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

The average balance of impaired loans approximated $19,429,000 in 2011, $15,487,000 in 2010, and $7,851,000 in 2009.  There was approximately $229,000 and $95,000 in interest income recognized by the Bank on impaired loans on an accrual or cash basis during 2011 and 2010, respectively (none in 2009).

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011 and 2010:

	2011				2010
	Recorded  investment		Allowance for  loan losses allocated		Recorded investment		Allowance for loan losses  allocated
With no related allowance recorded:
Commercial	$	-	$	-	$	2,381,774	$	-
Commercial and multi-family real estate		5,184,050		-		7,040,255		-
Agriculture		2,303,732		-		-		-
Agricultural real estate		-		-		-		-
Consumer		-		-		-		-
Residential 1 – 4 family real estate		172,494		-		190,864		-
With an allowance recorded:
Commercial		619,618		619,618		1,281,895		252,263
Commercial and multi-family real estate		10,870,325		1,235,351		4,793,837		439,517
Agriculture		1,836,985		135,256		-		-
Agricultural real estate		-		-		-		-
Consumer		-		-		-		-
Residential 1 – 4 family real estate		-		-		-		-
Total	$	20,987,204	$	1,990,225	$	15,688,625	$	691,780

Loans on non-accrual of interest approximated $21,700,000 and $16,497,000 at December 31, 2011 and 2010, respectively.  Loans past due 90 days or more and still accruing interest approximated $55,000 and $126,000 at December 31, 2011 and 2010, respectively.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

The following table presents the recorded investment in nonaccrual loans, loans past due over 90 days still on accrual and troubled debt restructurings by class of loans as of December 31, 2011 and 2010:

	2011						2010
	Nonaccrual		Loans past  due over 90  days still accruing		Troubled Debt Restructurings		Nonaccrual		Loans past due over 90  days still accruing		Troubled Debt Restructurings
Commercial	$	684,763	$	-	$	619,618	$	40,460	$	-	$	1,008,556
Commercial real estate		15,887,322		-		10,209,573		9,604,525		-		4,417,357
Agricultural real estate		1,074,694		-		-		1,350,336		-		175,768
Agriculture		1,064,282		-		2,303,732		2,272,939		-		-
Consumer		97		9,437		-		3,244		65,229		-
Residential:
1 – 4 family		2,867,753		26,002		57,192		3,077,011		55,745		59,439
Home equity		121,230		20,003		-		148,902		4,992		-
Total	$	21,700,141	$	55,442	$	13,190,115	$	16,497,417	$	125,966	$	5,661,120

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 and 2010 by class of loans:

	30 – 59 days past due		60 – 89 days past due		Greater than 90 days past due		Total past due		Loans not past due		Total
2011
Commercial	$	264,350	$	503,099	$	19,356	$	786,805	$	43,816,740	$	44,603,545
Commercial real estate		2,072,253		1,929,564		4,831,138		8,832,955		170,298,358		179,131,313
Agriculture		-		-		1,029,883		1,029,883		16,688,573		17,718,456
Agricultural real estate		-		-		933,945		933,945		28,067,104		29,001,049
Consumer		150,626		29,222		9,534		189,382		5,168,339		5,357,721
Residential real estate		2,244,462		877,860		544,990		3,667,312		58,467,312		62,134,624
Total	$	4,731,691	$	3,339,745	$	7,368,846	$	15,440,282	$	322,506,426	$	337,946,708

2010
Commercial	$	-	$	379,365	$	-	$	379,365	$	53,529,128	$	53,908,493
Commercial real estate		2,294,126		262,242		6,367,537		8,923,905		179,702,652		188,626,557
Agriculture		496,575		106,984		1,338,671		1,942,230		23,275,314		25,217,544
Agricultural real estate		275,437		27,377		898,625		1,201,438		36,703,128		37,904,566
Consumer		127,817		51,934		65,228		244,979		7,414,510		7,659,489
Residential real estate		1,626,599		720,314		1,456,454		3,803,367		66,527,471		70,330,838
Total	$	4,820,554	$	1,548,216	$	10,126,514	$	16,495,284	$	367,152,203	$	383,647,487

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

Credit Quality Indicators:

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Bank analyzes loans individually by classifying the loans as to the credit risk.  This analysis generally includes loans with an outstanding balance greater than $100,000 and non-homogenous loans, such as commercial and commercial real estate loans.  This analysis is performed on a quarterly basis.  The Bank uses the following definitions for risk ratings:

· Special Mention:  Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification.  Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.  The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered "potential", versus "defined", impairments to the primary source of loan repayment.

· Substandard:  These loans are inadequately protected by the current sound net worth and paying ability of the borrower.  Loans of this type will generally display negative financial trends such as poor or negative net worth, earnings or cash flow.  These loans may also have historic and/or severe delinquency problems, and bank management may depend on secondary repayment sources to liquidate these loans.  The bank could sustain some degree of loss in these loans if the weaknesses remain uncorrected.

· Doubtful:  Loans in this category display a high degree of loss, although the amount of actual loss at the time of classification is undeterminable.  This should be a temporary category until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  Loans listed as not rated are generally either less than $100,000 or are included in groups of homogenous loans.  As of December 31, 2011 and 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Not rated
2011
Commercial	$	54,683,831	$	2,966,782	$	3,768,348	$	903,040	$	-
Commercial and multi-family real estate		170,750,804		9,245,517		27,202,096		933,945		-
Residential 1 – 4 family		-		257,860		245,204		12,976		61,618,584
Consumer		-		2,538		18,716		-		5,336,467
Total	$	225,434,635	$	12,472,697	$	31,234,364	$	1,849,961	$	66,955,051

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

	Pass		Special Mention		Substandard		Doubtful		Not rated
2010
Commercial	$	70,136,217	$	4,553,372	$	2,324,007	$	2,112,441	$	-
Commercial and multi-family real estate		193,224,417		6,314,661		26,058,100		933,945		-
Residential 1 – 4 family		-		305,505		3,485,129		16,926		66,523,278
Consumer		-		-		-		-		7,919,389
Total	$	263,360,634	$	11,173,538	$	31,867,236	$	3,063,312	$	74,442,667

The Bank considers the performance of the loan portfolio and its impact on the allowance for loan losses.  For residential 1 – 4 family and consumer loan classes, the Bank also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  The following table presents the recorded investment in residential 1 – 4 family and consumer loans that are not risk rated, based on payment activity as of December 31, 2011 and 2010:

	2011				2010
	Consumer		Residential 1 – 4 family		Consumer		Residential 1 – 4 family
Performing	$	5,326,933	$	60,070,730	$	7,854,161	$	65,223,251
Nonperforming		9,534		1,547,854		65,228		1,300,027
Total	$	5,336,467	$	61,618,584	$	7,919,389	$	66,523,278

Purchased Loans:

From time to time, the Bank enters into loan participation agreements to purchase loans and also acquired loans through the Findlay branch acquisition described in Note 3.  At December 31, 2011, the Bank held no loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

Modifications:

The Bank’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  All TDRs are also classified as impaired loans.

When the Bank modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except with the sole (remaining) source of repayment for the loan in the operation or liquidation of the collateral.  In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows.  If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment is recognized through a specific reserve in the allowance or a direct write down of the loan balance if collection is not expected.

The following table includes the recorded investment and number of modifications for TDR loans during the year ended December 31, 2011.

	Number of modifications		Recorded investment		Allowance for loan losses  allocated
Troubled Debt Restructurings:
Commercial Real Estate		3	$	5,907,121	$	778,541

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan customers of the Bank.  Such loans are made in the ordinary course of business in accordance with the normal lending policies of the Bank, including the interest rate charged and collateralization.  Such loans amounted to $3,013,156 and $3,164,300 at December 31, 2011 and 2010, respectively.  The following is a summary of activity during 2011, 2010, and 2009 for such loans:

	2011			2010			2009
Beginning of year	$	3,164,300		$	3,353,452		$	3,988,374
Additions		35,000			60,997			1,999,262
Repayments		(186,144	)		(250,149	)		(2,634,184	)
End of year	$	3,013,156		$	3,164,300		$	3,353,452

Additions and repayments include loan renewals, as well as net borrowings and repayments under revolving lines-of-credit.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 2011 and 2010:

	2011		2010
Land and improvements	$	2,479,913	$	2,479,913
Buildings		9,008,149		8,969,778
Equipment		4,100,294		4,128,361
		15,588,356		15,578,052
Less accumulated depreciation		6,007,045		5,644,620
Premises and equipment, net	$	9,581,311	$	9,933,432

Depreciation expense amounted to $520,448 in 2011, $531,937 in 2010 and $493,130 in 2009.

NOTE 7 - SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balance of mortgage loans serviced for others approximated $164,568,000 and $175,931,000 at December 31, 2011 and 2010, respectively.

Mortgage servicing rights are included in other assets in the accompanying consolidated balance sheets.  The Bank has elected to record its mortgage servicing rights using the fair value measurement method.  Significant assumptions used in determining the fair value of servicing rights as of December 31, 2011 and 2010 include:

Prepayment assumptions:	Based on the PSA Standard Prepayment Model
Internal rate of return :	8% to 10%
Servicing costs:	$40 – $55 per loan, annually, increased at the rate of $1 per 1% delinquency based on loan count
Inflation rate of servicing costs:	3%

Following is a summary of mortgage servicing rights activity for the years ended December 31, 2011, 2010 and 2009:

	2011			2010			2009
Fair value at beginning of year	$	1,114,126		$	1,273,525		$	703,388
Capitalized servicing rights – new loan sales		168,342			315,039			612,499
Disposals (amortization based on loan payments and payoffs)		(240,662	)		(332,851	)		(237,463	)
Change in fair value		(314,566	)		(141,587	)		195,101
Fair value at end of year	$	727,240		$	1,114,126		$	1,273,525

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - SERVICING (CONTINUED)

The change in fair value of servicing rights for the year ended December 31, 2011 resulted from changes in external market conditions, including conditions that increased prepayment assumptions, which is a key valuation input used in determining the fair value of servicing.  While prepayment assumptions are constantly changing, such changes are typically within a relatively small parameter from period to period.  However, due to the declines in the secondary market mortgage rates experienced during 2011, the prepayment assumption factor used in determining the fair value of servicing at December 31, 2011 was 465 compared to 321 at December 31, 2010 and 300 at December 31, 2009.

NOTE 8 - PREPAID FDIC ASSESSMENTS

On September 29, 2009, the FDIC adopted a Notice of Proposed Rule making it mandatory that insured depository institutions prepay their quarterly risk-based assessments to the FDIC on December 30, 2009 for the fourth quarter of 2009 and for the years 2010 through 2012. As a result, the Bank had prepaid FDIC assessments amounting to $946,819 at December 31, 2011 and $1,888,581 at December 31, 2010 and such amounts are included in other assets in the accompanying consolidated balance sheets.

NOTE 9 - DEPOSITS

Time deposits at December 31, 2011 and 2010 include individual deposits of $100,000 or more approximating $83,842,000 and $80,791,000, respectively.  Interest expense on time deposits of $100,000 or more approximated $1,311,000 for 2011, and $1,520,000 for 2010.  The bank held no brokered deposits at December 31, 2011 or 2010.  Interest on brokered deposits approximated $158,000 in 2010 and none in 2011.

At December 31, 2011, time deposits approximated $242,740,000 and were scheduled to mature as follows: 2012, $160,986,000; 2013, $25,052,000; 2014, $21,658,000; 2015, $17,976,000; 2016, $14,286,000; and thereafter, $2,782,000.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – OTHER BORROWINGS

Other borrowings consists of the following at December 31, 2011 and 2010:

	2011		2010
Federal Home Loan Bank borrowings:
Secured note, with interest at 4.28%, due June 24, 2011	$	-	$	17,000,000
Secured note, with interest at 2.18%, due July 3, 2012		5,000,000		5,000,000
Secured note, with interest at 4.25% through February 28, 2008, thereafter putable back at the option of the holder, due August 28, 2012		5,000,000		5,000,000
Secured note, with interest at 4.20% through February 28, 2008, thereafter putable back at the option of the holder, due February 28, 2017		10,000,000		10,000,000
Secured note, with interest at 3.95% through September 11, 2008, thereafter putable back at the option of the holder, due September 11, 2017		7,500,000		7,500,000
Advances secured by individual residential mortgages under blanket agreement		64,985		100,197
Total Federal Home Loan Bank borrowings		27,564,985		44,600,197
Customer repurchase agreements with an average outstanding rate of .17% at December 31, 2011 and .25% at December 31, 2010		5,215,978		11,177,637
Total other borrowings	$	32,780,963	$	55,777,834

Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock and eligible mortgage loans approximating $92,165,870 at December 31, 2011.   The interest rates on advances outstanding at December 31, 2011, secured by individual mortgages under blanket agreement, ranged from 2.18% to 8.80%, with varying maturities through July 2019.  At December 31, 2011, the Bank had $17,700,000 of borrowing availability under various line-of-credit agreements with the Federal Home Loan Bank and other financial institutions.

Future contractual maturities of other borrowings, excluding short-term customer repurchase agreements, are as follows at December 31, 2011:  2012, $10,019,214; 2013, $13,722; 2014, $9,858; 2015, $7,514; 2016, $6,426 and thereafter, $17,508,251.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - 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 have a stated maturity date of March 26, 2033.  As of March 26, 2008, and quarterly thereafter, the debentures may be shortened at the Corporation’s option.  The interest rate of the debentures was fixed at 6.40% for a five-year period through March 26, 2008.  Effective March 27, 2008, interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR amounting to 3.72% at December 31, 2011, 3.44% at December 31, 2010 and 3.52% at December 31, 2009, with interest 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 $350,180 in 2011, $353,965 in 2010, and $409,971 in 2009, 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 Tier I capital inclusive of these securities under Federal Reserve Board guidelines.

NOTE 12 - OTHER OPERATING EXPENSES

Other operating expenses consisted of the following for the years ended December 31, 2011, 2010 and 2009:

	2011		2010		2009
Data processing	$	360,003	$	510,621	$	586,143
Professional fees		856,712		953,801		683,860
Franchise tax		397,210		452,185		522,909
Advertising		615,033		546,025		339,246
ATM processing and other fees		249,996		227,685		144,606
Amortization of core deposit intangible asset		40,857		94,218		253,980
Postage		175,993		192,699		192,138
Stationery and supplies		191,832		172,594		123,899
FDIC assessment		995,252		806,533		1,150,962
Loan closing fees		193,151		191,951		154,230
Internet banking		233,961		175,683		181,640
Other real estate owned		505,833		427,712		53,283
Other		1,292,565		1,540,353		1,225,722
Total other operating expenses	$	6,108,398	$	6,292,060	$	5,612,618

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - OTHER COMPREHENSIVE INCOME

The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2011, 2010, and 2009:

	2011			2010			2009
Unrealized holding gains (losses) on available-for-sale securities	$	3,604,865		$	(553,784	)	$	4,329,683
Reclassification adjustments for net securities gains realized in income		(896,764	)		(278,242	)		(129,493	)
Net unrealized gains (losses)		2,708,101			(832,026	)		4,200,190
Tax effect		920,754			(282,889	)		1,428,065
Net-of-tax amount	$	1,787,347		$	(549,137	)	$	2,772,125

NOTE 14 - INCOME TAXES

The provision for income taxes for the years ended December 31, 2011, 2010 and 2009 consist of the following:

	2011			2010			2009
Current	$	334,354		$	1,008,711		$	436,565
Deferred		(232,354	)		(865,711	)		(280,565	)
Total provision for income taxes	$	102,000		$	143,000		$	156,000

The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:

	2011			2010			2009
Expected tax using statutory tax rate of 34%	$	1,035,200		$	1,003,200		$	1,033,100
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and political subdivision loans		(670,000	)		(696,800	)		(706,800	)
Interest expense associated with carrying certain state and municipal securities and political subdivision loans		3,000			4,900			8,600
Tax-exempt income on life insurance contracts		(155,200	)		(167,500	)		(174,100	)
Deductible dividends paid to United Bancshares, Inc. ESOP		(1,500	)		(48,400	)		(61,700	)
Uncertain tax position reserves		(115,100	)		39,700			54,300
Other, net		5,600			7,900			2,600
Total provision for income taxes	$	102,000		$	143,000		$	156,000

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - INCOME TAXES (CONTINUED)

The deferred income tax credit of $232,354 in 2011, $865,711 in 2010, and $280,565 in 2009 resulted from the tax effects of temporary differences.  There was no impact for changes in tax laws and rates or changes in the valuation allowance for deferred tax assets.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented below:

	2011			2010
Deferred tax assets:
Allowance for loan losses	$	2,940,300		$	2,792,000
Deferred compensation		298,700			315,600
Alternative minimum tax credits		395,200			267,900
Nonaccrual loan interest		314,100			192,800
Deferred loan fees		130,400			135,000
Other real estate owned		68,100			33,500
Accrued expenses and other		214,000			119,200
Total deferred tax assets		4,360,800			3,856,000
Deferred tax liabilities:
Unrealized gain on securities available-for-sale		1,853,531			932,777
Federal Home Loan Bank stock dividends		877,500			877,500
Capitalized mortgage servicing rights		247,300			378,800
Depreciation and amortization		1,828,000			1,400,300
Prepaid expenses		85,700			96,800
Other		10,069			22,723
Total deferred tax liabilities		4,902,100			3,708,900
Net deferred tax assets (liabilities)	$	(541,300	)	$	147,100

Net deferred tax assets (liabilities) at December 31, 2011 and 2010 are included in other assets (liabilities) in the consolidated balance sheets.

Management believes it is more likely than not that the benefit of deferred tax assets will be realized.  Consequently, no valuation allowance for deferred tax assets is deemed necessary as of December 31, 2011 and 2010.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - INCOME TAXES (CONTINUED)

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2011			2010
Balance at January 1	$	235,100		$	203,000
Additions based on tax positions related to the current year		23,000			32,100
Additions for tax positions of prior years		-			-
Reductions for tax positions of prior years		(200	)		-
Reductions due to the statute of limitation		(82,300	)		-
Settlements		(48,800	)		-
Balance at December 31	$	126,800		$	235,100

The Corporation had unrecognized tax benefits of $126,800 and $235,100 at December 31, 2011 and 2010, respectively.  Such unrecognized tax benefits, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

The amount of accrued interest, net of federal tax, related to the Corporation’s uncertain tax positions was $8,900 at December 31, 2011 and $15,700 at December 31, 2010, respectively.

The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation and its subsidiaries are no longer subject to examination by taxing authorities for years before 2008.  A federal examination of the Corporation’s 2009 tax year was settled in 2011 resulting in no material impact to the Corporation’s financial position.

NOTE 15 - EMPLOYEE AND DIRECTOR BENEFITS

The Corporation and Bank sponsor a salary deferral, defined contribution plan which provides for both profit sharing and employer matching contributions.  The plan permits investing in the Corporation’s stock subject to certain limitations.  Participants who meet certain eligibility conditions are eligible to participate and defer a specified percentage of their eligible compensation subject to certain income tax law limitations.  The Corporation makes discretionary matching and profit sharing contributions, as approved annually by the Board of Directors, subject to certain income tax law limitations.  Contribution expense for the plan amounted to $519,300, $511,935, and $487,745 in 2011, 2010, and 2009, respectively.  At December 31, 2011, the Plan owned 333,396 shares of the Corporation’s common stock.

The Bank also sponsors nonqualified deferred compensation plans, covering certain directors and employees, which have been indirectly funded through the purchase of split-dollar life insurance policies.  In connection with the policies, the Bank has provided an estimated liability for accumulated supplemental retirement benefits amounting to $588,203 and $623,699 at December 31, 2011 and 2010, respectively, which is included in other liabilities in the accompanying consolidated balance sheets.  The Bank has also purchased split-dollar life insurance policies for investment purposes to fund other employee benefit plans.  The combined cash values of these policies aggregated $12,741,053 and $12,322,390 at December 31, 2011 and 2010, respectively.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - EMPLOYEE AND DIRECTOR BENEFITS (CONTINUED)

Under an employee stock purchase plan, eligible employees may defer a portion of their compensation and use the proceeds to purchase stock of the Corporation at a discount determined semi-annually by the Board of Directors as stipulated in the plan.  The Corporation sold from treasury 790 shares in 2011, 1,123 shares in 2010, and 2,103 shares in 2009 under the plan.

The Bank has an agreement with Leipsic’s former President, who is the Corporation’s current Chairman of the Board of Directors, to provide for retirement compensation benefits.  Such benefits are to be paid over a period of twenty years commencing upon retirement effective December 31, 2001.  At December 31, 2011 and 2010, the net present value (based on the 12% discount rate in effect at the time of origination of the agreement) of future deferred compensation payments amounted to $290,416 and $304,625, respectively.  Such amounts are included in other liabilities in the December 31, 2011 and 2010 consolidated balance sheets.  A split-dollar life insurance policy has been purchased and is available to fund a portion of the future deferred compensation payments.  The cash value of the policy amounted to $594,534 and $572,281 at December 31, 2011 and 2010, respectively.

The Chief Executive Officer and Chief Financial Officer of the Corporation have employment agreements which provide for certain compensation and benefits should any triggering events occur, as specified in the agreements, including change of control or termination without cause.

NOTE 16 - STOCK OPTIONS

The following summarizes stock options activity for the years ended December 31, 2011, 2010, and 2009:

	2011				2010					2009
	Shares		Weighted average exercise price		Shares			Weighted average exercise price		Shares		Weighted average exercise price
Outstanding at beginning of year		-	$	-		5,146		$	9.66		5,146	$	9.66
Expired		-		-		(5,146	)		9.66		-		-
Outstanding and exercisable at end of year		-	$	-		-		$	-		5,146	$	9.66

Options outstanding at December 31, 2009 at an exercise price of $9.66 expired May 5, 2010.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments are primarily loan commitments to extend credit and letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets.  The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments.

The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments.  The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans.

The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2011 and 2010:

	Contract amount
	2011		2010
Commitments to extend credit	$	67,009,000	$	67,433,000
Letters of credit	$	2,389,000	$	2,602,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the customer.  Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.

Letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration.  All letters of credit outstanding at December 31, 2011 expire in 2012.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  The Bank requires collateral supporting these commitments when deemed necessary.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - REGULATORY MATTERS

The Corporation (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).  Management believes, as of December 31, 2011 and 2010, that the Corporation and Bank meet all capital adequacy requirements to which they are subject.  Furthermore, the Board of Directors of the Bank has adopted a resolution to maintain Tier I capital at or above 8% of total assets.

As of December 31, 2011, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well capitalized”, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank is currently working with regulatory agencies to address certain regulatory matters resulting from the Bank’s most recent examination.  The management of the Bank is actively working towards achieving a resolution of any and all matters identified by the regulators during this examination and management does not believe that compliance with these issues will have a material adverse effect on the operations or financial condition of the Bank.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - REGULATORY MATTERS (CONTINUED)

The actual capital amounts and ratios of the Corporation and Bank as of December 31, 2011 and 2010 are presented in the following table:

						Minimum capital			Minimum to be  well capitalized  under prompt corrective
	Actual					requirement			action provisions
	Amount		Ratio			Amount		Ratio	Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2011
Total Capital (to Risk-Weighted Assets) Consolidated	$	62,785		15.3	%	$	32,870	> 8.0%		N/A		N/A
Bank	$	60,201		14.7	%	$	32,701	> 8.0%	$	40,876		10.0	%
Tier I Capital (to Risk-Weighted Assets) Consolidated	$	57,607		14.0	%	$	16,435	> 4.0%		N/A		N/A
Bank	$	55,049		13.5	%	$	16,350	> 4.0%	$	24,526		6.0	%
Tier I Capital (to Average Assets) Consolidated	$	57,607		10.0	%	$	23,101	> 4.0%		N/A		N/A
Bank	$	55,049		9.5	%	$	23,073	> 4.0%	$	28,841		5.0	%
As of December 31, 2010
Total Capital (to Risk-Weighted Assets) Consolidated	$	60,222		13.4	%	$	35,972	> 8.0%		N/A		N/A
Bank	$	57,740		12.9	%	$	35,890	> 8.0%	$	44,863		10.0	%
Tier I Capital (to Risk-Weighted Assets) Consolidated	$	54,572		12.1	%	$	17,986	> 4.0%		N/A		N/A
Bank	$	52,103		11.6	%	$	17,945	> 4.0%	$	26,918		6.0
Tier I Capital (to Average Assets) Consolidated	$	54,572		9.0	%	$	24,338	> 4.0%		N/A		N/A
Bank	$	52,103		8.6	%	$	24,311	> 4.0%	$	30,388		5.0	%

On a parent company only basis, the Corporation’s primary source of funds is dividends paid by the Bank.  The ability of the Bank to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles.  Generally, subject to certain minimum capital requirements, the Bank may declare dividends without the approval of the State of Ohio Division of Financial Institutions, unless the total dividends in a calendar year exceed the total of the Bank’s net profits for the year combined with its retained profits of the two preceding years.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION

A summary of condensed financial information of the parent company as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 is as follows:

Condensed Balance Sheets	2011			2010
Assets:
Cash	$	1,581,629		$	416,912
Investment in bank subsidiary		67,489,762			62,835,606
Premises and equipment, net of accumulated depreciation		369,261			394,883
Other assets, including income taxes receivable from bank subsidiary of $491,937 in 2011 and $72,900 in 2010		691,234			1,700,012
Total assets	$	70,131,886		$	65,347,413
Liabilities:
Accrued expenses	$	84,172		$	42,350
Junior subordinated deferrable interest debentures		10,300,000			10,300,000
Total liabilities		10,384,172			10,342,350
Shareholders’ equity:
Common stock		3,760,557			3,760,557
Surplus		14,660,579			14,660,000
Retained earnings		42,543,363			39,600,718
Accumulated other comprehensive income		3,598,031			1,810,684
Treasury stock, at cost		(4,814,816	)		(4,826,896	)
Total shareholders’ equity		59,747,714			55,005,063
Total liabilities and shareholders’ equity	$	70,131,886		$	65,347,413

Condensed Statements of Income	2011			2010			2009
Income – including dividends from bank subsidiary	$	575,099		$	6,226		$	3,006,657
Expenses – interest expense, professional fees and other expenses, net of federal income tax benefit		(499,263	)		(419,766	)		(511,641	)
Income (loss) before equity in undistributed net income of bank subsidiary		75,836			(413,540	)		2,495,016
Equity in undistributed net income of bank subsidiaries		2,866,809			3,221,222			387,580
Net income	$	2,942,645		$	2,807,682		$	2,882,596

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)

Condensed Statements of Cash Flows	2011			2010			2009
Cash flows from operating activities:
Net income	$	3,517,645		$	2,807,682		$	2,882,596
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed net income of bank subsidiary		(3,441,809	)		(3,221,222	)		(387,580	)
Depreciation and amortization		25,622			25,621			25,622
Increase in other assets		1,008,778			(386,185	)		(103,798	)
Increase (decrease) in accrued expenses		41,822			(76,829	)		614
Net cash provided by (used in) operating activities		1,152,058			(850,933	)		2,417,454
Cash flows from financing activities:
Proceeds from sale of treasury shares		12,659			17,511			30,632
Cash dividends paid		-			(1,550,098	)		(2,065,963	)
Net cash used in financing activities		12,659			(1,532,587	)		(2,035,331	)
Net increase (decrease) in cash		1,164,717			(2,383,520	)		382,123
Cash at beginning of the year		416,912			2,800,432			2,418,309
Cash at end of the year	$	1,581,629		$	416,912		$	2,800,432

During 2005, the Board of Directors approved a program whereby the Corporation purchases shares of its common stock in the open market.  The decision to purchase shares, the number of shares to be purchased, and the price to be paid depends upon the availability of shares, prevailing market prices, and other possible considerations which may impact the advisability of purchasing shares.  The Corporation did not purchase any shares in 2011, 2010, or 2009 under the program.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs.  An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.

FASB ASC 820-10, Fair Value Measurements (ASC 820-10) requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.  The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.  The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).  Valuation techniques should be consistently applied.  Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.  Inputs may be observable or unobservable.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.  Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.  Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability.  The inputs are developed based on the best information available in the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)

The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2011 and 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Level 1		Level 2		Level 3		Total
2011	inputs		inputs		inputs		fair value
Recurring:
Securities available-for-sale:
U.S. Government and Agencies	$	-	$	7,520,670	$	-	$	7,520,670
Obligations of state and political subdivisions		-		49,310,795		-		49,310,795
Mortgage-backed		-		94,599,469		-		94,599,469
Other		-		525,023		-		525,023
Mortgage servicing rights		-		-		727,240		727,240
Total recurring	$	-	$	151,955,957	$	727,240	$	152,683,197
Nonrecurring:
Impaired loans, net	$	-	$	-	$	18,996,979	$	18,996,979
Other real estate owned		-		-		2,833,500		2,833,500
Total nonrecurring	$	-	$	-	$	21,830,479	$	21,830,479

2010
Recurring:
Securities available-for-sale:
Obligations of state and political subdivisions	$	-	$	47,298,232	$	-	$	47,298,232
Mortgage-backed				92,632,687		-		92,632,687
Other		-		509,442		-		509,442
Mortgage servicing rights		-		-		1,114,126		1,114,126
Total recurring	$	-	$	140,440,361	$	1,114,126	$	141,554,487
Nonrecurring:
Impaired loans, net	$	-	$	-	$	14,996,845	$	14,996,845
Other real estate owned		-		-		4,524,729		4,524,729
Total nonrecurring	$	-	$	-	$	19,521,574	$	19,521,574

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy during 2011 and 2010 due to the lack of observable quotes in inactive markets for those instruments at December 31, 2011 and 2010.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)

The table below presents a reconciliation and income statement classification of gains and losses for mortgage servicing rights, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011, 2010 and 2009:

	2011			2010			2009
Balance at beginning of year	$	1,114,126		$	1,273,525		$	703,388
Gains or losses, including realized and unrealized:
Purchases, issuances, and settlements		168,342			315,039			612,499
Disposals – amortization based on loan payments and payoffs		(240,662	)		(332,851	)		(237,463	)
Other changes in fair value		(314,566	)		(141,587	)		195,101
Balance at end of year	$	727,240		$	1,114,126		$	1,273,525

The following is a summary of the changes in other real estate owned measured at fair value on a nonrecurring basis:

Balance as of December 31, 2010	$	4,524,729
Transfer of loans		498,000
Impairment		(351,049	)
Net Proceeds from sales		(1,838,180	)
Balance as of December 31, 2011	$	2,833,500

The following summarizes the changes in impaired loans measured at fair value on a nonrecurring basis:

Balance as of December 31, 2010	$	14,996,845
Net new impairments		7,775,908
Transferred to OREO or performing		(1,054,972	)
Charged off or paid principal		(730,577	)
Balance as of December 31, 2011	$	20,987,204

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)

In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would typically include government bonds and exchange traded equities.  If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds, mortgage-backed securities, and asset-backed securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified within Level 3 of the valuation hierarchy.  The Corporation did not have any securities classified as Level 1 or Level 3 at December 31, 2011 and 2010.

Mortgage Servicing Rights

The Corporation records mortgage servicing rights at estimated fair value based on a discounted cash flow model using level 3 inputs.  Due to the significance of the level 3 inputs, mortgage servicing rights have been classified as level 3.

Impaired Loans

The Corporation does not record impaired loans at fair value on a recurring basis.  However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral.  Collateral values are estimated using level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria.  Due to the significance of the level 3 inputs, impaired loans fair values have been classified as level 3.

Losses included in earnings before income taxes amounted to $3,111,023 in 2011 and $2,072,456 in 2010, relating to impaired loans, and such losses are included in the provision for loan losses.  There were no gains or losses relating to securities available-for-sale included in earnings before income taxes that were attributable to changes in fair values of securities held at December 31, 2011 and 2010.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS (CONTINUED)

Other Real Estate Owned

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs.  Such values are estimated primarily using appraisals and reflect a market value approach.  Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.  Financial assets and financial liabilities, excluding impaired loans and other real estate owned, measured at fair value on a nonrecurring basis were not significant at December 31, 2011.

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of recognized financial instruments at December 31, 2011 and 2010 are as follows:

	2011				2010
	Carrying amount		Estimated value		Carrying amount		Estimated value
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	57,287	$	57,287	$	48,604	$	48,604
Securities, including Federal Home Loan Bank stock		156,850		156,850		145,334		145,334
Net loans		329,403		330,286		375,631		388,864
Mortgage servicing rights		727		727		1,114		1,114
	$	544,267	$	545,150	$	570,683	$	583,916

	2011				2010
	Carrying amount		Estimated value		Carrying amount		Estimated value
	(dollars in thousands)
FINANCIAL LIABILITIES
Deposits	$	480,486	$	483,014	$	488,651	$	492,413
Other borrowings		32,781		35,484		55,778		58,415
Junior subordinated deferrable interest debentures		10,300		9,220		10,300		9,913
Other liabilities		3,730		3,801		2,883		2,963
	$	527,297	$	531,519	$	557,612	$	563,704

The above summary does not include accrued interest receivable and cash surrender value of life insurance which are also considered financial instruments.  The estimated fair value of such items is considered to be their carrying amounts.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

There are also unrecognized financial instruments at December 31, 2011 and 2010 which relate to commitments to extend credit and letters of credit.  The contract amount of such financial instruments amounts to $69,398,000 at December 31, 2011 and $70,035,000 at December 31, 2010.  Such amounts are also considered to be the estimated fair values.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:

Cash and cash equivalents:

Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less and do not represent unanticipated credit concerns.

Securities:

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would typically include government bonds and exchange traded equities.  If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds, mortgage-backed securities, and asset-backed securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified within Level 3 of the valuation hierarchy.  The Corporation did not have any securities classified as Level 1 or Level 3 at December 31, 2011 and 2010.

Loans:

Fair value for loans was estimated for portfolios of loans with similar financial characteristics.  For adjustable rate loans, which re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value.  For fixed rate loans the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans.  Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows.

Mortgage servicing rights:

The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Deposit liabilities:

The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand.  The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at year end for deposits of similar remaining maturities.  The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.

Other financial instruments:

The fair value of commitments to extend credit and letters of credit is determined to be the contract amount, since these financial instruments generally represent commitments at existing rates.  The fair value of other borrowings is determined based on a discounted cash flow analysis using current interest rates.  The fair value of the junior subordinated deferrable interest debentures is determined based on quoted market prices of similar instruments.  The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement described in Note 15.  The fair value of the contract is determined based on a discounted cash flow analysis using a current interest rate for a similar instrument.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect these estimates.

NOTE 22 - CONTINGENT LIABILITIES

In the normal course of business, the Corporation and its subsidiary may be involved in various legal actions, but in the opinion of management and legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.

UNITED BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following represents a summary of selected unaudited quarterly financial data for 2011 and 2010:

	Interest		Net interest		Net income		Income (loss) per common share
	income		income		(loss)		Basic		Diluted
2011	(Dollars in thousands, except per share data)
First quarter	$	6,983	$	5,093	$	766	$	.22	$	.22
Second quarter	$	6,854	$	4,854	$	987	$	.29	$	.29
Third quarter	$	6,451	$	4,669	$	248	$	.07	$	.07
Fourth quarter	$	6,173	$	4,519	$	942	$	.27	$	.27
2010
First quarter	$	7,712	$	5,223	$	1,024	$	.30	$	.30
Second quarter	$	7,789	$	5,406	$	307	$	.09	$	.09
Third quarter	$	7,522	$	5,420	$	879	$	.26	$	.26
Fourth quarter	$	7,241	$	5,256	$	598	$	.17	$	.17

UNITED BANCSHARES, INC.

Columbus Grove, Ohio

DIRECTORS – UNITED BANCSHARES, INC.

NAME	AGE		DIRECTOR SINCE		NAME	AGE		DIRECTOR SINCE
Robert L. Benroth		49		2003	David P. Roach		61		2001
Putnam County Auditor					Vice-President/GM, First Family Broadcasting of Ohio
Robert L. Dillhoff		65		2001	Daniel W. Schutt		64		2005
Retired Administrator, Department of Transportation					President/CEO
James N. Reynolds		74		2000	R. Steven Unverferth		59		2005
Chairman, Retired Banker					President, Unverferth Manufacturing Corporation, Inc.
H. Edward Rigel		69		2000
Farmer, Rigel Farms, Inc.

DIRECTORS – THE UNION BANK COMPANY

NAME	AGE	DIRECTOR SINCE (a)	NAME	AGE	DIRECTOR SINCE (a)
Robert L. Benroth	49	2001	H. Edward Rigel	69	1979
Putnam County Auditor			Farmer, Rigel Farms, Inc.
Robert L. Dillhoff	65	1991	David P. Roach	61	1997
Retired Administrator, Dept. of Transportation			Vice-President/GM, First Family Broadcasting of Ohio
Herbert H. Huffman	61	1993	Robert M. Schulte, Sr.	79	1994
Retired - Educator			Businessman/Spherion Services
Kevin L. Lammon	57	1996	Daniel W. Schutt	64	2005
Village Administrator, Village of Leipsic			Chairman/Chief Executive Officer
William R. Perry	53	1990	R. Steven Unverferth	59	1993
Farmer			President, Unverferth Manufacturing Corporation, Inc.
James N. Reynolds	74	1966	Brian D. Young	45	2008
Retired Banker			President/COO

(a) Indicates year first elected or appointed to the board of The Union Bank Company or any of the former affiliate banks, Bank of Leipsic or the Citizens Bank of Delphos.

OFFICERS – UNITED BANCSHARES, INC.

James N. Reynolds – Chairman	Daniel W. Schutt – President / Chief Executive Officer
Heather M. Oatman – Secretary	Brian D. Young – Chief Financial Officer, EVP & Treasurer

OFFICERS – THE UNION BANK COMPANY

Daniel W. Schutt - CEO/Chairman

Brian D. Young - President/COO

Diana L. Engelhardt	Senior Vice President	Norman V. Schnipke	Senior Vice President
John P. Miller	Senior Vice President	Curtis E. Shepherd	Senior Vice President
Heather M. Oatman	Senior Vice President, Sec.

Dan M. Best	Vice President	Jeffrey L. Point	Vice President
Amy E. Blankemeyer	Vice President	Lewis R. Renollet	Vice President
Michael R. Domin	Vice President	Ricardo Rosado	Vice President
Erin W. Hardesty	Vice President	Mary L. Schroeder	Vice President
Max E. Long	Vice President	Paul A. Walker	Vice President

Kathi J. Amstutz	Assistant Vice President	Amy E. Reese	Assistant Vice President
Donna J. Brown	Assistant Vice President	M. Chris Sanderson	Assistant Vice President
Nancianne Carroll	Assistant Vice President	Deborah R. Soldenwagner	Assistant Vice President
Paul M. Cira	Assistant Vice President	Suzanne L. St. Clair	Assistant Vice President
Amy C. Felter	Assistant Vice President	Craig R. Stechschulte	Assistant Vice President
Vicky K. Gilbert	Assistant Vice President	Theresa A. Stein-Moenter	Assistant Vice President
Christina J. Hegemier	Assistant Vice President	Stacia R. Thompson	Assistant Vice President
Susan A. Hojnacki	Assistant Vice President	Tracey L. Thompson	Assistant Vice President
Kimberly J. Kandik	Assistant Vice President	Jason R. Thornell	Assistant Vice President
Amy L. Laibe	Assistant Vice President	Kyle L. Unverferth	Assistant Vice President
Karen M. Maag	Assistant Vice President	Kimberly S. Verhoff	Assistant Vice President
Doris A. Neumeier	Assistant Vice President	Troy M. Verhoff	Assistant Vice President
Brent D. Nussbaum	Assistant Vice President	Vikki L. Williams	Assistant Vice President
James C. Osmon	Assistant Vice President	Lisa D. Wiswasser	Assistant Vice President
Peter J. Rafaniello	Assistant Vice President		Assistant Vice President
Patricia S. Christman	Accounting Officer