UNITED BANCSHARES INC/OH
General  United Bancshares, Inc. (the “Corporation”), an Ohio corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Corporation was incorporated and organized in 1985.  The executive offices of the Corporation are located at 100 S. High Street, Columbus Grove, Ohio 45830.  As of December 31, 2005, the Corporation employed approximately 162 employees.  On March 7, 2003, following the receipt of approval from the appropriate regulatory authorities, the Corporation collapsed the charters of Citizens Bank of Delphos and the Bank of Leipsic and merged them into the charter of The Union Bank Company (the “Bank”).  Following the merger of the Corporation’s other two bank subsidiaries into The Union Bank Company, the Corporatio n is now a one-bank holding company, as that term is defined by the Federal Reserve Board.  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.    The Corporation is registered as a Securities Exchange Act of 1934 (the “1934 Act”) reporting company.     Forward Looking Statements  Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks.  Actual strategies and results in future time periods may differ materially from those currently expected.  Such forward-looking statements represent management’s judgment as of the current date.  The Corporation disclaims, however, any intent or obligation to update such forward-looking statements.   General Description of Bank Subsidiary and Recent Acquisition  The Union Bank Company acquired branches from RFC Banking Company, effective March 28, 2003.  Since the acquisition was accounted for as a purchase, only the operations of the branches subsequent to March 28, 2003 are included in the Corporation’s consolidated financial information.  The Bank is engaged in the business of commercial banking.  The Bank is an Ohio state-chartered bank, which serves Allen, Putnam, Sandusky, Van Wert and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delphos, Gibsonburg, Kalida, Leipsic, Lima, Ottawa, and Pemberville.  The Bank offers a full range of commercial banking services, including checking accounts, savings and money market accounts; time certificates of deposit; automatic teller machines; commercial, consumer, agricultural, residential mortgage loans and home equity loans; credit card services; safe deposit box rentals; and other personalized banking services.      3   Competition  The Corporation competes for deposits with other savings associations, commercial banks and credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. Primary factors in competing for deposits include customer service, interest rates and convenience of office location. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The number of financial institutions competing with the Corporation is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acq uisitions. Such increased competition may have an adverse effect upon the Corporation.  Effect of Environmental Regulation  Compliance with federal, state and local provision regulating the discharge of material into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Corporation and its subsidiary.  The Corporation believes that the nature of the operations of its subsidiary has little, if any, environmental impact.  The Corporation, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future.  The Corporation’s subsidiary may be required to make capital expenditures for environmental control facilities related to properties, which they may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable.  Supervision and Regulation  Sarbanes-Oxley Act of 2002 - On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “SOA”). The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties within publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.   The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934. Given the extensive SEC role in implementing rules relating to many of the SOA’s new requirements, the final scope of these requirements remains to be determined.   The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, including the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.    4   The SOA addresses, among other matters:   * audit committees for all reporting companies;  * certification of financial statements by the chief executive officer and the chief financial officer; * the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;  * a prohibition on insider trading during pension plan black out periods;  * disclosure of off-balance sheet transactions;  * a prohibition on personal loans to directors and officers;  * expedited filing requirements for Forms 4;  * disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;  * “real time” filing of periodic reports;  * the formation of a public company accounting oversight board;  * auditor independence; and  * various increased criminal penalties for violations of securities laws.    The SOA contains provisions, which became effective upon enactment on July 30, 2002 and provisions which will become effective from within 30 days to one or more years from enactment. The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.  Other Statutes and Regulations  The following is a summary of certain other statutes and regulations affecting the Corporation and its subsidiary.  This summary is qualified in its entirety by reference to such statutes and regulations.  The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting shares or assets of any bank, savings association or other company.  The Corporation is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board.  Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans or extensions of credit to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiary; purchases or sales of  securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries.  Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board.  A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries.   5   As an Ohio state-chartered bank, the Bank is supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The deposits of the Bank are insured by the FDIC and the Bank is subject to the applicable provisions of the Federal Deposit Insurance Act.  A subsidiary of a bank holding company can be liable to reimburse the FDIC if the FDIC incurs or anticipates a loss because of a default of another FDIC-insured subsidiary of the bank holding company or in connection with FDIC assistance provided to such subsidiary in danger of default.  In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies’ regulations on prompt corrective action guarantees a portion of the institution’s capital shortfall, as discussed below.   Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of the Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching.  The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies.  The risk-based capital guidelines include both a definition and a framework for calculating risk weighted assets by assigning assets and off-balance sheet items to broad risk categories.  The minimum ratio of total capital to risk weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%.  At least 4% is to be comprised of common Shareholders’ equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interest in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (“Tier 1 capital”).  The remainder (“Tier 2 capital”) may consist, among other things, of mandatory convertible debt securities, a limi ted amount of subordinated debt, other preferred stock and a limited amount of allowance for loan losses.  The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank holding companies and state member banks that meet certain specified conditions, including having the highest regulatory rating.  The minimum leverage ratio is 1%-2% higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and for those banks experiencing or anticipating significant growth.  State non-member bank subsidiaries, such as the Bank are subject to similar capital requirements adopted by the FDIC.    The Corporation and its subsidiary currently satisfy all capital requirements.  Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC.  The trust preferred securities issued in 2003, as described in Note 9 to the consolidated financial statements contained in the Corporation’s Annual Report, currently qualify as Tier I capital for regulatory purposes.  However, it is possible that regulations could change so that such securities do not qualify.  The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks.  Under these regulations, institutions, which become undercapitalized, become subject to mandatory regulatory scrutiny and limitations that increase as capital decreases.  Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized.   6   The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by its subsidiary bank and other subsidiaries.  However, the Federal Reserve Board expects the Corporation to serve as a source of strength to its subsidiary bank, which may require it to retain capital for further investment in the subsidiary, rather than for dividends for shareholders of the Corporation.  The Bank may not pay dividends to the Corporation if, after paying such dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements.  The Bank must have the approval of its regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net income and the retained net income for the  preceding two years, less required transfers to surplus.  Payment of dividends by a bank subsidiary may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice.  These provisions could have the effect of limiting the Corporation’s ability to pay dividends on its outstanding common shares.   Deposit Insurance Assessments and Recent Legislation  The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund (“BIF”), of which The Union Bank Company is a member.  The FDIC may increase assessment rates for the fund if necessary to restore the fund’s ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met.  The FDIC has established a risk-based assessment system for BIF members.  Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund.  The risk level is determined based on the institution’s capital level and the FDIC’s level of supervisory concern about the institution.   Monetary Policy and Economic Conditions  The commercial banking business is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board.  The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits.  These policies and regulations significantly affect the overall growth and distribution of bank loans, investments and deposits, and the interest rates charged on loans as well as the interest rates paid on deposits and accounts.  The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have significant effects in the future.  In view of the changing conditions in the economy and the money market and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit level.   7   Statistical Financial Information Regarding the Corporation  The following schedules and table analyze certain elements of the consolidated balance sheets and statements of income of the Corporation and its subsidiary, as required under Securities Act Industry Guide 3 promulgated by the Securities and Exchange Commission, and should be read in conjunction with the narrative analysis presented in ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION and the Consolidated Financial Statements of the Corporation.   Available Information  The Corporation files various reports with the SEC, including forms 10-Q, 10-K, 11-K and 8-K as required.  The public may read and copy any filed materials with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information that the Corporation electronically files with the SEC.    Various information on the Corporation may also be obtained from the Corporation’s maintained website at http://www.theubank.com.    8  I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL  A. The following are the average balance sheets for the years ended December 31:   ASSETS 2005 2004 2003   (dollars in thousands)  Interest-earning assets     Securities available-for-sale (1)     Taxable $162,044 $141,107 $118,575  Non-taxable 38,859 54,337 42,947  Federal Home Loan Bank deposits 733 892 2,751  Federal funds sold 2,925 1,470 6,139  Loans (2) 311,107 297,732 280,303  Total interest-earning assets 515,668 495,538 450,715  Non-interest-earning assets     Cash and due from banks 8,339 9,302 7,774  Premises and equipment, net 6,483 6,986 6,575             Accrued interest receivable and other assets          20,757 16,859 16,269       Allowance for loan losses     (2,784)     (2,620)     (2,815)        $548,463 ======= $526,065 ======= $478,518 =======       LIABILITIES AND SHAREHOLDERS' EQUITY     Interest-bearing liabilities     Deposits     Savings and interest-bearing demand deposits $124,728  $127,199  $108,890  Time deposits 206,381 218,962 231,006  Federal funds purchased 99 56 2,127  Junior subordinated deferrable interest debentures 10,300  10,300  7,500  Long-term debt 125,978 91,046 54,621  Total interest-bearing liabilities 467,486 447,563 404,144  Non-interest-bearing liabilities     Demand deposits 34,033 32,324 26,440  Accrued interest payable and other liabilities 2,736  2,928  5,929    482,815 436,513  Shareholders' equity (3) 44,208     43,250     42,005   $548,463 ======= $526,065 ======= $478,518 =======    (1) Securities available-for-sale are carried at fair value.  The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Loan balances include principal balances of non-accrual loans and loans held for sale (3) Shareholders’ equity includes average net unrealized appreciation (depreciation) on securities available-for-sale, net of tax.   9   I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)  B. The following tables set forth, for the years indicated, the condensed average balances of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average interest rates earned or paid thereon.    2005 Average Balance   Interest  Average Rate  INTEREST-EARNING ASSETS (dollars in thousands)   Securities available-for-sale (1)     Taxable $162,044 $  7,264 4.48%  Non-taxable (2) 38,859 2,410 6.20%  Federal Home Loan Bank deposits 733 22 3.00%  Federal funds sold 2,925 93 3.18%  Loans (3, 4)   311,107   21,106 6.78%  Total interest-earning assets $515,668 $30,895 5.99%       INTEREST-BEARING LIABILITIES     Deposits     Savings and interest-bearing demand deposits  $124,728  $1,240  0.99%  Time deposits 206,381 5,119 2.48%  Federal funds purchased 99 4 4.04%  Junior subordinated deferrable interest debentures  10,300  640  6.21%  Long-term debt   125,978     4,977 3.95%  Total interest-bearing liabilities $467,486 $11,980 2.56%       Net interest income, tax equivalent basis  $ 18,915 ======   Net interest income as a percent of    average interest-earning assets    3.67% =====    (1) Securities, available-for-sale are carried at fair value.  The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory rate). (3) Loan balances include principal balance of non-accrual loans and loans held for sale. (4) Interest income on loans includes fees on loans of $1,035,557   10   I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)    2004 Average Balance   Interest  Average Rate  INTEREST-EARNING ASSETS (dollars in thousands)   Securities available-for-sale (1)     Taxable $141,107 $  5,778 4.09%  Non-taxable (2) 54,337 3,305 6.08%  Federal Home Loan Bank deposits 892 7 0.78%  Federal funds sold 1,470 24 1.63%  Loans (3, 4)   297,732   19,003 6.38%  Total interest-earning assets $495,538 $28,117 5.67%       INTEREST-BEARING LIABILITIES     Deposits     Savings and interest-bearing demand deposits  $127,199  $735  0.58%  Time deposits 218,962 5,403 2.47%  Federal funds purchased 56 1 1.79%  Junior subordinated deferrable interest debentures  10,300  640  6.21%  Long-term debt     91,046     3,555 3.90%  Total interest-bearing liabilities $447,563 $10,334 2.31%       Net interest income, tax equivalent basis  $ 17,783 ======   Net interest income as a percent of    average interest-earning assets    3.59% =====    (1) Securities, available-for-sale are carried at fair value.  The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory rate). (3) Loan balances include principal balance of non-accrual loans and loans held for sale. (4) Interest income on loans includes fees on loans of $1,147,934.     11   I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)    2003 Average Balance   Interest  Average Rate  INTEREST-EARNING ASSETS (dollars in thousands)   Securities available-for-sale (1)     Taxable $118,575 $  4,470 3.77%  Non-taxable (2) 42,947 2,720 6.33%  Federal Home Loan Bank deposits 2,751 41 1.49%  Federal funds sold 6,139 42 0.68%  Loans (3, 4)   280,303   18,428 6.57%  Total interest-earning assets $450,715 $25,701 5.70%       INTEREST-BEARING LIABILITIES     Deposits     Savings and interest-bearing demand deposits  108,890  1,044  0.96%  Time deposits 231,006 6,167 2.67%  Federal funds purchased 2,127 21 0.99%  Junior subordinated deferrable interest debentures  7,500  480  6.40%  Advances from FHLB     54,621     2,355 4.31%  Total interest-bearing liabilities $404,144 $10,067 2.49%       Net interest income, tax equivalent basis  $ 15,634 ======   Net interest income as a percent of    average interest-earning assets    3.47% =====    (1) Securities, available-for-sale are carried at fair value.  The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory rate). (3) Loan balances include principal balance of non-accrual loans and loans held for sale. (4) Interest income on loans includes fees on loans of $1,184,616.     12   I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)  C. The following tables set forth the effect of volume and rate changes on interest income and expenses for the periods indicated.  For purposes of these tables, changes in interest due to volume and rate were determined as follows: Volume variance - change in volume multiplied by the previous year’s rate. Rate variance - change in rate multiplied by the previous year’s volume. Rate/volume variance - change in volume multiplied by the change in rate. This variance was allocated to volume variances and rate variances in proportion to the relationship of the absolute dollar amount of the change in each. Interest on non-taxable securities has been adjusted to a fully tax equivalent basis using a statutory tax rate of 34% in all years presented.                            2005/2004_______    Total Variance Variance Attributable To            Volume                   Rate  INTEREST INCOME (dollars in thousands)  Securities -     Taxable $ 1,486 $  907 $  579       Non-taxable (895) (961) 66       Federal Home Loan Bank deposits 15 (1) 16  Federal funds sold 69 35 34  Loans      2,103   876   1,227          2,778   856     1,922       INTEREST EXPENSE     Deposits -     Savings and interest-bearing demand deposits  505  (14)  519       Time deposits (284) (312) 28       Federal funds purchased 3 1 2       Junior Subordinated deferrable interest debentures -- -- --       Long-term debt   1,422   1,381     41             1,646   1,056  590       NET INTEREST INCOME $ 1,132 ===== $ (200) ===== $ 1,332 =====      13   I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)                            2004/2003_________    Total Variance Variance Attributable To            Volume                   Rate  INTEREST INCOME (dollars in thousands)  Securities -     Taxable $ 1,308 $  900 $  408       Non-taxable 585 688 (103)       Federal Home Loan Bank deposits (34) (20) (14)  Federal funds sold (18) (76) 58  Loans      575   1,112   (537)          2,416   2,604     (188)       INTEREST EXPENSE     Deposits -     Savings and interest-bearing demand deposits  (309)  227  (536)       Time deposits (764) (312) (452)       Federal funds purchased (20) (118) 98       Junior subordinated deferrable interest debentures 160 174 (14)       Long-term debt   1,200   1,398     (198)             267   1,369  (1,102)       NET INTEREST INCOME $ 2,149 ===== $ 1,235 ===== $ 914 =====        14  II. INVESTMENT PORTFOLIO  A. The carrying amount of securities available-for-sale as of December 31 are summarized as follows:   2005 2004 2003   (dollars in thousands)  U.S. Treasury and U.S. Government      agency securities $28,877  $  24,904  $  21,769  Obligations of states and political subdivisions 42,357 44,431 66,246  Mortgage-backed securities 112,022 144,229 82,436  Other           53            53            53   $183,309 ======= $213,617  ======= $170,504 =======    The above excludes Federal Home Loan Bank stock amounting to $4,439,600 in 2005, $4,224,400 in 2004 and $4,054,700 in 2003.  B. The maturity distribution and weighted average yield of securities available-for-sale at December 31, 2005 are as follows:    Maturing      Within One Year After One year But Within Five Years After Five Years But Within Ten Years   After Ten Years   (dollars in thousands)  U.S. Treasury and U.S. Government     agency securities  $         0  $ 25,983  $ 2,894  $          0  Obligations of states and political     subdivisions  349  11,265  20,755  9,988  Mortgage-backed securities (1)      465    94,504    16,050     1,003         $   814 ===== $131,752 ====== $ 39,699 ====== $  10,991 ======        Weighted average yield  5.50% ===== 4.71% ====== 5.09% ======= 6.17% =======    (1) Maturity based upon estimated weighted-average life. (2) Table excludes Federal Home Loan Bank stock and $53,000 of securities having no maturity date.  The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount.  C. Excluding those holdings in the investment portfolio of U.S. Treasury and U.S. Government agency securities, there were four securities which exceeded 10% of Shareholders’ equity at December 31, 2005.  One security was a variable rate collateralized mortgage obligations (“CMO”) with a $9,329,000 book value as of December 31, 2005.  The other three securities were variable rate mortgage-backed securities (“MBS”) with the following book values as of December 31, 2005: $11,642,000, $12,160,000, and $15,805,000.   15   III. LOAN PORTFOLIO  A. Types of Loans – Total loans, including loans held for sale, are comprised of the following classifications at December 31 for the years indicated:    2005 2004 2003 2002 2001   (dollars in thousands)  Commercial and      agricultural $172,840  $ 172,818  $ 167,423  $ 132,148  $ 108,707  Real estate mortgage 108,252 112,786 108,180 98,425 119,579  Consumer loans to      individuals     28,913       20,987       16,618       12,982       15,709   $ 310,005 ======= $ 306,591 ======= $ 292,221 ======= $ 243,555 ======= $ 243,995 =======    Real estate mortgage amounts include real estate construction loans of $13.9 million in 2005, $14.6 million in 2004, $10.2 million in 2003, $4.9 million in 2002, and $7.5 million in 2001.  There is no lease financing receivables in any year.    CONCENTRATIONS OF CREDIT RISK – The Corporation’s depository institution subsidiary grants commercial, real estate, installment, and credit card loans to customers primarily located in Northwestern Ohio.  Commercial loans include loans collateralized by business assets and agricultural loans collateralized by crops and farm equipment.  As of December 31, 2005 commercial and agricultural loans make up approximately 55.75% of the loan portfolio; the loans are expected to be repaid from cash flow from operations of the businesses.  As of December 31, 2005, real estate mortgage loans make up approximately 34.92% of the loan portfolio and are collateralized by first mortgages on residential real estate.  As of December 31, 2005, consumer loans to individuals make up approximately 9.33% of the loan portfolio and are primarily collateralized by consumer assets.  B. Maturities and Sensitivities of Loans to Changes in Interest Rates – The following table shows the amounts of commercial and agricultural loans outstanding as of December 31, 2005 which, based on remaining scheduled repayments of principal, are due in the periods indicated.  Also, the amounts have been classified according to sensitivity to changes in interest rates for commercial and agricultural loans due after one year.  (Variable-rate loans are those loans with floating or adjustable interest rates.)       Maturing Commercial and Agricultural     (dollars in thousands)         Within one year $   30,739    After one year but within five years 25,246    After five years      116,855     $ 172,840 =======        16   III. LOAN PORTFOLIO (CONTINUED)    Interest Sensitivity    Fixed Rate Variable Rate  Total   (dollars in thousands)   Due after one year but within five years  $  8,932  $ 16,314  $   25,246  Due after five years     7,955    108,900    116,855     $ 16,887 ====== $ 125,214 ====== $ 142,101 =======    C. Risk Elements – Non-accrual, Past Due, Restructured and Impaired Loans – The following table summarizes non-accrual, past due, restructured and impaired loans at December 31:    2005 2004 2003 2002 2001   (dollars in thousands)  (a)  Loans accounted for on a non-accrual basis $2,360   $ 2,135   $ 1,625   $ 1,288   $  665  (b)  Accruing loans that are contractually past due 90 days or more as to interest or principal payments and are still accruing interest 906      707      1,207      410      836  (c)  Loans not included in (a) or (b) which are "Troubled Debt Restructurings" as defined by  Statement of  Financial Accounting Standards No. 15        --                 --                 --                 --                 --          $3,266 ===== $2,842 ===== $2,832 ===== $1,698 ===== $1,501 =====    Management believes the allowance for loan losses at December 31, 2005 is adequate to absorb any losses on non-performing loans, as the allowance balance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time.    17   III. LOAN PORTFOLIO (CONTINUED)  The following is reported for the year ended December 31, 2005:   2005 (dollars in thousands)  Gross interest income that would have been recorded in 2005 on non- accrual loans outstanding at December 31, 2005 if the loans had been current, in accordance with their original terms and had been  outstanding throughout the period or since origination if held for part of the period     $    179     Interest income actually recorded on non-accrual loans and included in net income for the period        47     Interest income not recognized during the period $    132 ======    1. Discussion of the non-accrual policy The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful.  When the accrual of  interest is discontinued, all interest income accrued but uncollected is reversed.  While loans which are past due 90 days or more as to interest or principal payments are considered for non-accrual status, management may elect to continue the accrual of interest when the estimated net realizable value of collateral, in management’s judgment, is sufficient to cover the principal balance and accrued interest.  These policies apply to both commercial and real estate loans.  2. Potential problem loans As of December 31, 2005, in addition to the $3,266,000 of loans reported under Item III. C, there are approximately $10,215,000 in other outstanding loans where known information causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans pursuant to Item III. C, at some future date.  Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in Item III. C above.  To the extent that such loans are not included in the $10,215,000 in potential problem loans described above, management believes that such loans will not materially impact future operating results, liquidity, or capital resources.  3. Foreign outstandings None  4. Loan concentrations At December 31, 2005, loans outstanding relating to agricultural operations or collateralized by agricultural real estate aggregated approximately $50,399,000.  At December 31, 2005, there were $360,000 in agricultural commercial loans, which were accounted for on a non-accrual basis; and there were $76,000 accruing agricultural commercial loans which were contractually past due ninety days or more as to interest or principal payments.  D. Other interest-bearing assets As of December 31, 2005, there were no other interest-bearing assets that are required to be disclosed.   18  IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:    2005 2004 2003 2002 2001  LOANS (dollars in thousands)  Loans outstanding at end  of period (1) $ 310,005 =======  $ 306,591 =======  $ 292,221 =======  $ 243,555 =======  $ 243,995 =======  Average loans outstanding  during period $ 311,107 =======  $ 297,732 =======  $ 280,303 =======  $ 242,688 =======  $ 264,243 =======  ALLOWANCE FOR LOAN LOSSES       Balance at beginning of period $ 2,757 $  2,768 $  2,785 $  2,592 $  1,936  Addition of allowance for acquired subsidiary - Citizens Bank of Delphos          --             --             --             --         721  Loans charged off - Commercial and agricultural (638)  (530)  (82)  (149)  (113)  Real estate mortgage (66) (116) (362) (215) (83)  Consumer loans to individuals (265)     (203)     (211)     (291)     (379)   (969)     (849)     (655)     (655)     (575)  Recoveries of loans previously charged off -       Commercial and agricultural 52 91 9 23 --  Real estate mortgage 31 34 107 17 13  Consumer loans to individuals 128  136  72  86  48   211 261 188 126 61  Net loans charged off (758) (588) (467) (529) (514)        Transfer to other Liabilities (71) -- -- -- --  Provision for loan losses 612       577       450       722       449         Balance at end of period $2,540 ===== $ 2,757 ===== $ 2,768 ===== $ 2,785 ===== $ 2,592 =====         Ratio of net charge-offs during the period to average loans outstanding during the period 0.24% =====   0.20% =====   0.17% =====   0.22% =====   0.19% =====   (1) Including loans held for sale. The allowance for loan losses balance and the provision for loan losses are judgmentally determined by management based upon periodic reviews of the loan portfolio.  In addition, management considered the level of charge-offs on loans as well as the fluctuations of charge-offs and recoveries on loans including the factors, which caused these changes.  Estimating the risk of loans and the amount of loss is necessarily subjective.  Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral value and other factors and estimates which are subject to change over time.     19   IV. SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)  B. The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios.   Allocation of the Allowance for Loan Losses      Allowance Amount Percentage of Loans in Each Category to Total Loans    Allowance Amount Percentage of Loans in Each Category to Total Loans   (dollars in thousands)   December 31, 2005 December 31, 2004  Commercial and      agricultural  $  1,395 55.8%  $  1,937  56.4%  Real Estate      mortgages  876  34.9%  543  36.8%  Consumer loans to      individuals  165  9.3%  262  6.8%  Unallocated       104      N/A       15      N/A   $ 2,540 ====== 100.0% ====== $ 2,757 ====== 100.0% ======         December 31, 2003 December 31, 2002  Commercial and      agricultural  $  1,758  57.3%  $  1,465  54.3%  Real Estate      mortgages  469  37.0%  592  40.4%  Consumer loans to      individuals  399  5.7%  581  5.3%  Unallocated       142      N/A       147      N/A   $ 2,768 ====== 100.0% ====== $ 2,785 ====== 100.0% ======               December 31, 2001   Commercial and      agricultural  $ 1,288  44.6%    Real Estate      mortgages  617  49.0%    Consumer loans to      individuals  383  6.4%    Unallocated       304      N/A     $ 2,592 ====== 100.0% ======      While management’s periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.    20   V. DEPOSITS  A.&B. The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:    (dollars in thousands)   2005 Average Amount 2005 Average Rate 2004 Average Amount 2004 Average Rate        Savings and interest- bearing demand  deposits   $ 124,728 0.99%   $ 127,199   0.58%  Time deposits 206,381 2.48% 218,962 2.47%  Demand deposits (non-interest bearing)        34,033   --        32,324   --   $ 365,142 =======  $ 378,485 =======                2003 Average Amount 2003 Average Rate          Savings and interest- bearing demand  deposits   $ 108,890   .96%    Time deposits 231,006 2.67%    Demand deposits (non-interest bearing)        26,440   --     $ 366,336 =======          C.&E. There were no foreign deposits in any periods presented  D. Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2005 are summarized as follows:   Three months or less $  5,812  Over three months and through six months 3,016  Over six months and through twelve months 11,678  Over twelve months  8,030      $28,536 ======      21   VI. RETURN ON EQUITY AND ASSETS  The ratio of net income to average shareholders’ equity and average total assets and certain other ratios are as follows:    2005 2004 2003    (dollars in thousands)       Average total assets $ 548,463 ======= $ 526,065 ======= $ 478,518 =======  Average shareholders' equity (1) $   44,208 ======= $   43,250 ======= $   42,005 =======  Net income  $     4,622 ======= $     3,088 ======= $     3,691 =======  Cash dividends declared $     1,760 ======= $     1,617 ======= $     1,606 =======       Return on average total assets  0.84% ===== 0.59% ===== 0.77% =====  Return on average    shareholders' equity  10.46% =====  7.14% =====  8.79% =====  Dividend payout ratio (2) 38.08% ===== 52.36% ===== 43.51% =====  Average shareholders' equity    to average total assets 8.06% =====  8.22% =====  8.78% =====     (1) Average Shareholders’ equity includes average unrealized appreciation or depreciation on securities available-for-sale. (2) Dividends declared divided by net income.  VII. SHORT-TERM BORROWINGS  None   22
An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business. The material risks and uncertainties that management believes affect the Corporation are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Corporation’s business operations. This report is qualified in its entirety by these risk factors.  If any of the following risks actually occur, the Corporation’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Corporation’s common stock could decline significantly, and you could lose all or part of your investment. Risks Related to the Corporation’s Business    The Corporation is Subject to Interest Rate Risk  The Corporation’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Corporation’s ability to originate loans and obtain deposits, (ii) the  fair value of the Corporation’s financial assets and liabilities, and (iii) the average duration of the Corporation’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Corporation’s net interest income,  and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.  Although management believes it has implemented effective asset and liability management strategies, to reduce the potential effects of changes in interest rates on the Corporation’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Corporation’s financial condition and results of operations.  The Corporation Is Subject To Lending Risk There are inherent risks associated with the Corporation’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates as well as those across the State of Ohio and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil monetary penalties against the Corporation. Although the Corporation does not have an inordinately large number of non-performing loans, an increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loans losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation’s Allowance for Loan Losses May Be Insufficient  The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and f uture trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Corporation will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation Is Subject To Environmental Liability Risk Associated With Lending Activities  A significant portion of the Corporation’s loan portfolio is secured by real property. During the ordinary course of business, the Corporation may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Corporation may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Corporation to incur substantial expenses and may materially reduce the affected property’s value or limit the Corporation’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Corporation’s exposure to environmental liability. Although the Corporation may perform an environmental re view before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation’s Profitability Depends Significantly on Economic Conditions in the State of Ohio  The Corporation’s success depends primarily on the general economic conditions of the State of Ohio and the specific local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in Allen, Putnam, Wood, Sandusky and Van Wert counties. The local economic conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securit ies markets or other factors could impact those local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation Operates in a Highly Competitive Industry and Market Area  The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets the Corporation operates. The Corporation also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, sec urities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can. The Corporation’s ability to compete successfully depends on a number of factors, including, among other things: · The ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets. · The ability to expand the Corporation’s market position. · The scope, relevance and pricing of products and services offered to meet customer needs and demands.  · The rate at which the Corporation introduces new products and services relative to its competitors. · Customer satisfaction with the Corporation’s level of service. · Industry and general economic trends.   Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation Is Subject To Extensive Government Regulation And Supervision  The Corporation, primarily through its wholly owned subsidiary, The Union Bank Company, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and prod ucts the Corporation may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.   The Corporation’s Controls and Procedures May Fail or be Circumvented  Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations and financial condition.   Corporation Relies On Dividends from Its Subsidiaries for Most of Its Revenue  The Corporation is a separate and distinct legal entity from its subsidiary. It receives substantially all of its revenue from dividends from its subsidiary. These dividends are the principal source of funds to pay dividends on the Corporation’s common stock, interest and principal on United’s debt, and other operating expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Corporation. Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to the Corporation, the Corporation may not be able to service debt, pay obligations or pay dividends on the Corporation’s common stock. The inability to receive dividends from the Bank could have a material  adverse effect on the Corporation’s business, financial condition and results of operations.   The Corporation May Not Be Able To Attract And Retain Skilled People  The Corporation’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.    The Corporation’s Information Systems May Experience an Interruption or Breach in Security  The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation’s information systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation  to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations.    The Corporation Continually Encounters Technological Change  The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Many of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technolog ical change affecting the financial services industry could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.    The Corporation Is Subject To Claims and Litigation Pertaining to Fiduciary Responsibility  From time to time, customers make claims and take legal action pertaining to the Corporation’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal action are not resolved in a manner favorable to the Corporation they may result in significant financial liability and/or adversely affect the market perception of the Corporation and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.   Severe Weather, Natural Disasters, Acts of War Or Terrorism And Other External Events Could Significantly Impact The Corporations Business  Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. Such events could affect the stability of the Corporation’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Corporation to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.  Risks Associated with the Corporation’s Common Stock    The Corporation’s Stock Price Can Be Volatile  Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Corporation’s stock price can fluctuate significantly in response to a variety of factors including, among other things: · Actual or anticipated variations in quarterly results of operations. · Recommendations by securities analysts. · Operating and stock price performance of other companies that investors deem comparable to the Corporation. · News reports relating to trends, concerns and other issues in the financial services industry. · Perceptions in the marketplace regarding the Corporation and/or its competitors. · New technology uses, or services offered, by competitors. · Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Corporation or its competitors. · Failure to integrate acquisitions or realize anticipated benefits from acquisitions. · Changes in government regulations. · Geopolitical conditions such as acts or threats of terrorism or military conflicts.  General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Corporation’s stock price to decrease regardless of operating results.   An Investment in the Corporation’s Common Stock is NOT an Insured Deposit  The Corporation’s common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in the Corporation’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Corporation’s common stock, you may lose some or all of your investment.   The Corporation’s Articles of Incorporation and Regulations as well as Certain Banking Laws  may have an Anti-Takeover Effect  Provisions, of the Corporation’s articles of incorporation and regulations and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Corporation’s common stock. Risks Associated with the Corporation’s Industry    The Earnings of Financial Services Companies are significantly affected by General Business  and Economic Conditions  The Corporation’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Corporation operates, all of which are beyond the Corporation’s control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Corporation’s products and services, among other things, any of which could have a material adverse impact on the Corporation’s financial condition and results of operations.    Financial Services Companies Depend on the Accuracy and Completeness of Information about Customers and Counterparties  In deciding whether to extend credit or enter into other transactions, the Corporation may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Corporation may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.    Consumers May Decide Not To Use Banks to Complete their Financial Transactions  Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Corporation’s financial condition and results of operations.    23
1. Its main office is a two-story brick building located at 100 South High Street, Columbus Grove, Ohio.  The building was constructed in approximately 1900 and contains approximately 7,870 square feet.  2. A full service branch office is located at 110 East North Street, Kalida, Ohio.  The building was constructed in 1994 and contains approximately 2,540 square feet.  3. A full service branch office is located at 245 West Main Street, Ottawa, Ohio.  The building was constructed in 1991 and contains approximately 2,400 square feet.  4. A full service branch office is located at 3211 Elida Road, Lima, Ohio.  The building was constructed in 1994 and contains approximately 4,000 square feet.  5. A full service branch office is located at 1410 Bellefontaine Avenue, Lima, Ohio.  The building was constructed in 1998 and contains approximately 4,200 square feet.  6. A drive-thru facility is located at 200 East Sycamore Street, Columbus Grove, Ohio.  The building was constructed in 1973 and contains approximately 480 square feet.  7. Two buildings located at 102 & 106 South High Street, Columbus Grove, Ohio were constructed in approximately 1930.  They are both two-story buildings and together contain approximately 9,700 square feet.  These facilities are used to house the operation areas of the subsidiary.  8. A full service branch office is located at 215 West Market Street, Lima, Ohio.  The building was constructed in approximately 1954 and contains approximately 5,700 square feet.  The building was acquired in 2000.  9. A full service branch office is located at 318 South Belmore Street, Leipsic, Ohio was opened on December 24, 2001.  10. A full service branch office is located at 114 East 3rd Street, Delphos, Ohio.  The building was acquired as part of the Citizens Bank of Delphos Acquisition in 2001.  11. A full service branch office located at 140 Front Street, Pemberville, Ohio.  The building was acquired as part of the RFCBC branch Acquisition in March 2003.  12. A full service branch office located at 230 West Main Street, Gibsonburg, Ohio.  The building was acquired as part of the RFCBC branch Acquisition in March 2003.  In addition to the aforementioned properties, The Union Bank Company leases approximately 2,000 square feet of office space at 1204 West Wooster Street, Bowling Green, Ohio.  The property is operated as a full-service banking center.  All of the properties are suitable for their intended use.   24
There are no pending legal proceedings to which the Corporation or its subsidiary are a party or to which any of their property is subject except routine legal proceedings to which the Corporation or its subsidiary are a party incident to its banking business.  None of such proceedings are considered by the Corporation to be material.
No matter was submitted to a vote of shareholders during the quarter ended December 31, 2005.   25  PART II
There were approximately 1,619 shareholders of record as of January 31, 2006.     The table below includes certain information regarding the Corporation’s repurchase of United Bancshares, Inc. common stock during the quarterly period ended December 31, 2005:  Total number  Maximum number shares purchased of shares that may Total number Average as part of publicly yet be purchased of shares price paid announced plan under the plan Period purchased(a) per share(c) or program or program(b)        10/1/05 - 10/31/05 None None None 20,619  11/01/05 -  11/30/05 10,000 $15.10 10,000 110,619  12/1/05 –  12/31/05 None None None 110,619  (a) All share purchases were part of a publicly announced plan and all were open-market transactions.  (b) A stock repurchase program (“Plan”) was announced on July 29, 2005 and expanded on December 23, 2005.  The Plan authorizes the Corporation to repurchase up to 200,000 shares of the Corporation’s shares from time to time in a program of market purchases or in privately negotiated transactions as the securities laws and market conditions permit.   (c) Exclude related brokerage fees.  Additional information required herein is incorporated by reference from (“Market Price and Dividends on Common Stock”) United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13.   Plan Category Number of securities to be issued upon exercise of outstanding options, warrants, and rights. Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance.    (a) (b) (c)  Equity compensation plans approved by security holders 39,446 $11.18  68,603  Equity compensation plans not approved by security holders --- --- ---  Total 39,446 $11.18  68,603
The information required herein is incorporated by reference from (“Five Year Summary of Selected Financial Data”) United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13.
The information required herein is incorporated by reference from pages 4 through 12 (“Management’s Discussion and Analysis”) of United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13.
The information required herein is incorporated by reference from page 12 (“Management’s Discussion and Analysis”) of United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13.
The information required herein is incorporated by reference from page 14 through 45 of United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13.
None
Evaluation of Disclosure Controls and Procedures.  The Corporation’s chief executive officer and its chief financial officer are charged with making an evaluation of the Corporation’s disclosure controls and procedures.  These controls and procedures are designed to ensure that information required to be disclosed in reports mandated by the Securities Exchange Act of 1934 is recorded, communicated to management, and accurately reported within the required time periods.  Based upon such evaluation, the Corporation’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures are effective as of the end of the period covered by this annual report.  Changes in Internal Controls Over Financial Reporting.  There have been no significant changes during the quarter ended December 31, 2005 in the Corporation’s internal controls over financial reporting  (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) or in other factors that could significantly affect the controls over financial reporting.
None.   26   PART III
Information required by this item concerning the Corporation’s Audit Committee is contained under the caption “Audit Committee Report” of the Corporation’s proxy statement dated March 22, 2006, which is incorporated herein by reference.  Information required by this item concerning the Corporation’s procedures for the nomination of Directors is contained under the caption “Committees of the Board of Directors” in the Corporation’s definitive proxy statement dated March 22, 2006, which is incorporated herein by reference.  Information required by this item concerning compliance with section 16(a) of the Securities Exchange Act of 1934, as amended, is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Corporation’s definitive proxy statement dated March 22, 2006, which is incorporated herein by reference.  On February 17, 2004, the Corporation adopted a Code of Ethics that is applicable to all employees of the Corporation, including the Corporation’s principal executive officer and principal financial and accounting officer, which is incorporated herein by reference to the Corporation’s 2004 form 10K/A filed August 5, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required herein is contained under the caption “Voting Securities” in the Corporation’s definitive proxy statement dated March 22, 2006, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services Information required by this item is contained under the caption “Independent Public Accountants” in the Corporation’s definitive proxy statement dated March 22, 2006, which is incorporated herein by reference.   27   PART IV
(a) 1. Financial Statements – The information required herein is filed as part of this report and is set forth in the United Bancshares’ Annual Report to Shareholders for 2005 (“Annual Report”), which is included herein as Exhibit 13. 2. Financial Statement Schedules - None. 3. Exhibits Required by Item 601 Regulations S-K - The following exhibits are either filed as a part of this report or are incorporated herein by reference to documents previously filed as indicated below:   Exhibit No.    3.1 Articles of Incorporation (1)  3.2 Regulations (1)  10 10.1 10.2 10.3 10.4 10.5 10.6 13 Material Contracts      Preferred Trust Securities, Placement and Debenture agreements      Employment Agreement – Daniel W. Schutt      Severance Agreement – E. Eugene Lehman      Agreement – Brian D. Young       Salary Continuation Agreement - Brian D. Young      Executive Supplemental Income Agreement - Bonita Selhorst Annual Report to Shareholders - 2005  (2) (2) (2) (2) (2) (2) (3)  14 Code of Ethics (2)  21 Subsidiaries (3)  23 Consent of Independent Accountants (3)  31.1 Rule 13a-14(a)/15d-14(a) CEO's Certification (3)      31.2 Rule 13a-14(a)/15d-14(a) CFO's Certification (3)      32.1 Section 1350 CEO's Certification (3)      32.2 Section 1350 CFO's Certification (3)      99 Safe Harbor under The Private Securities Litigation Reform Act of 1995        (1) Incorporated herein by reference to the Corporation's Definitive Proxy Statement pursuant to Section 14(a) filed March 8, 2002. (2) Incorporated herein by reference to the Corporation's 2004 Form 10K/A filed August 5, 2005. (3) Included herein          28   SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.    UNITED BANCSHARES, INC.      By: /s/ DANIEL W. SCHUTT Daniel W. Schutt, CEO, President      By: /s/ BRIAN D. YOUNG Brian D. Young, Chief Financial Officer    Date:  March 21, 2006  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.   Signatures Title Date      /s/ P. DOUGLAS HARTER P. Douglas Harter Director March 21, 2006      /s/ DANIEL W. SCHUTT Daniel W. Schutt Director March 21, 2006      /s/ JAMES N. REYNOLDS James N. Reynolds Director March 21, 2006      /s/ H. EDWARD RIGEL H. Edward Rigel Director March 21, 2006      /s/ DAVID P. ROACH David P. Roach Director March 21, 2006      /s/ JOE S. EDWARDS Joe S. Edwards Director March 21, 2006      /s/R. STEVEN UNVERFERTH R. Steven Unverferth Director March 21, 2006      /s/ ROBERT L. BENROTH Robert L. Benroth Director March 21, 2006   /s/ ROBERT L. DILLHOFF Robert L. Dillhoff  Director March 21, 2006      29    Exhibit 21  United Bancshares, Inc. Subsidiaries   The Union Bank Company  Ohio banking corporation  Columbus Grove, Ohio   United (OH) Statutory Trust I Connecticut statutory trust Columbus Grove, Ohio   30   Exhibit 23      Consent of Independent Accountants     The Board of Directors United Bancshares, Inc.   We hereby consent to the incorporation by reference in the Registration Statement (No. 333-106929) on Form S-8 of United Bancshares, Inc. of our report dated February 25, 2006, relating to the consolidated balance sheets of United Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005, which report appears in the December 31, 2005 Annual Report on Form 10-K of United Bancshares, Inc.        /s/   CLIFTON GUNDERSON LLP         Toledo, Ohio March 21, 2006    31  Exhibit 31.1  CERTIFICATION - CEO  In connection with the Annual Report of United Bancshares, Inc. on Form 10-K for the year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel W. Schutt, President and Chief Executive Officer of United Bancshares, Inc., certify, that:   (1) I have reviewed this Annual Report on Form 10-K of United Bancshares, Inc.;  (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report;  (4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the registrant and we have:  a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report is being prepared;  b. Evaluated the effectiveness of the registrant's disclosure control and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.  (5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and   b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   /s/ DANIEL W. SCHUTT Daniel W. Schutt President and Chief Executive Officer March 21, 2006   32  Exhibit 31.2  CERTIFICATION - CFO  In connection with the Annual Report of United Bancshares, Inc. on Form 10-K for the year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, Chief Financial Officer of United Bancshares, Inc., certify, that:  (1) I have reviewed this Annual Report on Form 10-K of United Bancshares, Inc.;  (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report;  (4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), for the registrant and we have:  a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report is being prepared;  b. Evaluated the effectiveness of the registrant's disclosure control and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.  (5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and   b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   /s/ Brian D. Young Brian D. Young Chief Financial Officer March 21, 2006   33   Exhibit 32.1   CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of United Bancshares, Inc. (the "Corporation") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel W. Schutt, Chief Executive Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.     /s/ DANIEL W. SCHUTT Daniel W. Schutt Chief Executive Officer   Date: March 21, 2006  *This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.    34   Exhibit 32.2   CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of United Bancshares, Inc. (the "Corporation") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian D. Young, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:   (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.     /s/ Brian D. Young Brian D. Young Chief Financial Officer   Date: March 21, 2006   *This certification is being furnished as required by Rule 13a –14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.   35   Exhibit 99.1  SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995  The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. United Bancshares, Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, is forward-looking. In some cases, information regarding certain import ant factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appears together with such statement. In addition, forward-looking statements are subject to other risks and uncertainties affecting the financial institutions industry, including, but not limited to, the following:  Interest Rate Risk The Corporation’s operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The interest income and interest expense of the Corporation change as the interest rates on interest-earning assets and interest-bearing liabilities change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond the Corporation's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of loans. Such differences in the adjustment o f interest rates on assets and liabilities may negatively affect the Corporation's income.   Possible Inadequacy of the Allowance for Loan Losses The Corporation maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of non-performing assets and classified loans, current economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans and changes in the composition of the loan portfolio. While the Board of Directors of the Corporation believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final determination.  Loans not secured by one-to-four family residential real estate are generally considered to involve greater risk of loss than loans secured by one- to four-family residential real estate due, in part, to the effects of general economic conditions. The repayment of multifamily residential, nonresidential real estate and commercial loans generally depends upon the cash flow from the operation of the property or business, which may be negatively affected by national and local economic conditions. Construction loans may also be negatively affected by such economic conditions, particularly loans made to developers who do not have a buyer for a property before the loan is made. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more likely to pay mortgage loans than consumer loans. In ad dition, the collateral securing such loans, if any, may decrease in value more rapidly than the outstanding balance of the loan.   36  Competition  The Corporation competes for deposits with other savings associations, commercial banks and credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Corporation competes with other commercial banks, savings associations, consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. The size of financial institutions competing with the Corporation are likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and a cquisitions. Such increased competition may have an adverse effect upon the Corporation.  Legislation and Regulation that may Adversely Affect the Corporation's Earnings  The Corporation is subject to extensive regulation by the State of Ohio, Division of Financial Institutions (the “ODFI”), the Federal Reserve Bank (the “FED”), and the Federal Deposit Insurance Corporation (the "FDIC") and is periodically examined by such regulatory agencies to test compliance with various regulatory requirements. As a bank holding company, the Corporation is also subject to regulation and examination by the FED. Such supervision and regulation of the Corporation and the bank are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of the company to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on the Corporation's net earnings.  The FDIC is authorized to establish separate annual assessment rates for deposit insurance of members of the Bank Insurance fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under such system, assessments may vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined by reference to the institution's capital level and the FDIC's level of supervisory concern about the bank.   37       EX-13 2 unitedexhibit13.htm     Table of Contents       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 ………………………... 14  Financial Statements  Consolidated Balance Sheets…………………………………………………. 15  Consolidated Statements of Income…………………………………………... 16  Consolidated Statements of Shareholders’ Equity……………………………. 17  Consolidated Statements of Cash Flows……………………………………… 18  Summary of Significant Accounting Policies………………………………………. 20  Notes to Consolidated Financial Statements………………………………………... 26  Directors and Officers………………………………………………………………. 46             March 22, 2006  Dear Shareholder,  I am pleased to report that 2005 proved to be a profitable year for United Bancshares, Inc. as the Company reported net income of over $4.6 million, or $1.26 per share.  As a result of the many efforts of the Company’s staff, the Company showed improving profitability throughout the year with quarterly earnings per common share of $0.29, $0.31, $0.31, and $0.35, respectively.  Primarily, the Company increased net income by improving net interest income by 8.6% and controlling non-interest expenses.   The Company’s improved profitability enabled the Company’s Board of Directors to increase its annual dividend from $0.44 per share in 2004 to $0.48 per share in 2005, a 9.1% increase.  Additionally, the Board of Directors approved a dividend for the first quarter of 2006 of $0.13 per share up from the previous $0.12 per share, an 8.3% increase.  I expect 2006 to bring challenges to our Company and to the banking environment as a whole.  It will be critical that we develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and safe, sound assets.  It will also be important that the Company expand its market position and recognize the scope, relevance and pricing of products and services offered to meet customer needs and demands, yet maintain an acceptable margin.  However, you can be assured that asset quality will not be sacrificed for the sake of growth.  Thank you for your continued support of United Bancshares, Inc. You have our pledge that we will continue to work to increase shareholder value.    Respectfully,   Daniel W. Schutt President & CEO   1  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) in March 2003, the Company is now a one-bank holding company, as that term is defined by the Federal Reserve Board.  Through its subsidiary, The Union Bank Company, Columbus Grove, Ohio (“Union”), 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, Putnam, Sandusky, Van Wert and Wood Counties, with office locations in Bowling Green, Columbus Grove, Delphos, 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 January 31, 2006, the common stock was held by 1,624 shareholders of record.  Below are the trading highs and lows for the periods noted.  Year 2005  High   Low   First Quarter $20.00 $15.03 Second Quarter      17.00   14.38 Third Quarter   17.00   14.77 Fourth Quarter   16.40   14.80  Year 2004  High   Low   First Quarter $16.75 $14.25 Second Quarter      16.99   15.31 Third Quarter   16.00   14.10 Fourth Quarter   17.70   14.75  Dividends declared by United Bancshares, Inc. on its common stock during the past two years were as follows:     2005   2004 First Quarter   $  .12   $  .11 Second Quarter              .12       .11 Third Quarter       .12       .11 Fourth Quarter       .12       .11 Total   $  .48   $  .44  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: Bonita Selhorst, Secretary United Bancshares, Inc. 100 S. High Street Columbus Grove, Ohio 45830 419-659-2141   2  UNITED BANCSHARES, INC. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA  Years ended December 31, 2005 2004 2003 2002 2001 (Dollars in thousands, except per share data)  Statements of income: Total interest income $ 30,058 $ 26,985 $ 24,765 $ 24,679 $ 26,234 Total interest expense       11,980 10,334 10,067 11,695 14,830 Net interest income 18,078 16,651 14,698 12,984 11,404 Provision for loan losses          612          577 450 722 449  Net interest income after provision for loan losses 17,466 16,074 14,248 12,262 10,955 Total non-interest income 2,611 3,023 4,083 3,099 2,827 Total non-interest expense       14,222 15,533 13,560 11,081 9,497 Income before federal income taxes 5,855 3,564 4,771 4,280 4,285 Federal income taxes 1,233 476 1,080 1,721 1,031 Income before change in accounting principle 4,622 3,088 3,691 2,559 3,254 Cumulative effect of change in  accounting principle -   -   -   3,807   -    Net income $ 4,622 $ 3,088 $ 3,691 $ 6,366 $ 3,254  Per share of common stock: Net income - basic $ 1.26    $ 0.84 $ 1.01 $ 1.77 $ 0.96 Dividends .48 0.44 0.44 0.44 0.44 Book value 12.09 11.99 11.69 11.28 9.65  Average shares outstanding - basic 3,674,352 3,670,981 3,644,642 3,601,184 3,376,652  Year end balances: Loans (6) $ 310,005 $ 306,591 $ 292,221 $ 243,555 $ 243,995 Securities 187,791 217,841    174,559 154,977 105,629 Total assets 536,209 559,323 498,695 424,997 386,401 Deposits 356,921 369,767 388,300 323,657 310,897 Shareholders' equity 43,793 44,229 42,710 40,958 34,672 Average balances: Loans (6) $ 311,107 $ 297,732 $ 280,303 $ 242,688 $ 264,243 Securities 200,903 195,444 161,522 136,018 74,597 Total assets 548,463 526,065 478,518 408,500 364,915 Deposits 364,531 378,485 366,336 310,740 287,011 Shareholders' equity 44,208 43,250 42,005 39,856 31,661 Selected ratios: Net yield on average interest-earning  assets 3.67% 3.59% 3.47% 3.56% 3.44% Return on average assets 0.84% 0.59% 0.77% 0.63% 0.89% Return on average shareholders equity 10.46% 7.14% 8.79% 6.42% 10.28% Net loan charge-offs as a percentage of average outstanding net loans 0.24% 0.20% 0.17% 0.22% 0.19% Allowance for loan losses as a percentage of year end loans 0.82% 0.90% 0.95% 1.14% 1.06% Shareholders' equity as a percentage of       total assets 8.17% 7.91% 8.56% 9.64% 8.97%  Notes:   1) 2002 ratios exclude the cumulative effect of the change in accounting principle. 2) Amounts for 2003 include RFCBC branch acquisitions, since their acquisition on March 28, 2003. 3) Net yield on average interest-earning assets was computed on a tax-equivalent basis. 4) Basic net income per share for 2002 includes $1.06 relating to change in accounting principle. 5) Non-interest expense in 2004 includes a payment to the Company’s former CEO and a provision related to the Company’s stock option accounting.  These two items reduced net income $825,000 ($0.23 per share). 6) Includes loans held for sale.   3  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. EARNINGS SUMMARY  Consolidated net income for United Bancshares, Inc. (the “Corporation”) and its wholly-owned subsidiary, The Union Bank Company (the “Bank”) for 2005 was $4.6 million compared to $3.1 million in 2004 and $3.7 million in 2003.  Basic income per share was $1.26 in 2005, an increase of $.42 per share (50.0%) from $0.84 in 2004.  Basic income per share was $0.84 in 2004, a decrease of $.17 per share (16.8%) from $1.01 in 2003.  The 2004 operating results included provisions for stock options and the retirement of the Corporation’s Chief Executive Officer which reduced net income $825,000 ($.22 per share).    The results of operations of the Gibsonburg and Pemberville branches purchased from RFCBC have been included for the period subsequent to the March 28, 2003 acquisition date.  In March 2003, Citizens Bank of Delphos and the Bank of Leipsic (wholly-owned subsidiaries of the Corporation) were merged into the Bank. FINANCIAL POSITION AND RESULTS OF OPERATIONS 2005 Compared With 2004  Net interest income for 2005 was $18.1 million, an increase of $1.4 million (8.6%) over 2004.  The increase was due to an increase in the Corporation’s net interest margin as well as average interest-earning assets, principally resulting from the $60 million leverage strategy implemented in June of 2004 and moderate loan growth.  The average yield on loans for 2005 increased to 6.78% compared to 6.38% for 2004, while the average rate paid on interest-bearing liabilities increased to 2.56% in 2005 from 1.78% in 2004.  The net effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, increasing from 3.59% in 2004 to 3.67% in 2005.  At December 31, 2005, total loans (including loans held for sale) amounted to $310.0 million compared to $306.6 million at December 31, 2004, an increase of $3.4 million (1.1%).  Loans held for sale decreased to $440,000 at December 31, 2005 from $801,000 in 2004.  Within the loan portfolio, residential real estate loans decreased $4.2 million (3.7%), commercial loans increased $2.2 million (1.8%), agricultural loans decreased $2.1 million (4.1%) and consumer loans increased $7.8 million (39.8%) during 2005.  In 2004, the Bank began originating indirect automobile loans.  During 2005, the Bank originated $12.2 million of consumer loans under these programs.  The Corporation, through its bank subsidiary, elects to sell in the secondary market a substantial portion of the fixed rate residential real estate loans originated, and typically retains the servicing rights relating to such loans.  During 2005, net gain on sale of loans was $356,000, including $209,000 of capitalized servicing rights.  The net gain on sale of loans was $704,000, including $376,000 of capitalized servicing rights in 2004.  Securities, including Federal Home Loan Bank of Cincinnati (FHLB) stock, totaled $187.8 million at December 31, 2005, representing a decrease of $30.0 million (13.8%) from total securities of $217.8 million at December 31, 2004.  The Bank is required to maintain a certain level of FHLB stock based on outstanding borrowings from the FHLB.  Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee (“ALCO”) meetings.  4  All securities except 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.  At December 31, 2005, net unrealized losses on available-for-sale securities, net of income taxes, amounted to $1.5 million.  At December 31, 2005, the Bank held 110 securities which were in a loss position with the fair value and gross unrealized losses of such securities amounting to $152.8 million and $2.8 million, 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 such securities is temporary.  FHLB stoc k is considered a restricted security which is carried at cost and evaluated periodically for impairment.  Total deposits at December 31, 2005 amounted to $356.9 million, a decrease of $12.8 million (3.5%) compared with total deposits of $369.8 million at December 31, 2004.  Of this decrease, $2.8 million (7.6%) was related to non-interest bearing deposits.  Long-term borrowings, consisting of FHLB advances and securities sold under agreements to repurchase but excluding deferrable interest debentures, amount to $120.7 million at December 31, 2005 compared to $132.0 million at December 31, 2004, a decrease of $11.3 million (8.5%).  The Bank utilizes long-term borrowings as an alternative source of funding to support asset growth and occasional deposit shrinkage as necessary.  The allowance for loan losses at December 31, 2005 was $2.5 million (0.82% of total loans) compared to $2.8 million (0.90% of total loans) at December 31, 2004.  The change in the allowance for loan losses included provision for loan losses charged to operations, loan charge-offs net of recoveries, and a transfer to other liabilities for possible credit loss relating to unfunded loan commitments.  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 was $612,000 in 2005 compared to $577,000 in 2004.  The increase in the provision for loan losses in 2005 was largely due to net loan charge offs increasing in 2005 to $758,000, compared to $587,000 in 2004, principally due to one large charge-off in the third quarter of 2005.  In addition, the provision for loan charge-offs increased as a result of a $75,000 transfer to other liabilities for possible credit loss relating to unfunded loan commitments.   Total non-interest income decreased $400,000 to $2.6 million in 2005 from $3.0 million in 2004.  The significant components of non-interest income include service charges on deposit accounts and gains from the sale of loans and securities.  Service charges on deposit accounts increased $123,000 (11.9%) to $1,157,000 in 2005 compared to $1,034,000 in 2004 largely due to the impact of the Bank increasing fees.   The Bank’s policy is to sell substantially all qualifying fixed rate residential mortgage loans it originates.  The net gain on sale of residential real estate loans decreased $348,000 to $356,000 in 2005 from $704,000 in 2004 due to decreased loan origination volume.  During 2005, the Bank sold $22.6 million of residential real estate loans compared to $42.4 million in 2004.  The lower loan sales activity in 2005 resulted from rising interest rates throughout 2005 resulting in less refinancing activity and mortgage loan origination activity.  Net securities gains amounted to $6,000 in 2005, a $544,000 decrease from $550,000 in 2004.  In anticipation of rising interest rates, the Bank elected to sell certain agency securities which contributed to the significant gains in 2004.    5  Total non-interest expenses decreased $1.3 million (8.4%) to $14.2 million in 2005 from $15.5 million in 2004.  Salaries and related costs decreased $697,000 (9.0%) to $7.1 million in 2005 from $7.8 million in 2004.  Such decrease is the result of an overall reduction in headcount in 2005 as well as the retirement of the Corporation’s Chief Executive Officer during the fourth quarter of 2004 resulting in $653,000 of severance costs.  Net occupancy expenses, including costs relating to the operation and maintenance of buildings, furnishings, and equipment, decreased $160,000 (10.9%) to $1.3 million in 2005 from $1.5 million in 2004.    Other operating expenses decreased $454,000 (7.2%) to $5.9 million in 2005 compared to $6.3 million in 2004.  The significant components of other operating expenses are summarized in Note 10 to the consolidated financial statements.  During 2004, the Board of Directors approved the use of pyramiding for the exercise of stock options as more fully described in Note 14 to the consolidated financial statements.  Consequently, the Corporation recognized a credit of $29,000 in 2005 compared to a provision of $597,000 in 2004 as a result of the use of pyramiding and such amounts are included in other operating expenses.  Data processing costs decreased $31,000 (3.1%) to $983,000 in 2005 from $1,014,000 in 2004.  Advertising costs increased $50,000 (10.9%) to $510,000 in 2005 compared to $460,000 in 2004.    The provision for income taxes for 2005 was $1.2 million (effective rate of 21.1%) compared to $476,000 (effective rate of 13.4%) in 2004, an increase of $757,000.  This increase resulted from a $2.3 million increase in income before taxes ($779,000 income tax effect) and a $590,000 decrease in interest income on tax-exempt securities ($178,000 income tax effect).  Conversely, the provision for income taxes was reduced $197,000 as a result of tax-exempt income on life insurance policies as more completely described in Note 12 to the consolidated financial statements. 2004 Compared With 2003  Net interest income for 2004 was $16.7 million, an increase of $2.0 million (13.3%) over 2003.  The increase was due to an increase in the Corporation’s interest-earning assets, primarily the result of a $60 million leverage strategy that was put in place in June of 2004 and loan growth.  The average yield on loans for 2004 decreased to 6.38% compared to 6.57% for 2003, while the average rate paid on interest-bearing liabilities decreased to 1.78% in 2004 from 2.12% in 2003.  The net effect of these and other factors resulted in the net interest yield on average interest-earning assets, on a tax-equivalent basis, increasing from 3.47% in 2003 to 3.59% in 2004.  At December 31, 2004, total loans (including loans held for sale) amounted to $306.6 million compared to $292.2 million at December 31, 2003, an increase of $14.4 million (4.9%).  Loans held for sale decreased to $801,000 at December 31, 2004 from $2.8 million at December 31, 2003.  Within the loan portfolio, residential real estate loans increased $6.6 million (6.2%), commercial loans decreased $1.6 million (1.3%), agricultural loans increased $7.0 million (15.4%), and consumer loans increased $4.2 million (27.1%) during 2004.  Securities, including FHLB stock, totaled $217.8 million at December 31, 2004, representing an increase of $43.2 million (24.7%) from total securities of $174.6 million at December 31, 2003.  The increase in securities resulted from the $70.0 million borrowing program described below.  All securities, except FHLB stock, were designated as available-for-sale at December 31, 2004 and 2003 and reported at fair value.  Net unrealized gains on available-for-sale securities reported as a separate component of shareholders’ equity, amounted to $714,000 at December 31, 2004, net of related income taxes.  Total deposits at December 31, 2004 amounted to $369.8 million, a decrease of $18.5 million (4.8%) compared to total deposits of $388.3 million at December 31, 2003.  The decrease in deposits was offset through long-term borrowings in 2004.    6  Long-term borrowings, excluding deferrable interest debentures, amounted to $132.0 million at December 31, 2004 compared to $54.4 million at December 31, 2003, an increase of $77.6 million (142.4%).  The increase includes the $64.0 million balance at December 31, 2004 of securities sold under agreements to repurchase, resulting from a $70.0 million leverage program where proceeds from securities sold under agreements to repurchase were invested in available-for-sale securities. Remaining long-term borrowings at December 31, 2004 consisted of FHLB advances.  Long-term borrowings are summarized in Note 8 to the consolidated financial statements.  The allowance for loan losses at December 31, 2004 was $2.8 million (0.90% of total loans) compared to $2.8 million (0.95% of total loans) at December 31, 2003.  Although the allowance remained approximately the same, the allowance for loan losses as a percentage of total loans decreased as a result of loan growth.  The provision for loan losses charged to operations was $577,000 in 2004 compared to $450,000 in 2003.  The increase in the provision for loan losses in 2004 was due to growth in the loan portfolio and ongoing monitoring by management.  Total non-interest income decreased $1.1 million to $3.0 million in 2004 from $4.1 million in 2003.  The net gain on sale of loans was $704,000 in 2004 (including $376,000 of capitalized servicing rights) compared to $2.3 million in 2003 (including $936,000 of capitalized servicing rights), a decrease of $1.6 million. During 2004, the Bank sold $42.4 million of residential real estate loans compared to $94.8 million in 2003.  The high loan sales activity in 2003 resulted from historically low residential real estate rates which prompted a significant level of refinancing activity.  Service charges on deposit accounts increased $170,000 (19.7%) to $1,034,000 in 2004 compared to $864,000 in 2003 largely due to the impact of the Bank increasing fees charged to customers.  Gain on sale of securities was $550,000 for 2004, a $306,000 increase (125.4%) from $244,000 in 2003.  In 2003, the Bank also recognized $202,000 of income from insurance demutualization.  Total non-interest expenses increased $2.0 million (14.5%) to $15.5 million in 2004 from $13.5 million in 2003.  Salaries and related costs increased $974,000 (14.3%) to $7.8 million in 2004 from $6.8 million in 2003.  The increase was substantially due to the impact of the severance payment made to the Corporation’s former CEO in November 2004. Net occupancy expenses, including buildings, furnishings, and equipment, increased $98,000 (7.2%) to $1.5 million in 2004 from $1.4 million in 2003.  Other non-interest expenses increased $901,000 (16.7%) to $6.3 million in 2004 compared to $5.4 million in 2003.  The significant components of other non-interest expenses are summarized in Note 10 to the consolidated financial statements. Data processing costs decreased $67,000 (6.2%) to $1.0 million in 2004 from $1.1 million in 2003.  Advertising costs increased $86,000 (22.9%) to $460,000 in 2004 compared to $374,000 in 2003.   In addition, the 2004 operating results included a provision for stock options which amounted to $597,000 due to the use of pyramiding for the exercise of stock options as more fully described in Note 14 to the consolidated financial statements.  The provision for income taxes for 2004 was $476,000, a decrease of $604,000 (55.9%) from $1.1 million 2003.  This decrease primarily resulted from the $1.2 million decrease in income before income taxes coupled with a higher percentage of the Corporation’s income before income taxes being derived from tax-exempt income on state and municipal securities, as more fully described in Note 12 to the consolidated financial statements. 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   7  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 held for sale.  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 2005, 2004, and 2003 follows.  The Corporation generated cash from operating activities of $7.1 million in 2005, $6.8 million in 2004, and $3.1 million in 2003.    Net cash flows generated from investing activities amounted to $15.7 million in 2005, with $61.2 million in 2004, and $8.7 million in 2003 being used for investing activities.  Generation of cash flows from investing activities in 2005 was largely due to $28.8 million of proceeds from the sales or maturities of available-for-sale securities, net of related purchases.  Conversely, investing cash flows were reduced as a result of the Bank’s $8,000,000 purchase of split-dollar life insurance policies and $5.0 million as a result of net loan growth.  Net proceeds from securities were used principally to reduce long-term debt.  Cash flows used for investing activities in 2004 included $17.6 million of loan portfolio growth and $43.4 million of securities purchases, net of proceeds from sales or maturities.  The increase in securities was funded through the aforementioned $70 million borrowing program.  Cash flows used for i nvesting activities in 2003 included $20.7 million of securities purchases, net of proceeds from sales or maturities, offset by principal payments on loans, net of origination, of $7.2 million, and $5.8 million of cash received from the RFCBC March 2003 branch acquisitions.   Net cash flows provided by (used in) financing activities amounted to $(27.2) million in 2005, $57.9 million in 2004, and $(44,000) in 2003.  The use of cash flow for financing activities in 2005 primarily resulted from customer deposit shrinkage of $12.5 million and $11.3 million of principal payments on long-term debt, net of borrowings.  In addition, the Board of Directors approved a stock buyback program during 2005, as described in Note 17, resulting in the purchase of 89,381 shares of the Corporation’s common stock for $1.4 million.  The Corporation also paid dividends of $1.8 million ($.48 per share).  Net cash flows provided from financing activities in 2004  was largely due to net proceeds from long-term borrowings, net of repayments, of $77.5 million, offset by decreased deposits ($18.2 million) and the payment of $1.6 million ($.44 per share) of cash dividends.  Net cash flows used in financing activities in  2003 were nominal, but were comprised of net repayments of FHLB borrowings of $1.5 million, cash dividends of $1.6 million ($.44 per share), and a decrease in deposits of $7.1 million, offset the issuance of the junior subordinated deferrable interest debentures of $10.3 million.   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,  8  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, 2005 is approximately 100% assets to liabilities or essential neutral. 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 generally accepted accounting principles, 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 the Summary of Significant Accounting Policies.  These policies, along with other disclosures presented in the Notes to Consolidated Financial Statements and in 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 and the valuation of servicing assets 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.  The valuation of the goodwill acquired in 2003 as a result of the RFCBC branch acquisitions is another accounting area that requires estimates, assumptions and judgments.  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.   9  Servicing assets are recognized as separate assets when rights are acquired through sale of mortgage loans.  Servicing assets are evaluated for impairment based upon the fair value of the rights, as determined by an independent third party, as compared to amortized cost.  Impairment is determined by stratifying rights and by predominant characteristics, such as interest rates and terms.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS  The Corporation does not believe the adoption of any recently issued pronouncements will have a significant impact on its consolidated financial statements.  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, 2005: Amount of commitment to expire per period Total Less than 1 – 3 4 – 5 Over Amount 1 year years years 5 years (Dollars in thousands) Type of commitment Commercial lines-of-credit $   24,164   $ 21,348 $ 2,786 $ 30 $           -      Real estate lines-of-credit 31,080 5,121 3,050 2,855 20,054 Consumer lines-of-credit 354 354 -     -     -     Credit card lines-of-credit 5,829 5,829 -     -     -     Guarantees -     -     -     -     -      Total commitments $ 61,427 $ 32,652 $ 5,836 $ 2,885 $ 20,054 ====== ====== ====== ====== =======  As indicated in the preceding table, the Corporation had $61.4 million in total loan commitments at December 31, 2005, with $32.7 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.  The credit card lines were all made on an unsecured basis.  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, particularly the credit card lines, which represent the maximum amount available to all cardholders.     10  The following table summarizes the Corporation’s contractual obligations as of December 31, 2005:                           Payments due by period   Total Less than 1– 3  4 – 5 Over Amount 1 year years years 5years (Dollars in thousands) Contractual obligations Long-term debt                                   $ 130,987 $ 42,339 $ 57,126 $ 20,970     $ 10,552 Capital leases           -           -          -        -              -                 Operating leases -     -     -     -     -     Unconditional purchase obligations -     -     -     -     -     Other long-term liabilities     reflected under GAAP 355   8 30 27 290  Total obligations $ 131,342 $ 42,347 $ 57,156 $ 20,997 $ 10,842 ====== ====== ====== ====== =======  Long-term debt presented in the preceding table is comprised of $61.7 million in borrowings from the FHLB, $59.0 million in securities sold under agreements to repurchase and $10.3 million from the issuance of junior subordinated deferrable interest debentures (see Notes 8 and 9 of the consolidated financial statements).    FHLB borrowings include notes that require payment of interest on a monthly basis, with principal on most issues due at maturity.  The remaining FHLB issues require monthly principal payments as disclosed in Note 8 to the consolidated financial statements. FHLB borrowings include $51.7 million in advances with fixed interest rates and $10.0 million in advances with variable interest rates.  While the variable rate obligations may be prepaid without penalty, certain of the 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 f ederal 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.  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 over a period of twenty years, commencing upon retirement effective December 31, 2001.  At December 31, 2005, the net present value of future deferred compensation payments amounted to $355,000.  Such amount is included in other liabilities in the December 31, 2005 consolidated balance sheet - see Note 13 of the consolidated financial statements.   As indicated in the table, the Corporation had no capital leases or unconditional purchase obligations as of December 31, 2005.  The Corporation has certain operating lease obligations, including photocopying   11  equipment and an office space lease, which are considered immaterial and not included in the preceding table.  The Bank also has a non-qualified deferred compensation plan covering certain directors and officers, and has provided an estimated liability of $264,000 at December 31, 2005 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  7;shocks” to its financial instruments up and down 200 basis points.  The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2005:   Change in Interest Rates (basis points)  Percentage Change in Net Interest Income  Percentage Change in Net Income      +200 -2.07% -4.59%  -200 -0.05% -0.20%    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 decrease by 2.07% and net income would decrease by 4.59%.  A 200bp decrease in interest rates would decrease net interest income by 0.05% and decrease net income by 0.20%.  Management does not expect any significant adverse effect to net interest income in 2006 based on the composition of the portfolio and anticipated trends in rates.  12  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 f orward-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.  13  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 its subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005.  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 its subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.  /s/    CLIFTON GUNDERSON LLP     Toledo, Ohio February 25, 2006   14    UNITED BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2005 and 2004  ASSETS 2005 2004 CASH AND CASH EQUIVALENTS Cash and due from banks $ 8,968,880 $ 9,187,378 Interest-bearing deposits in other banks 75,488 867,571 Federal funds sold 1,070,000 4,517,000 Total cash and cash equivalents 10,114,368 14,571,949 SECURITIES, available-for-sale 183,351,256 213,617,118 FEDERAL HOME LOAN BANK STOCK, at cost 4,439,600 4,224,400 LOANS HELD FOR SALE 440,432 801,066 LOANS 309,564,672 305,789,653 Less allowance for loan losses 2,540,301 2,757,491 Net loans 307,024,371 303,032,162 PREMISES AND EQUIPMENT, net 6,198,467 6,720,388 GOODWILL 7,282,013 7,282,013 OTHER INTANGIBLE ASSETS, net 1,092,005 1,423,384 CASH SURRENDER VALUE OF LIFE INSURANCE 10,479,078 2,220,468 OTHER ASSETS, including accrued interest receivable 5,787,082 5,430,255  TOTAL ASSETS $ 536,208,672 $ 559,323,203 ========== =========== LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits: Non-interest bearing $ 34,628,941 $ 37,476,832 Interest-bearing 322,291,895 332,290,064 Total deposits 356,920,836 369,766,896 Long-term debt 120,687,394 131,958,033 Junior subordinated deferrable interest debentures 10,300,000 10,300,000 Other liabilities 4,507,929 3,069,087 Total liabilities 492,416,159 515,094,016 SHAREHOLDERS’ EQUITY Common stock, stated value $1.  Authorized  4,750,000 shares; issued 3,760,557 shares  3,760,557 3,760,557 Surplus 14,651,596 14,598,030 Retained earnings 29,026,911 26,166,782 Accumulated other comprehensive income (loss) (1,521,648) 713,857 Treasury stock, at cost, 139,108 shares in 2005 and 71,576 shares in 2004 (2,124,903) (1,010,039) Total shareholders’ equity 43,792,513 44,229,187 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 536,208,672 $ 559,323,203 ========== ===========   These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. 15     UNITED BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2005, 2004 and 2003   2005 2004 2003 INTEREST INCOME Loans, including fees $ 21,087,737 $ 18,995,472 $ 18,416,881 Securities: Taxable 7,264,131 5,777,900 4,470,411 Tax-exempt 1,590,872 2,181,370 1,794,905 Other 115,252 30,740 82,973  Total interest income 30,057,992 26,985,482 24,765,170 INTEREST EXPENSE Deposits 6,359,259 6,137,770 7,210,734 Borrowings 5,620,976 4,196,253 2,856,069  Total interest expense 11,980,235 10,334,023 10,066,803  Net interest income 18,077,757 16,651,459 14,698,367  PROVISION FOR LOAN LOSSES 612,075 577,072 450,000  Net interest income after provision for loan losses 17,465,682 16,074,387 14,248,367  NON-INTEREST INCOME Service charges on deposit accounts 1,156,613 1,033,876 863,614 Gain on sale of loans 355,702 703,921 2,336,756 Net securities gains 6,180 550,114 244,108 Demutualization of life insurance company -        -        201,656 Other operating income 1,092,450 734,574 436,996  Total non-interest income 2,610,945 3,022,485 4,083,130  NON-INTEREST EXPENSES Salaries, wages and employee benefits 7,070,459 7,767,266 6,793,531 Occupancy expenses 1,300,039 1,459,894 1,362,104 Other operating expenses 5,851,247 6,305,489 5,404,423  Total non-interest expenses 14,221,745 15,532,649 13,560,058  Income before income taxes 5,854,882 3,564,223 4,771,439  PROVISION FOR INCOME TAXES 1,232,700 476,000 1,080,000  NET INCOME $ 4,622,182 $ 3,088,223 $ 3,691,439 ========= ========= ==========  NET INCOME PER SHARE Basic $ 1.26 $ 0.84 $ 1.01  Diluted $ 1.25 $ 0.83 $ 1.00   These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. 16    UNITED BANCSHARES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years Ended December 31, 2005, 2004 and 2003  Accumulated other compre- Common Retained hensive Treasury stock Surplus earnings income (loss) stock Total BALANCE AT DECEMBER 31, 2002 $ 3,718,277 $ 14,373,897 $ 22,612,142 $ 1,496,359 $ (1,242,699) $ 40,957,976 Comprehensive income: Net income -        -        3,691,439 -        -        3,691,439 Change in net unrealized gain, net of reclassification adjustments and income taxes -        -        -        (440,749) -        (440,749) Total comprehen- sive income 3,250,690 Exercise of stock options 22,191 85,696 -        -        -        107,887 Cash dividends declared, $.44 per share -        -        (1,606,140) -        -        (1,606,140)  BALANCE AT DECEMBER 31, 2003 3,740,468 14,459,593 24,697,441 1,055,610 (1,242,699) 42,710,413 Comprehensive income: Net income -        -        3,088,223 -        -        3,088,223 Change in net unrealized gain, net of reclassification adjustments and income taxes -        -        -        (341,753) -        (341,753) Total comprehen- sive income 2,746,470 Exercise of stock options, including 9,321 treasury shares 20,089 138,194 -        -        131,533 289,816 Sale of 7,167 treasury shares -        243 (1,906) -        101,127 99,464 Cash dividends declared, $.44 per share -        -        (1,616,976) -        -        (1,616,976)  BALANCE AT DECEMBER 31, 2004 3,760,557 14,598,030 26,166,782 713,857 (1,010,039) 44,229,187 Comprehensive income: Net income -        -        4,622,182 -        -        4,622,182 Change in net unrealized gain, net of reclassification adjustments and income taxes -        -        -        (2,235,505) -        (2,235,505) Total comprehen- sive income 2,386,677 Exercise of stock options – 12,040 treasury shares -        53,200 -        -        169,901 223,101 Sale of 9,809 treasury shares -        366 (1,961) -        138,419 136,824 Purchase of 89,381 shares -        -        -        -        (1,423,184) (1,423,184) Cash dividends declared, $.48 per share -        -        (1,760,092) -        -        (1,760,092)  BALANCE AT DECEMBER 31, 2005 $ 3,760,557 $ 14,651,596 $ 29,026,911 ($ 1,521,648) $ (2,124,903) $ 43,792,513 ======== ========= ========= ========= = ======== == ==========   These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. 17    UNITED BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003   2005 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,622,182 $ 3,088,223 $ 3,691,439 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,307,745 1,476,426 1,851,491 Provision (credit) for accrued compensation – stock options (29,031) 597,099 -        Deferred income taxes 258,624 (946) 139,053 Provision for loan losses 612,075 577,072 450,000 Gain on sale of loans (355,702) (703,921) (2,336,756) Net securities gains (6,180) (550,114) (244,108) Federal Home Loan Bank stock dividends (215,200) (169,700) (158,000) Increase in cash surrender value of life insurance (258,610) (87,319) (51,960) Net amortization (accretion) of security  premiums and discounts 46,784 287,245 840,257 Provision for deferred compensation 68,301 85,400 59,659 Loss (gain) on disposal of premises and equipment 22,602 32,350 (6,500) Proceeds from sale of loans held-for-sale 22,700,760 42,737,012 96,197,474 Originations of loans held-for-sale (22,192,928) (40,449,946) (95,473,631) Decrease (increase) in other assets (58,827) 56,805 6,412 Increase (decrease) in other liabilities 530,697 (165,697) (1,874,223)  Net cash provided by operating activities 7,053,292 6,809,989 3,090,607  CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of available-for-sale securities 26,643,772 70,885,028 11,346,383 Proceeds from maturities of available-for-sale securities, including paydowns on mortgage-backed securities 42,900,177 52,348,097 106,718,173 Purchases of available-for-sale securities (40,730,470) (166,600,652) (138,753,232) Net decrease (increase) in loans (4,976,876) (17,570,822) 7,201,972 Purchase of bank owned life insurance (8,000,000) -        -        Proceeds from sale of premises and equipment 35,000 -        6,500 Net cash received from branch acquisitions -        -        5,748,394 Investment in business trust -        -        (300,000) Purchases of premises and equipment (163,487) (261,372) (653,817)  Net cash provided by (used in) investing activities 15,708,116 (61,199,721) (8,685,627)   18    UNITED BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003   2005 2004 2003 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits $ (12,521,304) $ (18,208,475) $ (7,056,287) Long-term debt borrowings: Proceeds 15,000,000 106,500,000 14,000,000 Repayments (26,270,639) (28,988,110) (15,510,332) Issuance of junior subordinated deferrable interest debentures -        -        10,300,000 Fees paid on issuance of trust preferred securities -        -        (265,000) Purchase of common stock (1,423,184) -        -        Proceeds from issuance of common stock -       97,660 107,887 Proceeds from sale of treasury shares 136,824 99,464 -        Payments of deferred compensation (380,594) (17,003) (14,207) Cash dividends paid (1,760,092) (1,616,976) (1,606,140)  Net cash provided by (used in) financing activities (27,218,989) 57,866,560 (44,079)  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,457,581) 3,476,828 (5,639,099) CASH AND CASH EQUIVALENTS At beginning of year 14,571,949 11,095,121 16,734,220  At end of year $ 10,114,368 $ 14,571,949 $ 11,095,121 ========= ========= =========  SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the year for: Interest $ 11,612,695 $ 10,154,985 $ 10,043,013 ========= ========= =========  Federal income taxes $ 925,000 $ 320,000 $ 2,115,726 ========= ========= =========  Non-cash operating activity: Change in deferred income taxes on net unrealized gain or loss on available-for-sale securities $ 1,151,624 $ 176,054 $ 227,053 ========= ========= =========  Transfer of allowance for loan losses to other liabilities $ 70,780 $ -        $ -        ========= ========= =========  Non-cash operating and investing activity: Available-for-sale securities purchased but not settled until after year end $ 1,975,350 $ -        $ -        ========= ========= =========  Non-cash investing activities: Transfer of loans to foreclosed assets $ -       $ 352,667 $ -        ========= ========= =========   These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.     Change in net unrealized gain or loss on available-for-sale securities $ (3,387,129) $ (517,807) $ (667,802) ========== ========== ==========  Non-cash financing activities: Addition to surplus resulting from tax benefit of exercise of options $ -       $ 45,350 $ -       ========== ========== ==========  Treasury stock issued for accrued compensation – stock options $ 223,101 $ 146,806 $ -        ========== ========== ==========   These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. 19    UNITED BANCSHARES, INC. 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, and operated as a three-bank holding company.  On March 7, 2003, following receipt of approval from the appropriate regulatory authorities, the charters of Leipsic and Citizens were collapsed and merged into the Bank.  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 Delphos, Kalida, Leipsic, Lima, and Ottawa, Ohio.  On March 28, 2003, the Bank completed the acquisition of branches located in Gibsonburg and Pemberville, Ohio.  In 2004, the Bank opened a full-service banking center in Bowling Green, 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 generally accepted accounting principles 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 most significant estimates susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of servicing assets.    PRINCIPLES OF CONSOLIDATION  The consolidated financial statements include the accounts of the Corporation and the Bank, as well as the accounts of Leipsic and Citizens prior to the collapsing of their charters in March 2003.  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.  SECURITIES AND FEDERAL HOME LOAN BANK STOCK  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).   20    UNITED BANCSHARES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   SECURITIES AND FEDERAL HOME LOAN BANK STOCK (CONTINUED) The cost of available-for-sale debt 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.  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. 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.  Any net unrealized losses are recognized through a valuation allowance by charges to income.  Such valuation allowance amounted to $12,898 at December 31, 2005 and $7,455 at December 31, 2004.  Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Bank.  The carrying value of mortgage loans sold 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. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are stated at their 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 discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Credit card loans and other personal loans are typically charged-off no later than 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.  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.   21    UNITED BANCSHARES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ALLOWANCE FOR LOAN LOSSES (CONTINUED) 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 the 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.  The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as either doubtful or substandard.  For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or 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 (doubtful, substandard or special mention) without specific reserves and 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 and construction 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.  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. FORECLOSED ASSETS Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value 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.  Foreclosed assets amounting to $362,274 and $706,941 at December 31, 2005 and 2004, respectively, are included in other assets in the accompanying consolidated balance sheets.  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 credit card arrangements, commercial letters of credit, and standby letters of credit.  Such financial instruments are recorded when they are funded.   22    UNITED BANCSHARES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   SERVICING Servicing assets are recognized as separate assets when rights are acquired through sale of mortgage loans.  Capitalized servicing rights are reported in other assets and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans.  Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.  Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.  Servicing fee income is recorded for fees earned 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 netted 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 using both accelerated and straight-line methods.   INTANGIBLE ASSETS Goodwill arising from the March 2003 Gibsonburg and Pemberville branch acquisitions is not amortized, but is subject to an annual impairment test to determine if an impairment loss has occurred.  Other intangible assets determined to have a definite life are amortized on a straight-line basis over the estimated useful lives of the individual assets which range from 7 to 10 years.  ADVERTISING COSTS  All advertising costs are expensed as incurred.  FEDERAL 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 their 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.  The Bank is not currently subject to state and local income taxes.   23    UNITED BANCSHARES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   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, after restatement for stock dividends.  Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  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, 2005, 2004 and 2003 were as follows: 2005 2004 2003  Basic 3,674,352 3,670,981 3,644,642 ======= ======= =======  Diluted 3,685,699 3,701,983 3,687,768 ======= ======= =======  Dividends per share are based on the number of shares outstanding at the declaration date, after restatement for any stock dividends.  STOCK-BASED COMPENSATION During 2004, the Board of Directors approved an alternative payment method for the exercise of all remaining outstanding options effectively resulting in the expensing of the fair value of options, as more fully described in Note 14.  Prior to 2004, compensation expense under stock option plans was reported only if options were granted below market price at the grant date.  Pro forma disclosure of compensation cost of stock-based awards for 2003 have been determined and are presented below using the fair value method that considers the time value of the option and the risk-free interest rate over the expected life of the option.  Had compensation cost for stock options been measured using Financial Accounting Standards Board’s Statement No. 123, net income and net income per share for 2003 would have approximated the pro forma amounts indicated below.   Net income Net per share 2003 income Basic Diluted  As reported $ 3,691,439 $ 1.01 $ 1.00 Pro forma 3,517,465 .97 .95  The pro forma effects were computed using the following weighted-average assumptions as of grant date.  Risk-free interest rate  2.75% Expected option life (in years) 3.7 Dividend yield 2.75%  Any subsequent tax benefit from the exercise of options is recorded by the Corporation as an addition to capital surplus.  In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payments” (FAS 123R), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.  FAS 123R also establishes fair value as the measurement objective in accounting for share-based payment arrangements, including share options.  The Statement will require the Corporation to measure compensation expense based on the grant-date fair value of options awarded over the period during which the recipient is required to provide services in exchange for the award.  Statement 123R applies to all options awarded after the required effective date and to awards modified, repurchased, or cancelled after that date.     24    UNITED BANCSHARES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   STOCK-BASED COMPENSATION (CONTINUED)  The Corporation was required to adopt the provisions of FAS 123R for the quarter ended June 30, 2005.  There was no impact on the consolidated financial statements as a result of adopting FAS 123R since the value of all options has been expensed as described in Note 14. 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. RATE LOCK COMMITMENTS The Financial Accounting Standards Board has determined that loan commitments related to the origination or acquisition of mortgage loans that will be held for sale must be 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, 2005 and 2004, derivative assets and liabilities relating to rate lock commitments were not material to the consolidated financial statements. 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.  RECLASSIFICATIONS  Certain reclassifications of 2004 and 2003 amounts have been made to conform to the 2005 presentation.    This information is an integral part of the accompanying consolidated financial statements.  25    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SECURITIES  The amortized cost and fair value of securities as of December 31, 2005 and 2004 are as follows:  2005 2004 Amortized Fair Amortized Fair cost value cost value   Available-for-sale:      U.S. Treasury and   agencies  $  29,641,901  $  28,877,134  $  25,078,303  $  24,904,144  Obligations of states and   political subdivisions  42,189,859  42,356,608  43,513,203  44,430,857  Mortgage-backed 113,772,014 112,064,505 143,891,001 144,229,108  Other 53,009 53,009 53,009 53,009        Total $185,656,783 ========= $183,351,256 ========== $212,535,516 ========== $213,617,118 ==========    A summary of unrealized gains and losses on investment securities at December 31, 2005 and 2004 follows: 2005 2004 Gross Gross Gross Gross unrealized unrealized unrealized unrealized gains losses gains losses Available-for-sale: U.S. Treasury and agencies $ -       $ 764,767 $ 954 $ 175,113 Obligations of states and political subdivisions 411,510 244,761 1,000,676 83,022 Mortgage-backed 38,645 1,746,154 992,291 654,184  Total $ 450,155 $ 2,755,682 $ 1,993,921 $ 912,319 ======= ========= ========= ========  The amortized cost and fair value of securities at December 31, 2005, 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 cost value  Due in one year or less $       962,609 $       966,611 Due after one year through five years 133,733,568 131,752,029 Due after five years through ten years 40,037,331 39,699,171 Due after ten years 10,870,266 10,880,436 Other securities having no maturity date 53,009 53,009  Total $ 185,656,783 $ 183,351,256 ========== ==========  Securities with a carrying value of approximately $138,529,000 at December 31, 2005 and $117,429,000 at December 31, 2004 were pledged to secure public deposits and for other purposes as required or permitted by law, including those described in Note 8.   26    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SECURITIES (CONTINUED)  The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2005 and 2004:  Securities in a continuous unrealized loss position Less than 12 months 12 months or more Total Unrealized Fair Unrealized Fair Unrealized Fair 2005 losses value losses value losses value  U.S. Treasury and agencies $ 172,097 $ 8,860,095 $ 592,670 $ 19,017,038 $ 764,767 $ 27,877,134 Obligations of states and political subdivisions 191,339 16,748,609 53,421 2,132,418 244,761 18,881,027 Mortgage-backed 615,850 65,459,198 1,130,305 40,599,933 1,746,154 106,059,130 Total temporarily impaired securities $ 979,286 $ 91,067,902 $ 1,776,396 $ 61,749,389 $ 2,755,682 $ 152,817,291 ======= ========== ========= ========= ========= ===========  2004  U.S. Treasury and agencies $ 159,562 $ 19,418,741 $ 15,551 $ 484,449 $ 175,113 $ 19,903,190 Obligations of states and political subdivisions 72,392 4,148,224 10,630 1,217,388 83,022 5,365,612 Mortgage-backed 527,721 48,332,248 126,463 5,646,159 654,184 53,978,407 Total temporarily impaired securities $ 759,675 $ 71,899,213 $ 152,644 $ 7,347,996 $ 912,319 $ 79,247,209 ======= ========= ========= ========= ========= ===========  There were 110 securities in an unrealized loss position at December 31, 2005, 43 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 and volatility in the bond market in concluding that the unrealized losses as of December 31, 2005 were primarily the result of customary and expected fluctuations in the bond market.  As a result, all security impairments as of December 31, 2005 are considered temporary.  Gross realized gains from sale of securities, including securities calls, amounted to $151,223 in 2005, $877,599 in 2004, and $297,829 in 2003, with the income tax provision applicable to such gains amounting to $51,416 in 2005, $298,384 in 2004, and $101,262 in 2003.  Gross realized losses from sale of securities amounted to $145,043 in 2005, $327,485 in 2004 and $53,721 in 2003 with related income tax effect of $49,315 in 2005, $111,345 in 2004 and $18,265 in 2003.   27    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - LOANS  Loans at December 31, 2005 and 2004 consist of the following:  2005 2004  Residential real estate $ 107,810,865 $ 111,984,630 Commercial 122,441,598 120,289,459 Agriculture 50,399,134 52,528,595 Consumer 27,386,495 19,584,404 Credit cards 1,526,580 1,402,565  Total loans $ 309,564,672 $ 305,789,653 =========== ========== Certain commercial and agricultural loans are secured by real estate.  Fixed rate loans approximated $94,834,000 at December 31, 2005 and $89,652,000 at December 31, 2004, including loans classified as held-for-sale.  Impaired loans were as follows as of December 31, 2005 and 2004: 2005 2004  Loans with no allowance for loan losses allocated $ 875,425 $ 1,077,775 Loans with allowance for loan losses allocated 1,822,603 1,209,762  Total impaired loans $ 2,698,028 $ 2,287,537 ========= ========  Amount of the allowance allocated $ 164,283 $ 181,465 ========= ========  The average balance of impaired loans approximated $2,821,000 in 2005, $2,075,000 in 2004, and $1,939,000 in 2003.  The amount of interest income reported and received on a cash basis relating to impaired loans approximated $123,000 in 2005 and $108,000 in 2004 and 2003.  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, and do not represent more than a normal collection risk.  Such loans amounted to $3,845,453 and $4,278,813 at December 31, 2005 and 2004, respectively.  The following is a summary of activity during 2005 and 2004 for such loans:  2005 2004  Beginning of year $ 4,278,813 $ 3,688,835 Additions 430,360 1,642,313 Repayments (863,720) (1,052,335)  End of year $ 3,845,453 $ 4,278,813 ========= ========  Additions and repayments include loan renewals, as well as net borrowings and repayments under revolving lines-of-credit.   28    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 2 - LOANS (CONTINUED)  Most of the Banks’ lending activities are with customers primarily located in Northwestern and West Central Ohio.  As of December 31, 2005 and 2004, the Bank’s loans from borrowers in the agriculture industry represent the single largest industry and amounted to $50,399,134 and $52,528,595, respectively.  Agricultural loans are generally secured by property, equipment, and crop income.  Repayment is expected from cash flow from the harvest and sale of crops.  The agricultural customers are subject to the risks of weather and market prices of crops which could have an impact on their ability to repay their loans.  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.  Loans on non-accrual of interest amounted to $2,360,000 and $2,135,000 at December 31, 2005 and 2004, respectively.  Loans past due more than 90 days and still accruing interest amounted to $906,000 and $707,000 at December 31, 2005 and 2004, respectively. NOTE 3 - ALLOWANCE FOR LOAN LOSSES  The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003: 2005 2004 2003  Balance at beginning of year  $2,757,491  $2,767,521  $2,784,509 Provision charged to operations 612,075 577,072 450,000 Transfer to other liabilities (70,780) -       -       Loans charged-off (969,272) (848,371) (655,168) Recoveries of loans charged-off 210,787 261,269 188,180  Balance at end of year $ 2,540,301 $ 2,757,491 $ 2,767,521 ========= ======== ========  During 2005, the Bank transferred $70,780 from the allowance for loan losses to other liabilities representing the Bank’s calculation of possible credit loss relating to unfunded loan commitments. NOTE 4 - PREMISES AND EQUIPMENT  The following is a summary of premises and equipment at December 31, 2005 and 2004:  2005 2004  Land and improvements $ 1,463,829 $1,473,829 Buildings 5,862,625 5,885,241 Equipment 3,412,678 3,697,924 10,739,132 11,056,994 Less accumulated depreciation 4,540,665 4,336,606  Premises and equipment, net $ 6,198,467 $ 6,720,388 ========= = =========  Depreciation expense amounted to $627,806 in 2005, $730,809 in 2004 and $779,061 in 2003.   29    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 5 - OTHER INTANGIBLE ASSETS  Intangible assets other than goodwill consist of deposit base premiums resulting from the branch acquisitions of the Gibsonburg and Pemberville, Ohio offices of RFC Banking Company in March 2003, as well as a branch acquisition completed by Leipsic in 1996.  The net book value of other intangible assets represents cost of $ 2,551,550, less accumulated amortization of $1,459,545 and $1,128,165 at December 31, 2005 and 2004, respectively.  Amortization of other intangible assets amounted to $ 331,380 in 2005 and 2004 and $267,885 in 2003.  Expected amortization expense for the five years subsequent to 2005 is as follows:  2006, $266,513; 2007, $253,990; 2008, $253,990; 2009, $253,990; and 2010, $63,522. NOTE 6 - 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 $210,343,000 and $214,319,000 at December 31, 2005 and 2004, respectively.  The balance of capitalized servicing rights, net of a valuation allowance, included in other assets amounted to $ 1,298,839 and $1,408,839 at December 31, 2005 and 2004, respectively.  The estimated fair value of these rights, determined using discount rates and prepayment speeds, approximated $ 1,828,000 and $1,629,000 at December 31, 2005 and 2004, respectively.  The following table summarizes mortgage servicing rights capitalized and related amortization, along with activity in the related valuation allowance:    2005 2004 2003       Mortgage servicing rights capitalized $208,504 $376,101 $936,488  Mortgage servicing rights amortization 318,504 384,181 672,380    Valuation allowance:        Beginning of year $511,463 $652,065 $314,949  Addition (reduction) (252,882) (140,602) 337,116       End of year $258,581 $511,463 $652,065   NOTE 7 - DEPOSITS  Time deposits at December 31, 2005 and 2004 include individual deposits of $100,000 or more approximating $28,536,000 and $28,825,000, respectively.  Interest expense on time deposits of $100,000 or more approximated $658,000 for 2005, $627,000 for 2004 and $678,000 for 2003.    At December 31, 2005, time deposits approximated $205,453,454 and were scheduled to mature as follows:  2006, $139,120,172; 2007, $36,691,127; 2008, $9,595,956; 2009, $12,934,495; 2010, $6,650,660; and thereafter, $461,044.   30    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 8 - LONG-TERM DEBT  Long-term debt consists of the following at December 31, 2005 and 2004:    2005 2004  Federal Home Loan Bank borrowings:    Secured note, with interest at 5.02%, due March 28, 2005 $                - $4,000,000  Secured note, with interest at 2.34%, due April 11, 2005 - 2,000,000  Secured note, with interest at 2.59%, due October 13, 2005 - 3,000,000  Secured note, with interest at 2.95%, due August 6, 2006 10,000,000 10,000,000  Secured note, with floating rate based on 1 month LIBOR plus 16 basis points (4.50% at December 31, 2005), due October 6, 2006   5,000,000   5,000,000  Secured note, with floating rate based on 1 month LIBOR plus 8 basis points (4.60% at December 31, 2005), due June 22, 2007   5,000,000   -  Secured note, with interest at 3.06%, due October 13, 2006 5,000,000 5,000,000  Secured $5,000,000 term note, with monthly principal and interest payments of $93,990, including interest at 4.84%, due April 1, 2007   1,541,283   2,567,464  Secured note, with interest at 4.02%, due August 30, 2007 8,000,000 8,000,000  Secured note, with interest at 3.81%, due October 13, 2008 2,500,000 2,500,000  Secured note, with interest at 4.61% through June 2003, thereafter convertible to variable rate at the option of the holder, due December 4, 2008   5,000,000   5,000,000  Secured note, with interest at 3.25%, due March 6, 2009 4,000,000 4,000,000  Secured $2,500,000 term note with interest at 3.08%, with monthly principal and interest payments of $45,011, due May 1, 2009   1,749,526   2,227,753  Secured $2,500,000 term note with interest at 3.08%, with monthly principal and interest payments of $45,011, due May 1, 2009   1,749,526   2,227,753  Secured note, with interest at 6.55% through June 2003, thereafter convertible to variable rate at the option of the holder, due June 16, 2010   6,500,000   6,500,000  Secured note, with interest at 6.46% through June 2003, thereafter convertible to variable rate at the option of the holder, due July 28, 2010   5,000,000   5,000,000  Advances secured by individual residential mortgages under blanket agreement  647,059  935,063  Total Federal Home Loan Bank borrowings 61,687,394 67,958,033          31    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 8 - LONG-TERM DEBT (CONTINUED)    2005 2004  Securities sold under agreements to repurchase:    4.01%, due October 13, 2009 $  5,000,000 $  5,000,000  4.28%, due June 24, 2008 12,000,000 12,000,000  3.91%, due June 25, 2007 12,000,000 12,000,000  3.51%, due October 15, 2007 5,000,000 5,000,000  3.38%, due June 24, 2006 15,000,000 15,000,000  2.56%, due June 24, 2005 - 15,000,000  3.91%, due December 26, 2006 5,000,000 -  4.07%, due June 24, 2008 5,000,000 -  Total securities sold under agreements to repurchase  59,000,000  64,000,000      Total long-term debt $120,687,394 $131,958,033        Federal Home Loan Bank borrowings are secured by Federal Home Loan Bank stock, securities with an aggregate carrying value of approximately $31,517,000 and eligible mortgage loans totalling $43,727,701 at December 31, 2005.  Interest on advances outstanding at December 31, 2005 secured by individual mortgages under blanket agreement ranged from 5.62% to 8.80%, with maturities ranging from February 2006 through July 2019.  During 2004, the Bank entered into various repurchase agreements with the proceeds used to purchase securities, principally mortgage-backed securities with 7-year rate reset.  Outstanding repurchase agreements are secured by mortgage-backed securities with an aggregate carrying value approximating $64,840,000 at December 31, 2005.  The Bank may be required to provide additional collateral based on the fair value of the underlying securities.  Future contractual maturities of long-term debt are as follows at December 31, 2005:  2006, $42,339,149; 2007, $31,485,984; 2008, $25,639,558; 2009, $9,417,475; 2010, $11,553,023; and thereafter, $252,205.   NOTE 9 - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES   During the first quarter of 2003, the Corporation formed a business trust, United (OH) Statutory Trust (United Trust) and invested $300,000.  United Trust is not consolidated by the Corporation.  Effective March 26, 2003, United Trust issued $10,000,000 of trust preferred securities, which are guaranteed by the Corporation, and are subject to mandatory redemption upon payment of the debentures.  United Trust used the proceeds from the issuance of the trust preferred securities, as well as the Corporation’s capital investment, to purchase $10,300,000 of junior subordinated deferrable interest debentures issued by the Corporation.  The debentures mature on March 26, 2033, which date may be shortened to March 26, 2008, if certain conditions are met, as well as quarterly thereafter.  The interest rate of the debentures is fixed at 6.40% for a five-year period through March 2008.  Thereafter, interest is at a floating rate  adjustable quarterly and equal to 315 basis points over the 3-month LIBOR.  Interest is payable quarterly.  The Corporation has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods.  Interest expense on the debentures amounted to $640,000 in 2005 and 2004 and is included in interest expense-borrowings in the accompanying consolidated statements of income.   32    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 9 - JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (CONTINUED)  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 under Federal Reserve Board guidelines inclusive of these securities.  The Corporation utilized the proceeds of these issuances to inject capital into the Bank to facilitate the Gibsonburg and Pemberville branch acquisitions.  NOTE 10 - OTHER OPERATING EXPENSES  Other operating expenses consisted of the following for the years ended December 31, 2005, 2004 and 2003: 2005 2004 2003  Data processing $ 983,393 $ 1,014,321 $ 1,081,564 Professional fees 382,870 387,546 375,968 Amortization of other intangible assets 331,380 331,380 267,885 Stationery and supplies 184,933 232,932 271,846 Advertising 509,647 460,035 374,430 Franchise tax 520,000 520,000 442,962 Provision (credit) for accrued compensation – stock options (29,031) 597,099 -        Other 2,968,055 2,762,176 2,589,768  Total other operating expenses $ 5,851,247 $ 6,305,489 $ 5,404,423 ========= ========= =========  NOTE 11 - OTHER COMPREHENSIVE INCOME (LOSS)  The components of other comprehensive income (loss) and related tax effects are as follows for the years ended December 31, 2005, 2004 and 2003:    2005 2004 2003       Unrealized holding gains (losses) on available-for-sale securities  $(3,380,949)  $   32,307  $(423,694)  Reclassification adjustments for net securities gains realized in income  (6,180)  (550,114)  (244,108)  Net unrealized losses (3,387,129) (517,807) (667,802)  Tax effect 1,151,624 176,054 227,053       Net-of-tax amount $(2,235,505) ========= $(341,753) ======== $(440,749) ========      33    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 12 - INCOME TAXES  The provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consist of the following: 2005 2004 2003  Current $ 974,076 $ 476,946 $ 940,947 Deferred 258,624 (946) 139,053  Total provision for income taxes $ 1,232,700 $ 476,000 $ 1,080,000 ========= ======= = ========  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:  2005 2004 2003  Expected tax using statutory tax rate of 34% $ 1,990,700 $ 1,211,800 $ 1,622,300 Increase (decrease) in tax resulting from: Tax-exempt income on state and municipal  securities and political subdivision loans (548,800) (740,800) (612,600) Interest expense associated with carrying  certain state and municipal securities  and political subdivision loans 55,800 69,700 62,600 Tax-exempt income on life insurance  contracts (76,600) -        -        Deductible dividends paid to United Bancshares, Inc. ESOP (26,500) -        -        Elimination of deferred taxes on cash surrender value of life insurance (120,200) -        -        Other, net (41,700) (64,700) 7,700  Total provision for income taxes $ 1,232,700 $ 476,000 $ 1,080,000 ========= ========= ========  A deferred tax liability was originally provided on the annual increase in cash value of the life insurance policies purchased to fund the nonqualified deferred compensation plans described in Note 13.  During the third quarter of 2005, it was determined that Bank management intends to hold such policies until the death of the insured individuals.  Consequently, the increase in cash value is not required to be carried as a temporary difference since any proceeds ultimately received will not be taxable.  As result, the deferred tax liability of $120,200 relating to the increase in cash surrender value of life insurance was eliminated during the fourth quarter of 2005.  The deferred income tax provision (credit) of $258,624 in 2005, ($946) in 2004, and $139,053 in 2003 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.   34    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 12 - INCOME TAXES (CONTINUED)  The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below:  2005 2004 Deferred tax assets: Unrealized loss on securities available-for-sale $ 783,879 $ -      Allowance for loan losses 760,600 815,400 Deferred compensation 210,400 319,000 Accrued compensation – stock options 67,400 153,100 Alternative minimum tax credit carryforward -       81,600 Accrued expenses and other 128,221 81,700  Total deferred tax assets 1,950,500 1,450,800  Deferred tax liabilities: Unrealized gain on securities available-for-sale -         367,745 Federal Home Loan Bank stock dividends 723,100 649,900 Capitalized mortgage servicing rights 441,600 479,000 Depreciation and amortization 254,600 174,800 Cash surrender value of life insurance -        108,900 Other 70,200 102,455  Total deferred tax liabilities 1,489,500 1,882,800  Net deferred tax assets (liabilities) $ 461,000 $ (432,000) ========= ========  Net deferred tax assets at December 31, 2005 are included in other assets and net deferred tax liabilities at December 31, 2004 are included in other 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, 2005 and 2004.  NOTE 13 - 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 the 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 and Bank make 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 $437,473, $517,908, and $434,084 in 2005, 2004 and 2003, respectively.  At December 31, 2005, the Plan owned 221,489 shares of the Corporation’s common stock.   35    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 13 - EMPLOYEE AND DIRECTOR BENEFITS (CONTINUED)  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 $ 263,969 at December 31, 2005 and $576,262 at December 31, 2004 which is included in other liabilities in the accompanying consolidated balance sheets.  During 2005, the Bank purchased $8,000,000 of split-dollar life insurance policies for investment purposes to fund other employee benefit plans.  The combined cash values of these policies aggregated $10,006,007 and $1,764,396 at December 31, 2005 and 2004, respectively.    Under an employee stock purchase plan established effective January 1, 2004, eligible employees may defer a portion of their compensation and use the proceeds to purchase stock of the Corporation at a price determined semi-annually by the Board of Directors.  The Corporation issued 9,809 shares and 7,167 shares under the plan during 2005 and 2004, respectively.  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, 2005 and 2004, 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 $354,992 and $361,936, respectively.  Such amounts are included in other liabilities in the December 31, 2005 and 2004 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 and the cash value of the policy, amounting to $473,071  and $456,072 at December 31, 2005 and 2004, respectively, is included in other assets in the accompanying  supplemental consolidated balance sheets.  On November 17, 2004, the Corporation’s former Chief Executive Officer and the Board of Directors of the Corporation reached an agreement, which resulted in the Chief Executive Officer retiring from all executive management positions and resigning from all board positions, effective December 1, 2004.  Under the terms of the agreement, the Corporation agreed to make a lump sum severance payment and provide certain other benefits to the former executive aggregating approximately $653,000 (net income effect of $431,000, or $.12 per share).  Such amounts were all paid prior to December 31, 2004 and are included in salaries, wages and employee benefits in the 2004 consolidated statement of income.  The Corporation also made a payment of $356,340 to the former Chief Executive during the first quarter of 2005 representing accumulated supplemental retirement benefits.  NOTE 14 - STOCK OPTIONS  The Corporation maintains a stock option plan, under which directors and certain officers are entitled to purchase common shares.  The plan generally provides that the exercise price of any stock option may not be less than the fair market value of the common stock on the date of the grant.   36    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - STOCK OPTIONS (CONTINUED) The following summarizes the stock options activity for the years ended December 31, 2005, 2004 and 2003: 2005 2004 2003 Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 66,887 $  10.86 114,417 $ 9.70 136,608 $ 8.91 Exercised (27,441) $  10.40 (47,530) 8.06 (22,191) 4.86 Outstanding at end of year 39,446 $  11.18 66,887 $ 10.86 114,417 $ 9.70 ====== ====== ======= ====== ====== ====== Options exercisable at year end 39,446 $  11.18 66,887 $ 10.86 114,417 $ 8.91 ====== ====== ====== ====== ====== ======  Options outstanding at December 31, 2005 were as follows: Outstanding and exercisable Range of Remaining exercise contractual prices Number life (years) $ 9.66 5,146 5 10.40 27,440 2 15.42     6,860 3  Outstanding at year end   39,446 ====== Weighted average contractual life 2.6 ===  In connection with its acquisition in March 2001 of Citizens, the Corporation issued options to certain directors and a senior officer of Citizens under the terms of Citizens’ Amended and Restated Stock-Based Incentive Plan (the “Plan”).  The Plan provides that options may be exercised through an “alternative option payment mechanism” referred to in the Plan as using “pyramiding transactions” where options are exercised, the shares gained through the exercise rate are tendered back to the Corporation as payment for a greater number of options, and the process is repeated as needed until all options are exercised.  Ultimately, the holder of the option ends up with a lower number of shares than exercised but at essentially no cash outlay.  In October 2004, the Board of Directors approved the use of pyramiding for the exercise of the Corporation’s remaining stock options which were all held by former directors and a senior officer of Citizens.  Consequently, the Corporation recognized a provision for compensation expense approximating $597,000 (net income effect of $394,000, or $.11 per share) representing the fair value of the 34,327 shares which could be tendered, at the discretion of the option holders, under the pyramiding transactions exercise method.  On November 29, 2004 and January 6, 2005, one of the option holders exercised 27,441 options on each date, resulting in 9,321 and 12,040 shares, with a fair value of $146,806 and $223,101, being tendered under the pyramiding transactions exercise method, respectively.  At December 31, 2005, 12,233 shares may be tendered from the 39,446 remaining outstanding options under the pyramiding transactions exercise method.  The fair value of the shares  that may be tendered, amounting to $198,172 ($450,304 at December 31, 2004), is included in other liabilities in the December 31, 2005 consolidated balance sheet.   37    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 15 - 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 their 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, 2005 and 2004: Contract amount 2005 2004 Commitments to extend credit $ 60,959,000 $ 57,276,000 ========= =========  Letters of credit $ 468,000 $ 1,354,000 ========== =========  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.  At December 31, 2005, letters of credit totalling $368,000 expire in 2006; and $100,000 expires in 2008.  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.  NOTE 16 - 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 compani es.   38    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - REGULATORY MATTERS (CONTINUED) 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, 2005 and 2004, that the Corporation and Bank meet all capital adequacy requirements to which they are subject.  As of December 31, 2005, 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 actual capital amounts and ratios of the Corporation and Bank as of December 31, 2005 and 2004 are presented in the following table: Minimum to be well capitalized Minimum under prompt capital corrective Actual requirement action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of December 31, 2005 Total Capital (to Risk- Weighted Assets) Consolidated $ 49,651 14.4% $ 27,544 > 8.0% N/A N/A Bank 43,564 12.7% 27,428 > 8.0% $ 34,286 10.0%  Tier I Capital (to Risk- Weighted Assets) Consolidated $ 47,111 13.7% $ 13,772 > 4.0% N/A N/A Bank 41,024 12.0% 13,714 > 4.0% $ 20,571 6.0%  Tier I Capital (to Average Assets) Consolidated $ 47,111 8.9% $ 21,229 > 4.0% N/A N/A Bank 41,024 7.8% 21,091 > 4.0% $ 26,363 5.0%  As of December 31, 2004 Total Capital (to Risk- Weighted Assets) Consolidated $ 47,725 14.3% $ 26,706 > 8.0% N/A N/A Bank 45,376 13.6% 26,613 > 8.0% $ 33,266 10.0%  Tier I Capital (to Risk- Weighted Assets) Consolidated $ 44,968 13.5% $ 13,353 > 4.0% N/A N/A Bank 42,619 12.8% 13,306 > 4.0% $ 19,960 6.0%  Tier I Capital (to Average Assets) Consolidated $ 44,968 8.2% $ 22,046 > 4.0% N/A N/A Bank 42,619 7.8% 21,998 > 4.0% $ 27,498 5.0%   39    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 16 - REGULATORY MATTERS (CONTINUED)  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.    The Board of Governors of the Federal Reserve System generally considers it to be an unsafe and unsound banking practice for a bank holding company to pay dividends except out of current operating income, although other factors such as overall capital adequacy and projected income may also be relevant in determining whether dividends should be paid.  NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION  A summary of condensed financial information of the parent company as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 is as follows:  CONDENSED BALANCE SHEETS 2005 2004  Assets: Cash $ 5,046,297 $ 566,917 Investment in bank subsidiary 48,006,102 52,179,959 Premises and equipment, net of accumulated depreciation 504,659 565,278 Other assets, including income taxes receivable from bank subsidiary of $269,283 in 2005 and $1,015,587 in 2004 887,811 1,845,218  Total assets $ 54,444,869 $ 55,157,372 ========= ========= Liabilities: Accrued expenses, including accrued compensation for stock options of $198,172 in 2005 and $450,304 in 2004 $ 352,356 $ 628,185 Junior subordinated deferrable interest debentures 10,300,000 10,300,000  Total liabilities 10,652,356 10,928,185  Shareholders’ equity: Common stock 3,760,557 3,760,557 Surplus 14,651,596 14,598,030 Retained earnings 29,026,911 26,166,782 Accumulated other comprehensive income (loss) (1,521,648) 713,857 Treasury stock, at cost (2,124,903) (1,010,039)  Total shareholders’ equity 43,792,513 44,229,187  Total liabilities and shareholders’ equity $ 54,444,869 $ 55,157,372 ========= =========   40    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)  CONDENSED STATEMENTS OF INCOME 2005 2004 2003  Income – including dividends from bank subsidiaries $ 7,300,940 $ 500,000 $ 500,000 Expenses – interest expense, professional fees  and other expenses, net of federal income tax benefit (740,407) (1,035,570) (496,587)  Income (loss) before equity in undistributed net income of bank subsidiary 6,560,533 (535,570) 3,413  Equity in undistributed net income of bank subsidiaries (1,938,351) 3,623,793 3,688,026  Net income $ 4,622,182 $ 3,088,223 $ 3,691,439 ========= ======== = =========   CONDENSED STATEMENTS OF CASH FLOWS  Cash flows from operating activities: Net income $ 4,622,182 $ 3,088,223 $ 3,691,439 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net income  of bank subsidiary 1,938,351 (3,623,793) (3,688,026) Provision (credit) for accrued  compensation – stock options (29,031) 597,099 -        Depreciation and amortization 79,442 82,493 70,746 Gain on sale of security -      -        (4,400) Gain on sale of premises (823) -        -        Decrease (increase) in other assets 904,407 1,179,313 (1,982,038) Increase (decrease) in accrued expenses (23,696) (72,325) 72,027  Net cash provided by (used in) operating activities 7,490,832 1,251,010 (1,840,252)  Cash flows from investing activities: Proceeds from sale of available-for-sale security -      -        104,400 Capital contribution to bank subsidiary -      -        (11,600,000) Purchases of premises and equipment -      -        (102,020) Proceeds from the sale of premises 35,000 -        -       Investment in business trust -      -        (300,000)  Net cash provided by (used in) investing activities 35,000 -        (11,897,620)   41    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)   CONDENSED STATEMENTS OF CASH FLOWS 2005 2004 2003  Cash flows from financing activities: Issuance of junior subordinated deferrable  interest debentures $ -      $ -        $ 10,300,000 Fees paid on issuance of trust preferred securities -      -        (265,000) Purchase of common stock (1,423,184) -        -        Proceeds from issuance of common stock -      97,660 107,887 Proceeds from sale of treasury shares 136,824 99,464 -        Cash dividends paid (1,760,092) (1,616,976) (1,606,140)  Net cash provided by (used in) financing activities (3,046,452) (1,419,852) 8,536,747  Net increase (decrease) in cash 4,479,380 (168,842) (5,201,125)  Cash at beginning of the year 566,917 735,759 5,936,884  Cash at end of the year $ 5,046,297 $ 566,917 $ 735,759 ======== ========= =========  During 2005, the Board of Directors approved a program whereby the Corporation purchases share 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.  During 2005, the Corporation purchased 89,381 shares under the program.   NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS  The Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments”, requires that the estimated fair value of financial instruments, as defined by the Statement, be disclosed.  Statement 107 also requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments.   42    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)  The estimated fair values of recognized financial instruments at December 31, 2005 and 2004 are as follows: 2005 2004 Carrying Estimated Carrying Estimated amount value amount value (dollars in thousands) FINANCIAL ASSETS Cash and cash equivalents $ 10,114 $ 10,114 $ 14,572 $ 14,572 Securities, including Federal Home Loan Bank stock 187,791 187,791 217,841 217,841 Net loans, including loans held for sale 307,465 309,605 303,833 305,760 Mortgage servicing rights 1,299 1,828 1,409 1,629  Total $ 506,669 $ 509,338 $ 537,655 $ 539,802 ======= ======== ======= =======  FINANCIAL LIABILITIES Deposits $ 356,921 $ 354,534 $ 369,767 $ 369,142 Long-term debt 120,687 119,704 131,958 132,735 Junior subordinated deferrable interest debentures 10,300 10,266 10,300 10,351 Other liabilities 4,508 4,636 3,069 3,206  Total $ 492,416 $ 489,140 $ 515,094 $ 515,434 ======= ======= ======= =======  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.  There are also unrecognized financial instruments at December 31, 2005 and 2004 which relate to commitments to extend credit and letters of credit.  The contract amount of such financial instruments amounts to $61,427,000 at December 31, 2005 and $58,630,000 at December 31, 2004.  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:  The fair value of securities is determined based on quoted market prices of the individual securities or, if not available, estimated fair value was obtained by comparison to other known securities with similar risk and maturity characteristics.  Such value does not consider possible tax ramifications or estimated transaction costs.   43    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)  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.  The estimated value of credit card loans is based on existing loans and does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio.  Mortgage servicing rights:  The fair value for mortgage servicing rights is determined based on an analysis of the portfolio by an independent third party.  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 Federal Home Loan Bank borrowings and junior subordinated deferrable interest debentures is determined based on a discounted cash flow analysis using current interest rates.  The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement described in Note 13 (carrying value of obligation of $354,992 in 2005 and $361,936 in 2004, and a fair value of $483,311 in 2005 and $499,167 in 2004).  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.   44    UNITED BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   NOTE 19 - CONTINGENT LIABILITIES  In the normal course of business, the Corporation and its subsidiaries 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.  NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)  The following represents a summary of selected unaudited quarterly financial data for 2005 and 2004:  Net Earnings per Interest interest Net common share income income income Basic Diluted (Dollars in thousands, except per share data)  2005 First quarter $ 7,277 $ 4,445 $ 1,083 $ .29 $ .29 Second quarter 7,538 4,584 1,133 .31 .30 Third quarter 7,572 4,531 1,146 .31 .31 Fourth quarter 7,671 4,518 1,260 .35 .35  2004 First quarter $ 6,205 $ 3,653 $ 845 $ .23 $ .23 Second quarter 6,358 3,856 763 .21 .21 Third quarter 7,083 4,316 1,097 .30 .30 Fourth quarter 7,339 4,826 383 .10 .09  The fourth quarter 2004 results included provisions for stock options and the retirement of the Corporation’s Chief Executive Officer which collectively reduced fourth quarter net income approximately $825,000, or $.22 per share.   45    UNITED BANCSHARES, INC. Columbus Grove, Ohio As of 12/31/05  DIRECTORS – UNITED BANCSHARES, INC.                 DIRECTOR               DIRECTOR NAME AGE  SINCE NAME AGE  SINCE Robert L. Dillhoff 59 2001 Robert L. Benroth 43 2003   District Highway Mgmt. Adm.   Putnam County Treasurer  Joe S. Edwards, Jr. 63 2000 James N. Reynolds 68 2000    Businessman/Investor/Pres. Buckeye Stave Co.   Chairman, Retired Banker  P. Douglas Harter 59 2001 H. Edward Rigel 63 2000    Associate of Harter & Son Funeral Home    Farmer  Daniel W. Schutt 58 2005 David P. Roach 55 2001 President/CEO    Manager of Maverick Media Radio Station of Ohio  R. Steven Unverferth 53 2005    President, Unverferth Manufacturing, Inc.   DIRECTORS – THE UNION BANK COMPANY   DIRECTOR     DIRECTOR  NAME AGE  SINCE (a) NAME AGE  SINCE (a) Robert L. Benroth 43 2001 James Anthony O’Neill, M.D. 49 2001    Putnam County Treasurer                                      Physician  Joe S. Edwards, Jr. 63 1977 James N. Reynolds 68 1966   Businessman/Investor/Pres. Buckeye Stave Co.    Retired Banker  Herbert H. Huffman 55 1993 Robert M. Schulte, Sr. 73 1994    Educator    Businessman/Spherion Services  Daniel W. Schutt 58 2005 R. Steven Unverferth 53 1993    Chairman, Pres. and Chief Executive Officer    President, Unverferth Manufacturing, Inc.  Kevin L. Lammon    51    1996 H. Edward Rigel    63        1979  Insurance and Real Estate Sales   Farmer  William R. Perry 47 1990 P. Douglas Harter 59 1969   Farmer    Associate of Harter & Son Funeral Home  David P. Roach 55 1997 Robert L. Dillhoff 59 1991    Manager of Maverick Media Radio Station of Ohio            District Highway Mgmt. Adm.  (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.   46    OFFICERS – UNITED BANCSHARES, INC.   James N. Reynolds – Chairman       Daniel W. Schutt – President / Chief Executive Officer Bonita R. Selhorst – Secretary         Brian D. Young – Chief Financial Officer, EVP & Treasurer   OFFICERS – THE UNION BANK COMPANY    Daniel W. Schutt - President/CEO/Chairman    Brian D. Young - Executive Vice President        Nancianne Carroll Senior Vice President Lewis R. Renollet Senior Vice President  Scott C. Lehman Senior Vice President Norman V. Schnipke Senior Vice President  Ronald J. McNeely Senior Vice President Bonita R. Selhorst Senior Vice President, Sec.  Heather M. Oatman Senior Vice President Melissa L. Zureich Senior Vice President       Michael D. Ebbeskotte Vice President John P. Miller Vice President  Mark G. Honigford Vice President Barry J. von der Embse Vice President  Donald W. Miller Vice President Brent A. Gibson Commercial Loan Officer       Edward B. Beecher Assistant Vice President Rose Ann Recker Assistant Vice President  Amy E. Blankemeyer Assistant Vice President Amy E. Reese Assistant Vice President  Kimberly K. Dray Assistant Vice President Kevin E. Rice Assistant Vice President  Vicky K. Gilbert Assistant Vice President Gary G. Ricker Assistant Vice President  Shawn C. Goetz Assistant Vice President Mary L. Schroeder Assistant Vice President  Jason P. Juergens Assistant Vice President Deborah R. Soldenwagner Assistant Vice President  Elizabeth A. Kahlenberg Assistant Vice President Craig R. Stechschulte Assistant Vice President  Kimberly J. Kandik Assistant Vice President Theresa A. Stein-Moenter Assistant Vice President  Amy L. Laibe Assistant Vice President Carol J. Swords Assistant Vice President  Dana F. Lawrence Assistant Vice President Kimberly S. Verhoff Assistant Vice President  Max E. Long Assistant Vice President, Security Officer Troy M. Verhoff Assistant Vice President  Doris A. Neumeier Assistant Vice President Vikki L. Williams Assistant Vice President  Jeffrey L. Point Assistant Vice President         J. Sue Alexander Construction Loan Admin. M. Chris Sanderson Compliance Officer  Larry L. Durham Financial Consultant Manager LeAnn Wilkins Mortgage Underwriter  Cynthia A. Long Accounting Officer        47    Employee Anniversaries             Thirty Years Twenty Years Sue Jenkins Ruth Schroeder                          Five Years Back row (left to right):  Troy Verhoff, Pat Grossi, Brenda McElwain, Front row:  Deb Soldenwagner, Troas Mantooth, Yvonne Stevens     Ten Years Not pictured:  Rachael Averesch, Julie Cook, Gail Richer.   48       -----END PRIVACY-ENHANCED MESSAGE-----