UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM
10-K




(Mark
One)




x


ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For the
fiscal year ended December 31, 2007


OR





 ̈


TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





for the
transition period from 
to





Commission
file number: 0-25976





UNITED
BANCSHARES, INC.


(Exact
name of registrant as specified in its charter)








Pennsylvania
            
            23-2802415(State
      of other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)The
      Graham Building, 30 South 15th
      Street,     Suite 1200, Philadelphia,
      Pennsylvania
            
            19102(Address
      of principal executive offices)
            
            (Zip
      Code)





(215)
351-4600


[Registrant’s
telephone number, including area code]





Name and
fiscal year not changed, but former address was 300 North 3rd Street
Philadelphia, PA 19106


(Former
name, former address and former fiscal year, if changed since last
report)





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            Name
      of each exchange on
              which
      registeredNONE
            NONE





Securities
registered pursuant to Section 12(g) of the Act:








Common
Stock, $ .01 Par Value


(Title of
Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act





Yes [
]      No [x]





Indicate
by check mark if registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act.


Yes [
]   No  [x]


Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.   Yes [x]   No  [ ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [x]





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting
company.  See definitions of accelerated filer, large accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange
Act.  (Check One):





[ ] Large
Accelerated filer  [ ] Accelerated filer   [
] Non-accelerated filer  [x] Smaller Reporting Company





Indicate
by checkmark whether the Registrant is a shell company (as defined by Rule 126-2
of the Exchange Act):


Yes 
    No X





The
aggregate market value of shares of common stock held by non-affiliates of
Registrant (including fiduciary accounts administered by affiliates) was
[_______________] on June 30, 2007.   Not applicable, the
Registrant shares are not publicly traded.




United
Bancshares, Inc. (sometimes herein also referred to as the “Company” or “UBS”)
has two classes of capital stock authorized 2,000,000 shares of $.01 par value
Common Stock and 500,000 shares of Series Preferred Stock  (Series A
Preferred Stock).





The Board
of Directors designated a subclass of the common stock, Class B Common Stock, by
filing of Articles of Amendment to its Articles of Incorporation on September
30, 1998.  This Class B Common Stock has all of the rights and
privileges of Common Stock with the exception of voting rights.  Of
the 2,000,000 shares of authorized Common Stock, 250,000 have been designated
Class B Common Stock.  There is no market for the Common
Stock.  None of the shares of the Registrant’s stock was sold within
60 days of the filing of this Form 10-K.





As of
March 3, 2008 the aggregate number of the shares of the Registrant’s Common
Stock outstanding was 1,068,588 (including 191,667 Class B
non-voting).





DOCUMENTS
INCORPORATED BY REFERENCE:





Document
            Parts Into Which
      IncorporatedNone

























FORM
10-K


United
Bancshares, Inc.


Index





Item
      No.
            Page





PART
I





1.
            Business
            
            41A.
            Risk Factors
            
            111B.
            Unresolved Staff Comments
            
            132.
            Properties
            
            133.
            Legal Proceedings
            
            144.
            Submission of Matters to a Vote of Security
      Holders
            
            14PART
      II5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases ofEquity Securities
            
            156.
            Selected Financial Data
            
            167.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            167A.
            Quantitative and Qualitative Disclosures about Market
      Risk
            
            348.
            Financial Statements and Supplementary
    Data
            
            349.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            
            349A.
            Controls and Procedures
            
            359B.
            Other Information
            
            35PART
      III10.
            Directors, Executive Officers and Corporate Governance
            
            3611.
            Executive Compensation
            
            4112.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            
            4513.
            Certain Relationships and Related Transactions, and
      Director Independence
            
            4714.
            Principal Accountant Fees and Services
            
            47




PART
      IV







15.
            Exhibits and Financial Statements
    Schedules
            
            43





UNLESS
OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 3, 2008.








PART I





SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT





Certain of the matters discussed in
this document and the documents incorporated by reference herein, including
matters discussed under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” may constitute forward looking
statements for the purposes of the Securities Act of 1933, as amended and the
Securities Exchange Act of 1934, as amended, and may involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of United Bancshares, Inc (“UBS”) to be materially
different from future results, performance or achievements expressed or implied
by such forward looking statements.  The words “expect,” “anticipate,”
“intended,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are
intended to identify such forward-looking statements. UBS’ actual results may
differ materially from the results anticipated by the forward-looking statements
due to a variety of factors, including without limitation: (a) the effects of
future economic conditions on UBS and its customers, including economic factors
which affect consumer confidence in the securities markets, wealth creation,
investment and consumer saving patterns; (b) UBS interest rate risk exposure and
credit risk; (c) changes in the securities markets with respect to the market
values of financial assets and the stability of particular securities markets;
(d) governmental monetary and fiscal policies, as well as legislation and
regulatory changes; (e) changes in interest rates on the level and composition
of deposits, loan demand, and the values of loan collateral and securities, as
well as interest-rate risks; (f) changes in accounting requirements or
interpretations; (g) the effects of competition from other commercial banks,
thrifts, mortgage companies, consumer finance companies, credit unions
securities brokerage firms, insurance company’s, money-market and mutual funds
and other financial institutions operating in the UBS’ trade market area and
elsewhere including institutions operating locally, regionally, nationally and
internationally, together with such competitors offering banking products and
services by mail, telephone, computer and the internet; (h) any extraordinary
events (such as the September 11, 2001 events) ,the war on terrorism and the
U.S. Government’s response to those events or the U.S. Government becoming
involved in a conflict in a foreign country including the war in Iraq; (i) the
failure of assumptions underlying the establishment of reserves for loan losses
and estimates in the value of collateral, and various financial assets and
liabilities and technological changes being more difficult or expensive than
anticipated; (j) UBS’ success in generating new business in its existing
markets, as well as its success in identifying and penetrating targeted markets
and generating a profit in those markets in a reasonable time; (k) UBS’ timely
development of competitive new products and services in a changing environment
and the acceptance of such products and services by its customers; and (l) UBS’
success in managing the risks involved in the foregoing.





All
written or oral forward-looking statements attributed to UBS are expressly
qualified in their entirety by use of the foregoing cautionary
statements.  All forward-looking statements included in this Report
are based upon information presently available, and UBS assumes no obligation to
update any forward-looking statement.




ITEM 1 — BUSINESS





United
Bancshares, Inc.





United Bancshares, Inc. (“Registrant”
or “UBS”) is a holding company for United Bank of Philadelphia (the
“Bank”).  UBS was incorporated under the laws of the Commonwealth of
Pennsylvania on April 8, 1993.  The Registrant became the bank holding
company of the Bank, pursuant to the Bank Holding Company Act of 1956, as
amended, on October 14, 1994.





The Bank commenced operations on March
23, 1992.  UBS provides banking services through the
Bank.  The principal executive offices of UBS and the Bank are located
at The Graham Building, 30 S 15th Street,
Suite 1200, Philadelphia, Pennsylvania 19102.  The Registrant’s
telephone number is (215) 351-4600.





As of March 3, 2008, UBS and the Bank
had a total of 30 employees.





4







United
Bank of Philadelphia





United Bancshares, Inc. is an African
American controlled and managed bank holding company for United Bank of
Philadelphia (the “Bank”), a commercial bank chartered in 1992 by the
Commonwealth of Pennsylvania, Department of Banking.  The deposits
held by the Bank are insured by the Federal Deposit Insurance Corporation
(“FDIC”).  The Bank provides full service community banking in
Philadelphia neighborhoods that are rich in diversity providing a market
opportunity that includes men, women, families, small business owners, skilled
laborers, professionals and many more who value home ownership and need banking
services to help make their dreams come true.





The Bank conducts all its banking
activities through its three offices located as follows:  West
Philadelphia Branch 38th and Lancaster Avenue, Philadelphia,
Pennsylvania, (iii) Mount
Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (iv)
Progress
Plaza Branch 1015 North Broad Street, Philadelphia,
Pennsylvania.  In addition, the Bank leases and concurrently subleases
to another company, the retail space on the bottom floor of its Center City
Graham Building corporate office. The Bank has an automated teller machine in
the lobby of this space that allows it to have a branding presence in Center
City Philadelphia without incurring additional occupancy expense. Through its
locations, the Bank offers a broad range of commercial and consumer banking
services.  At December 31, 2007, the Bank had total deposits
aggregating approximately $66.1 million and had total net loans outstanding of
approximately $44.6 million.  Although the Bank’s primary service area
for Community Reinvestment Act purposes is Philadelphia County, it also
services, generally, the Delaware Valley, which consists of portions of
Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle
County in Delaware; and Camden, Burlington, and Gloucester Counties in New
Jersey.





The city of Philadelphia is comprised
of 381 census tracts and, based on census data, 249 or 65% of these are
designated as low to moderate-income tracts while 105 or 27.5% are characterized
both as low to moderate-income and minority tracts.  The Bank’s
primary service area consists of a population of 1,517,550, which includes a
minority population of 752,309.





United Bank of Philadelphia, while
state chartered as a commercial bank, is uniquely structured provide retail
services to its urban communities, while maintaining and establishing a solid
portfolio of commercial relationships that include small businesses, churches
and corporations.  The Bank has leveraged its CDFI (community
development financial institution) designation as established by the United
States Department of Treasury to attract deposits from universities and
corporations in the region seeking Community Reinvestment Act (the “CRA Act”)
credit.  It was also awarded grants from the Commonwealth of
Pennsylvania and City of Philadelphia in 2006 and 2007 to loan activity in low
to moderate income communities.





The Bank will seek to strengthen
communities in the Philadelphia region with innovative products and services
including remote deposit capture as well as enhanced e-banking functionality.
The Bank engages in commercial banking business with a particular focus on, and
sensitivity to, groups that have been traditionally under-served, including
Blacks, Hispanics and women.  The Bank offers a wide range of deposit
products, including checking accounts, interest-bearing NOW accounts, money
market accounts, certificates of deposit, savings accounts and Individual
Retirement Accounts.





A broad range of credit products is
offered to the businesses and consumers in the Bank’s service area, including
commercial loans, student loans, home improvement loans, auto loans, personal
loans, home equity loans and secured credit card loans.  At March 3,
2008, the Bank’s maximum legal lending limit was approximately $1,199,000 per
borrower.  However, the Bank’s internal Loan Policy limits the Bank’s
lending to $500,000 per borrower in order to diversify the credit risk in the
loan portfolio.   The Board of Directors of the Bank maintains
the ability to waive its internal lending limit upon consideration of a
loan.  The Board of Directors has exercised this power with respect to
loans and participations on a number of occasions.





5


United Bank of Philadelphia has the
flexibility to develop loan arrangements targeted at a customer’s
objectives.  Typically, these loans are term loans or revolving credit
arrangements with interest rate, collateral and repayments terms, varying based
upon the type of credit, and various factors used to evaluate
risk.  The Bank participates in the government-sponsored Small
Business Administration (“SBA”) lending program and when the Bank deems it
appropriate, obtains  SBA guarantees for up to 90% of the loan
amount.  These guarantees are intended to reduce the Bank’s exposure
to loss in its commercial loan portfolio.  Commercial loans are
typically made on the basis of cash flow to support repayment with secondary
reliance placed on the underlying collateral.





Other services the Bank offers include
safe deposit boxes, travelers’ checks, money orders, direct deposit of payroll
and Social Security checks, wire transfers, access to regional and national
automated teller networks and most recently , remote deposit
capture.





Segments





The Company has one reportable segment,
“Community Banking.” All of the Company’s activities are interrelated, and each
activity is dependent and assessed based on how each of the activities of the
Company supports the other.  For example, commercial lending is
dependent upon the ability of the Bank to fund it with retail deposits and other
borrowings and to manage interest rate and credit risk.  This
situation is also similar for consumer and residential mortgage
lending.  Accordingly, all significant operating decisions are based
upon analysis of the Company as one operating segment or unit.





Access
to the Bank’s Website and the United States Securities and Exchange Commission
Website





Reports filed electronically by United
Bancshares, Inc.’s with the Securities and Exchange Commission including proxy
statements, reports on Form 10-K, reports on Form 10-Q, and current event
reports on Form 8–K, as well as any amendment of those reports, and other
information about UBS and the Bank are accessible at no cost on the Bank’s web
site at www.ubphila.com  under
the “investor information” section.  These files are also accessible
on the Commission’s website  at  www.sec.gov .





Competition





There is increasing competition among
financial institutions in the Bank’s service area.  Money center banks
have continued to position new branches in once abandoned neighborhoods seeking
to grow market share in minority communities.  The Bank competes with
local, regional and national commercial banks, as well as savings banks and
savings and loan associations.  Many of these banks and financial
institutions have an amount of capital that allows them to do more advertising
and promotion and to provide a greater range of services to customers including
cash management, investment and trust services.  To date, the Bank has
attracted, and believes it will continue to attract its customers from the
deposit  base of such existing banks and financial institutions
largely due to the Bank’s mission to service groups of people who have
traditionally been under served and by its devotion to personalized customer
service.  The Bank’s strategy has been, and will continue to be, to
emphasize personalized services with special sensitivity to the needs of Blacks,
Hispanics and women and to offer competitive rates to borrowers and
depositors.





The Bank focuses its efforts on the
needs of individuals and small and medium-sized businesses.  In the
event that there are customers whose loan demands exceed the Bank’s lending
limit, the Bank will seek to arrange for such loans on a participation basis
with other financial institutions and intermediaries.  The Bank will
also assist those customers requiring other services not offered by the Bank to
obtain such services from its correspondent banks.





6


The principal competition for deposits
and loans has been other depository institutions.  The Bank also
competes with other financial intermediaries such as brokerage houses offering
investment vehicles to the general public.  Other entities, both
public and private, seeking to raise capital through the issuance and sale of
debt or equity securities are also competitors with banks and savings and loan
associations in the acquisition of deposits.





Major corporations with operations in
the Philadelphia region will also be targeted for business including deposits,
loan syndications and other banking services.  An example of this
strategy in action is the alliance the Bank has developed in a broker
relationship with a local health insurance provider to sell reduced rate
health insurance to its customers resulting in commission fee
income.   Adding this service to its arsenal of services presents
the opportunity for the Bank to cross-sell other products and service to small
business owners.








Supervision
and Regulation





Regulation of United
Bancshares, Inc.





UBS, as a Pennsylvania business
corporation, is subject to the jurisdiction of the Securities and Exchange
Commission (the “SEC”) and certain state securities commissions concerning
matters relating to the offering and sale of its
securities.  Accordingly, if UBS wishes to issue additional shares of
its Common Stock, for example, to raise capital or to grant stock options, UBS
must comply with the registration requirements of the Securities Act of 1933, as
amended, and any applicable states securities laws, or use an applicable
exemption from such registration, if available.







The
Bank Holding Company Act





UBS, as a bank holding company, is
subject to the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and
supervision by the Federal Reserve Board. The BCH Act limits the business of
bank holding companies to banking, managing or controlling banks, performing
certain servicing activities for subsidiaries and engaging in such other
activities as the Federal Reserve Board may determine to be closely related to
banking. UBS is subject to the supervision of and inspection by the Federal
Reserve Board and is required to file with the Board an annual report and such
additional information as the Board may require pursuant to the BHC Act and its
implementing regulations.





A bank holding company is prohibited
from engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in non-banking activities, unless the
Federal Reserve Board, by order or regulation, has found such activities to be
so closely related to banking or managing or controlling banks, as to be a
proper incident thereto.  In making this determination, the Board
considers whether the performance of these activities by a bank holding company
would offer benefits to the public that outweigh possible adverse
effects.





The BHC Act requires UBS to secure the
prior approval of the Federal Reserve Board before it owns or controls, directly
or indirectly, more than 5% of the voting shares of any corporation, including
another holding company or bank.





The BHC Act and the Federal Reserve
Board’s regulations prohibit a bank holding company and its subsidiaries from
engaging in certain tying arrangements in connection with any extension of
credit or services.  The “anti-tying” provisions prohibit a bank from
extending credit, leasing, selling property or furnishing any service to a
customer on the condition that the customer obtain additional credit or service
from the bank, its bank holding company or any other subsidiary of its bank
holding company, or on the condition that the customer not obtain other credit
or services from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.





The Bank, as a subsidiary of UBS, is
subject to certain restrictions imposed by the Federal Reserve Act, as amended,
on any extensions of credit to UBS or its subsidiaries, on investments in the
stock or other securities UBS or its subsidiaries, and on taking such stock or
securities as collateral for loans.





7


The Federal Reserve Act and Federal
Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders.  In addition, that Act and those regulations may affect
the terms upon which any person who becomes a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.





The
Financial Services Act





The Financial Services Act (the “FSA
Act”), sometimes referred to as the Gramm-Leach-Bliley Act, repealed the
provisions of the Glass-Steagall Act, which prohibited commercial banks and
securities firms from affiliating with each other and engaging in each other’s
businesses.  Thus, many of the barriers prohibiting affiliations
between commercial banks and securities firms have been eliminated.





The FSA Act authorizes the
establishment of “financial holding companies” (“FHC”) to engage in new
financial activities offering and banking, insurance, securities and other
financial products to consumers. Bank holding companies may elect to become a
FHC, if all of its subsidiary depository institutions are well capitalized and
well managed. See “Regulatory
Action” and “Regulatory Matters” below.  If those requirements
are met, a bank holding company may file a certification to that effect with the
Federal Reserve Board and declare that it elects to become a
FHC.  After the certification and declaration are filed, the FHC may
engage either de novo or through an acquisition in any activity that has been
determined by the Federal Reserve Board to be financial in nature or incidental
to such financial activity.





Under the FSA Act the Bank, subject to
various requirements, is permitted to engage through “financial subsidiaries” in
certain financial activities permissible for affiliates of an
FHC.  However, to be able to engage in such activities the Bank must
be well capitalized and well managed and receive at least a “satisfactory”
rating in its most recent CRA examination. See “The Community Reinvestment Act”
below.





UBS cannot be certain of the future
effect of the legislation and regulations, described above, on its business,
although there may be consolidation among financial service institutions and
increased competition for UBS as well as an increase in the expense of
regulatory compliance.





The FDIC generally prohibits all
payments of dividends by a bank which is in default of any assessment to the
FDIC.  (See “Regulatory Action”
below.)




Regulation of the
Bank





The Bank is subject to supervision,
regulation and examination by the Pennsylvania Department of Banking and the
FDIC.  In December 2007, to better avail itself of the minority bank
resources offered by the FDIC, the Bank voluntarily surrendered its Federal
Reserve Membership and simultaneously applied and was accepted as an FDIC
regulated institution.  The FDIC regulates more minority/community
banks than any other regulator. Therefore, beginning January 1, 2008, the FDIC
became the Bank’s primary regulator. In addition, the Bank is subject to a
variety of local, state and federal laws that affect its operation. Below are
summarized those laws and regulations which have material impact on the
operations and expenses of the Bank and thus UBS.





Branch
Banking





The Pennsylvania Banking Code of 1965,
as amended, the (“Banking Code”), has been amended to harmonize Pennsylvania law
with federal law to enable Pennsylvania banking institutions, such as the Bank,
to participate fully in interstate banking and to remove obstacles to out of
state banks engaging in banking in Pennsylvania.





8




FDIC
Membership Regulations




The FDIC is (i) empowered to issue cease-and-desist or civil money penalty
orders against the Bank or its executive officers, directors and/or principal
shareholders based on violations of law or unsafe and unsound banking practices;
(ii) is authorized the FDIC to remove executive officers who have participated
in such violations or unsound practices; (iii) has restricted lending by the
Bank to its executive officers, directors, principal shareholders or related
interests thereof; (iv) has restricted management personnel of the Bank from
serving as directors or in other management positions with certain depository
institutions whose assets exceed a specified amount or which have an office
within a specified geographic area.  Additionally, the Bank Control
Act provides that no person may acquire control of the Bank unless the FDIC has
been given 60-days prior written notice and within that time has not disapproved
of the acquisition or extended the period for disapproval.





The
Federal Deposit Insurance Corporation Act





The Federal Deposit
Insurance Corporation Act (the “FDIC Act”) includes several provisions that have
a direct material impact on the Bank.  The most significant of these
provisions are discussed below.





The Bank is insured by the FDIC, which
currently insures the Bank’s deposits to a maximum of $100,000 per depositor.
For this protection, each insured bank pays a quarterly statutory insurance
assessment and is subject to certain rules and regulations of the FDIC. The
amount of FDIC assessments paid by individual insured depository institutions,
such as the Bank, is based on their relative risk as measured by regulatory
capital ratios and certain other factors. Under this system, in establishing the
insurance premium assessment for each bank, the FDIC will take into
consideration the probability that the deposit insurance fund will incur a loss
with respect to an institution, and will charge an institution with perceived
higher inherent risks a higher insurance premium.  The FDIC will also
consider the different categories and concentrations of assets and liabilities
of the institution, the revenue needs of the deposit insurance fund, and any
other factors the FDIC deems relevant.  A significant increase in the
assessment rate or a special additional assessment with respect to insured
deposits could have an adverse impact on the results of operations and capital
levels of the Bank and/or UBS.





In February 2006, the Federal
Deposit Insurance Reform Act was enacted. The new law merged the old Bank
Insurance Fund (BIF) and Savings Insurance Fund (SAIF) into the single Deposit
Insurance Fund, increased deposit insurance coverage for IRAs to $250,000,
provides for the further increase of deposit insurance on all accounts by
indexing the coverage to the rate of inflation, authorizes the FDIC to set the
reserve ratio of the combined Deposit Insurance Fund at a level between 1.15%
and 1.50%, and permits the FDIC to establish assessments to be paid by insured
banks to maintain the minimum ratios.





In November 2006, the FDIC adopted
final regulations to implement the Reform Act. The final regulations include the
annual assessment rates that took effect at the beginning of 2007. The new
assessment rates for all banks can vary between five and forty-three cents for
every $100 of domestic deposits.   However, although the Bank is
adequately capitalized, because of its current regulatory rating and designation
as a “troubled financial institution”, its rate was twenty-eight cents for every
$100 of deposits.  As part of the Reform Act, Congress provided
credits to institutions that paid high premiums in the past to bolster the
FDIC’s insurance reserves. As a result, according to the FDIC, the Bank had an
assessment credit to initially offset a portion of its premium in 2007. The
assessment credit for United Bank of Philadelphia was $122,000. The assessment
credit will continue to be used to reduce deposit premiums that would otherwise
be due. The Bank’s usage of the credit is limited to the average assessment of
all institutions of between five and seven cents for every $100.  With
this credit, the net premium  for the Bank was twenty-three cents per
$100, or $154,597--an increase of 40%, or $32,093, from its 2006 deposit
insurance assessment.





In addition to deposit insurance
premiums, all insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s. The annual rate (as of the first quarter of 2007) for all
insured institutions is $0.122 for every $1,000 in domestic deposits. These
assessments are revised quarterly and will continue until the bonds mature in
the year 2017.





9




The
Community Reinvestment Act





The Bank is required, by the CRA Act
and its implementing regulations, to: (i) meet the credit needs of the
community, including the low and moderate-income neighborhoods, which it serves.
The Bank’s CRA Act record is taken into account by the regulatory authorities in
their evaluation of any application made by the Bank for, among other things,
approval of a branch or other deposit facility, branch office relocation, a
merger or an acquisition.  The CRA Act also requires the federal
banking agencies to make public disclosure of their evaluation of a bank’s
record of meeting the credit needs of its entire community, including low and
moderate-income neighborhoods. After its most recent CRA Act examination the
Bank was given an “outstanding” CRA Act rating.





The
Bank Secrecy Act





Under the Bank Secrecy Act (“BSA”), the
Bank and other financial institutions are required to report to the Internal
Revenue Service currency transactions, of more than $10,000 or multiple
transactions of which the Bank has knowledge exceed $10,000 in the
aggregate.  Civil and criminal penalties are provided under the BSA
for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.





Privacy
of Consumer Financial Information





The FSA Act also contains provisions
designed to protect the privacy of each consumer’s financial information held in
a financial institution. The regulations (the “Regulations”) issued pursuant to
the FSA Act are designed to prevent financial institutions, such as the Bank,
from disclosing a consumer’s nonpublic personal information to third parties.
However, financial institutions can share a consumer customer’s personal
information or information about business with affiliated
companies.





The FSA Act Regulations permit
financial institutions to disclose nonpublic personal information to
nonaffiliated third parties for marketing purposes but financial institutions
must provide a description of their privacy policies to the consumers and give
consumers an opportunity to opt-out of such disclosure and prevent disclosure by
the financial institution of the consumer’s nonpublic personal information to
nonaffiliated third parties. These privacy Regulations will affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors.





The
Patriot Act





The Patriot Act of 2001 which was
enacted in the wake of the September 11, 2001 attacks, include provisions
designed to combat international money laundering and advance the U.S.
government’s war against terrorism. The Patriot Act, and the regulations, which
implement it, contains many obligations, which must be satisfied by financial
institutions, such as the Bank, which include appropriate policies and
procedures and controls to detect, prevent, and report money laundering and
terrorist financing and to verify the identity of their customers all of which
involve additional expenses for the Bank. In March of 2006 the Patriot Act,
which was about to expire, was extended. The provisions in the Patriot Act
concerning anti-terrorism were extended and provisions were added to the Patriot
Act to curb certain of the criminal investigation powers that were in the
original Patriot Act.  The failure to comply with the patriot Act
could have serious legal and reputational consequences for a financial
institution.





The
Sarbanes-Oxley Act of 2002 (The” SOX Act”)





On
July 30, 2002, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) was signed
into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity or debt
securities registered under the Securities Exchange Act of 1934. On December 15,
2006, the Securities and Exchange Commission delayed the internal control
reporting requirements under Section 404 of the Sarbanes-Oxley Act for
non-accelerated filers to periods ending after December 15, 2007. In accordance
with the requirements of Section 404(a), Management’s report on internal
controls is included herein at Part 9. On January 31, 2008, the SEC proposed a
further one-year delay from fiscal years ending after December 15, 2008 to
fiscal years ending after December 15, 2009 for the auditor’s attestation report
on internal controls over financial reporting.





10




The Bank,
in compliance with the Sarbanes-Oxley Act of 2002, has made the determination
that the Audit Committee of the Bank has a “financial expert” on the committee.
This “financial expert” is Joseph Drennan, an independent director of the Bank,
who is not associated with the daily management of the Bank.  Mr.
Drennan is a former bank executive and currently serves as Chief Financial
Officer for a venture capital firm.  He has an understanding of
financial statements and generally accepted accounting principles.





In 2007,
the Audit Committee of the Bank and the Board of Directors adopted and
implemented a Code of Ethics for the Chief Executive Officer and Chief Financial
Officer of the Bank in compliance with the Sarbanes-Oxley Act.





Regulatory
Action





In
February 2000, as a result of a regulatory examination completed in December
1999, the Bank entered into a Written Agreement (“Agreement”) with its primary
regulators with regard to, among other things, achievement of agreed-upon
capital levels, implementation of a viable earnings/strategic plan, adequate
funding of the allowance for loan losses, the completion of a management review
and succession plan, and improvement in internal controls.  That
Agreement required the Bank to maintain a minimum leverage capital ratio of
7.00%. As of December 31, 2002, the Bank had met the required ratios by
continuing to implement strategies that included improving profitability,
consolidating branches, and soliciting new and additional sources of capital. At
December 31, 2007, the Bank’s Tier 1 leverage ratio was 9.95%--295 basis points
above the 7.00% minimum requirement.  Management continues to address
all matters outlined in the Agreement and believes that the Bank is
substantially in compliance with the Agreement’s terms and
conditions.  Failure to comply could result in additional regulatory
supervision and/or actions.





The Bank
voluntarily surrendered its Federal Reserve Membership effective December 31,
2007.  As a result, the Agreement terminated.  The Bank
applied for and received approval to have the FDIC be its primary regulator
effective January 1, 2008.  Taking into account the results of the
2007 regulatory examinations, the FDIC and the Commonwealth of Pennsylvania
issued new regulatory orders (“Orders”) that parallel the Agreement the Bank had
with the Federal Reserve and Commonwealth Department of Banking except for the
addition of several new provisions to further enhance credit administration and
Asset Liability Management reporting to the Company’s Board of
Directors.





Management
believes that the Bank is substantially in compliance with the Agreement’s terms
and conditions and will comply with the requirements of the Orders.Management continues to
address all matters outlined in the Order.  Failure to comply could
result in additional regulatory supervision and/or actions.








ITEM 1A--RISK FACTORS





Below is a list of the significant
risks that concern UBS, the Bank and the banking industry.  The list
may not be a complete listing and has not been prepared in any certain
order.








Changes in the economy could
have an adverse affect on the Company





The strength of the U.S. economy and
the local economy in which the Bank operates may be different than
expected.  The business and earnings of the Bank are directly affected
by general conditions in the U.S. and in particular, economic conditions in the
Philadelphia region.  These conditions include legislative and
regulatory changes, inflation, and changes in government and monetary and fiscal
policies, all of which are beyond the Bank’s control.  A downturn in
the economy could result in a decrease in products and service demand, an
increase in loan delinquencies and increases in problem assets.  Real
estate pledged as collateral for loans made by the Bank may decline in value,
reducing the value of assets and collateral associated with the Bank’s existing
loans.  These factors could result in an increase in the provision for
loan losses and a decrease in net income.





11




Future loan losses may
exceed the Bank’s allowance for loan losses




The Bank is subject to credit risk,
which is the risk of losing principal or interest due to borrowers’ failure to
repay loans in accordance with their terms.  A downturn in the economy or
the real estate market in Bank’s market area or a rapid change in interest rates
could have a negative effect on collateral values and borrowers’ ability to
repay. This deterioration in economic conditions could result in losses to UBS
in excess of loan loss allowances. To the extent loans are not paid timely by
borrowers, the loans are placed on non-accrual, thereby reducing interest
income. To the extent loan charge-offs exceed the Bank’s projections, increased
amounts allocated to the provision for loan losses would reduce
income.




Changing interest rates
could reduce the Bank’s net interest margin, net interest income, fee income and
net income




Interest and fees on loans and
securities, net of interest paid on deposits and borrowings, are a large part of
the Bank’s net income.  Interest rates are key drivers of the Bank’s net
interest margin and subject to many factors beyond the control of the Bank’s
management.  As interest rates change, net interest income is affected.
Rapidly changing interest rates in the future could result in interest expense
increasing faster than interest income because of mismatches in financial
instrument maturities and/or competitive pressures.  Further,
substantially higher interest rates generally reduce loan demand and may result
in slower loan growth.  Decreases or increases in interest rates could
have a negative effect on the spreads between the interest rates earned on
assets and the rates of interest paid on liabilities, and therefore decrease net
interest income.




Government regulation can
result in limitations on operations




The Bank operates in a highly regulated
environment and is subject to supervision and regulation by a number of
governmental regulatory agencies.  Regulations adopted by these
agencies are generally intended to provide protection for depositors and
customers rather than for the benefit of the shareholders, establish permissible
activities for the Bank to engage in, maintenance of adequate capital levels,
and other aspects of operations.  The laws and regulations applicable
to the banking industry could change at any time, and we cannot predict the
effect of these changes on the Bank’s business and
profitability.  Increased regulation could increase the cost of
compliance and adversely affect profitability.  In addition, the Bank
is currently operating under a regulatory agreement that requires the
maintenance of minimum capital levels.  Losses from operations may
result in deterioration of the Bank’s capital levels below required levels and
could result in more severe regulatory action. (See “Regulatory Action”
above)




The financial services
industry is very competitive




The Bank faces competition in
attracting and retaining deposits, making loans, and providing other financial
services such as trust and investment management services throughout the Bank’s
market area. The Bank’s competitors include other community banks, larger
banking institutions, trust companies and a wide range of other financial
institutions such as credit unions, government-sponsored enterprises, mutual
fund companies, insurance companies and other non-bank businesses.  Many of
these competitors have substantially greater resources than the Bank and are
able to expend greater funds for advertising and marketing.  If the
Bank’ is unable to compete effectively, the Bank will lose market share and
income from deposits, loans, and other products may be reduced.




Inadequate
liquidity




The Bank may not be able to meet the
cash flow requirements of its customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs.  While the Bank actively manages
its liquidity position and is required to maintain minimum levels of liquid
assets, rapid loan growth or unexpected deposit attrition may negatively impact
the Bank’s ability to meet its liquidity requirements.




12




Ability to attract and
retain management and key personnel may affect future growth and
earnings




The Company’s success will be
influenced by its ability to attract and retain management experienced in
banking and financial services and familiar with the communities in the Bank’s
market areas.  The Bank’s ability to retain executive officers,
management team, and support staff is important to the successful implementation
of the Bank’s strategic plan.  It is critical, as the Bank grows, to
be able to attract and retain qualified staff with the appropriate level of
experience and knowledge in community banking.  The unexpected loss of
services of key personnel, or the inability to recruit and retain qualified
personnel in the future could have an adverse effect on the Bank’s business,
financial condition, and results of operations.




Additional, risk factors
also include the following all of which may reduce revenues and/or increase
expenses and/or pull the Bank’s management attention away from core banking
operations which may ultimately reduce the Bank’s net income




Ø
            New
      developments in the banking
industry


Ø
            Variations
      in quarterly or annual operating
results


Ø
            Revision
      of or the issuance of additional regulatory actions affecting UBS or the
      Bank


Ø
            Litigation
      involving UBS or the Bank


Ø
            Changes
      in accounting policies or
procedures





Investments
in UBS common shares involve risk.  There is no trading market for
UBS’ common shares.




ITEM 1B—UNRESOLVED STAFF COMMENTS


None.




ITEM 2 —
PROPERTIES





Corporate
Headquarters





United Bank of Philadelphia’s corporate
office is located in The Graham Building, 30 S. 15th Street,
Suite 1200, Center City Philadelphia.   In February 2005, the
Bank began a 10-year lease for its new Center City headquarters
location.  The Graham building is located in the heart of the
Philadelphia business district, directly across from City Hall. The Bank
occupies approximately 10,000 square feet on the 12th Floor,
including executive offices, operations, finance, human resource, and security
and loss prevention functions.  The average monthly lease rate over
the term of the lease is $15,170.





In August 2005, the Bank assumed the
remaining term from another financial institution of a lease for retail space on
the ground level of the Graham Building.  The Bank simultaneously
subleased this space to another company with the exception of the lobby in which
its automated teller machine (ATM) is located.   The lease
expires in September 2009. The Bank’s average aggregate gross monthly rental is
$5,012 of which the tenant pays an average monthly rent of $3,581. In addition,
the Bank pays $1,500 per month for the ATM lobby plus one third of common area
maintenance.





Mt.
Airy Branch





The Bank operates a branch at 1620
Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is
located in a densely populated residential neighborhood and in close proximity
to small businesses/retail stores. Management believes this branch has not
reached its capacity and looks forward to increased business opportunities in
this area. To further enhance its appeal, the internal appearance of this branch
was updated in 2006 to include new paint, flooring, and
furnishings.   This facility, comprising a retail banking lobby,
teller area, offices, and vault and storage space is currently leased at a
monthly rental of $4,077.





13





West
Philadelphia Branch





The Bank owns and operates the branch
location at 3750 Lancaster Avenue.  This branch is located in close
proximity to two major universities and hospitals.   It is
comprised of approximately 3,000 square feet.  Internal and external
renovations are planned for this branch in 2008. The main floor houses teller
and customer service areas, a drive-up teller facility and automated teller
machine.  The basement provides storage for the facility.





Progress
Plaza Branch





The Bank leases a branch facility
located at 1015 North Broad Street, Philadelphia, Pennsylvania.  The
Progress Plaza branch is a very active branch with the largest number of
customers seeking service on a daily basis.   This area of North
Philadelphia is an important area for the Bank and its mission. The facility is
comprised of teller and customer service areas, lobby and vault.  The
aggregate monthly rental for this facility is $3,875 per
month.  Extensive improvements to the shopping plaza in which this
branch is located will be completed in 2008.   The Bank will be
relocated within the shopping plaza in a space to be constructed by the Spring
of 2008.  The lease on this facility is currently on a month-to-month
basis until occupancy of the new facility.  Terms of the lease for the
new space have been negotiated to include a term of ten years with average
aggregate gross monthly rent of $5,996.





ITEM 3 — LEGAL PROCEEDINGS





No material litigation
or  claims have been instituted or threatened by or against UBS or the
Bank.





ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





A
shareholders’ annual meeting of UBS was held on December 7,
2007.  Proxies for the annual meeting were solicited pursuant to
Regulation 14A of the Exchange Act and there were no solicitation in opposition
to the management’s nominees as listed in the proxy statement and all such
nominees were elected.





The
matters voted upon at the shareholders’ annual meeting of UBS were the
reelection of two (2) Class D directors to serve four year terms and the
ratification of the appointment of McGladrey and Pullen LLP as UBS’ independent
registered public accountants for the year 2007.





The votes
cast at the meeting for the election of directors, for, against or withheld, as
well as a number of absentee and non-broker votes as to each matter voted upon
at the meeting, including a separate tabulation with respect to each nominee for
office is as follows:





56.411%
      Shares Voted
            492,579.66
      of 873,192.32 Shares16.847%
      Accounts Voted
            530
      of 3,146 Accounts





Question
            YES
            NO
            WITHHOLD/ABSTAINEvelyn
      F. Smalls
              (CLASS
      D)
            98.596%
              485,662.33
            0.00%
              0.00
            1.404%
              6,917.33William
      B. Moore
              (CLASS
      D)
            91.335%
              449,895.66
            0.00%
              0.00
            8.665%
              42,684.00Ratify
      McGladrey and Pullen, LLP
            93.358%
              459,862.33
            0.244%
              1,200.00
            0.639%
              31,517.33




14




PART II





ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY,


RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Common
Stock


The Common Stock is not traded on any
national exchange or otherwise traded in any recognizable market. There is no
established public trading market for UBS’ common stock.  Prior to
December 31, 1993, the Bank conducted a limited offering (the “Offering”)
pursuant to a registration exemption provided in Section 3(a) (2) of the
Securities Exchange Act of 1933.  The price-per-share during the
Offering was $12.00.  Prior to the Offering, the Bank conducted an
initial offering of the Common Stock (the “Initial Offering”) at $10.00 per
share pursuant to the same registration exemption.





There
were no capital stock transactions during 2007 and 2006.





As of March 3, 2008 there were 3,143
shareholders of record of UBS’ voting Common Stock and two shareholders of
record of UBS’ Class B Non-voting Common Stock.





Dividend
Restrictions





UBS has never declared or paid any cash
or stock dividends.  The Pennsylvania Banking Code of 1965, as
amended, provides that cash dividends may be declared and paid only from
accumulated net earnings and that, prior to the declaration of any dividend, if
the surplus of a bank is less than the amount of its capital, the bank shall,
until surplus is equal to such amount, transfer to surplus an amount which is at
least ten percent of the net earnings of the bank for the period since the end
of the last fiscal year or any shorter period since the declaration of a
dividend.  If the surplus of the Bank is less than 50% of the amount
of its capital, no dividend may be declared or paid by the Bank without the
prior approval of the Pennsylvania Department of Banking.





Under the Federal Reserve Act, if a
bank has sustained losses equal to or exceeding its undivided profits then on
hand, no dividend shall be paid, and no dividends can ever be paid in an amount
greater than such bank’s net profits less losses and bad debts.  Cash
dividends must be approved by the Board if the total of all cash dividends
declared by a bank in any calendar year, including the proposed cash dividend,
exceeds the total of the Bank’s net profits for that year plus its retained net
profits from the preceding two years less any required transfers to surplus or
to a fund for the retirement of preferred stock.  Under the Federal
Reserve Act, the Federal Reserve Board has the power to prohibit the payment of
cash dividends by a bank if it determines that such a payment would be an unsafe
or unsound banking practice.  As a result of these laws and
regulations, the Bank, and therefore UBS, whose only source of income is
dividends from the Bank, will be unable to pay any dividends while an
accumulated deficit exists.  UBS does not anticipate that dividends
will be paid for the foreseeable future.





Securities
Authorized for Issuance Under Equity Compensation Plans





In 1998, options to purchase 29,694
shares of the Company’s common stock at a price of $8.54 per share were awarded
to the former chief executive officer.





Equity
Compensation Plan Table


(a)
            (b)
            (c)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 under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
            29,694
            $8.54
            70,306Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            29,694
            $8.54
            70,306


The
information below has been derived from UBS’ consolidated financial
statements.


15





ITEM 6 — SELECTED FINANCIAL DATA








Selected
      Financial DataYear ended December 31,(Dollars
      in thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Net
      interest income
            
            $
            3,600
            
            
            $
            3,622
            
            
            $
            3,571
            
            
            $
            3,279
            
            
            $
            3,290Provision
      for loan losses
            
            
            120
            
            
            
            137
            
            
            
            558
            
            
            
            45
            
            
            
            565Noninterest
      income
            
            
            1,320
            
            
            
            1,415
            
            
            
            1,582
            
            
            
            3,655
            
            
            
            1,891Noninterest
      expense
            
            
            4,753
            
            
            
            4,780
            
            
            
            4,864
            
            
            
            5,242
            
            
            
            5,732Net
      income (loss)
            
            
            47
            
            
            
            119
            
            
            
            (269
            )
            
            
            1,647
            
            
            
            (1,115
            )Net
      income (loss) per share – basic
            
            
            0.04
            
            
            
            0.11
            
            
            
            (0.25
            )
            
            
            1.54
            
            
            
            (1.03
            )Net
      income (loss) per share – fully diluted
            
            
            0.04
            
            
            
            0.11
            
            
            
            (0.25
            )
            
            
            1.50
            
            
            
            (1.03
            )Balance
      sheet totals:Total
      assets
            
            $
            75,232
            
            
            $
            73,935
            
            
            $
            72,210
            
            
            $
            72,301
            
            
            $
            74,717Net
      loans
            
            
            44,594
            
            
            
            41,957
            
            
            
            45,950
            
            
            
            46,490
            
            
            
            46,690Investment
      securities
            
            
            13,921
            
            
            
            15,891
            
            
            
            13,706
            
            
            
            13,560
            
            
            
            15,637Deposits
            
            
            66,084
            
            
            
            64,924
            
            
            
            63,324
            
            
            
            63,172
            
            
            
            67,117Shareholders’
      equity
            
            
            8,685
            
            
            
            8,614
            
            
            
            8,492
            
            
            
            8,811
            
            
            
            7,235Ratios:Tangible
      Equity to assets
            
            
            10.17
            %
            
            
            9.93
            %
            
            
            9.87
            %
            
            
            9.89
            %
            
            
            6.85
            %Return
      on assets
            
            
            0.06
            %
            
            
            0.16
            %
            
            
            (0.37
            )%
            
            
            2.38
            %
            
            
            (1.38
            )%Return
      on equity
            
            
            0.62
            %
            
            
            1.63
            %
            
            
            (3.78
            )%
            
            
            26.96
            %
            
            
            (13.03
            )%





ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS


OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Because UBS is a bank holding company
for the Bank, the financial statements in this report are prepared on a
consolidated basis to include the accounts of the Company and the
Bank.  The purpose of this discussion is to focus on infor­mation
about the Bank’s financial condition and results of operations, which is not
otherwise apparent from the consolidated financial statements included in this
annual report.  This discussion and analysis should be read in
conjunction with the financial statements presented elsewhere in this
report.





Critical
Accounting Policies


Allowance
for Credit Losses





The Bank considers that the
determination of the amount of the allowance for loan losses involves a higher
degree of judgment and complexity than its other significant accounting
policies.   The balance in the allowance for loan losses is
determined based on management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the portfolio,
current economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and
losses.   All of these factors may be susceptible to significant
change. To the extent actual outcomes differ from management’s estimates,
additional provisions for loan losses may be required that would adversely
impact earnings in future periods.





Income
Taxes





Under the liability method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities.  Deferred
tax assets are subject to management’s judgment based upon available evidence
that future realization is more likely than not.   For financial
reporting purposes, a valuation allowance of 100% of the net deferred tax asset
has been recognized to offset the net deferred tax assets related to cumulative
temporary differences and tax loss carryforwards.  If management
determines that the Bank may be able to realize all or part of the deferred tax
asset in the future, a credit to income tax expense may be required to increase
the recorded value of the net deferred tax asset to the expected realizable
amount.





16




Executive
Brief





United Bank of Philadelphia is the only
African American-owned and controlled community development financial
institution headquartered in Philadelphia. With increased competition in the
marketplace from money center banks and other African American-owned and
controlled banks with headquarters in other states, management must maximize its
competitive advantage by leveraging its strategic partnerships and relationships
to increase market penetration and to help ensure that the communities it serves
have full access to financial products and services. Management’s goal is to
continue to increase core profitability and build franchise/shareholder value
by:





·
            Increasing
      deposits and loans


·
            Managing
      and controlling credit risk


·
            Managing
      and controlling interest rate risk


·
            Attracting
      and retaining talented staff


·
            Enhancing
      the branch network and alternative delivery
  options





Increasing deposits and
loans




In 2007, while the Bank’s total assets
grew by $1.3 million, or 1.76%, it only achieved modest profitability of
$47,000.  Even though the Bank’s net interest margin remained
relatively strong at 5.19%, the 2007 financial results were negatively impacted
by competition from money center banks that have placed new branches in close
proximity to the Bank’s branches. The neighborhoods in which the Bank’s branches
are located had seen a departure of these types of financial institutions in the
late 80’s and early 90’s when the Bank was formed. These institutions now
understand the relevance of these communities to increase market
share.  With significantly more capital, these banks are often able to
offer higher interest rates, longer hours, and state of the art branches and
ATMs.  As a result, growth in the Bank’s deposits and loans has become
more challenging. Collaboration among the Bank, regional corporations, small
businesses and the community is the Bank’s most important business development
strategy to overcome these challenges.  The Bank’s role will be that
of a connector; to link the corporate community, small businesses and low and
moderate income neighborhoods.  As such, the Bank will form
partnerships, gather deposits from the corporate community, use these funds to
lend to small businesses and nonprofits throughout the region and arrange and
lead credit facilities that generate fee income.  The Bank has already
begun to demonstrate the effectiveness of this type of collaboration with
regional corporations including a health insurance provider and cable operator
where the Bank has been the recipient of deposits, established a loan fund and
received fees for credit syndication services.




Managing and controlling
credit risk


In 2007, the Bank experienced an
increased migration of loans to “impaired” status for which the balance now
exceeds $1 million.  Typically these customers no longer demonstrate
the ability to service their debt from the ongoing operations of their
businesses.  The Bank’s source of repayment becomes the net
liquidation value of the underlying collateral.  Based on a recent
evaluation, the risk related to these credits is almost completely mitigated by
strong collateral positions in real estate or guarantees of the SBA. However,
management is mindful of the need to proactively manage these exposures by
constantly communicating with customers and detailing requirements in
forbearance agreements. Management will aggressively work with its attorneys to
expedite repayment activity. To avoid further deterioration of credit quality,
management will convene frequent asset quality meetings to identify and manage
identified risks before they become severe problems.  Also, loans will
be underwritten to ensure that loans meet the Bank’s tightened risk tolerance
standards.





Managing and controlling
interest rate risk


From September 2007 to March 2008, the
Federal Reserve reduced interest rates by 300 basis points.  This
unexpected reduction resulted in the immediate repricing of all of the Bank’s
adjustable rate loans that are indexed to prime as well as a reduction in the
interest earned on Federal Funds Sold, the Bank’s overnight
investments.   To minimize margin compression, the Bank
simultaneously reduced the rates on its premium rate savings, interest checking
products and certificates of deposit.  The Bank currently has a
“positive” gap position which makes it more vulnerable to declining interest
rates.  This position is due largely to the high level of Federal
Funds Sold and loans with immediate repricing
characteristics.  Management will actively manage the Bank’s exposure
to interest rate risk by modifying the mix of investments and loan structures to
lock in yields to minimize further compression in the current falling rate
environment.





17




Attracting and retaining
talented staff


With the decline in interest rates, the
Bank can no longer compete for business with premium interest rate
products.  It must instead reinforce its sales and service team with
individuals who embrace the meaning of “service” and aggressively cross-sell the
mission, products and services of the Bank.  Management will seek to
supplement the team with experienced bankers who possess the knowledge and
versatility to explain the Bank’s mission and ask for the business instead of
waiting for it to come.  The focus of the Bank’s business development
staff is to proactively manage relationships to attract and retain a strong core
customer base.  While the Bank originated more than $9 million in
commercial loans during 2007, it experienced more than $4 million in
payoffs/paydowns.  Many of the  paydowns were attributed to
loan participations the Bank has with other financial institutions. Because the
Bank does not have a direct relationship with these loan customers, payoffs are
often unexpectedly received.





Enhancing the branch network
and alternative delivery options


Customer service will be improved
through more efficient and effective use of technology.  This process
began in 2007 with the implementation of a new e-banking platform in 2007 that
allows for more robust cash management by its customers including remote deposit
capture, automated clearing house (ACH) origination and on-line real time
transaction views.  In addition, a new loan origination platform was
implemented to expedite the loan underwriting process as well as streamline
backroom operations by integration with the Bank’s core system.  The
Bank also overhauled its website to improve the ease of use as well as provide
“fillable” applications for loans and deposits.




Finally, management has engaged in a
more aggressive marketing and advertising campaign to get the Bank back into the
marketplace and in the minds of potential customers. With increased competition
in the region, branding and visibility are critical to the success of the Bank’s
strategies.   Full advantage will continue to be taken of the
co-branding opportunities with the Bank’s strategic alliances to increase the
Bank’s small business lending, fee income services and to grow
deposits.  In addition, newspaper (advertising/articles), radio
(interviews/advertising), and direct mail solicitation will continue to be
utilized.





18





Results
of Operations





In 2007, the Company recorded net
income of $47,000 ($0.04 per share) compared to net income of $119,000 ($0.11
per share) in 2006 and a net loss of $269,000($0.25 per share) in
2005.  A detailed explanation for each component of earnings is
included in the sections below.





Table
1—Average Balances, Rates, and Interest Income and Expense
Summary





­­­­­­­­­­­­­­­­­­­­­­
            
            2007
            
            
            2006
            
            
            2005Average
            
            
            
            
            
            Yield/
            
            
            Average
            
            
            
            
            
            Yield/
            
            
            Average
            
            
            
            
            
            Yield/(Dollars
      in thousands)
            
            balance
            
            
            Interest
            
            
            rate
            
            
            balance
            
            
            Interest
            
            
            rate
            
            
            balance
            
            
            Interest
            
            
            rateAssets:Interest-earning
      assets:Loans
            
            $
            43,674
            
            
            $
            3,516
            
            
            
            8.05
            %
            
            $
            45,863
            
            
            $
            3,626
            
            
            
            7.91
            %
            
            $
            47,861
            
            
            $
            3,429
            
            
            
            7.16
            %Investment
      securities held-to-maturity
            
            
            11,917
            
            
            
            585
            
            
            
            4.91
            
            
            
            9,513
            
            
            
            427
            
            
            
            4.49
            
            
            
            8,636
            
            
            
            357
            
            
            
            4.13Investment
      securities available-for-sale
            
            
            3,249
            
            
            
            170
            
            
            
            5.23
            
            
            
            3,119
            
            
            
            150
            
            
            
            4.81
            
            
            
            3,852
            
            
            
            180
            
            
            
            4.67Interest
      bearing balances with other banks
            
            
            281
            
            
            
            16
            
            
            
            5.69
            
            
            
            281
            
            
            
            8
            
            
            
            2.85
            
            
            
            584
            
            
            
            10
            
            
            
            1.71Federal
      funds sold
            
            
            10,294
            
            
            
            525
            
            
            
            5.10
            
            
            
            7,140
            
            
            
            357
            
            
            
            5.00
            
            
            
            5,482
            
            
            
            180
            
            
            
            3.29Total
      interest-earning assets
            
            
            69,415
            
            
            
            4,812
            
            
            
            6.93
            
            
            
            65,916
            
            
            
            4,568
            
            
            
            6.93
            
            
            
            66,415
            
            
            
            4,156
            
            
            
            6.26Noninterest-earning
      assets:Cash
      and due from banks
            
            
            3,052
            
            
            
            
            
            
            
            
            
            
            
            3,606
            
            
            
            
            
            
            
            
            
            
            
            3,772Premises
      and equipment, net
            
            
            1,046
            
            
            
            
            
            
            
            
            
            
            
            1,046
            
            
            
            
            
            
            
            
            
            
            
            1,073Other
      assets
            
            
            2,349
            
            
            
            
            
            
            
            
            
            
            
            2,573
            
            
            
            
            
            
            
            
            
            
            
            2,648Less
      allowance for loan losses
            
            
            (561
            )
            
            
            
            
            
            
            
            
            
            
            (510
            )
            
            
            
            
            
            
            
            
            
            
            (683
            )Total
            
            $
            75,301
            
            
            
            
            
            
            
            
            
            
            $
            72,631
            
            
            
            
            
            
            
            
            
            
            $
            73,225Liabilities
      and shareholders’ equity:Interest-bearing
      liabilities:Demand
      deposits
            
            $
            10,576
            
            
            
            171
            
            
            
            1.61
            %
            
            $
            9,906
            
            
            
            111
            
            
            
            1.12
            %
            
            $
            9,204
            
            
            
            64
            
            
            
            0.71
            %Savings
      deposits
            
            
            20,302
            
            
            
            287
            
            
            
            1.41
            
            
            
            17,759
            
            
            
            138
            
            
            
            0.78
            
            
            
            17,069
            
            
            
            58
            
            
            
            0.34Time
      deposits
            
            
            21,640
            
            
            
            754
            
            
            
            3.49
            
            
            
            22,264
            
            
            
            697
            
            
            
            3.13
            
            
            
            23,344
            
            
            
            463
            
            
            
            1.98Total
      interest-bearing liabilities
            
            
            52,518
            
            
            
            1,212
            
            
            
            2.31
            
            
            
            49,929
            
            
            
            946
            
            
            
            1.89
            
            
            
            49,617
            
            
            
            585
            
            
            
            1.18Noninterest-bearing
      liabilities:Demand
      deposits
            
            
            13,885
            
            
            
            
            
            
            
            
            
            
            
            13,993
            
            
            
            
            
            
            
            
            
            
            
            14,668Other
            
            
            570
            
            
            
            
            
            
            
            
            
            
            
            520
            
            
            
            
            
            
            
            
            
            
            
            444Shareholders’
      equity
            
            
            8,328
            
            
            
            
            
            
            
            
            
            
            
            8,189
            
            
            
            
            
            
            
            
            
            
            
            8,496Total
            
            
            75,301
            
            
            
            
            
            
            
            
            
            
            
            72,631
            
            
            
            
            
            
            
            
            
            
            
            73,225Net
      interest income
            
            
            
            
            
            
            3,600
            
            
            
            
            
            
            
            
            
            
            $
            3,622
            
            
            
            
            
            
            
            
            
            
            $
            3,571Net
      yield on interest-earning assets
            
            
            
            
            
            
            
            
            
            
            5.19
            %
            
            
            
            
            
            
            
            
            
            
            5.50
            %
            
            
            
            
            
            
            
            
            
            
            5.38
            %


For
purposes of computing the average balance, loans are not reduced for
nonperforming loans.  Loan fee income is included in interest income
on loans.


19





Net
Interest Income





Net interest income is an effective
measure of how well management has balanced the Bank’s interest rate-sensitive
assets and liabilities.  Net interest income, the difference between
(a) interest and fees on interest-earning assets and (b) interest paid on
interest-bearing liabilities, is a significant component of the Bank’s
earnings.  Changes in net interest income result primarily from
increases or decreases in the average balances of interest-earning assets, the
availability of particular sources of funds and changes in prevailing interest
rates.





Net interest income totaled $3,600,000
in 2007, a decrease of $22,000, or 0.61%, compared to 2006. Net interest income
was $3,622,000 in 2006, an increase of $51,000, or 1.43%, compared to
2005.





Table
2—Rate-Volume Analysis of Changes in Net Interest Income


2007 compared to 2006
            
            
            2006 compared to 2005Increase (decrease) due to
            
            
            Increase (decrease) due to(Dollars
      in thousands)
            
            Volume
            
            
            Rate
            
            
            Net
            
            
            Volume
            
            
            Rate
            
            
            NetInterest
      earned on:Loans
            
            $
            (174
            )
            
            $
            64
            
            
            $
            (110
            )
            
            $
            (160
            )
            
            $
            357
            
            
            
            197Investment
      securities held-to-maturity
            
            
            118
            
            
            
            40
            
            
            
            158
            
            
            
            39
            
            
            
            31
            
            
            
            70Investment
      securities available-for-sale
            
            
            7
            
            
            
            13
            
            
            
            20
            
            
            
            (35
            )
            
            
            5
            
            
            
            (30
            )Interest-bearing
      deposits with other banks
            
            
            -
            
            
            
            8
            
            
            
            8
            
            
            
            (9
            )
            
            
            7
            
            
            
            (2
            )Federal
      funds sold
            
            
            161
            
            
            
            7
            
            
            
            168
            
            
            
            83
            
            
            
            94
            
            
            
            177Total
      Interest-earning assets
            
            
            112
            
            
            
            132
            
            
            
            244
            
            
            
            (82
            )
            
            
            494
            
            
            
            412Interest
      paid on:Demand
      deposits
            
            
            14
            
            
            
            45
            
            
            
            59
            
            
            $
            8
            
            
            
            39
            
            
            
            47Savings
      deposits
            
            
            41
            
            
            
            109
            
            
            
            150
            
            
            
            5
            
            
            
            75
            
            
            
            80Time
      deposits
            
            
            (26
            )
            
            
            83
            
            
            
            57
            
            
            
            (34
            )
            
            
            268
            
            
            
            234Total
      interest-bearing liabilities
            
            
            29
            
            
            
            237
            
            
            
            266
            
            
            
            (21
            )
            
            
            382
            
            
            
            361Net
      interest income
            
            $
            83
            
            
            $
            (105
            )
            
            $
            (22
            )
            
            $
            (61
            )
            
            $
            112
            
            
            $
            51





Changes
in interest income or expense not arising solely as a result of volume or rate
variances are allocated to rate variances due to the interest sensitivity of
consolidated assets and liabilities.








In 2007, there was an increase in net
interest income of $83,000 due to changes in volume but a decrease of $105,000
due to changes in rate. In 2006, there was a decrease in net interest income of
$61,000 due to changes in volume and an increase of $112,000 due to changes in
rate.





Average earning assets increased to
$69.4 million in 2007 from $65.9 million in 2006.  However, the net
interest margin of the Bank decreased to 5.19% in 2007 from 5.50% in 2006 and
5.38% in 2005. The margin reduction in 2007 was driven by an increase in the
Bank’s interest expense on its deposits.  The cost of funds increased
42 basis points in 2007while the yield on earning assets remained unchanged from
2006.





In 2006, the Bank introduced a premium
rate statement savings account.  In 2007, the rate on this product was
increased from 3.50% to 4.00% to attract and retain
customers.  Previously, the Bank paid .50% on similar
products.  Much of the average $2.6 million deposit growth experienced
in 2007 was in these higher interest rate products. In addition, many of the
Bank’s existing customers migrated to these products. Rates on maturing
certificates of deposit were also increased because of market pressures in a
higher interest rate environment. When setting the rates for its deposits, the
Bank generally uses the median rate paid by its competitors in the
region.





During 2007, the average federal funds
yield was 5.10% compared to 5.00% in 2006 and 3.29% in 2005.  The
average investment in federal funds increased by $3,154,000—this, coupled with
an increase in the Federal Funds rate, resulted in an increase of $168,000 in
interest income on federal funds sold.





The yield on the investment portfolio
increased 41 basis points to 4.98% in 2007compared to 4.57% in 2006 and 4.30%.
2005.  The increase in yield was the result of the maturity of lower
yielding agency securities purchased in 2004 that were replaced with higher
yielding agency and mortgage-backed securities in 2006 and 2007.  In
addition, some of the Bank’s floating rate mortgage-backed securities that had
Treasury and LIBOR indices repriced in 2007 in a higher interest rate
environment.  However, the average yield is projected to decrease in
2008 to 4.50% or less because of the projected call of more than $2 million
higher yielding agency securities and replacement in the current declining
interest rate environment.  Management will seek to shift proceeds
from calls, when possible, to higher yielding commercial and/or consumer loan
portfolios while continuing to monitor and manage its liquidity
position.





20


Provision
for Loan Losses





The provision for loan losses is based
on management’s estimate of the amount needed to maintain an adequate allowance
for loan losses.  This estimate is based on the review of the loan
portfolio, the level of net credit losses, past loan loss experience, the
general economic outlook and other factors management feels are
appropriate.





The net provision for loan losses
charged against earnings in 2007 was $120,000 compared to $137,000 in 2006 and
$558,000 in 2005. The Bank’s provision is based on a review and analysis of the
loan portfolio, and is therefore subject to fluctuation based on qualitative
factors like delinquency trends, charge-offs, economic conditions,
concentrations, etc. Management monitors its credit quality closely by working
with borrowers in an effort to identify and control credit risk. Systematic
provisions are made to the allowance for loan losses to cover potential credit
losses in the portfolio.  Based on its analysis, management believes
the level of the allowance for loan losses is adequate as of December 31,
2007.Refer to the Allowance
for Loan Loss section below for further discussion/analysis of the Bank’s credit
quality.





Noninterest
Income





Noninterest income decreased $94,000,
or 6.65%, in 2007 compared to 2006 and decreased $168,000, or 10.61%, in 2006
compared to 2005.





The customer service fee component of
noninterest income reflects the volume of transactional and other accounts
handled by the Bank and includes such fees and charges as low balance account
charges, overdrafts, account analysis, and other customer service
fees.  During 2007, customer service fees declined $12,000, or 2.06%,
compared to 2006 and declined $79,000, or 11.54%, in 2006 compared to 2005. Over
the last several years there has been a decline in the Bank’s average
noninterest bearing demand deposits. This decline resulted in less overdraft
fees, activity service charges and low balance fees.  Although
noninterest bearing demand deposit levels were somewhat stabilized in 2007,
higher balances were being maintained by customers to avoid service
charges.





During 2007, surcharge income on the
Bank’s ATM network declined $63,000, or 12.17%, compared to 2006, and declined
$53,000, or 9.28%, compared to 2005.  Some of the Bank’s ATMs have
experienced significant reductions in volume as competitors have placed machines
in close proximity to existing high volume ATMs of the
Bank.   Early in 2007, the Bank experienced a high level of
down-time due to poor service.  In July 2007, the Bank converted to a
new service provider to improve the efficiency of its
network.  Management has identified several potential high volume
locations to offset the decline in volume.  In addition, the ATM
surcharge fee level will be reviewed and adjusted on a per machine basis to
include a convenience factor for machines in more remote locations.





Since 2002, the Bank has served as
arranger/agent for loan syndications for several major corporations throughout
the country.  In this capacity, the Bank syndicates back-up
lines/letters of credit with other minority banks for which it receives
agent/administrative fees.  In 2007, these fees totaled $120,000
compared to $150,000 in 2006 and $202,000 in 2005.  The decline in
2007 was the result of the non-renewal of one credit facility in September 2007
for which the Bank’s fees were $30,000.  The decline in 2006 was the
result of the non-renewal of one credit facility for which the Bank’s fees were
$52,000.  In 2007, the Bank continued to serve as agent/arranger for
two (2) facilities and has been selected by another public utility to be an
arranger for a facility in 2008.  Fees on these facilities will be
received annually for the administration of the credit
facilities.   Management plans to continue to develop this core
line of business to generate fee income to support the Bank’s profitability
goals.





In 2006, the Bank was awarded a $50,000
grant by the Commonwealth of Pennsylvania to support a loan program for small
businesses and non-profit organizations.  In 2007, the Bank was
awarded $50,000 in matching funds by the City of Philadelphia for this loan
program. These grants are included in other income for the respective
years.





In 2007, the Bank sold a commercial
property it had assumed from a former loan customer in foreclosure that was
included in other real estate for a net gain of $24,000.  This gain is
included in other income.





21


Noninterest
Expense





Noninterest expense decreased
$27,000, or 0.57%, in 2007 compared to 2006, and decreased $84,000, or 1.72%, in
2006 compared to 2005.





Salaries and benefits decreased
$120,000, or 6.87%, in 2007 compared to 2006 and decreased $84,000, or 4.59%, in
2006 compared to 2005. As part of the Bank’s continued effort to reduce/control
expenses there were staff reductions and job consolidations. Management
continues the review of its staffing model to ensure the Bank is operating with
the most efficient organizational structure.





Occupancy and equipment expense
increased $25,000, or 2.50%, in 2007 compared to 2006 and decreased $1,200, or
0.13%, in 2006 compared to 2005.  Leasehold improvement expenses were
incurred during the last quarter of 2006 to renovate the interior of the Bank’s
Wadsworth Avenue branch including paint, flooring and new
furnishings.  Additional improvements were completed in 2007 to the
exterior of this branch building including painting, signage and
landscaping.  Similar interior and exterior improvements were deferred
but are planned for the Bank’s West Philadelphia branch in
2008.  These renovations have resulted in increased
leasehold/furniture depreciation expense.   In addition, the
Bank’s Progress Plaza branch is scheduled to be re-located in the Spring of 2008
to a newly built space within the shopping plaza where it is currently located.
A new 10-year lease has been negotiated that will result in an increase of
$25,000, on an annualized basis, in the Bank’s rent expense.





Office operations and supplies expense
increased $10,000, or 3.27%, in 2007 compared to 2006, and decreased $36,000, or
10.43% in 2006 compared to 2005 and decreased $67,000, or 16.18%, in 2005
compared to 2004. During 2007, the Bank’s telephone expense increased by $17,000
as a result of increased high speed lines to improve communication in the Bank’s
wide area network. Management continues to review all office operations expenses
including supplies, storage, security, etc. to determine if expense reductions
can be made.





Marketing and public relations expense
increased $5,000, or 4.39%, in 2007 compared to 2006, and increased $15,000, or
15.27%, in 2006 compared to 2005.  In January 2007, the Bank hired a
marketing consultant to assist with the implementation of its marketing campaign
to re-brand and introduce new products and services including a direct mail
solicitation, newspaper advertisements, and billboards.





Professional services decreased
$35,000, or 11.87%, in 2007 compared to 2006, and increased $25,000, or 9.49%,
in 2006 compared to 2005. The decline in 2007 is a result of the elimination of
a monthly legal retainer for the Bank’s general counsel because of fewer legal
matters.  Legal services are now billed based on actual hours spent.
Consulting expenses also declined in 2007.  In 2006, the Bank used
consultants to assist in the evaluation of several business
transactions.





Data processing expenses are a result
of the management’s decision to outsource a majority of its data processing
operations to third party processors.  Such expenses are reflective of
the high level of accounts being serviced for which the Bank is charged a per
account charge by processors.  The Bank experiences a higher level of
data processing expenses relative to its peer group because of the nature of its
deposit base--low average balance and high transaction volume.  In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, and student loan portfolios.  To better serve
its customers, the Bank also has an extensive ATM network of twenty-eight (28)
machines for which it pays processing fees.  This network is larger
than most banks in its peer group.





Data processing expenses increased
$35,000, or 8.24%, in 2007 compared to 2006, and increased $14,000, or 3.53%, in
2006 compared to 2005. The increase in 2007 relates to the implementation of a
new e-banking platform for the Bank’s remote deposit capture
product.  This platform will be used by the Bank’s corporate customers
to perform cash management transactions.  The increase is also related
to the Bank’s ATM processing expense—specifically, its net interchange
expense.  More Bank customers are using non-proprietary ATMs for which
the Bank is charged a fee versus non-customers using the Bank’s ATM network for
which it receives a fee.





Federal deposit insurance premiums
increased $44,000, or 39.67%, in 2007 compared to 2006, and decreased $2,000, or
2.17%, in 2006 compared to 2005. FDIC insurance premiums are applied to all
financial institutions based on a risk based premium assessment
system.  Under this system, bank strength is based on three factors:
1) asset quality, 2) capital level, and 3) management.  Premium
assessments are then assigned based on the institution’s overall rating, with
the stronger institutions paying lower rates.  By typical regulatory
guidelines the Bank is considered “well” capitalized, however, because it was
operating with a Written Agreement (Refer to “Regulatory Action” above), it
is only considered to be “adequately” capitalized.  The FDIC adopted
new rules in 2006 to re-capitalize the deposit insurance fund that resulted in
increased deposit insurance premiums in 2007. (Refer to “The Federal Deposit Insurance
Act” above)





All other expenses are reflective of
the general cost to do business and compete in the current regulatory
environment and maintenance of adequate insurance coverage.


22





FINANCIAL
CONDITION





Sources
and Uses of Funds





The Bank’s financial condition can be
evaluated in terms of trends in its sources and uses of funds.  The
comparison of average balances in Table 3 below indicates how the Bank has
managed these elements.  Average funding uses increased $3,499,000, or
5.31% in 2007 compared to 2006 and increased approximately $499,000, or 0.75% in
2006 compared to 2005.





Table
3—Sources and Use of Funds Trends


2007
            
            
            2006Increase
            
            
            
            
            
            
            
            
            IncreaseAverage
            
            
            (decrease)
            
            
            
            
            
            Average
            
            
            (decrease)(Dollars
      in thousands)
            
            balance
            
            
            amount
            
            
            Percent
            
            
            balance
            
            
            amount
            
            
            PercentFunding
      uses:Loans
            
            $
            43,674
            
            
            $
            (2,189
            )
            
            
            (4.77
            %)
            
            $
            45,863
            
            
            $
            (1,998
            )
            
            
            (4.17
            )%Investment
      securitiesHeld-to-maturity
            
            
            11,917
            
            
            
            2,404
            
            
            
            25.27
            
            
            
            9,513
            
            
            
            877
            
            
            
            10.16Available-for-sale
            
            
            3,249
            
            
            
            130
            
            
            
            4.17
            
            
            
            3,119
            
            
            
            (733
            )
            
            
            (19.03
            )Interest-bearing
      balances with other banks
            
            
            281
            
            
            
            0
            
            
            
            0
            
            
            
            281
            
            
            
            (303
            )
            
            
            (51.88
            )Federal
      funds sold
            
            
            10,294
            
            
            
            3,154
            
            
            
            44.17
            
            
            
            7,140
            
            
            
            1,658
            
            
            
            30.24Total
      uses
            
            $
            69,415
            
            
            $
            3,499
            
            
            
            
            
            
            $
            65,916
            
            
            $
            (499
            )Funding
      sources:Demand
      deposits:Noninterest-bearing
            
            $
            13,885
            
            
            $
            ($108
            )
            
            
            (0.77
            %)
            
            $
            13,993
            
            
            $
            (675
            )
            
            
            (4.60
            )%Interest-bearing
            
            
            10,576
            
            
            
            670
            
            
            
            6.76
            
            
            
            9,906
            
            
            
            702
            
            
            
            7.63Savings
      deposits
            
            
            20,302
            
            
            
            2,543
            
            
            
            14.32
            
            
            
            17,759
            
            
            
            690
            
            
            
            4.04Time
      deposits
            
            
            21,640
            
            
            
            (624
            )
            
            
            (2.80
            )
            
            
            22,264
            
            
            
            (1,080
            )
            
            
            (4.63
            )Total
      sources
            
            
            66,403
            
            
            
            2,481
            
            
            
            
            
            
            $
            63,922
            
            
            $
            (363
            )








Investment
Securities and Other Short-Term Investments





The Bank’s investment portfolio is
classified as either held-to-maturity or
available-for-sale.  Investments classified as held-to-maturity are
carried at amortized cost and are those securities the Bank has both the intent
and ability to hold to maturity.  Investments classified as
available-for-sale are those investments the Bank intends to hold for an
indefinite amount of time, but not necessarily to maturity, and are carried at
fair value, with the unrealized holding gains and losses reported as a component
of shareholders’ equity on the balance sheet.





Average investment securities,
increased $2.5 million, or 20.00%, in 2007 compared to 2006, and increased
$144,000, or 1.15%, in 2006 compared to 2005.The increase in investments was
primarily a result of additional liquidity created by payoffs/paydowns in the
Bank’s loan portfolio.  Funds were re-deployed into short-term
investments pending increased loan origination activity.





The
Bank's current investment portfolio primarily consists of mortgage-backed
pass-through agency securities and other government-sponsored agency
securities.  The Bank does not invest in high-risk securities or
complex structured notes.  As reflected in Table 4 below, the average
maturity of the portfolio is 2.60 years in 2007 compared to 2.90 years in 2006.
In the current interest rate environment, the duration of the investment
portfolio is shortened because of the short-term nature of the Bank’s callable
agency securities that have an average life of 1.3 years.  These
securities are typically used as collateral for short-term jumbo governmental
certificates of deposit.





23


At
December 31, 2007, approximately 47% of the portfolio consisted of government
sponsored agency (GSA) mortgage-backed pass-through securities.  These
securities do not have the same risk characteristics of pooled subprime
mortgages for which many financial institutions have experienced valuation
declines and losses.  The payments of principal and interest on these
pools of GSA loans are guaranteed by these entities that bear the risk of
default.  The Bank’s risk is prepayment risk when defaults accelerate
the repayment activity.  These loans have longer-term con­tractual
maturities but are sometimes paid off/down before maturity or have repricing
characteristics that occur before final maturity.  The Bank has
attempted to minimize the repayment risk (risk of very fast or very slow
repayment) associated with these types of securities by investing primarily in a
number of seasoned mortgage pools for which there is a repayment
history.  This history better enables the Bank to project the
repayment speeds. In addition, the Bank has minimized the interest rate risk
associated with these mortgage-backed securities by investing in a variety of
pools, many of which have variable rates with indices that track closely with
the current interest rate environment. Because customers are less likely to
refinance in the current uncertain economic environment, the prepayment speed
decreased on this component of the portfolio.  The constant one year
prepayment rate (CPR) at December 31, 2007 was 13.00% compared to 14.42% at
December 31, 2006.  This translates into 13.00% of the mortgage-backed
pools repaying on an annual basis.  This results in less monthly cash
flow than was received in 2006.





The
Bank will continue to take steps to control the level of optionality in the
portfolio by identifying replacement loans or securities that diversify risk and
provide some level of monthly cash flow to fund the loan pipeline.








Table
4—Analysis of Investment Securities





Within
      one year
            
            
            After
      one but within five years
            
            
            After
      five but within ten years
            
            
            After
      ten years(Dollars
      in thousands)
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            Yield
            
            TotalOther
      government securities
            
            $
            1,000
            
            
            
            3.63
            %
            
            $
            4,499
            
            
            
            4.66
            %
            
            $
            1,000
            
            
            
            5.38
            %
            
            $
            -
            
            %
            
            $
            6,499Mutual
      funds and other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            124Mortgage-backed
      securities
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            7,290Total
      securities
            
            $
            1,000
            
            
            
            
            
            
            $
            4,499
            
            
            
            
            
            
            $
            1,000
            
            
            
            
            
            
            
            -
            
            
            
            $
            13,913Average
      maturity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2.6 years





The above
table sets forth the maturities of investment securities at December 31, 2007
and the weighted average yields of such securities (calculated on the basis of
the cost and effective yields weighted for the scheduled maturity of each
security).








Loans





Average loans decreased $2,189,000, or
4.77%, in 2007 compared to 2006 and decreased $1,998,000, or 4.17%, in 2006
compared to 2005. During 2007, the Bank funded $10.8 million in new commercial
loans.  However, growth in the loan portfolio was offset by payoffs of
some large loan participations the Bank had with other financial
institutions.  The Bank has relationships with other financial
institutions in the region with which it participates in loans to supplement
loan growth and to diversify credit risk.  At December 31, 2007, the
Bank had $4 million in loan participations --most of which are secured by real
estate.





Management will attempt to minimize the
level of payoffs and prepayments by providing counter offers and imposing
prepayment penalties whenever possible.  The Bank will also use the
capital markets whenever necessary to purchase loans to supplement its
portfolio.  In May 2007, the Bank purchased $1.7 million in
residential mortgage loans from another financial institution.  None
of the purchased residential mortgage loans were originated in the subprime
market.  They are seasoned well-performing loans.





As a result of increased origination
activity during the quarter ending December 31, 2007 totaling $1.9 million, the
Bank’s loan-to-deposit ratio improved to 67.22% compared to 64.62% at December
31, 2006. The target loan-to-deposit ratio is 75%.  This level would
allow the Bank to optimize interest income on earning assets while maintaining
adequate liquidity.





As reflected in Table 5 below, the
Bank’s loan portfolio is heavily concentrated in loans secured by real estate.
In 2007, of the $10.8 million in new commercial loan originations, many were
real estate transactions, including $5 million in loans made to religious
organizations.  Most of the commercial real estate loans are owner
occupied.





As reflected in Table 6 below,
approximately 50.80% of the Bank’s loan portfolio has scheduled maturities or
reprice in five years or more.  This position is largely a result of
the relatively high level of loans in the commercial real estate portfolio that
typically have five to seven year balloon structures.  While scheduled
maturities and repricing exceed five years, the actual duration of the portfolio
may be much shorter because of changes in market conditions and refinancing
activity.




24
  
 Table
5—Loans Outstanding, Net of Unearned Income
 
 December 31,(Dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Commercial
      and industrial
              
              $
              4,463
              
              
              $
              5,323
              
              
              $
              4,544
              
              
              $
              5,845
              
              
              $
              5,322Commercial
      real estate
              
              
              28,640
              
              
              
              27,016
              
              
              
              28,441
              
              
              
              22,442
              
              
              
              17,901Residential
      mortgages
              
              
              6,549
              
              
              
              5,551
              
              
              
              7,546
              
              
              
              10,665
              
              
              
              15,110Consumer
      loans
              
              
              5,532
              
              
              
              4,628
              
              
              
              5,891
              
              
              
              6,729
              
              
              
              8,695Total
      loans
              
              $
              45,184
              
              
              $
              42,518
              
              
              $
              46,422
              
              
              $
              45,681
              
              
              $
              47,028Table
      6—Loan Maturities and RepricingWithin
              
              
              After
      one but
              
              
              After(Dollars
      in thousands)
              
              one year
              
              
              within five years
              
              
              five years
              
              
              TotalCommercial
      and industrial
              
              $
              2,841
              
              
              $
              591
              
              
              $
              1,031
              
              
              $
              4,463Commercial
      real estate
              
              
              4,848
              
              
              
              9,698
              
              
              
              14,094
              
              
              
              28,640Residential
      mortgages
              
              
              691
              
              
              
              337
              
              
              
              5,521
              
              
              
              6,549Consumer
      loans
              
              
              2,638
              
              
              
              583
              
              
              
              2,311
              
              
              
              5,532Total
      loans
              
              $
              11,018
              
              
              $
              11,209
              
              
              $
              22,957
              
              
              $
              45,184Loans
      maturing after one year with:Fixed
      interest rates
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              10,152Variable
      interest rates
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24,014
 
 Nonperforming
Loans
 
 Table 7 reflects the Bank’s
nonperforming and restructured loans for the last five years.  The
Bank generally determines a loan to be “nonperforming” when interest or
principal is past due 90 days or more.  If it otherwise appears
doubtful that the loan will be repaid, management may consider the loan to be
nonperforming before the lapse of 90 days. The Bank’s policy is to charge off
unsecured loans after 90 days past due.  Interest on nonperforming
loans ceases to accrue except for loans that are well collateralized and in the
process of collection.  When a loan is placed on nonaccrual,
previously accrued and unpaid interest is reversed out of income unless adequate
collateral from which to collect the principal of, and interest on, the loan
appears to be available.
 
 Table
7—Nonperforming Loans
 
 (Dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Nonaccrual
      loans
              
              $
              745
              
              
              $
              626
              
              
              $
              683
              
              
              $
              1,366
              
              
              $
              1,588Interest
      income included in net incomefor
      the year
              
              
              35
              
              
              
              39
              
              
              
              37
              
              
              
              22
              
              
              
              62Interest
      income that would have beenrecorded
      under original terms
              
              
              65
              
              
              
              51
              
              
              
              56
              
              
              
              143
              
              
              
              120Loans
      past due 90 days and still accruing
              
              
              1,067
              
              
              
              170
              
              
              
              -
              
              
              
              65
              
              
              
              560Restructured
      loans
              
              
              1,206
              
              
              
              1,311
              
              
              
              554
              
              
              
              1,411
              
              
              
              569
  25




At December 31, 2007, nonaccrual loans
totaled $745,000 compared to $626,000 at December 31, 2006.  The
non-accrual loans include commercial loans with SBA guarantees or strong
loan-to-value ratios that help to mitigate potential losses.  At
December 31, 2007, one loan totaling $110,000 had been submitted to the SBA for
collection.





The balance of impaired loans was
$1,788,000 and $896,000 at of December 31, 2007 and 2006, respectively. The
increase is a result of several collateral-dependent loans for which borrowers
do not show the ability to make payments from the cash flows generated by their
businesses.  The Bank identifies a loan as impaired when it is
probable that interest and principal will not be collected according to the
contractual terms of the loan agreement.  The valuation allowance
associated with these loans was $191,000 and $101,000 at December 31, 2007 and
2006, respectively.  The allowance was determined based on careful
review and analysis including collateral liquidation values and/or guarantees
and is deemed adequate to cover shortfalls in loan repayment.  One
loan, totaling $459,000, has a specific allowance of $166,000 at December 31,
2007 because of its severe delinquency and the uncertainty in the financial
condition of the business and value of the underlying
collateral.  Although the level of impaired loans increased
significantly from 2006 to 2007, other loans classified as impaired did not
require specific valuation allowances because of the strength of the estimated
liquidation value of the underlying collateral that exceed the customers’
remaining loan balances. Management is working aggressively to resolve the
potential credit risk associated with its impaired loans by detailing specific
payment requirements in forbearance agreements.  Requirements might
include the sale of underlying collateral or obtaining take-out
financing.





Interest income recognized on impaired
loans during the year ended December 31, 2007 and 2006 was $112,000 and $76,000,
respectively. The Bank recognizes income on impaired loans under the cash basis
when the loans are both current and the collateral on the loan is sufficient to
cover the outstanding obligation to the Bank.   If these factors
do not exist, the Bank will not recognize income on such loans.





From time to time, management will
modify or restructure the terms of certain loans to provide relief to
borrowers.  Restructured loans are those loans whose terms have been
modified because of deterioration in the financial condition of a borrower to
provide for a reduction of either interest or principal, regardless of whether
such loans are secured or unsecured and regardless of whether such credits are
guaranteed by the government or by others.  At December 31, 2007,
restructured loans totaled $1,206,000 compared to $1,311,000 at December 31,
2006.





The Bank grants commercial,
residential, and consumer loans to customers primarily located in Philadelphia
County, Pennsylvania and surrounding counties in the Delaware
Valley.  Although the Bank has a diversified loan portfolio, its
debtors’ ability to honor their contracts is influenced by the region’s
economy.





Consistent with 2006, at December 31,
2007, approximately 33% of the commercial loan portfolio of the Bank was
concentrated in loans made to religious organizations. From inception, the Bank
has received support in the form of investments and deposits and has developed
strong relationships with the Philadelphia region’s religious
community.  Loans made to these organizations are primarily for
expansion and repair of church facilities.  At December 31, 2007,
several of these loans are now showing signs of  weakness and are
included in the Bank’s classified loans and analysis of allowance for loan
losses.  The Bank is actively managing these credits to avoid any
further deterioration in asset quality.





Allowance
for Loan Losses





The allowance for loan losses
reflects management’s continuing evaluation of the loan
portfolio.  Table 8 below presents the allocation of loan losses by
major category for the past five years.  The specific allocations in
any particular category may prove to be excessive or inadequate and
con­sequently may be reallocated in the future to reflect then current
conditions. The allowance for loan losses as a percentage of total loans was
1.28% at December 31, 2007 compared to 1.31% at December 31,
2006.  Systematic provisions are made to the allowance for loan losses
in accordance with a detailed periodic analysis.  This analysis
includes specific reserves allocated to classified and impaired loans based on
underlying recovery values as well as a general reserve for the portfolio based
on many factors including charge-off history, migration analysis, economic
conditions, concentrations of credit risk and other relevant
data.  Although there was a substantial increase in the level of
impaired loans in 2007, significant reserves/provisions were not required
because of the strength of the liquidation value of underlying collateral.
(Refer to Nonperforming
Loans discussion above.)





26


The level of classified loans decreased
to $2,288,000 at December 31, 2007 from $2,671,000 at December 31,
2006.  This decline is reflective of increased collection efforts that
resulted in either the sale of underlying collateral or borrowers refinancing
their loans with other financial institutions. Management continues to closely
monitor and manage this credit to minimize the risk of loss.





Recent information from the Federal
Reserve leadership suggests that the 2007 U.S. economy appears to be slowing
with a looming recession.  The fallout in the subprime mortgage market
has created credit quality challenges and significant write downs by financial
institutions across the nation. It also appears to be the end of the commercial
real estate boom. The Bank’s portfolio of commercial real estate consists
primarily of owner occupied properties which minimizes credit risk. Subprime
foreclosures have also continued to increase. Falling home values and
over-leveraged consumers are contributing to increased delinquencies and
charge-offs of consumer credits. The Bank did not originate a high volume of
HELOCS or residential mortgage loans during the last five years of home price
escalation. Home equity loans originated during this period were underwritten
within the Bank’s LTV policy limits. Because of these factors, the Bank is
somewhat insulated from negative industry trends related to residential
loans.  However, the “trickle down” effect is always a concern in a
recessionary economy with reduced employment and reduced
spending.  Management will actively monitor the Bank’s portfolio for
signs of weakness.








Table
8—Allocation of Allowance for Loan Losses





2007
            
            
            
            
            
            2006
            
            
            
            
            
            2005
            
            
            
            
            
            2004
            
            
            
            
            
            2003Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            Percentof
      loans
            
            
            
            
            
            of
      loans
            
            
            
            
            
            of
      loans
            
            
            
            
            
            of
      loans
            
            
            
            
            
            of
      loansin
      each
            
            
            
            
            
            in
      each
            
            
            
            
            
            in
      each
            
            
            
            
            
            in
      each
            
            
            
            
            
            in
      eachcategory
              to
            
            
            
            
            
            category
      to
            
            
            
            
            
            category
      to
            
            
            
            
            
            category
      to
            
            
            
            
            
            category
      toAmount
            
            
            total loans
            
            
            Amount
            
            
            total loans
            
            
            Amount
            
            
            total loans
            
            
            Amount
            
            
            total loans
            
            
            Amount
            
            
            total loans(Dollars
      in thousands)Commercial
      and industrial
            
            $
            517
            
            
            
            24.36
            
            
            $
            362
            
            
            
            24.33
            %
            
            $
            267
            
            
            
            15.46
            %
            
            $
            424
            
            
            
            32.31
            %
            
            $
            267
            
            
            
            24.16
            %Commercial
      real estate
            
            
            28
            
            
            
            48.90
            
            
            
            140
            
            
            
            51.73
            
            
            
            66
            
            
            
            55.59
            
            
            
            49
            
            
            
            27.75
            
            
            
            -
            
            
            
            25.22Residential
      mortgages
            
            
            8
            
            
            
            14.49
            
            
            
            22
            
            
            
            13.06
            
            
            
            17
            
            
            
            16.25
            
            
            
            14
            
            
            
            17.29
            
            
            
            35
            
            
            
            32.13Consumer
      loans
            
            
            37
            
            
            
            12.25
            
            
            
            37
            
            
            
            10.88
            
            
            
            79
            
            
            
            12.69
            
            
            
            110
            
            
            
            22.65
            
            
            
            37
            
            
            
            18.49Unallocated
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4
            
            
            
            -
            
            
            
            6
            
            
            
            
            
            
            
            -
            
            
            
            -$
            590
            
            
            
            100.00
            %
            
            $
            561
            
            
            
            100.00
            %
            
            $
            472
            
            
            
            100.00
            %
            
            $
            603
            
            
            
            100.00
            %
            
            $
            339
            
            
            
            100.00
            %





Management believes that the allowance
for loan losses is adequate at December 31, 2007.  While available
information is used to recognize losses on loans, future additions may be
necessary based on changes in economic conditions.  In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses.  Such
agencies may require the Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of the
examination.








Table
9—Analysis of Allowance for Loan Losses





Year ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
      at January 1
            
            $
            561
            
            
            $
            472
            
            
            $
            603
            
            
            $
            339
            
            
            $
            675Charge-offs:Commercial
      and industrial
            
            
            (91
            )
            
            
            (70
            )
            
            
            (762
            )
            
            
            -
            
            
            
            (799
            )Commercial
      real estate
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Residential
      mortgages
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      loans
            
            
            (139
            )
            
            
            (202
            )
            
            
            (219
            )
            
            
            ( 240
            )
            
            
            (174
            )(230
            )
            
            
            (272
            )
            
            
            (981
            )
            
            
            (240
            )
            
            
            (973
            )Recoveries—commercial
      loans
            
            
            92
            
            
            
            57
            
            
            
            165
            
            
            
            265
            
            
            
            -Recoveries—consumer
      loans
            
            
            46
            
            
            
            168
            
            
            
            127
            
            
            
            194
            
            
            
            72138
            
            
            
            225
            
            
            
            292
            
            
            
            459
            
            
            
            72Net
      recoveries(charge-offs)
            
            
            (92
            )
            
            
            (47
            )
            
            
            (689
            )
            
            
            219
            
            
            
            (901
            )Provisions
      charged to operations
            
            
            120
            
            
            
            137
            
            
            
            558
            
            
            
            45
            
            
            
            565Balance
      at December 31
            
            $
            589
            
            
            $
            561
            
            
            $
            472
            
            
            $
            603
            
            
            $
            339Ratio
      of net (recoveries) charge-offs to average loansoutstanding
            
            
            0.21
            %
            
            
            0.10
            %
            
            
            1.50
            %
            
            
            (0.48
            )%
            
            
            1.99
            %








27


Deposits





Average deposits increased $2,481,000,
or 3.88%, in 2007 compared to 2006 and declined $363,000, or .56%, in 2006
compared to 2005. Most of the growth in 2007 is attributable to the Bank’s
premium interest signature savings product where the yield exceeded 4.00% during
the year.  Also, the Bank introduced a high interest bearing checking
account that it marketed to churches and non-profit organizations in the
region.  The result was an increase of $670,000, or 6.76%, in the
average balances of interest checking accounts.   The growth in
these products was offset by a decline of $624,000, or 2.80%, in average
certificate of deposit balances primarily related to a shift to the Bank’s
higher yielding signature savings account.  In addition, several jumbo
certificates of deposit with corporations did not renew at
maturity.





With increased competition in the
region as well as declining interest rates, the Bank can no longer compete by
offering a premium interest rate. Simultaneous reductions were made in premium
rates paid on signature deposit products consistent with reductions made by the
Federal Reserve that totaled 300 basis points from September 2007 to March 2008.
It is more  important than ever for the Bank to be distinguished as a
community development bank through which corporations in the region can work to
impact community.  Placing deposits in the Bank provides the necessary
funds for small business loans that improve the financial capacity of these
businesses and result in job creation.  Therefore, management will
focus its marketing efforts on large corporations headquartered or doing
business in the region to drive deposit growth.  In addition, the Bank
will better enforce the deposit requirements of its commercial loan
customers.





Table
10—Average Deposits by Class





2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            RateNoninterest-bearing
      demand deposits
            
            $
            13,885
            
            
            
            -
            %
            
            $
            13,993
            
            
            
            -
            %
            
            $
            14,668
            
            
            
            -
            %Interest-bearing
      demand deposits
            
            
            10,576
            
            
            
            1.61
            
            
            
            9,906
            
            
            
            0.89
            
            
            
            9,204
            
            
            
            0.71Savings
      deposits
            
            
            20,302
            
            
            
            1.42
            
            
            
            17,759
            
            
            
            0.59
            
            
            
            17,069
            
            
            
            0.34Time
      deposits
            
            
            21,640
            
            
            
            3.49
            
            
            
            22,264
            
            
            
            2.79
            %
            
            
            23,344
            
            
            
            1.98








28


Other
Borrowed Funds





The Bank did not borrow funds during
2007.  Generally, the level of other borrowed funds is dependent on
many items such as loan growth, deposit growth, customer collateral/security
requirements and interest rates paid for these funds.  The Bank’s
liquidity has been enhanced by loan paydowns/payoffs and called investment
securities—thereby, reducing the need to borrow.





Off
Balance Sheet Arrangements





The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit, which are conditional commitments issued by the
Bank to guarantee the performance of an obligation of a customer to a third
party.  Both arrangements have credit risk essentially the same as
that involved in extending loans and are subject to the Bank’s normal credit
policies.  Collateral may be obtained based on management’s assessment
of the customer. The Bank’s exposure to credit loss in the event of
nonperformance by the other party to the financial instruments is represented by
the contractual amount of those instruments.





Summaries
of the Bank’s financial instrument commitments are as
follows:




2007
            
            
            2006Commitments
      to extend credit
            
            $
            14,004,300
            
            
            $
            12,995,600Outstanding
      letters of credit
            
            
            -
            
            
            
            -





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 and unused credit card
lines.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.  Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a
fee.  The increase in commitment in 2007 is primarily related to
construction loans the Bank has approved and is in the process of funding.
Management believes the Bank has adequate liquidity to support the funding of
unused commitments.





Liquidity
and Interest Rate Sensitivity Management





The primary functions of
asset/liability management are to assure adequate liquidity and maintain
appropriate balance between interest-sensitive earning assets and
interest-bearing liabilities.  Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs.  Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and
enhance consistent growth of net interest income through periods of changing
interest rates.





The Bank must maintain minimum levels
of liquid assets.  This requirement is evaluated in relation to the
com­position and stability of deposits; the degree and trend of reliance on
short-term, volatile sources of funds, including any undue reliance on
particular segments of the money market or brokered deposits; any difficulty in
obtaining funds; and the liquidity provided by securities and other
assets.  In addition, consideration is given to the nature, volume and
anticipated use of commitments; the adequacy of liquidity and funding policies
and practices, including the provision for alternate sources of funds; and the
nature and trend of off-balance-sheet activities.  As of December 31,
2007, management believes the Bank’s liquidity is satisfactory.





The
Bank’s principal sources of asset liquidity include investment securities
consisting primarily of U.S. Government and agency issues, particularly those of
shorter maturities, and mortgage-backed securities with monthly repayments of
principal and interest.  There are no securities maturing in one year
or less.  However, other types of assets such as federal funds sold,
as well as maturing loans, are sources of liquidity.  At December 31,
2007, approximately $7.7 million in commercial loans are scheduled to mature
within one year.





In addition, the Bank has several
back-up sources of liquidity consisting of a borrowing arrangement with one of
its correspondent banks that includes a Federal Funds line of credit totaling $2
million.    Borrowings under this agreement have interest
rates that fluctuate based on market conditions.  The Bank also has
the ability to borrow on a fully secured basis at the Discount Window of the
Federal Reserve Bank.  As of December 31, 2007 and 2006, the Bank had
no borrowings outstanding.





29


The Bank’s overall liquidity has been
enhanced by a significant level of core deposits which management has determined
are less sensitive to interest rate movements.  The Bank has avoided
reliance on large-denomination time deposits as well as brokered
deposits.  Table 11 provides a breakdown of the maturity of time
deposits of $100,000 or more.  These deposits include $9 million in
deposits of governmental and quasi-governmental organizations that have
short-term maturities.  All except, $1 million, is expected to
continue to renew at maturity as they have for more than 10 years.











Table
11—Maturity of Time Deposits of $100,000 or More


(Dollars
      in thousands)3
      months or less
            
            $
            8,919Over
      3 through 6 months
            
            
            1,400Over
      6 months through 1 year
            
            
            2,812Over
      1 through five years
            
            
            250Over
      five years
            
            
            -Total
            
            $
            13,381








The
following table sets forth contractual obligations and other commitments
representing required and potential cash outflows as of December 31,
2007:





Table
12—Contractual Obligations and Other Commitments





Less
      than
            
            
            One
      to
            
            
            Four
      to
            
            
            After(Dollars
      in thousands)
            
            Total
            
            
            one year
            
            
            three years
            
            
            five years
            
            
            five yearsCertificates
      of Deposit
            
            $
            21,697
            
            
            $
            20,562
            
            
            $
            908
            
            
            $
            121
            
            
            $
            106Operating
      Lease Obligations
            
            
            3,158
            
            
            
            402
            
            
            
            952
            
            
            
            294
            
            
            
            1,217Total
            
            $
            24,855
            
            
            $
            20,964
            
            
            $
            1,860
            
            
            
            415
            
            
            $
            1,323





In September 2007, the Bank
re-negotiated its 10-year lease for a new branch with increased visibility in
the Progress Plaza shopping center that is scheduled to be constructed by the
Spring of 2008.  The lease requires annual rental payments of $66,482
for years 1-5 and $75,431 for Years 5-10.  This transaction is
reflected in the Bank’s long-term operating lease obligations noted above. The
Bank currently leases the branch it occupies at Progress Plaza on a
month-to-month basis.





Interest rate sensitivity varies with
different types of interest-earning assets and interest-bearing
liabilities.  Overnight federal funds on which rates change daily and
loans that are tied to prime or other short-term indices differ considerably
from long-term investment securities and fixed-rate loans.  Similarly,
time deposits are much more interest-sensitive than passbook savings
accounts.  The shorter-term interest rate sensitivities are key to
measuring the interest sensitivity gap or excess interest-earning assets over
interest-bearing liabilities.  Management of interest sensitivity
involves matching repricing dates of interest-earning assets with
interest-bearing liabilities in a manner designed to optimize net interest
income within the limits imposed by regulatory authorities, liquidity
determinations and capital considerations.  Table 13 sets forth the
earliest repricing distribution of the Bank’s interest-earning assets and
interest-bearing liabilities at December 31, 2007, the Bank’s interest rate
sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over
interest rate-sensitive liabilities, divided by total assets) and the Bank’s
cumulative interest rate sensitivity gap ratio.  For purposes of the
table, except for savings deposits, an asset or liability is considered
rate-sensitive within a specified period when it matures or could be repriced
within such period in accordance with its contractual terms.  At
December 31, 2007, an asset-sensitive position is maintained on a cumulative
basis through one year of 9.58%.  Generally, because of the positive
gap position of the Bank, in shorter time frames, the Bank can anticipate that
increases in market rates will have a positive impact on the net interest
income, while decreases will have the opposite effect.  Although
increasing, this level is well within the Bank’s policy guidelines of +/-15% on
a cumulative one-year basis.    In the current declining
interest rate environment, this positive gap position creates margin
compression.  Management will seek to minimize the impact by shifting
excess funds to commercial loan originations that are fixed for at least five
years and reducing the interest rates it pays on its premium savings and
interest-bearing deposit products.





30


For purposes of the gap analysis, 50%
of such deposits (savings, MMA, NOW) which do not have definitive maturity dates
and do not readily react to changes in interest rates have been placed in longer
repricing intervals versus immediate repricing time frames, making the analysis
more reflective of the Bank’s historical experience.








Table
13—Interest Sensitivity Analysis





Interest rate sensitivity gaps as of December 31,
      2007OverOver
            
            
            1
      year
            
            
            Over3
      months
            
            
            3
      through
            
            
            through
            
            
            3
      through
            
            
            Over(Dollars
      in thousands)
            
            or less
            
            
            12 months
            
            
            3 years
            
            
            5 years
            
            
            5 years
            
            
            CumulativeInterest-sensitive
      assets:Interest-bearing
      deposits with banks
            
            $
            
            
            
            $
            289
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            289Investment
      securities
            
            
            4,415
            
            
            
            2,469
            
            
            
            2,187
            
            
            
            1,788
            
            
            
            2,937
            
            
            
            13,796Federal
      funds sold
            
            
            9,755
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,755Loans
            
            
            16,552
            
            
            
            8,849
            
            
            
            5,663
            
            
            
            3,277
            
            
            
            10,843
            
            
            
            45,184Total
      interest-sensitive assets
            
            
            30,722
            
            
            
            11,607
            
            
            
            7,850
            
            
            
            5,065
            
            
            
            13,780
            
            
            $
            69.024Cumulative
      totals
            
            
            30,722
            
            
            
            42,329
            
            
            
            50, 179
            
            
            
            55,244
            
            
            
            69,024Interest-sensitive
      liabilities:Interest
      checking accounts
            
            
            2,292
            
            
            
            -
            
            
            
            2,292
            
            
            
            -
            
            
            
            -
            
            
            
            4,585Savings
      accounts
            
            
            12,860
            
            
            
            -
            
            
            
            12,860
            
            
            
            -
            
            
            
            -
            
            
            
            25,719Certificates  $100,000
      or more
            
            
            8,919
            
            
            
            4,212
            
            
            
            250
            
            
            
            -
            
            
            
            -
            
            
            
            13,361Certificates
      of less than $100,000
            
            
            2,878
            
            
            
            4,554
            
            
            
            459
            
            
            
            425
            
            
            
            -
            
            
            
            8,316Total
      interest-sensitive liabilities
            
            $
            26,949
            
            
            $
            8,766
            
            
            $
            15,861
            
            
            $
            425
            
            
            $
            -
            
            
            $
            52,001Cumulative
      totals
            
            $
            26,949
            
            
            $
            35,715
            
            
            $
            51,576
            
            
            $
            52,001
            
            
            $
            52,001Interest
      sensitivity gap
            
            $
            3,773
            
            
            $
            5,743
            
            
            $
            (8,011
            )
            
            $
            4,640
            
            
            $
            13,780Cumulative
      gap
            
            
            3,773
            
            
            
            6,614
            
            
            
            (1,397
            )
            
            
            3,243
            
            
            
            17,023Cumulative
      gap/total earning assets
            
            
            5.46
            %
            
            
            9.58
            %
            
            
            (0.02
            %)
            
            
            4.70
            %
            
            
            29.36
            %Interest-sensitive
      assets to interest-sensitiveliabilities
            
            
            1.14
            
            
            
            1.19
            
            
            
            0.97
            
            
            
            1.06
            
            
            
            -


Core
deposits such as checking and savings deposits have been placed in repricing
intervals based on historical trends and management’s
estimates.





31


While using the interest sensitivity
gap analysis is a useful management tool as it considers the quantity of assets
and liabilities subject to repricing in a given time period, it does not
consider the relative sensitivity to market interest rate changes that are
characteristic of various interest rate-sensitive assets and
liabilities.  Consequently, even though the Bank currently has a
positive gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment.  For example, changes in the
prime rate on variable commercial loans may not result in an equal change in the
rate of money market deposits or short-term certificates of
deposit.  A simulation model is therefore used to estimate the impact
of various changes, both upward and downward, in market interest rates and
volumes of assets and liabilities on the net income of the Bank.  The
calculated estimates of net interest income or “earnings” at risk at December
31, 2007 are as follows:





Net
      interest
            Percent
      ofChanges in rate
            income
            risk(Dollars
      in thousands)+200
      basis points
            $3,630
            1.51%+100
      basis points
            3,606
            0.84Flat
      rate
            3,576
            --100 basis
      points
            3,534
            (1.17)-200 basis
      points
            3,483
            (2.60)








A simulation model is also used to
estimate the impact of various changes, both upward and downward, in market
interest rates and volumes of assets and liabilities on the economic value of
the Bank.  This model produces an interest rate exposure report that
measures the long-term rate risks in the balance sheet by valuing the Bank’s
assets and liabilities at market.  It simulates what amount would be
left over if the Bank liquidated its assets and liabilities.  This is
otherwise known as “economic value” of the capital of the Bank.  The
calculated estimates of economic value at risk at December 31, 2007 are as
follows:








MV
      of equityChanges in rate
            MV equity
            Risk change(Dollars
      in thousands)+200
      basis points
            $6,793
            (11.20)%+100
      basis points
            7,250
            (5.30)Flat
      rate
            7,563
            --100 basis
      points
            7,810
            2.00-200 basis
      points
            7,859
            2.70








The market value of equity may be
impacted by the composition of the Bank’s assets and liabilities.  A
shift in the level of variable versus fixed rate assets will create swings in
the market value of equity.  The Bank’s market value of equity
declines in a rising rate environment because of the high level of fixed rate
loans and investments it has in its portfolio that do not follow market rate
changes.





The assumptions used in evaluating the
vulnerability of the Bank’s earnings and equity to changes in interest rates are
based on management’s consideration of past experience, current position and
anticipated future economic conditions.  The interest sensitivity of
the Bank’s assets and liabilities, as well as the estimated effect of changes in
interest rates on the earnings and equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.





The Bank’s Board of Directors and
management consider all of the relevant factors and conditions in the
asset/liability planning process.  Interest rate exposure is within
the policy limits of the Bank at December 31, 2007.  However, if
significant interest rate risk arises, the Board of Directors and management may
take, but are not limited to, one or all of the following steps to reposition
the balance sheet as appropriate:





1.
            Limit
      jumbo certificates of deposit and movement into money market deposit
      accounts and short-term certificates of deposit through pricing and other
      marketing strategies.





2.
            Purchase
      quality loan participations with appropriate interest rate/gap match for
      the Bank’s balance sheet.





3.
            Restructure
      the Bank’s investment portfolio.





The Board of Directors has determined
that active supervision of the interest rate spread between yield on earning
assets and cost of funds will decrease the Bank’s vulnerability to interest rate
cycles.





32





Capital
Resources





Total shareholders’ equity increased
$72,000 in 2007 compared to 2006 and increased $133,000 in 2006 compared to
2005.  The increase in capital in 2007 is attributable to net income
of $47,000 as well as other comprehensive income related to an increase in the
unrealized gain on the securities classified as available-for-sale.




Management continues to implement
growth and profitability strategies to increase retained earnings.  In
addition, management may consider other strategic business combinations to
further strengthen capital, create liquidity, increase economies of scale, and
better penetrate the marketplace.




Regulatory standards for measuring
capital adequacy for U.S. Banking organizations require that banks maintain
capital based on “risk-adjusted” assets so that categories of assets with
potentially higher risk will require more capital backing than assets with lower
risk.  In addition, banks are required to maintain capital to support,
on a risk-adjusted basis, certain off-balance-sheet activities such as loan
commitments.  The FRB standards classify capital into two tiers,
referred to as Tier I and Tier II.  Tier I consists of common
shareholders’ equity (excluding net unrealized holding gains on available for
sale securities), noncumulative and cumulative perpetual preferred stock, and
minority interests less goodwill and/or intangible assets).  Tier II
capital consists of allowance for loan losses, hybrid capital instruments, term
subordinated debt, and intermediate-term preferred stock.  Banks are
required to meet a minimum ratio of 8% of qualifying capital to risk-adjusted
total assets with at least 4% Tier I capital and a Tier I leverage ratio of at
least 6%.  Capital that qualifies as Tier II capital is limited
to 100% of Tier I capital.





As indicated in Table 14, the Company’s
risk-based capital ratios are above the minimum requirements, however, the
Bank’s growth and operating results may have an adverse effect on its capital
ratios.  UBS and the Bank do not anticipate paying dividends in the
near future.








Table
14—Capital Ratios





(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Total
      Capital
            
            $
            8,685
            
            
            $
            8,624
            
            
            $
            8,491Less:
      Intangible Assets/Net unrealized gains (losses) on available
      forsale
            
            
            (1,026
            )
            
            
            (1,185
            )
            
            
            (1,382
            )Tier
      I capital
            
            
            7,659
            
            
            
            7,433
            
            
            
            7,109Tier
      II capital
            
            
            571
            
            
            
            556
            
            
            
            472Total
      qualifying capital
            
            $
            8,230
            
            
            $
            7,995
            
            
            $
            7,581Risk-adjusted
      total assets (including off-balance-sheet exposures)
            
            $
            45,667
            
            
            $
            44,464
            
            
            $
            44,503Tier
      I risk-based capital ratio
            
            
            16.77
            %
            
            
            16.73
            %
            
            
            15.97
            %Total
      (Tier I and II) risk-based capital ratio
            
            
            18.02
            
            
            
            17.98
            
            
            
            17.03Tier
      I leverage ratio
            
            
            10.34
            
            
            
            10.33
            
            
            
            9.87





See “Regulatory Action” above for
a description of and status of compliance with the regulatory Agreement under
which the Bank is currently operating.





Recent
Accounting Pronouncements





In June 2006, the FASB issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes.”  This interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the application of SFAS No. 109 by defining the
criteria that an individual tax position must meet in order for the position to
be recognized within the financial statements and provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition for tax positions.  This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted.  The Bank adopted FIN 48 on January 1,
2007. The adoption of this statement did not have a material impact on its
financial position, results of operation and cash flows.




33


SFAS No. 141 (R), Business Combinations.This Statement is a
revision of a previous statement on business combinations.  The new
standard requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination.  This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date.  The Bank does not expect that the
adoption of this statement will have a material impact on its financial
statements.




In September 2006, the FASB issued SFAS
No. 157, “Fair Value
Measurements”.This Statement defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.  It clarifies that fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts.  This Statement does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  This Statement is effective for fiscal years beginning after
November 15, 2007, with earlier adoption permitted.  The Bank is
currently evaluating the impact that the adoption of this Statement will have on
its financial position, results of operations and cash flows.




In February 2007, FASB issued Statement
of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial
Assets and Financial Liabilities”.  This statement permits entities
to choose to measure many financial instruments and certain other items at fair
value.  The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.  This statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007.  The Bank is currently evaluating the impact that the adoption of
this Statement will have on its financial position, results of operation and
cash flows.




SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements requires all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions.  This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited.   This Statement shall be
applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. The Bank
does not expect that adoption of this statement will have a material impact on
its financial statements.




ITEM 7A— QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The financial information required by
this Item 7A is incorporated by reference to page 29 of this Report, the
Liquidity and Interest Rate Sensitivity Management provisions and pages 29 to 32
of this Report, including Table 13 the Interest Sensitivity Analysis Table of
this Report.








ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





See Consolidated Financial Statements
on pages 52 to 76 hereof.





ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS


ON
ACCOUNTING AND FINANCIAL DISCLOSURE





There were no changes in or
disagreements with accountants on accounting and financial disclosure during the
year ended December 31, 2007.





34








ITEM 9A—CONTROLS AND PROCEDURES





(a)
Evaluation of Disclosure Controls and Procedures.




The
management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934 as of the end of the period covered by this
Report (the “Evaluation Date”). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the Evaluation
Date, the Company’s disclosure controls and procedures were effective in
ensuring that all material information relating to the Company, including our
consolidated subsidiary, required to be filed in this Report has been made known
to them in a timely manner.




(b)
Management’s Report on Internal Control Over Financial Reporting.




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and with the
participation of principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the framework,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2007.




Management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2007 has not been audited by McGladrey & Pullen, LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.  The effectiveness of our internal controls over
financial reporting was not subject to attestation by the Bank’s registered
public accounting firm pursuant to temporary rules of the SEC that permit
the Company to provide only management’s report in this
document.




(c)
Changes in Internal Control Over Financial Reporting.




There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the final fiscal quarter of the year to which this Report
relates that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.







ITEM 9B—OTHER INFORMATION





None.





35


PART III





ITEM 10— DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The following table sets forth certain
biographical information.  Other than as indicated below, each of the
persons named below has been employed in their present principal occupation for
the past five years.





(a)         Directors of the Registrant
and Bank





Principal
      occupation and
            Year
      first
            TermName
            Age
            other
      directorships
            became
      director
            will expireBernard
      E. Anderson
            69
            Professor
      of Management/Economist
            2002
            2010At
      the Wharton School,Philadelphia,
      PADavid
      R. Bright
            68
            Retired,
      Executive Vice PresidentMeridian
      Bancorp
            2002
            2010Philadelphia,
      PAJoseph
      T. Drennan
            62
            Universal
      Capital Management, Inc.
            2004
            2010Wilmington,
      DEL.
      Armstead Edwards
            65
            Chairman
      of the Board,
            1993
            2008United
      Bancshares, Inc.Owner
      and President,Edwards
      Entertainment., Inc.Philadelphia,
      PennsylvaniaMarionette
      Y. Wilson(Frazier)
            63
            Retired
      as co-Founder,
            1996
            2008John
      Frazier, Inc.Philadelphia,
      Pennsylvania


36


Principal
      occupation and
            Year
      first
            Term


Name
            Age
            other directorships
            became
      director
            will
      expireWilliam
      B. Moore
            65
            Vice
      Chairman of the Board,United
      Bancshares, Inc.Pastor,
      Tenth Memorial
            1993
            2011Baptist
      ChurchPhiladelphia,
      PennsylvaniaAhsan
      M. Nasratullah1
            50
            President
            2004
            2009JNA
      Capital, Inc.Philadelphia,
      PAEvelyn
      F. Smalls
            62
            President
      and CEO of Registrant
            2000
            2011and
      United Bank of PhiladelphiaErnest
      L. Wright
            79
            Founder,
      President and
            1993
            2008CEO
      of Ernest L. WrightConstruction
      CompanyPhiladelphia,
      Pennsylvania





(b)                                Executive Officers of
Registrant and Bank





Name
            Age
            OfficeEvelyn
      F. Smalls
            62
            President
      and Chief Executive OfficerBrenda
      M. Hudson-Nelson
            46
            Executive
      Vice President/Chief Financial OfficerTerrence
      D. Barclift
            33
            Senior
      Vice President/Senior Lending
Officer*





*Effective
February 25, 2008, Mr. Barclift resigned his position as Senior Vice
President/Senior Lenidng Officer for personal reasons.





CORPORATE
GOVERNANCE





General
Information About UBS’ and Bank’s Boards of Directors





The Board
of Directors of the Company and the Bank has determined that all of its members
are independent and meet the independence requirements of National Association
of Securities Dealers (“ NASDAQ”) except Evelyn F. Smalls.  Because
Ms. Smalls is the President and Chief Executive Officer of the Company and the
Bank she is not independent as defined by NASDAQ.In
determining the independence of its directors, other than Ms. Smalls, the Board
of Directors considered routine banking transactions between the Bank and each
of the directors, their family members and businesses with whom they are
associated.  In each case, the Board of Directors determined that none
of the transaction relationships or arrangements impaired the independence of
the director.




1 Effective January 23,
2008, Ahsan M. Nasratullah resigned from the Board of Directors for personal
reasons.





37


UBS’ Board of Directors meets when
necessary and during 2007 held eleven (11) meetings, including UBS’ organization
meeting. In 2007, the Bank’s Board of Directors was scheduled to meet at least
monthly, except in August and during 2007 held eleven (11)
meetings.   The independent directors of the UBS’ and the Bank’s
Board of Directors will hold executive sessions on a regular basis, but, in any
event, not less than twice a year.




Policy
for Attendance at Annual Meetings




UBS has a policy requiring all of its
directors to attend UBS’ annual meeting.  At the annual meeting held
on December 7, 2007, eight (8) of UBS’ ten (10) directors attended the
meeting.





Information
about the UBS’ Audit/Compliance Committee and Financial Expert





The Audit/Compliance Committee of UBS’
Board of Directors is comprised of Joseph T. Drennan (Chairman), L. Armstead
Edwards, Marionette Y. Wilson (Frazier) and William B. Moore, meets when
necessary at the call of the


Chairman.
The Committee meets with the internal auditor to review audit programs and the
results of audits of specific areas, as well as other regulatory compliance
issues.  The Committee selects the independent registered public
accountants. In addition, the Committee meets with UBS’ independent registered
public accountants to review the results of the annual audit and other related
matters. Each member of the Committee is “independent” as defined in the
applicable listing standards of the National Association of Securities Dealers
(“NASDAQ”). The Committee held twelve (12) meetings during 2007.





Each
member of the Audit/Compliance Committee is financially literate as defined by
NASDAQ.  The Board of Directors of the Company and the Bank has
determined that Joseph T. Drennan is the “Financial Expert,” as defined in the
Commission’s regulations. The Audit Committee charter is available by request
and is not on the Company's website.





The Compliance Committee was combined
with the Audit Committee and is comprised of the same members.  On a
quarterly basis compliance matters are addressed to include the review of
regulatory compliance matters, the Bank’s compliance programs and the CRA Act
activities.





Information
About the Bank’s Audit/Compliance Committee





The Audit/Compliance Committee
comprised of Joseph T. Drennan
(Chairman), L. Armstead Edwards, William B. Moore, and Marionette Y. Wilson met
at least monthly in accordance with its Written Agreement with regulators. The
Audit/Compliance Committee meets with the internal auditor to review audit
programs and the results of audits of specific areas, as well as other
regulatory compliance issues. In addition, the Audit/Compliance Committee meets
with the Bank’s independent registered public accountants to review the results
of the annual audit and other related matters, as well as other regulatory
compliance issues. Each member of the Audit/Compliance Committee is
“independent” as defined in the applicable listing standards of NASDAQ. The
Committee held twelve (12) meetings during 2007.





The
Compliance Committee is combined with the Audit Committee and is comprised of
the same members.  On a quarterly basis compliance matters are
addressed to include the review of regulatory compliance matters, the Bank’s
compliance programs and the Community Reinvestment Act (CRA)
activities.





Audit Committee
Report




In connection with the preparation
and filing of UBS’ Annual Report on Form 10-K for the year ended December 31,
2007, the Audit Committee (i) reviewed and discussed the consolidated audited
financial statements with UBS’ management, (ii) discussed with McGladrey and
Pullen, LLP, UBS’ independent registered public accounting firm, the matters
required to be discussed by Statement on Auditing Standards No. 61 (as modified
or supplemented), (iii) discussed the independence of   McGladrey
and Pullen, LLP, and (iv) has received the written disclosures and the letter
from McGladrey and Pullen, LLP required by Independence Standards Board Standard
No. 1 (as modified or supplemented). Based on the review and discussions
referred to above, the Audit Committee recommended to the Board of Directors
that the audited consolidated financial statements be included in UBS’ Annual
Report on Form 10-K for the year ending December 31, 2007.





38


UBS’ Audit Committee is composed
of   Joseph T. Drennan (Chairman), L. Armstead Edwards, William
B. Moore, and Marionette Y. Wilson who each endorsed this report.




Respectfully
      submitted:


Joseph
      T. Drennan (Chairman)


L.
      Armstead Edwards


William
      B. Moore


Marionette
      Y. Wilson (Frazier)







INFORMATION
ABOUT THE COMMITTEES OF THE BOARDS





Information
About the Committees of UBS’ Board of Directors





The Committees of UBS’ Board of
Directors are the Executive Committee, Audit/Compliance Committee, and the
Nominating Committee.  The Executive Committee, comprised of L.
Armstead Edwards (Chairman), David R. Bright, Joseph T. Drennan, William B.
Moore, Evelyn F. Smalls, and Marionette Y. Wilson (Frazier) meets, when
necessary, at the call of the Chairman, and to exercise the authority and powers
of UBS’ Board of Directors at intervals between meetings of the Board of
Directors insofar as may be permitted by law. The Executive Committee held
eleven (11) meetings during 2007. See Item 11 below for the duties
and functions of the Executive Committee acting as the Compensation
Committee.





For
information about UBS’ and the Bank’s Audit/Compliance Committees refer to“INFORMATION ABOUT THE AUDIT
COMMITTEES” above.







Information
About UBS’ Nominating Committee







The
Nominating Committee, comprised of L. Armstead Edwards (Chairman), Ernest L.
Wright, and Joseph T. Drennan meets at the call of the Chairman. The Committee
is responsible for considering and recommending future director nominees to the
Board of Directors of UBS and the Bank and the Committee is independent and
meets the requirements for independence of the NASDAQ Stock market. The
Nominating Committee charter will be made available, without charge, upon
written request by the shareholders of UBS to the corporate secretary of
UBS.  A copy of the charter is not available on UBS’
website.  The Committee did not hold any meetings during
2007.  Directors standing for re-election were nominated by the
Executive Committee of the Board.





Meetings
of UBS’ Board and its Committees





The total number of meetings of UBS’
Board of Directors that were held in 2007 was eleven (11). All of the incumbent
directors, who were directors during 2007 (i) attended at least seventy-five
percent (75%) of the total number of meetings of the Board of Directors, except
William B. Moore, who attended seventy-three percent (73%) and Marionette Y.
Frazier, who attended sixty-four percent (64%); and (ii) all directors attended
at least seventy-five percent (75%) of the aggregate of the total number of
meetings held by all committees of the Board on which the director served,
except William B. Moore, who attended seventy-three percent (73%) of the
Executive Committee meetings and forty percent (40%) of the Audit Committee
meetings.





39


Information
About Committees of the Bank’s Board of Directors





The Committees of the Bank’s Board
of Directors are the Executive, Asset and Liability Management, the
Audit/Compliance Committees, and the Loan Committee.





The Executive Committee, comprised of
L. Armstead Edwards (Chairman), William B. Moore, Joseph T. Drennan, David R.
Bright, Evelyn F. Smalls and Marionette Y. Wilson meets, when necessary, at the
call of the Chairman, to discuss and approve certain human resource matters
including compensation, to ratify and approve certain of the Bank’s loans and to
exercise the authority and powers of the Bank’s Board of Directors at intervals
between meetings of the Board of Directors insofar as may be permitted by law.
The Executive Committee held eleven (11) meetings during 2007. The Bank’s Board
of Directors does not have a Compensation Committee; the Executive Committee
performs that function without Evelyn Smalls who serves as an executive officer
of the Bank. See Item 11 below for the duties and functions of the
Executive Committee acting as the Compensation Committee.





The Asset Liability Management
Committee, comprised of Bernard E. Anderson (Chairman), L. Armstead Edwards,
Angela M. Huggins3, Joseph
T. Drennan, Evelyn F. Smalls and Ernest L. Wright meets, when necessary, at the
call of the Chairman, to review and manage the Bank’s exposure to interest rate
risk, market risk and liquidity risk. During 2007, the Asset and Liability
Management Committee held four (4) meetings.





The Loan Committee, comprised of
David R. Bright (Chairman), L. Armstead Edwards, Evelyn F. Smalls, and Ernest
Wright meets when necessary to review and approve loans that are $200,000 and
over and to discuss other loan-related matters.  During 2007, the Loan
Committee held twelve (12) meetings.





For information about UBS’ and the
Bank’s Audit/Compliance Committees refer to“INFORMATION ABOUT THE AUDIT
COMMITTEES” above.








Meetings
of Bank’s Board and its Committees







The total number of meetings of the
Bank’s Board of Directors that were held in 2007 was eleven (11). All incumbent
directors (i) attended at least seventy-five percent (75%) of the total number
of meetings of the Board of Directors; except William B. Moore, who attended
seventy-three percent (73%) and Marionette Y. Frazier, who attended sixty-four
percent (64%); and, (ii) all directors attended at least seventy-five percent
(75%) of the aggregate of the total number of meetings held by all committees of
the Board on which the director served, except William B. Moore, who attended
seventy-three percent (73%) of the Executive Committee meetings and forty
percent (40%) of the Audit Committee meetings.








BOARD
OF DIRECTORS COMPENSATION





Directors
Fees





The
normal non-officer director fee paid by the Bank is Three Hundred Fifty Dollars
($350) for attending each Board meeting and One Hundred Seventy-five Dollars
($175) per quarter for attending the Board of Directors’ Committee meetings.
Directors’ fees are not paid to officer directors for attending Bank Board of
Directors or Committee meetings. UBS does not pay any fees to any directors for
attending UBS’ Board of Directors or Committee meetings.  Effective
April 1, 2002, the Board of Directors elected to waive all fees for an
indefinite period of time.  Therefore, no  table
summarizing the compensation paid to non-employee directors is required for the
fiscal year ended December 31, 2007.





40





UBS’S
AND BANK’S EXECUTIVE OFFICERS





The following table sets forth
certain information with respect to the current executive officers of UBS and
Bank as of  March 3, 2008:





Name,
      Principal Occupation and
              Business Experience For Past 5
      Years
            Age
      as of
              March 3,
      2008
            Office with the UBS
      and/or Bank
            UBS
      Stock
              Beneficially
              OwnedEvelyn
      F. Smalls(1)(2)
            62
            President
      and Chief Executive Officer and
              Director
      of UBS and Bank
            500Brenda
      M. Hudson-Nelson (3)
            46
            Executive
      Vice President and Chief Financial Officer
              of
      UBS and Bank
            50Terrence
      D. Barclift(4)
            33
            Senior
      Vice President and Senior Lending Officer
            -





Footnote
Information Concerning Executive Officers


(1)
            Ms.
      Smalls was elected as a director and was appointed as President and Chief
      Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior Vice
      President of Human Resources and Compliance from October 1993 to May
      2000.


(2)
            The
      President and Chief Executive Officer, currently Evelyn F. Smalls, acts as
      Trustee of certain voting trust agreements (the “Voting Trusts”) pursuant
      to which Fahnstock, Inc deposited 5,209 shares of Common Stock of
      UBS.


(3)
            Ms.
      Hudson-Nelson was appointed Senior Vice President and Chief Financial
      Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President
      and Controller from January 1992 to May 2000.  In May 2002, Ms.
      Hudson-Nelson was promoted to Executive Vice President and Chief Financial
      Officer.


(4)
            Mr.
      Barclift was hired as Senior Vice President and Senior Lending Officer in
      October 2006.  Prior to that, Mr. Barclift served five years as
      senior vice president/relationship manager for two money center
      banks.  Mr. Braclift has over 13 years experience in credit
      administration and lending. Effective February 25, 2008, Mr. Barclift
      resigned for personal reasons.








CODE
OF CONDUCT AND ETHICS





UBS  and the Bank has adopted
a Code of Business Conduct and Ethics ( the “Code”) that applies to all its
directors, employees and  officers and including its Chief Executive
Officer and its Chief Financial Officer.  The Code meets the
requirement of a code of ethics for the UBS’ and the Bank’s principal executive
officer and  principal  financial officer or persons
performing similar functions under Item 406 of  the SEC’s Regulation
S-K.  Any amendments to the Code, or any waivers of the Code for
directors or executive officers will be disclosed promptly on a Form 8-K filed
with the SEC or by any other means approved by the SEC.The Code complies with
requirements of Sarbanes – Oxley Act and the listing standards of NASDAQ and UBS
provides a copy of the Code to each director, officer and employee.





UBS will provide, without charge, a
copy of its Code of Business Conduct and Ethics to any person who requests a
copy of the Code.  A copy of the Code may be requested by writing to
the President of UBS at United Bank of Philadelphia at 30 S. 15th Street,
Suite 1200, Philadelphia, PA  19102.





SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section 16(a) of the Exchange Act
requires that UBS’ directors and executive officers file reports of their
holdings of UBS’ Common Stock with the SEC. Based on UBS’ records and other
information available to UBS believes that the SEC’s Section 16(a) reporting
requirements applicable to UBS’ directors and executive officers were complied
with for UBS’ fiscal year ended December 31, 2007.  There were no
reportable transactions during this period.





ITEM 11— EXECUTIVE COMPENSATION





The
Executive Committee, comprised of L. Armstead Edwards (Chairman of the Board),
William B. Moore(Vice Chairman of the Board), Marionette Y. Wilson, Joseph T.
Drennan, and David R. Bright without Evelyn Smalls, who is not independent,
serves as the compensation committee and meets to discuss compensation
matters.  It annually reviews and approves corporate goals and
objectives relevant to CEO compensation, evaluates the CEO’s performance in
light of those goals and objectives and determines and approves the compensation
and benefits to be paid or provided to the Evelyn F. Smalls the President of
UBS, Brenda M. Hudson-Nelson Executive Vice President and Chief Financial
Officer, and Terrence Barclift, Senior Vice President and Senior Lending
Officer.  Each member of the Compensation Committee is independent as
defined by NASDAQ. During 2007, the Executive Committee held two (2) meetings as
the Compensation Committee to discuss the terms of renewal of executive
contracts including terms, salaries and other benefits.  Details of
these contracts are still being reviewed and negotiated by the Bank’s executive
officers and have not been finalized.





41


Compensation
Discussion and Analysis





The
primary objectives of our compensation policy are:




•
            To
      attract and retain highly qualified key executive officers essential to
      our long-term success;


•
            To
      reward properly executive officers for performance, achievement of goals
      and enhancement of shareholder
value.


§
            Succession
      Planning to ensure adequate replacement for key
  executives





Compensation
Philosophy




The
compensation philosophy is to compensate our executive officers for performance.
However, because the Bank is currently designated as a “troubled financial
institution”, non-salary benefits have limitations including the inability to
offer executives significant deferred compensation, post-retirement benefits or
compensation in the event of a change in control.





The
Committee’s Process





Because
of the inability of management to attain the goals outlined in the 2006
Strategic Plan, there were no salary increases given to executive officers in
2007.  Therefore, there were no deliberations by the committee in
reference to salary increases.





Components
of Compensation for 2007




For the
fiscal year ended December 31, 2007, the components of executive compensation
were:




•
            Salary;


•
            Life
      Insurance two times salary; and


•
            Automobile
      Allowance.




Salary




Salary
provides the compensation base rate and is intended to be internally fair among
executive officers at the same level of responsibility.




In
setting the salary for the chief executive officer, the committee considers
financial results, organizational development, marketing initiatives, board
relations, management development, work on representing us to our customers,
clients and the public, and results in developing, expanding and integrating our
products and services. The committee also takes into account the effects of
inflation. The committee exercises discretion in setting the chief executive
officer’s salary and may increase or decrease the chief executive officer’s
salary based on our financial performance or on non-financial performance
factors, if it so decides. However, the employment contract with Ms. Smalls,
chief executive officer, sets a minimum salary of $160,000 per
year.




The
committee receives evaluations of the other executive officers performance from
Ms. Smalls and her recommendations for base salaries for those officers. The
recommendations are based on the officer’s level of responsibility and
performance of duties. The committee then reviews and modifies, where
appropriate, the recommendations and sets the salaries for the other executive
officers.




Life Insurance and Auto
Allowance




These
basic benefits help the Company attract and retain qualified personnel within
current financial constraints.










42





COMPENSATION
COMMITTEE REPORT





The
Executive Committee serving as the Compensation Committee has reviewed and
discussed the Compensation Discussion and Analysis required by Item 402(b)
of Regulation S-K with management and, based on such review and discussions, the
committee recommended that the Compensation Discussion and Analysis be
included  our Annual Report on Form 10-K for the year ended December
31, 2007.




Respectfully
      submitted:





L.
      Armstead Edwards


William
      B. Moore


Marionette
      Y. Wilson


Joseph
      T. Drennan


David
      R. Bright


Summary Compensation
Table





The table below summarizes the total
compensation paid or earned by each of the Named Executive Officers for the year
ended December 31, 2007.


Name
      and Principal
              Position
            Year
            Salary ($)
            Bonus
              ($)(1)
            Stock
              Awards
              ($)(1)
            Option
              Awards
              ($)(1)
            Non-Equity
              Incentive
      Plan
              Compensation(1)
            Change
      in
              Pension
              Value
      and
              Nonqualified
              Deferred
              Compensation
              Earnings
              ($)(1)
            All
      Other
              Compensation
              ($)(2)
            Total
              ($)Evelyn
      F. Smalls
              President
      and Chief Executive Officer
            2007
              2006
            $160,000
              164,307
            $0
              0
            $0
              0
            $0
              0
            $0
              0
            $0
              0
            $6,209
              6,209
            $166,209
              170,516Brenda
      Hudson-Nelson,
            2007
              2006
            115,000
              118,390
            0
            0
            0
            0
            0
            6,095
              6,095
            121,095
              124,485Executive
      Vice President and Chief Financial OfficerTerrence
      Barclift(3)
              Senior Vice President
      and Senior Lending Officer
            2007
              2006
            110,000
              26,230
            0
              0
            0
              0
            0
              0
            1,348
              0
            0
              0
            21,000
              500
            132,348
              26,730


(1)
            Amounts
      are not included in the Bonus, Stock Awards, Option Awards, Non-equity
      Incentive Plan Compensation, Change in Pension and Nonqualified Deferred
      Compensation Earnings and All Other Compensation columns of the table
      because no compensation of this nature was paid by UBS or the Bank and the
      restricted stock awards and long term incentivepayouts columns are
      not included in the Compensation Table since these benefits are not made
      available by UBS or the Bank.


(2)
            UBS’ executives receive a $500
      per month automobile allowance. UBS’ executive are provided with life
      insurance policies equivalent to two times their annual salary for which
      the cost is $209/annually for Evelyn Smalls and $95/annually for Brenda
      Hudson-Nelson


(3)
            For personal reasons, Terrence
      Barclift resigned his position as Senior Vice President/Senior Lending
      Officer effective February 25, 2008.(4)
            In
      2006, there was an extra pay period that resulted in a higher level of
      compensation.








43





Executive
Employment Agreements





The Bank entered into an Employment
Agreement with Evelyn F. Smalls in November 2004 to continue to serve as the
Bank’s President and Chief Executive Officer. The term of the Employment
Agreement was three (3) years.  The contract expired in November
2007. Renewal terms are under review by the Compensation
Committee.  Ms. Smalls is currently working under the provisions of
the expired contract which provide for an annual base salary of $160,000 that
may be increased, but not decreased as well as life insurance equivalent to two
times her base salary, and a $500 per month automobile allowance.





The Bank entered into an Employment
Agreement with Brenda M. Hudson-Nelson in November 2004 to continue to serve as
the Bank’s Executive Vice President and Chief Financial Officer. The term of the
Employment Agreement was three (3) years.  Renewal terms are under
review by the Compensation Committee.  Ms. Hudson-Nelson is currently
working under the provisions of the expired contract which provide for an annual
base salary of $115,000 that may be increased, but not decreased as well as life
insurance equivalent to two times her base salary, and a $500 per month
automobile allowance.





The
Bank entered into an Employment Agreement with Terrence Barclift in October 2006
to serve as the Bank’s Senior Vice President and Senior Lending Officer. The
term of the Employment Agreement was two (2) years, unless extended or
terminated.    The Employment Agreement provided for an
annual base salary of $110,000 that may be increased, but not decreased as well
as life insurance equivalent to two times her base salary, and a $500 per month
automobile allowance. For personal reasons, Mr. Barclift resigned effective
February 25, 2008.





Payments
Upon Termination





The named executive officers are only
entitled to payment of their salary, life insurance, and automobile allowance
through the date of termination.





Equity
Compensation Plan Information





The Company adopted a Stock Option
Plan in 1998.  Under this Plan, options to acquire shares of common
stock were granted to the former chief executive officer.  The Stock
Option Plan provides for the granting of options at the fair market value of the
Company’s common stock at the time the options are granted.  Each
option granted under the Stock Option Plan may be exercised within a period of
ten years from the date of grant.  However, no option may be exercised
within one year from the date of grant.  No options were granted in
2007.





Other
Compensation Tables





We have not included a grant of
plan-based awards table, an outstanding equity awards table, options exercises
and stock vested table, and pension benefits table because those tables are not
applicable.





44


ITEM 12— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT





The following table sets forth
certain information known to UBS, as of March 3, 2008 (1), with respect to the
only persons to UBS’ knowledge, who may be beneficial owners of more than 5% of
UBS’ Common Stock.


Name
      and Address
              of Beneficial Owner
            Amount
      and Nature of
              Beneficial
      Ownership
              of
      Corporation
              Common
    Stock
            Percentage
      of
              Outstanding
              Corporation
              Common
      Stock
              OwnedPhiladelphia
      Municipal
            71,667
            8.17%Retirement
      System2000
      Two Penn CenterPhiladelphia,
      Pennsylvania 19102Wachovia
      Corporation, (formerly, First Union Corporation)2
            50,000
            5.70%301
      S College Street, Floor 27Charlotte,
      NC 28288Greater
      Philadelphia Urban Affairs Coalition
            47,500
            5.42%1207
      Chestnut Street, Floor 7Philadelphia,
      PA  19107The
      Estate of James F. Bodine
            44,583
            5.08%401
      Cypress StreetPhiladelphia,
      PA  19106


(1)   As
of March 3, 2008, there were 876,921 shares of UBS’ voting Common Stock
outstanding.




(2) Wachovia
Corporation owns 241,666 shares of UBS Common Stock of which 50,000 are voting
shares.








45














The
following table lists the beneficial ownership of shares of the UBS’ Common
Stock as of March 3, 2008 for each of the UBS’ director, nominees and executive
officers.   The table also shows the total number of shares of
Common Stock ownership by the director, nominees and executive officers of UBS
as a group.





Name
            Common
              Stock9,10,11,
      12
            Percent of
              Outstanding StockCurrent
      DirectorsL.
      Armstead
      Edwards
            10,833
            1.23%Marionette
      Y. Wilson
      (Frazier)
            17,900
            2.04%Ernest
      L.
      Wright
            7,084
            *Bernard
      E.
      Anderson
            850
            *David
      R.
      Bright
            850
            *Joseph
      T.
      Drennan
            783
            *William
      B.
      Moore
            1,834
            *





Certain
      Executive OfficersEvelyn
      F.
      Smalls
            500**
            *Brenda
      M.
      Hudson-Nelson
            50
            *All
      Current Directors and Executive Officers as a Group
            40,684
            4.64%
      ***


__________________


Footnotes
Concerning Beneficial Ownership of Stock




*
            Less
      than one percent.**
            Ms.
      Smalls is also a Director; see listing above.***
            Calculated
      by adding the Common Stock owned plus exercisable options and dividing by
      the actual number of shares outstanding on March 3, 2008, plus the shares
      subject to the exercisable option.





(9) Stock
ownership information is given as of March 3, 2008, and includes shares that the
individual has the right to acquire (other than by exercise of stock options)
within sixty (60) days of March 3, 2008. Unless otherwise indicated, each
director and each such named executive officer holds sole voting and investment
power over the shares listed.


(10) The
number of shares “beneficially owned” in each case includes, when applicable,
shares owned beneficially, directly or indirectly, by the spouse or minor
children of the director, and shares owned by any other relatives of the
director residing with the director. None of the directors holds title to any
shares of UBS of record that such director does not own
beneficially.
 (11) UBS
does not know of any person having or sharing voting power and/or investment
power with respect to more than 5% of the UBS’ Common Stock other than Wachovia
Corporation (formerly First Union Corporation), Philadelphia Municipal
Retirement System, Greater Philadelphia Urban Affairs Coalition, and the Estate
of James F. Bodine.


(12) None
of the common stock of directors and executive officers is pledged to secure a
debt.





46


ITEM 13— CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS







Some of
our directors, executive officers, and members of their immediate families and
the companies with which they are associated were our customers of and had
banking transactions with us in the ordinary course of our business during the
year 2007 All loans and commitments to lend were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons.  In our opinion, the
transactions and loan commitments did not involve more than normal risk of
collectively or present other unfavorable features.




Our
written Audit Committee Charter requires our Audit Committee to approve related
party transactions. Our written Policy on Related Party Transactions establishes
procedures for the Audit Committee’s review and approve of related party
transactions other than excepted transactions and preapproved transactions.
Transactions available to all employees generally, and transactions involving
less than $120,000 when aggregated with all similar transactions in any calendar
year, are excepted transactions. The following types of transactions are
preapproved transactions:




-              Compensation
payable to directors or officers if reportable under Item 402 of the
Commission’s Regulation S-K;




-              Compensation
payable to an immediate family member of another director or executive officer,
if approved by the Executive Committee acting as the Compensation
Committee;




-              Transactions
with another company (including charitable contributions, grants or endowments
to a charitable organization) at which a related person’s only relationship is
as an employee (other than executive officer), director or less than 10% owner,
if the aggregate amount involved does not exceed $200,000 or 5% of that
company’s total revenues; and




-              Routine
banking relationships that otherwise comply with banking laws and
regulations.




The Audit
Committee is to apply the following standards when it reviews related party
transactions for approval:




-              Whether
the transaction is on terms no less favorable to the Corporation than terms
generally available with an unaffiliated third party under similar
circumstances;




-              The
extent of the related person’s interest in the transaction; and




-              Other
factors the committee deems appropriate.





For loan
transactions, our written Regulation O Policy requires the Executive Committee
to review and approve loan transactions with directors, executive officers and
their related interests in accordance with the standards established by Federal
Reserve Board Regulation O.





All
of the members of the Board of Directors of UBS and the Bank, except Ms. Smalls,
are independent and meet the requirements for independence of the NASDAQ Stock
market.








ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following table presents the fees for each of the last two fiscal years for the
UBS’ principal accountants by category:


2007
            
            
            2006Audit
      Fees
            
            $
            100,440
            
            
            $
            93,274Audit-related
      fees
            
            
            -
            
            
            
            -Tax
      fees
            
            
            11,515
            
            
            
            10,794All
      other fees
            
            
            -
            
            
            
            -Total
      fees
            
            $
            111,955
            
            
            $
            104,068





47


Services
Provided by McGladrey and Pullen, LLP




1)
            Audit
      Fees—These are fees for professional services performed by McGladrey and
      Pullen, LLP in 2007 and 2006 for the audit, including an audit of
      consolidated  financial statements reporting, and review of
      financial statements included in our Form 10-Q and Form 10-K
      filings.





2)
            Tax
      Fees—These are fees for professional services performed by RSM McGladrey,
      Inc. (an independent company associated with McGladrey and Pullen, LLP
      through an alternative practice structure) with respect to tax compliance
      and tax advice. This includes preparation of our tax returns, tax research
      and tax advice.





Our Audit Committee has considered
whether the provision of the non-audit services is compatible with maintaining
the independence of McGladrey and Pullen, LLP and determined that to be the
case.




Pre-approval
of Services





The Audit
Committee pre-approves all auditing services and permitted non-audit services
(including the fees and terms thereof) to be performed for UBS by its
independent auditor, subject to the minimus exceptions for non-audit services
described in Section 10A (i) (1) (B) of the Exchange Act which are approved by
the Committee prior to the completion of the audit.  The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting. All services performed by McGladrey and
Pullen, LLP and RSM McGladrey, Inc. are pre-approved by the Audit
Committee.








PART IV





ITEM 15— EXHIBITS AND FINANCIAL STATEMENTS
SCHEDULES





The
following documents are filed as part of this report of United Bancshares,
Inc.:





Page(a)
            1.
            Financial Reports of
      United Bancshares, Inc.Report of Independent Registered Public Accounting
      Firm.
            52Consolidated Balance Sheets at December 31, 2007 and
      2006.
            53Consolidated Statements of Operations for the three
      years ended December 31, 2007.
            55Consolidated Statements of Changes in Shareholders’ Equity
      for the three years endedDecember 31, 2007.
            56Consolidated Statements of Cash Flows for the three years
      ended December 31, 2007.
            57Notes to Consolidated Financial
    Statements
            582.
            Financial
      Statement SchedulesFinancial
      Statement Schedules are omitted because the required information is either
      not applicable, not required or is shown in the respective financial
      statements or in the notes thereto.3.
            The
      following Exhibits are filed herewith or incorporated by reference as a
      part of this Annual Report:





48


Exhibit Number
            Item(3(i))
            Articles
      of Incorporation (Incorporated by reference to Registrant’s 1998 Form
      10-K).(3(ii))
            Bylaws
      (Incorporated by reference to Registrant’s 1997 Form
  10-K).(9.1)
            Voting
      Trust Agreement with NationsBank (Incorporated by reference to
      Registrant’s 1997 Form 10-K).(9.2)
            Voting
      Trust Agreement with Fahnstock (Incorporated by reference to Registrant’s
      1997 Form 10-K).(10)
            Material
      Contractsa)
            Lease
      for corporate headquarters office located at The Graham Building, 30 S.
      15th
      Street, Suite 1200, Philadelphia, PA (Incorporated by reference to
      Registrant’s 2004 Form 10-K)b)
            Lease
      for branch office located at 1620 Wadsworth Avenue(Incorporated by
      reference to Registrant’s 2002 Form 10-K)c)
            Lease
      for branch office located at 1015 North Broad Street(Incorporated by
      reference to Registrant’s 2002 Form 10-K)d)
            Evelyn
      F. Smalls’ Employment Agreement, dated November 1, 2004, (Incorporated by
      reference to Registrant’s 2005 Form 10-K)e)
            Brenda
      Hudson-Nelson’s Employment Agreement, dated November 1, 2004, ,
      (Incorporated by reference to Registrant’s 2005 Form
  10-K)f)
            Long
      Term Incentive Compensation Plan (Incorporated by reference to
      Registrant’s 1992 Form 10)g)
            Lease
      for Retail office located at The Graham Building, 30 S. 15th
      Street, Philadelphia, PA, , (Incorporated by reference to Registrant’s
      2005 Form 10-K)h)
            Sublease
      for Retail office located at The Graham Building, 30 S. 15th
      Street, Philadelphia, PA(Incorporated by reference to Registrant’s 2005
      Form 10-K)i)
            Lease
      for branch office located at 1520 North Broad Street is attached hereto as
      Exhibit (10)j.j)
            Terrence Barclift’s Employment Agreement, dated October
      2, 2006 (Incorporated by reference to the Registrant’s 2006 Form
      10-K).(11)
            Statement
      of Computation of Earnings Per Share.  Included at Note 16 of
      the Financial Statements hereof.




49


(12)
            Statement
      of Computation of Ratios.  Included at Note 17 of the Financial
      Statements  hereof.(14)
            Code
      of Conduct and Ethics (Incorporated by reference to Registrant’s 2004
      10-K)





(21)
            Subsidiaries of
      RegistrantName
            State of
      IncorporationUnited
      Bank of Philadelphia
            Pennsylvania





(31)
            Certification
      of the Annual Report(31.1)
            Certification of the Chief Executive Officer Pursuant to
      Section 302 of the Sabanes-Oxley Act of 2002.(31.2)
            Certification of the Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.(32)
            Certification
      Pursuant to issue of Section 1350(A)
            Exhibit 32.1Certification
      Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer attached
      hereto as Exhibit 99.1.(B)
            Exhibit 32.2Certification
      Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer attached
      hereto as Exhibit 99.2.(99)
            Supplemental
      Information(A)
            The
      Annual Report to Shareholders and Proxy material will be furnished after
      the filing of Form 10-K.  Copies of these materials will be
      submitted to the Commission when they are sent to the
      shareholders.








50


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.
            DATE/s/_________________________________________
            April
      15, 2008Evelyn
      F. Smalls, President & CEO, Director/s/_________________________________________
            April
      15, 2008Brenda
      M. Hudson-Nelson, EVP, CFO/s/___________________________________
            April
      15, 2008L.
      Armstead Edwards, Chairman, Director/s/_________________________________________
            April
      15, 2008Marionette
      Y. Wilson(Frazier),  Secretary, Director/s/_________________________________________
            April
      15, 2008William
      B. Moore, Secretary,  Vice Chairman, Director/s/________________________________________
            April
      15, 2008Bernard
      E. Anderson, Director/s/________________________________________
            April
      15, 2008David
      R. Bright, Director/s/________________________________________
            April
      15, 2008Joseph
      T. Drennan, Treasurer, Director/s/_________________________________________
            April
      15, 2008Ernest
      L. Wright, Director







51












Report
of Independent Registered Public Accounting Firm
 
 
 
 To the
Board of Directors
 United
Bancshares, Inc.
 
 
 We have
audited the consolidated balance sheets of United Bancshares, Inc. and
Subsidiary (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in shareholders’ equity and cash
flows for each of the years in the three year period ended December 31, 2007.
These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
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
Subsidiary as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
 
 We were
not engaged to examine management’s assertion about the effectiveness of the
Bank’s internal control over financial reporting as of December 31, 2007
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
 
 
 
 Blue
Bell, Pennsylvania
 April 14,
2008




52











UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATED
BALANCE SHEETS


December
31,





Assets
            
            2007
            
            
            2006Cash
      and due from banks
            
            $
            3,875,911
            
            
            $
            3,179,239Interest-bearing
      deposits with banks
            
            
            289,095
            
            
            
            281,920Federal
      funds sold
            
            
            9,755,000
            
            
            
            9,158,000Cash
      and cash equivalents
            
            
            13,920,006
            
            
            
            12,619,159Investment
      securities:Available-for-sale,
      at fair market value
            
            
            3,455,363
            
            
            
            3,087,056Held-to-maturity,
      at amortized cost (fair market value of $10,493,820and
      $12,683,809 in 2007 and 2006, respectively)
            
            
            10,466,053
            
            
            
            12,804,351Loans,
      net of unearned discount of $67,807 and $5,204 in 2007and
      2006, respectively
            
            
            45,183,839
            
            
            
            42,518,151Less
      allowance for loan losses
            
            
            (589,526
            )
            
            
            (561,409
            )Net
      loans
            
            
            44,594,313
            
            
            
            41,956,742Bank
      premises and equipment, net
            
            
            966,494
            
            
            
            1,099,524Accrued
      interest receivable
            
            
            399,243
            
            
            
            422,216Intangible
      assets
            
            
            1,026,124
            
            
            
            1,204,202Prepaid
      expenses and other assets
            
            
            408,855
            
            
            
            731,924Total
      assets
            
            $
            75,231,507
            
            
            $
            73,925,174Liabilities
      and Shareholders’ EquityLiabilities:Demand
      deposits, noninterest-bearing
            
            $
            12,762,066
            
            
            $
            14,082,940Demand
      deposits, interest-bearing
            
            
            11,712,926
            
            
            
            10,585,080Savings
      deposits
            
            
            19,912,673
            
            
            
            18,056,849Time
      deposits, under $100,000
            
            
            8,315,998
            
            
            
            8,885,199Time
      deposits, $100,000 and over
            
            
            13,380,822
            
            
            
            13,313,571Total
      deposits
            
            
            66,084,485
            
            
            
            64,923,639Accrued
      interest payable
            
            
            134,844
            
            
            
            132,785Accrued
      expenses and other liabilities
            
            
            326,768
            
            
            
            254,906Total
      liabilities
            
            
            66,546,097
            
            
            
            65,311,330





Commitments
and Contingencies (Notes 6, 10, 14 and 15)





53


Shareholders’
equity:


Series
      A preferred stock, noncumulative, 6%, $0.01 par value,500,000
      shares authorized; 136,842 issued; 6,308 shares held in
      treasury
            
            
            1,368
            
            
            
            1,368Common
      stock, $0.01 par value; 1,750,000 shares authorized;876,921
      issued
            
            
            8,769
            
            
            
            8,769Class
      B Non-voting Common Stock; 250,000 shares authorized; $0.01 par
      value;191,667
      issued and outstanding
            
            
            1,917
            
            
            
            1,917Treasury
      Stock, 33,500 shares of common stock, at cost
            
            
            -
            
            
            
            -Additional
      paid-in-capital
            
            
            14,749,852
            
            
            
            14,749,852Accumulated
      deficit
            
            
            (6,082,165
            )
            
            
            (6,129,452
            )Accumulated
      other comprehensive income (loss)
            
            
            5,669
            
            
            
            (18,610
            )Total
      shareholders’ equity
            
            
            8,685,410
            
            
            
            8,613,844Total
      liabilities and shareholders’ equity
            
            $
            75,231,507
            
            
            $
            73,925,1744The
      accompanying notes are an integral part of these
    statements.


54


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF OPERATIONS





Years
ended December 31,





2007
            
            
            2006
            
            
            2005Interest
      income:Interest
      and fees on loans
            
            $
            3,515,693
            
            
            $
            3,625,617
            
            
            $
            3,428,778Interest
      on investment securities
            
            
            756,020
            
            
            
            577,224
            
            
            
            537,077Interest
      on federal funds sold
            
            
            524,720
            
            
            
            357,080
            
            
            
            180,258Interest
      on time deposits with other banks
            
            
            16,024
            
            
            
            7,843
            
            
            
            9,717Total
      interest income
            
            
            4,812,457
            
            
            
            4,567,764
            
            
            
            4,155,830Interest
      expense:Interest
      on time deposits
            
            
            754,189
            
            
            
            696,901
            
            
            
            462,910Interest
      on demand deposits
            
            
            170,566
            
            
            
            111,128
            
            
            
            64,224Interest
      on savings deposits
            
            
            287,546
            
            
            
            137,958
            
            
            
            57,940Total
      interest expense
            
            
            1,212,301
            
            
            
            945,987
            
            
            
            585,074Net
      interest income
            
            
            3,600,156
            
            
            
            3,621,777
            
            
            
            3,570,756Provision
      for loan losses
            
            
            120,000
            
            
            
            137,000
            
            
            
            558,000Net
      interest income after provision for loan losses
            
            
            3,480,156
            
            
            
            3,484,777
            
            
            
            3,012,756Noninterest
      income:Gain
      on sale of loans
            
            
            -
            
            
            
            10,656
            
            
            
            33,679Customer
      service fees
            
            
            590,841
            
            
            
            603,259
            
            
            
            681,919ATM
      Fee Income
            
            
            454,338
            
            
            
            517,302
            
            
            
            570,274Loan
      Syndication Fee Income
            
            
            120,000
            
            
            
            150,000
            
            
            
            202,171Gain
      on sale of bank premises and equipment
            
            
            24,000
            
            
            
            -
            
            
            
            -Other
      income
            
            
            131,203
            
            
            
            133,285
            
            
            
            94,011Total
      noninterest income
            
            
            1,320,382
            
            
            
            1,414,502
            
            
            
            1,582,054Noninterest
      expense:Salaries,
      wages and employee benefits
            
            
            1,626,580
            
            
            
            1,746,539
            
            
            
            1,830,572Occupancy
      and equipment
            
            
            1,018,213
            
            
            
            993,397
            
            
            
            994,690Office
      operations and supplies
            
            
            319,394
            
            
            
            309,268
            
            
            
            345,265Marketing
      and public relations
            
            
            120,837
            
            
            
            115,756
            
            
            
            100,421Professional
      services
            
            
            256,186
            
            
            
            290,687
            
            
            
            265,487Data
      processing
            
            
            456,463
            
            
            
            421,699
            
            
            
            407,324Deposit
      insurance assessments
            
            
            154,597
            
            
            
            110,687
            
            
            
            113,144Other
      operating
            
            
            800,981
            
            
            
            792,556
            
            
            
            807,324Total
      noninterest expense
            
            
            4,753,251
            
            
            
            4,780,589
            
            
            
            4,864,227Net
      income (loss) before income taxes
            
            $
            47,287
            
            
            $
            118,690
            
            
            $
            (269,417
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss)
            
            $
            47,287
            
            
            $
            118,690
            
            
            $
            (269,417
            )Net
      income (loss) per common share—basic
            
            $
            0.04
            
            
            $
            0.11
            
            
            $
            (0.25
            )Net
      income (loss) per common share—diluted
            
            $
            0.04
            
            
            $
            0.11
            
            
            $
            (0.25
            )Weighted
      average number of common shares
            
            
            1,068,588
            
            
            
            1,068,588
            
            
            
            1,068,588The
      accompanying notes are an integral part of these
    statements.


55


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY





Years
ended December 31, 2007, 2006 and 2005





AccumulatedAdditional
            
            
            
            
            
            other
            
            
            TotalSeries A preferred stock
            
            
            Common stock
            
            
            paid-in
            
            
            Accumulated
            
            
            comprehensive
            
            
            shareholders’
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            capital
            
            
            deficit
            
            
            income (loss)
            
            
            equity
            
            
            income (loss)Balance
      at December 31, 2004
            
            
            136,842
            
            
            $
            1,368
            
            
            
            1,068,588
            
            
            $
            10,686
            
            
            $
            14,749,852
            
            
            $
            ( 5,978,725
            )
            
            $
            17,562
            
            
            $
            8,800,743Unrealized
      losses on investmentsecurities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (50,132
            )
            
            
            (50,132
            )
            
            $
            (50,132
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (269,417
            )
            
            
            
            
            
            
            (269,417
            )
            
            
            (269,417
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (319,549
            )Balance
      at December 31, 2005
            
            
            136,842
            
            
            $
            1,368
            
            
            
            1,068,588
            
            
            $
            10,686
            
            
            $
            14,749,852
            
            
            $
            ( 6,248,142
            )
            
            $
            (32,570
            )
            
            $
            8,481,194Unrealized
      gains on investment securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,960
            
            
            
            13,960
            
            
            $
            13,960Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            118,690
            
            
            
            118,690
            
            
            
            118,690Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            132,650Balance
      at December 31, 2006
            
            
            136,842
            
            
            $
            1,368
            
            
            
            1,068,588
            
            
            $
            10,686
            
            
            $
            14,749,852
            
            
            $
            (6,129,452
            )
            
            $
            ( 18,610
            )
            
            $
            8,613,844Unrealized
      gains on investment securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24,279
            
            
            $
            24,279
            
            
            $
            24,279Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            47,287
            
            
            
            47,287
            
            
            
            47,287Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            71,566Balance
      at December 31, 2007
            
            
            136,842
            
            
            $
            1,368
            
            
            
            1,068,588
            
            
            $
            10,686
            
            
            $
            14,749,852
            
            
            $
            (6,082,165
            )
            
            $
            5,669
            
            
            $
            8,685,410











The
accompanying notes are an integral part of these statements.


56


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
ended December 31,








2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income (loss)
            
            $
            47,287
            
            
            $
            118,691
            
            
            $
            (269,417
            )Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Provision
      for loan losses
            
            
            120,000
            
            
            
            137,000
            
            
            
            558,000Gain
      on sale of loans
            
            
            -
            
            
            
            (10,656
            )
            
            
            (33,679
            )Gain
      on sale of fixed assets
            
            
            (24,000
            )Depreciation
      and amortization
            
            
            462,632
            
            
            
            447,189
            
            
            
            480,976Decrease
      (Increase) in accrued interest receivable andother
      assets
            
            
            103,437
            
            
            
            (173,145
            )
            
            
            (211,387
            )Increase
      (decrease) in accrued interest payable andother
      liabilities
            
            
            73,922
            
            
            
            6,742
            
            
            
            77,082Net
      cash provided by operating activities
            
            
            783,278
            
            
            
            525,821
            
            
            
            601,575Cash
      flows from investing activities:Purchase
      of available-for-sale investments
            
            
            (1,010,099
            )
            
            
            (503,125
            )
            
            
            -Purchase
      of held-to-maturity investments
            
            
            (3,775,751
            )
            
            
            (5,116,828
            )
            
            
            (4,762,327
            )Proceeds
      from maturity and principal reductions ofavailable-for-sale
      investments
            
            
            904,992
            
            
            
            833,197
            
            
            
            1,084,929Proceeds
      from maturity and principal reductions ofheld-to-maturity
      investments
            
            
            6,114,630
            
            
            
            2,380,686
            
            
            
            3,440,765Proceeds
      from sale of student loans
            
            
            -
            
            
            
            568,166
            
            
            
            1,806,173Net
      proceeds ftom sale of fixed assets
            
            
            204,000
            
            
            
            -
            
            
            
            -Net
      (increase) decrease in loans
            
            
            (1,039,510
            )
            
            
            3,288,272
            
            
            
            (1,771,882
            )Purchase
      of loans
            
            
            (1,718,060
            )
            
            
            -
            
            
            
            -Purchase
      of premises and equipment
            
            
            (323,478
            )
            
            
            (196,945
            )
            
            
            (244,306
            )Net
      cash (used in) provided by investing activities
            
            
            (643,277
            )
            
            
            1,253,423
            
            
            
            (446,648
            )Cash
      flows from financing activities:Net
      increase in deposits
            
            
            1,160,846
            
            
            
            1,600,123
            
            
            
            151,297Net
      cash provided by financing activities
            
            
            1,160,846
            
            
            
            1,600,123
            
            
            
            151,297Net
      increase in cash and cash equivalents
            
            
            1,300,847
            
            
            
            3,379,366
            
            
            
            306,224Cash
      and cash equivalents at beginning of year
            
            
            12,619,159
            
            
            
            9,239,793
            
            
            
            8,933,569Cash
      and cash equivalents at end of year
            
            $
            13,920,006
            
            
            $
            12,619,159
            
            
            $
            9,239,793Supplemental
      disclosure of cash flow information:Cash
      paid during the year for interest
            
            $
            1,214,361
            
            
            $
            963,979
            
            
            $
            512,493


The
accompanying notes are an integral part of these statements.








57








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS





December
      31, 2007, 2006, and 2005














1.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of United
      Bancshares, Inc. (the Company) and its wholly owned subsidiary, United
      Bank of Philadelphia (the Bank).  All significant intercompany
      transactions and balances have been
eliminated.





Statement
      of Cash Flows





For
      purposes of reporting cash flows, cash and cash equivalents include cash
      on hand, amounts due from banks, and federal funds sold on an overnight
      basis.  Changes in loans made to and deposits received from
      customers are reported on a net
basis.





Securities
      Held-to-Maturity





Bonds,
      notes, and debentures for which the Bank has both the positive intent and
      ability to hold to maturity are classified as held-to-maturity and carried
      at cost, adjusted for premiums and discounts that are recognized in
      interest income using the interest method over the period to
      maturity.





Securities
      Available-for-Sale





Available-for-sale
      securities consist of bonds, notes and debentures, for which the Bank does
      not have positive intent to hold to maturity.  These securities
      are carried at fair value.





Unrealized
      holding gains and losses on securities classified as available-for-sale
      are carried as a separate component of shareholders’ equity net of related
      income tax effects.





Gains
      and losses on the sale of available-for-sale securities are determined by
      the specific identification method.





Premiums
      and discounts are recognized in interest income using the interest method
      over the period to maturity.





Securities
classified as available for sale or held to maturity are considered to be
impaired when a decline in the fair value is judged to be other-than
temporary.  The Bank evaluates the securities for the
other-than-temporary impairment at least on a quarterly basis and more
frequently when economic or market conditions warrant such
evaluation.  The Bank employs a systematic methodology that considers
available evidence in evaluating potential impairment of its
investments.  In the event that the cost of an investment exceeds its
fair value, the Bank evaluates, among other factors, the
magnitude  and duration of the decline in fair value; for equity and
debt securities the financial health of and business outlook of the issuer; the
performance of the underlying assets in interests in securitized assets; and the
Bank’s intent and ability to hold the investment.  Once a decline in
fair value is determined to be other-than-temporary, an impairment charge is
recorded in investment income and a new cost basis in the investment is
established.








(Continued)











58








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005








1.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
Continued





Loans





The
      Bank has both the positive intent and ability to hold the majority
      of  its loans to maturity.  These loans are stated at
      the amount of unpaid principal, reduced by net unearned discount and an
      allowance for loan losses.  Interest income on loans is
      recognized as earned based on contractual interest rates applied to daily
      principal amounts outstanding and accretion of discount.  It is
      the Bank’s policy to discontinue the accrual of interest income when a
      default of principal or interest exists for a period of 90 days except
      when, in management’s judgment, the collection of principal and interest
      is reasonably anticipated or adequate collateral
      exists.  Interest received on nonaccrual loans is either applied
      against principal or reported as interest income according to management’s
      judgment as to collectability of principal.  When interest
      accruals are discontinued, interest credited to income is reversed and the
      loan is classified as
nonperforming.





Unearned
      discount is amortized over the weighted average maturity of the mortgage
      loan portfolio.  Loan origination and commitment fees and
      certain direct loan origination costs are deferred, and the net amount is
      amortized as an adjustment of the related loan’s yield.  The
      Bank is amortizing these amounts over the contractual life of the
      loan.





For
      purchased loans, the discount remaining after the loan loss allocation is
      being amortized over the remaining life of the purchased loans using the
      interest method.





Loans
Held-for-Sale





Transfers
of financial assets, for which the Bank has surrendered control, are accounted
for as sales to the extent that consideration other than beneficial interests in
the transferred assets is received in exchange.  Retained interests in
a sale of financial assets are measured at the date of transfer by allocating
the previous carrying amount between the assets transferred and based on their
relative estimated fair values.  The fair values of retained servicing
rights and any other retained interests are determined based on the present
value of expected future cash flows associated with those interests and by
reference to market prices for similar assets.





Loans
      held-for-sale are carried at the lower of aggregate cost or market
      value





Allowance
      for Loan Losses





The
      allowance for loan losses related to “impaired loans” is based on the
      discounted cash flows using the impaired loans’ initial effective interest
      rate as the discount rate, or the fair value of the collateral for
      collateral-dependent loans.  A loan is impaired when it meets
      the criteria to be placed on nonaccrual status.  Loans that are
      evaluated for impairment are assessed on a loan-by-loan basis and include
      only commercial nonaccrual loans.  Large groups of smaller,
      homogeneous loans, such as credit cards, student loans, residential
      mortgages, and other student loans, are evaluated collectively for
      impairment.





(Continued)








59







UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





1.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
Continued





The
      allowance for loan losses is maintained at a level considered adequate to
      provide for potential losses in the portfolio.  The allowance is
      increased by provisions charged to operating expenses and reduced by
      charge-offs net of recoveries.  Management’s determination of
      the adequacy of the allowance is based on continuous credit reviews of the
      loan portfolio, consideration of the current economic conditions, review
      of specific problem loans, and other relevant factors.  This
      evaluation is subjective as it requires material estimates, including the
      amounts and timing of future cash flows expected to be received on
      impaired loans that may be susceptible to significant
      change.  However, actual losses on specific loans, which are
      encompassed in the analysis, may vary from estimated
      losses.  The allowance is an accounting estimate subject to
      short-term changes based on the outcome of periodic
    analysis.





Bank
      Premises and Equipment





Bank
      premises and equipment are stated at cost less accumulated
      depreciation.  Depreciation is computed on the straight-line
      method over the estimated useful lives of the
      assets.  Amortization of leasehold improvements is computed over
      the shorter of the related lease term or the useful life of the
      assets.





Income
      Taxes





The
      liability method is used in accounting for income
      taxes.  Deferred tax assets and liabilities are determined based
      on differences between financial reporting and tax bases of assets and
      liabilities and are measured using the enacted tax rates and laws that
      will be in effect when the differences are expected to
      reverse.  It is the Company’s policy to recognize interest and
      penalties related to unrecognized tax liabilities within income tax
      expense in the statement of income.





Earnings
      (Loss) Per Share





Basic
      EPS excludes dilution and is computed by dividing income available to
      common shareholders by the weighted average common shares outstanding
      during the period.  Diluted EPS takes into account the potential
      dilution that could occur if securities or other contracts to issue common
      stock were exercised and converted into common
  stock.





Stock-based
Compensation




As of
January 1, 2006, the Bank transitioned to fair value based accounting for
stock-based compensation using a modified version of prospective application in
accordance with Statement of Financial Accounting Standards No. 123R, (“FAS
123R”), Share-Based Payment. There was no compensation cost charged against
income for the Plan for the years ended December 31, 2007, 2006and 2005 as no
options were granted under the Plan during these periods.  All options
were fully vested at December 31, 2007.






At
December 31, 2007, the Company had one stock-based employee compensation plan
which is more fully described in Note 12.  The Stock Option Plan
provides for the granting of options at the fair market value of the Company’s
common stock at the time the options are granted.  Each option granted
under the Stock Option Plan may be exercised within a period of ten years from
the date of grant.  However, no option may be exercised within one
year from the date of grant.  In 1998, options to purchase 29,694
shares of the Company’s common stock at a price of $8.54 per share were awarded,
to the former chief executive officer.  Those options remain
outstanding at December 31, 2007.







(Continued)





60







UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005











1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES –
Continued








Off-Balance-Sheet Financial
Instruments





In
      the ordinary course of business, the Bank has entered into
      off-balance-sheet financial instruments consisting of commitments to
      extend credit and letters of credit.  Such financial instruments
      are recorded in the financial statements when they become
      payable.





Financial Instruments





The
      following methods and assumptions were used by the Bank in estimating its
      fair value disclosures for financial
  instruments:





Cash
      and cash equivalents: The carrying amounts reported in the balance sheet
      for cash and cash equivalents approximate those assets’ fair
      values.





Investment
      securities: Fair values for investment securities are based on quoted
      market prices, where available.  If quoted market prices are not
      available, fair values are based on quoted market prices of comparable
      instruments.  The carrying amount of accrued interest receivable
      approximates fair market value.





Loans
held-for-sale: Fair values are estimated using quoted rates based upon secondary
market sources for similar loans.





Loans:
      The fair value of loans was estimated using a discounted cash flow
      analysis, which considered estimated pre­payments and
      amortizations.  Prepayments and discount rates were based on
      current marketplace estimates and pricing.  Residential mortgage
      loans were discounted at the current effective yield, including fees, of
      conventional


loans,
      adjusted for their maturities with a spread to the Treasury yield
      curve.  The carrying amount of accrued interest receivable
      approximates fair market value.





Deposit
      liabilities: The fair values disclosed for demand deposits (e.g., interest
      and noninterest checking, passbook savings, and certain types of money
      market accounts) are equal to the amounts payable on demand at the
      reporting date (e.g., their carrying amounts).  The carrying
      amounts for variable-rate, fixed-term money market accounts and
      certificates of deposit approximate the fair values at the reporting
      date.  Fair values for fixed-rate certificates of deposit are
      estimated using a discounted cash flow calculation.  The
      Treasury Yield Curve was utilized for discounting cash flows as it
      approximates the average marketplace certificate of deposit rates across
      the relevant maturity spectrum. Commitments to extend credit: The carrying
      amounts for commitments to extend credit approximate fair value as such
      commitments are not substantially different from the fees currently
      charged to enter into similar agreements, taking into account the
      remaining terms of the agreements and the present creditworthiness of the
      counterparts.  The carrying amount of accrued interest payable
      approximates fair market value.





(Continued)





61










UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005








1.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
Continued





Intangible
Assets





On
      September 24, 1999, the Bank acquired four branches from First Union
      Corporation with deposits totaling $31.5 million.   As a
      result of the acquisition, the Bank recorded a core deposit intangible of
      $2,449,488.    The core deposit intangible is being
      amortized over 14 years.




2007
            
            
            2006Core
      Deposit Premium (cost)
            
            $
            2,449,488
            
            
            $
            2,449,488Less
      accumulated amortization
            
            
            (1,423,364
            )
            
            
            (1,245,286
            )$
            1,026,202
            
            
            $
            1,204,202




Amortization
      of the intangible totaled $178,078 for each of the years ended December
      31, 2007, 2006, 2005.  The amortization of the intangible is
      projected to be $178,078 for each of the next five
  years.





Intangible
assets are reviewed for possible impairment when events or changed circumstances
may affect the underlying basis of the net asset.  Such reviews
include an analysis of current results and take into consideration the
discounted value of projected operating cash flows. The core deposit intangible
was tested for impairment.  No impairment has been
recognized.





Foreclosed
      Real Estate





Real
      estate properties acquired through, or in lieu of, loan foreclosure are to
      be sold and are initially recorded at fair value at the date of
      foreclosure, establishing a new cost basis.  After foreclosure,
      valuations are periodically performed by management, and the real estate
      is carried at the lower of carrying amount or fair value less the cost to
      sell.  Revenue and expenses from operations and changes in
      valuation allowance are charged to operations.  The historical
      average holding period for such properties is 24
  months.





Management’s
      Use of Estimates





The
      preparation of the financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the amounts
      reported in the financial statements and accompanying
      notes.  Actual results could differ from those
      estimates.  Material estimates which are particularly
      susceptible to significant change in the near term relate to the market
      value of investment securities, the determination of the allowance for
      loan losses, valuation of other real estate, valuation allowance for
      deferred tax assets and consideration of impairment of other intangible
      assets.

















(Continued)





62














UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006 and 2005





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES –
Continued





Segments





The
      Company has one reportable segment, “Community Banking.” All of the
      Company’s activities are interrelated, and each activity is dependent and
      assessed based on how each of the activities of the Company supports the
      other.  For example, commercial lending is dependent upon the
      ability of the Bank to fund it with retail deposits and other borrowings
      and to manage interest rate and credit risk.  This situation is
      also similar for consumer and residential mortgage
      lending.  Accordingly, all significant operating decisions are
      based upon analysis of the Company as one operating segment or
      unit.





Reclassifications





Certain
      reclassifications have been made to the prior year’s financial statements
      to conform to the 2007
presentation.





Comprehensive
      Income





Comprehensive
      income includes net income as well as certain other items that result in a
      change to equity during the period. The components of other comprehensive
      income are as follows:





December 31, 2007Before
      tax
            
            
            Tax
            
            
            Net
      of taxamount
            
            
            (expense)
            
            
            amountUnrealized
      gains on securitiesUnrealized
      holding gains arising during period
            
            $
            36,237
            
            
            
            (11,958
            )
            
            $
            24,279Less:
      reclassification adjustment for gainsrealized
      in net income
            
            
            -
            
            
            
            -
            
            
            
            -Other
      comprehensive income, net
            
            $
            36,237
            
            
            $
            (11,958
            )
            
            $
            24,279December 31, 2006Before
      tax
            
            
            Tax
            
            
            Net
      of taxamount
            
            
            benefit(expense)
            
            
            amountUnrealized
      gains on securitiesUnrealized
      holding gains arising during period
            
            $
            20,836
            
            
            $
            (6,876
            )
            
            $
            13,960Less:
      reclassification adjustment for gainsrealized
      in net income
            
            
            -
            
            
            
            -
            
            
            
            -Other
      comprehensive income, net
            
            $
            20,836
            
            
            $
            (6,876
            )
            
            $
            13,960December 31, 2005Before
      tax
            
            
            Tax
            
            
            Net
      of taxamount
            
            
            benefit(expense)
            
            
            amountUnrealized losses
      on securitiesUnrealized
      holding losses arising during period
            
            $
            (75,958
            )
            
            $
            25,826
            
            
            $
            (50,132
            )Less:
      reclassification adjustment for gainsrealized
      in net income
            
            
            -
            
            
            
            -
            
            
            
            -Other
      comprehensive income(loss), net
            
            $
            (75,958
            )
            
            $
            25,826
            
            
            $
            (50,132
            )








63


UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES –
Continued








Recent
      Accounting Pronouncements


SFAS No.
141 (R), Business
Combinations.This Statement is a
revision of a previous statement on business combinations.  The new
standard requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination.  This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date.  The Bank does not expect that the
adoption of this statement will have a material impact on its financial
statements.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.This Statement defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements.  It
clarifies that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity
transacts.  This Statement does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  This Statement is effective for fiscal years beginning after
November 15, 2007, with earlier adoption permitted.  The Bank is
currently evaluating the impact that the adoption of this Statement will have on
its financial position, results of operations and cash flows.




In
February 2007, FASB issued Statement of Financial Accounting Standards No. 159
(SFAS 159), “The Fair Value
Option for Financial Assets and Financial Liabilities”.  This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value.  The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  This
statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  The Bank is currently evaluating the
impact that the adoption of this Statement will have on its financial
position, results of operation and cash flows.




SFAS No.
160, Non-controlling Interests
in Consolidated Financial Statement, requires all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions.  This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited.   This Statement shall be
applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. The Bank does not expect that the
adoption of this statement will have a material impact on its financial
statements.





64










UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005








2.
            REGULATORY
      AGREEMENT





In
February 2000, as a result of a regulatory examination completed in December
1999, the Bank entered into a Written Agreement (Agreement) with its primary
regulators with regard to, among other things, achievement of agreed-upon
capital levels, implementation of a viable earnings/strategic plan, adequate
funding of the allowance for loan losses, the completion of a management review
and succession plan, and improvement in internal controls.  The
current Agreement requires the Bank to increase its capital ratio to 6.5% by
June 30, 2000 and to 7% at all times thereafter.  As of December 31,
2000, the Bank had met the required ratios by implementing strategies that
included:  increasing profitability, consolidating branches, and
soliciting new and additional sources of capital.   At December
31, 2007 and 2006, the Bank’s tier one leverage ratio was 9.99% and 9.47%,
respectively.





The Bank
voluntarily surrendered its Federal Reserve Membership effective December 31,
2007.  As a result, the Agreement terminated.  The Bank
applied and received approval to have its primary regulator to be the FDIC
effective January 1, 2008.  Taking into account the results of the
2007 regulatory examinations, the FDIC issued a regulatory order (“Order”) that
generally parallels the Agreement that the Bank had with the Federal Reserve and
Commonwealth Department of Banking.





Management
believes that the Bank is substantially in compliance with the Order’s terms and
conditions and will comply with the requirements of the Order.Management continues to
address all matters outlined in the Order.  Failure to comply could
result in additional regulatory supervision and/or actions.










3.  CASH
      AND DUE FROM BANK BALANCES





The
      Bank maintains various deposit accounts with other banks to meet normal
      fund transaction requirements and to compensate other banks for certain
      correspondent services.  The withdrawal or usage restrictions of
      these balances did not have a significant impact on the operations of the
      Bank as of December 31, 2007.  Reserve balances were $627,000 as
      of December 31, 2007 and 2006.





4.  INVESTMENTS





The
      amortized cost, gross unrealized holding gains and losses, and estimated
      market value of the available-for-sale and held-to-maturity investment
      securities by major security type at December 31, 2007 and 2006 are as
      follows:





2007Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealized
            
            
            Marketcost
            
            
            gains
            
            
            losses
            
            
            valueAvailable-for-sale:U.S.
      Government agency securities
            
            $
            500,000
            
            
            $
            5,625
            
            
            $
            -
            
            
            $
            505,625Mortgage-backed
      securities
            
            
            2,822,982
            
            
            
            15,621
            
            
            
            (12,785
            )
            
            
            2,825,818Total
      debt securities
            
            
            3,322,982
            
            
            
            21,246
            
            
            
            (12,785
            )
            
            
            3,331,443Investments
      in mutual funds
            
            
            123,920
            
            
            
            
            
            
            
            
            
            
            
            123,920$
            3,446,902
            
            
            $
            21,246
            
            
            $
            ( 12,785
            )
            
            $
            3,455,363Held-to-maturity:U.S.Government
      agency securities
            
            $
            5,999,273
            
            
            $
            16,745
            
            
            $
            (6,865
            )
            
            $
            6,009,153Mortgage-backed
      securities
            
            
            4,466,780
            
            
            
            43,699
            
            
            
            ( 25,812
            )
            
            
            4,484,667$
            10,466,053
            
            
            $
            60,144
            
            
            $
            (32,677
            )
            
            $
            10,493,820








65








UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





4.  INVESTMENTS-Continued





2006Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealized
            
            
            Marketcost
            
            
            gains
            
            
            losses
            
            
            valueAvailable-for-sale:Mortgage-backed
      securities
            
            $
            2,997,170
            
            
            $
            14,335
            
            
            $
            (42,111
            )
            
            $
            2,969,394Investments
      in mutual funds
            
            
            117,662
            
            
            
            
            
            
            
            
            
            
            
            117,662$
            3,114,832
            
            
            $
            14,335
            
            
            $
            ( 42,111
            )
            
            $
            3,087,056Held-to-maturity:U.S.Government
      agency securities
            
            $
            9,247,342
            
            
            $
            2,425
            
            
            $
            (95,430
            )
            
            $
            9,154,337Mortgage-backed
      securities
            
            
            3,557,009
            
            
            
            19,725
            
            
            
            (47,262
            )
            
            
            3,529,472$
            12,804,351
            
            
            $
            22,150
            
            
            $
            (142,692
            )
            
            $
            12,683,809








The table
below indicates the length of time individual securities, both held-to-maturity
and available-for-sale, have been in a continuous unrealized loss position at
December 31, 2007 (in thousands):





Number
            
            
            Less than 12 months
            
            
            12 months or longer
            
            
            TotalDescription
      of
            
            of
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedSecurities
            
            securities
            
            
            value
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesU.S.
      Governmentagency
      securities
            
            
            6
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,243
            
            
            $
            (7
            )
            
            $
            2,243
            
            
            $
            (
      7
            )Mortgage
      backedsecurities
            
            
            19
            
            
            
            1,148
            
            
            
            (4
            )
            
            
            2,586
            
            
            
            (34
            )
            
            
            3,734
            
            
            
            (38
            )Total
      temporarilyimpaired
      investmentsecurities
            
            
            25
            
            
            $
            1,148
            
            
            $
            (4
            )
            
            $
            4,829
            
            
            $
            (41
            )
            
            $
            5,977
            
            
            $
            (45
            )








The
table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been in
a   continuous unrealized loss position at December 31, 2006 (in
thousands):








Number
            
            
            Less than 12 months
            
            
            12 months or longer
            
            
            TotalDescription
      of
            
            of
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedSecurities
            
            securities
            
            
            value
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesU.S.
      Governmentagency
      securities
            
            
            16
            
            
            $
            3,246
            
            
            $
            (2
            )
            
            $
            4,405
            
            
            $
            (93
            )
            
            $
            7,651
            
            
            $
            (
      95
            )Mortgage
      backedsecurities
            
            
            19
            
            
            
            395
            
            
            
            (1
            )
            
            
            3,149
            
            
            
            (88
            )
            
            
            3,544
            
            
            
            (89
            )Total
      temporarilyimpaired
      investmentsecurities
            
            
            35
            
            
            $
            3,641
            
            
            
            (3
            )
            
            $
            7,554
            
            
            $
            (181
            )
            
            $
            11,195
            
            
            $
            ( 184
            )





66





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005








4. INVESTMENTS-Continued





Management
does not believe any individual unrealized loss as of December 31, 2007 and 2006
represents other-than temporary impairment.  The unrealized losses on
these securities are caused by the changes in general market interest
rates





All
securities with unrealized losses are reviewed by management at least quarterly
to determine whether the unrealized losses are other-than-temporary. The
Company believes it will collect all amounts contractually due on these
securities as   they are backed by the full faith and credit of
the U.S. Government or are guaranteed by an agency of the U.S.
Government.  The Company has the ability and the intent to hold these
securities until market price recovery or maturity.





Maturities
of investment securities classified as available-for-sale and held-to-maturity
at December 31, 2007  were as follows.  Expected maturities
may differ from contractual maturities.


Amortized
            
            
            Marketcost
            
            
            valueAvailable-for-sale:Due
      after one month through three years
            
            $
            -
            
            
            $
            -Due
      after three year through five years
            
            
            -
            
            
            
            -Due
      after five years through fifteen years
            
            
            500,000
            
            
            
            505,625Mortgage-backed
      securities
            
            
            2,822,982
            
            
            
            2,825,818Total
      debt securities
            
            
            3,322,982
            
            
            
            3,331,443Investments
      in mutual funds
            
            
            123,920
            
            
            
            123,920$
            3,446,902
            
            
            $
            3,455,363Held-to-maturity:Due
      in one month through three years
            
            $
            3,499,273
            
            
            $
            3,498,168Due
      after three years through five years
            
            
            2,000,000
            
            
            
            2,006,453Due
      after five years through fifteen years
            
            
            500,000
            
            
            
            504,533Mortgage-backed
      securities
            
            
            4,466,780
            
            
            
            4,484,667$
            10,466,053
            
            
            $
            10,493,820





No
securities were sold during 2007, 2006 and 2005.





As of
December 31, 2007 and 2006, investment securities with a book value of
$11,607,363 and $10,769,296  were pledged as collateral to secure
public deposits and for other purposes required or permitted by
law.








5.  LOANS
AND ALLOWANCE FOR LOAN LOSSES





The
composition of the net loans is as follows:





2007
            
            
            2006Commercial
      loans
            
            $
            33,102,633
            
            
            $
            32,339,517Residential
      mortgages
            
            
            6,549,378
            
            
            
            5,551,098Consumer
      loans
            
            
            5,531,828
            
            
            
            4,627,536Total
      loans
            
            
            45,183,839
            
            
            
            42,518,151Less
      allowance for loan losses
            
            
            (589,526
            )
            
            
            (561,409
            )Net
      loans
            
            $
            44,594,313
            
            
            $
            41,956,742




At
December 31, 2007 and 2006, unamortized net deferred fees and costs totaled
$109,651 and $128,552, respectively.





67


UNITED BANCSHARES, INC. AND
SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





5. LOANS
AND ALLOWANCE FOR LOAN LOSSES—Continued





As of
December 31, 2007 and 2006, the Bank had loans to certain officers and directors
and their affiliated interests  in
aggregate dollar amounts of $877,946 and  $1,023,076, respectively.
During 2007, there were no new loans to related parties and repayments amounted
to 145,129. During 2006, there were $212,176 in new loans to related parties and
repayments amounted to $95,299.





The Bank
identifies a loan as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the loan agreement.
The Bank recognizes income on impaired loans under the cash basis when the loans
are both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Bank.   If these factors do not
exist, the Bank will not recognize income on such loans.





Details
on the Bank’s non-performing loans are as follows (in
thousands):





2007
            
            
            2006
            
            
            2005Total
      non-accrual loans
            
            $
            745
            
            
            $
            626
            
            
            $
            683Total
      impaired loans
            
            
            1,788
            
            
            
            896
            
            
            
            386Average
      impaired loans
            
            
            929
            
            
            
            538
            
            
            
            903Specific
      allowance allocated to impaired loans
            
            
            191
            
            
            
            105
            
            
            
            113Non-accrual/impaired
      loans with SBA Guarantees
            
            
            374
            
            
            
            152
            
            
            
            190Interest
      recognized on impaired loans
            
            
            112
            
            
            
            76
            
            
            
            37Loans
      past due 90 days and still accruing
            
            
            1,067
            
            
            
            170
            
            
            
            -





Changes
      in the allowance for possible loan losses are as
  follows:





2007
            
            
            2006
            
            
            2005Balance,
      beginning of year
            
            $
            561,409
            
            
            $
            472,198
            
            
            $
            602,939Provision
            
            
            120,000
            
            
            
            137,000
            
            
            
            558,000Charge-offs
            
            
            (229,557
            )
            
            
            (272,459
            )
            
            
            (981,355
            )Recoveries
            
            
            137,674
            
            
            
            224,670
            
            
            
            292,614Balance,
      end of year
            
            $
            589,526
            
            
            $
            561,409
            
            
            $
            472,198





The Bank
grants commercial, residential, and consumer loans to customers primarily
located in Philadelphia County, Pennsylvania and surrounding counties in the
Delaware Valley.  Although the Bank has a diversified loan portfolio,
its debtors’ ability to honor their contracts is influenced by the region’s
economy.  At December 31, 2007, approximately 33% of the Bank’s
commercial loan portfolio was concentrated in loans made to religious
organizations.








6.  BANK
PREMISES AND EQUIPMENT





The major
classes of bank premises and equipment and the total accumulated depreciation
are as follows:


Estimateduseful life
            
            2007
            
            
            2006Buildings
      and leasehold improvements
            10-15
      years
            
            $
            1,039,387
            
            
            $
            1,005,923Furniture
      and equipment
            3-
      7 years
            
            
            1,349,614
            
            
            
            1,236,9782,389,001
            
            
            
            2,242,901Less
      accumulated depreciation
            
            
            
            (1,422,507
            )
            
            
            (1,143,377
            )$
            966,494
            
            
            $
            1,099,524





68





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





6. BANK
PREMISES AND EQUIPMENT-Continued





The Bank
leases other facilities and other equipment under non-cancelable operating lease
agreements.  The amount of expense for operating leases for the years
ended December 31, 2007, 2006, and 2005 was $384,179, $387,144, and
$340,638.  Future minimum lease payments under operating leases are as
follows:


OperatingYear ending December 31,
            
            leases2008
            
            $
            402,1562009
            
            
            363,0352010
            
            
            299,6042011
            
            
            288,5742012
            
            
            293,710Thereafter
            
            
            1,217,281Total
      minimum lease payments
            
            $
            3,158,071





In
September 2007, the Bank re-negotiated a 10-year lease for a new more visible
retail space at Progress Plaza .  The construction is scheduled to be
completed by April 2008.  The lease requires annual rental payments of
$66,482 for Years 1-5 and $75,431 for Years 5-10.  This transaction is
not reflected in the Bank’s long-term rental obligations noted above as the
lease will commence upon completion and occupancy of the new
branch.  The Bank currently leases the branch it occupies at Progress
Plaza on a month-to-month basis.





7.  DEPOSITS





At
December 31, 2007, the scheduled maturities of time deposits (certificates of
deposit) are as follows ( in thousands):





2007
            
            $
            20,5622008
            
            
            5232009
            
            
            1522010
            
            
            2332011
            
            
            121Thereafter
            
            
            106$
            21,697




8. BORROWINGS





At
December 31, 2007, the Bank has a borrowing arrangement with one of its
correspondent banks that includes a Federal Funds line of credit totaling $2
million. Borrowings under this agreement have interest rates that fluctuate
based on market conditions.  In addition, the Bank has the ability to
borrow on a fully secured basis at the Discount Window of the Federal Reserve
Bank.  As of December 31, 2007 and 2006, the Bank had no borrowings
outstanding.





9. INCOME
TAXES





At
December 31, 2007, the Bank has net operating loss carry forwards of
approximately $4,610,000 for income tax purposes that expire in 2011 through
2025.











69







UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006 and 2005





9. INCOME
TAXES – Continued





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amount used for income tax purposes.  For financial reporting
purposes, a valuation allowance of  $2,185,715 and $2,171,782 as of
December 31, 2007 and 2006, respectively, has been recognized to offset the
deferred tax assets related to the cumulative temporary differences and the tax
loss carry forwards.  Significant components of the Bank’s deferred
tax assets are as follows:





2007
            
            
            2006Deferred
      tax assets(liabilities):Provision
      for loan losses
            
            $
            82,166
            
            
            $
            9,224Unrealized
      losses on investment securities
            
            
            2,877
            
            
            
            (9,444
            )Depreciation
            
            
            413,569
            
            
            
            424,521Net
      operating loss carryforwards
            
            
            1,570,340
            
            
            
            1,600,303Other
            
            
            107,132
            
            
            
            90,269Valuation
      allowance for deferred tax assets
            
            
            (2,176,085
            )
            
            
            (2,114,873
            )Net
      deferred tax assets
            
            $
            -
            
            
            $
            -2007
            
            
            2006Effective
      rate reconciliation:Tax
      at statutory rate (34%)
            
            $
            16,078
            
            
            $
            40,355Nondeductible
      expenses
            
            
            (6,111
            )
            
            
            5,741Increase
      in valuation allowance
            
            
            (61,212
            )
            
            
            (56,607
            )Other
            
            
            39,024
            
            
            
            10,511Total
      tax expense
            
            $
            -
            
            
            $
            -




In June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes.”  This interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the application of SFAS No. 109 by defining the
criteria that an individual tax position must meet in order for the position to
be recognized within the financial statements and provides guidance on
measurement, de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition for tax positions.  This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted.  The Bank adopted FIN 48 on January 1,
2007. The adoption of this statement did not have a material impact on its
financial position, results of operation and cash flows.


10.  FINANCIAL
INSTRUMENT COMMITMENTS





The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit, which are conditional commitments issued by the
Bank to guarantee the performance of an obligation of a customer to a third
party.  Both arrangements have credit risk essentially the same as
that involved in extending loans and are subject to the Bank’s normal credit
policies.  Collateral may be obtained based on management’s assessment
of the customer.  The Bank’s exposure to credit loss in the event of
nonperformance by the other party to the financial instruments is represented by
the contractual amount of those instruments.





Summaries
of the Bank’s financial instrument commitments are as
follows:





2007
            
            
            2006Commitments
      to extend credit
            
            $
            14,004,300
            
            
            $
            12,995,600Outstanding
      letters of credit
            
            
            -
            
            
            
            -


70


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006 and 2005





10.
            FINANCIAL
      INSTRUMENT COMMITMENTS--continued





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 and unused credit card
lines.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.  Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a
fee.





11.  FAIR
VALUES OF FINANCIAL INSTRUMENTS





Fair
value information about financial instruments is required to be disclosed,
whether or not recognized in the balance sheet, where it is practicable to
estimate that value.  In cases where quoted market prices are not
available, fair values are based on estimates using discounted cash flows or
other valuation techniques.  Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows.  In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the
instrument.  Certain financial instruments and all nonfinancial
instruments are exempt from disclosure requirements.  Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bank.





2007
            
            
            2006Carrying
            
            
            Fair
            
            
            Carrying
            
            
            Fairamount
            
            
            value
            
            
            amount
            
            
            value(Dollars
      in thousands)Assets:Cash
      and cash equivalents
            
            $
            13,920
            
            
            $
            13,920
            
            
            $
            12,619
            
            
            $
            12,619Investment
      securities
            
            
            13,921
            
            
            
            13,949
            
            
            
            15,891
            
            
            
            15,771Loans,
      net of allowance for loan losses
            
            
            44,594
            
            
            
            45,400
            
            
            
            41,957
            
            
            
            41,795Interest
      receivable
            
            
            399
            
            
            
            399
            
            
            
            422
            
            
            
            422Liabilities:Demand
      deposits
            
            
            24,728
            
            
            
            24,728
            
            
            
            24,688
            
            
            
            24,688Savings
      deposits
            
            
            19,913
            
            
            
            19,913
            
            
            
            18,057
            
            
            
            18,057Time
      deposits
            
            
            21,697
            
            
            
            21,697
            
            
            
            22,199
            
            
            
            22,199Interest
      Payable
            
            
            135
            
            
            
            135
            
            
            
            133
            
            
            
            133





12.  EMPLOYEE
COMPENSATION





In
November 2004, the Bank renewed the employment agreements of its chief executive
officer and its chief financial officer covering such items as salaries, bonuses
and benefits for three years. These contracts expired in November 2007. Renewal
terms are under review by the Compensation Committee. These executives are
currently working under the provisions of the expired contracts. These
agreements provide for guaranteed minimum annual compensation over the term of
the contracts. In October 2006, the Bank entered into a two year employment
agreement with its senior lending officer covering similar terms. In February
2008, the senior lending officer resigned for personal reasons.





71





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





12.  EMPLOYEE
COMPENSATION—Continued





In 1998,
the Company adopted a Stock Option Plan with the approval of its shareholders.
In accordance with the contractual terms with its former chief executive
officer, the Bank granted the right to acquire up to 4% of the Bank’s stock as
of December 31, 1993 at $8.54 per share, which was the book value at the date of
grant.  Under this Plan, options to acquire shares of common stock
were granted to the former chief executive officer.  The Stock Option
Plan provides for the granting of options at the fair market value of the
Company’s common stock at the time the options are granted.  Each
option granted under the Stock Option Plan may be exercised within a period of
ten years from the date of grant.  However, no option may be exercised
within one year from the date of grant.  In 1998, options to purchase
29,694 shares of the Company’s common stock at a price of $8.54 per share were
awarded to the former chief executive officer.  Those options remain
outstanding at December 31, 2007 and have no intrinsic value as of that date.
These options expire in 2008.  There are 70,306 additional shares
authorized under the Plan. A summary of the status of the Bank’s stock options
as of December 31, 2007 and 2006 and the changes during the years ended on those
dates is as presented below:





2007
            
            
            2006#
      Shares of Underlying
              Options
            
            
            Exercise
      Price
            
            
            #
      Shares of Underlying
              Options
            
            
            Exercise
      PriceOutstanding
      at the beginning of the period
            
            
            29,694
            
            
            $
            8.54
            
            
            
            29,694
            
            
            $
            8.54Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding
      at the end of the period
            
            
            29,694
            
            
            
            29,694
            
            
            
            29,694
            
            
            $
            8.54Exercisable
      at the end of the period
            
            
            29,694
            
            
            $
            8.54
            
            
            
            29,694
            
            
            $
            8.54




The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: no dividends declared; expected volatility
of 20%; a risk-free interest rate of 4.7%, and expected life of 10
years.




The
Company made no stock-based compensation awards to any employee during 2007,
2006, and 2005.








72





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





13.  CONSOLIDATED
FINANCIAL INFORMATION—PARENT COMPANY ONLY





Condensed
      Balance Sheets


December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006Assets:Due
      from banks (subsidiary)
            
            $
            253
            
            
            $
            289Investment
      in United Bank of Philadelphia
            
            
            8,435
            
            
            
            8,335Total
      assets
            
            
            8,688
            
            
            
            8,624Liabilities:Other
      accrued liabilities
            
            
            3
            
            
            
            11Total
      Liabilities
            
            
            3
            
            
            
            11Shareholders’
      equity:Series
      A preferred stock
            
            
            1
            
            
            $
            1Common
      stock
            
            
            11
            
            
            
            11Additional
      paid-in capital
            
            
            14,750
            
            
            
            14,750Accumulated
      deficit
            
            
            (6,083
            )
            
            
            (6,130
            )Net
      unrealized holding gains (losses) on securities
      available-for-sale
            
            
            6
            
            
            
            (19
            )Total
      shareholders’ equity
            
            $
            8,685
            
            
            $
            8,613Total
      liabilities and shareholders’ equity
            
            $
            8,688
            
            
            $
            8,624








Condensed
      Statements of Operations


Years ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Equity
      in net (loss) income of subsidiary
            
            $
            75
            
            
            $
            119
            
            
            $
            (269
            )Net
      (loss) income
            
            $
            75
            
            
            $
            119
            
            
            $
            (269
            )Condensed
      Statements of Cash FlowsYears ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income (loss)
            
            $
            47
            
            
            $
            119
            
            
            $
            (269
            )Adjustments:Increase
      (decrease) in liabilities
            
            
            (8
            )Equity
      in net income (loss) of subsidiary
            
            
            (75
            )
            
            
            (119
            )
            
            
            269Net
      cash provided by operating activities
            
            
            (36
            )
            
            
            -
            
            
            
            -Cash
      and cash equivalents at beginning of year
            
            
            289
            
            
            
            289
            
            
            
            289Cash
      and cash equivalents at end of year
            
            $
            253
            
            
            $
            289
            
            
            $
            289





73





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005




14.  REGULATORY
MATTERS





The Bank
engages in the commercial banking business, with a particular focus on serving
Blacks, Hispanics and women, and is subject to substantial competition from
financial institutions in the Bank’s service area.  As a bank holding
company and a banking subsidiary, the Company and the Bank, respectively, are
subject to regulation by the FDIC and the Pennsylvania Department of Banking and
are required to maintain capital requirements established by those regulators.
Effective January 1, 2008, the FDIC became the Bank’s primary regulator after it
voluntarily surrendered it Federal Reserve Membership. Prompt corrective actions
may be taken by those regulators against banks that do not meet minimum capital
requirements.  Prompt corrective actions range from restriction or
prohibition of certain activities to the appointment of a receiver or
conservator of an institution’s net assets.  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 Bank’s financial statements.  Under capital
adequacy guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices, the Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
Tier I capital (as defined in the regulations) for capital adequacy purposes to
risk-weighted assets (as defined).





The most
recent notification from the Bank’s regulatory agencies categorized the Bank as
“adequately capitalized” under the regulatory framework for prompt and
corrective action.  To be categorized as “well capitalized,” the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. By typical regulatory guidelines the
Bank is considered “well” capitalized, however, because it is operating with a
regulatory order, it is only considered to be “adequately” capitalized. The
Bank’s growth and other operating factors may have an adverse effect on its
capital ratios.  (Also see Note 2. REGULATORY
AGREEMENT)





The
      Bank’s actual capital amounts and ratios are as follows:


Actual
            
            
            For
      capital
              adequacy purposes
            
            
            To
      be well capitalized under
              prompt
      correctiveaction
      provisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2007:Total
      capital to risk-weighted
      assets:Consolidated
            
            $
            8,230
            
            
            
            18.02
            %
            
            $
            3,676
            
            
            
            8.00
            %
            
            
            N/ABank
            
            
            7,974
            
            
            
            17.46
            
            
            
            3,653
            
            
            
            8.00
            %
            
            $
            4,567
            
            
            
            10.00
            %Tier
      I capital to risk-weighted
      assets:Consolidated
            
            
            7,659
            
            
            
            16.77
            
            
            
            1,838
            
            
            
            4.00
            %
            
            
            N/ABank
            
            
            7,403
            
            
            
            16.15
            
            
            
            1,827
            
            
            
            4.00
            %
            
            $
            2,740
            
            
            
            6.00
            %Tier
      I capital to average assets:Consolidated
            
            
            7,659
            
            
            
            10.34
            
            
            
            2,975
            
            
            
            4.00
            %
            
            
            N/ABank
            
            
            7,403
            
            
            
            9.99
            
            
            
            2,964
            
            
            
            4.00
            %
            
            $
            3,705
            
            
            
            5.00
            %








74




UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005As
      of December 31, 2006:Total
      capital to risk-weighted
      assets:Consolidated
            
            $
            7,995
            
            
            
            17.98
            %
            
            $
            3,580
            
            
            
            8.00
            %
            
            
            N/ABank
            
            
            7,706
            
            
            
            17.33
            
            
            
            3,557
            
            
            
            8.00
            
            
            $
            4,446
            
            
            
            10.00
            %Tier
      I capital to risk-weighted
      assets:Consolidated
            
            
            7,439
            
            
            
            16.73
            
            
            
            1,790
            
            
            
            4.00
            
            
            
            N/ABank
            
            
            7,150
            
            
            
            16.08
            
            
            
            1,779
            
            
            
            4.00
            
            
            $
            2,668
            
            
            
            6.00Tier
      I capital to average assets:Consolidated
            
            
            7,439
            
            
            
            10.33
            
            
            
            2,892
            
            
            
            4.00
            
            
            
            N/ABank
            
            
            7,150
            
            
            
            9.93
            
            
            
            2,880
            
            
            
            4.00
            
            
            $
            3,600
            
            
            
            5.00





Under the
framework, the Bank’s capital levels do not allow the Bank to accept brokered
deposits without prior approval from regulators.  Historically, the
Bank has not accepted brokered deposits and management believes this restriction
does not significantly limit the Bank’s ability to attract deposits and maintain
adequate liquidity.





15.  COMMITMENTS
AND CONTINGENCIES





The Bank
is a defendant in certain claims and legal actions arising in the ordinary
course of business.  In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial condition of the
Company.





16.  EARNINGS
PER SHARE COMPUTATION





Net
income (loss) per common share is calculated as follows:





Year ended December 31,
2007Income
            
            
            Shares
            
            
            Per
      share(numerator)
            
            
            (denominator)
            
            
            amountNet
      income
            
            $
            47,287Basic  EPSIncome
      available to common stockholders
            
            $
            47,287
            
            
            
            1,068,588
            
            
            $
            0.04Fully
      Diluted EPSIncome
      available to common stockholders
            
            $
            47,287
            
            
            
            1,102,088
            
            
            $
            0.04Year ended December 31,
2006Income
            
            
            Shares
            
            
            Per
      share(numerator)
            
            
            (denominator)
            
            
            amountNet
      income
            
            $
            118,690Basic  EPSIncome
      available to common stockholders
            
            $
            118,690
            
            
            
            1,068,588
            
            
            $
            0.11Fully
      Diluted EPSIncome
      available to common stockholders
            
            $
            118,690
            
            
            
            1,102,088
            
            
            $
            0.11








75







UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2007, 2006, and 2005





16.  EARNINGS
PER SHARE COMPUTATION-Continued





Year ended December 31,
  2005Income
            
            Shares
            Per
      share(numerator)
            
            (denominator)
            amountNet
      loss
            
            $
            (269,417
            )Basic
      and fully diluted EPSLoss
      available to common stockholders
            
            $
            (269,417
            )
            1,068,588
            $           
      (0.25)





Options
to purchase 29,694 shares of common stock are not included in the computation of
diluted EPS for the years ended December 31, 2007, 2006, and 2005 noting that
such inclusion would be anti-dilutive.





The
preferred stock is non cumulative and the Company is restricted from paying
dividends.  Therefore, no effect of the preferred stock is included in
the earnings per share calculations.





17.  SUMMARY
OF QUARTERLY RESULTS (UNAUDITED)





The
following summarizes the consolidated results of operations during 2007 and
2006, on a quarterly basis, for United Bancshares, Inc. and
Subsidiary:





(Dollars
      in thousands)2007Fourth
            
            
            Third
            
            
            Second
            
            
            Firstquarter
            
            
            quarter
            
            
            quarter
            
            
            quarterInterest
      income
            
            $
            1,183
            
            
            $
            1,236
            
            
            $
            1,221
            
            
            $
            1,171Interest
      expense
            
            
            294
            
            
            
            327
            
            
            
            311
            
            
            
            280Net
      interest income
            
            
            889
            
            
            
            909
            
            
            
            910
            
            
            
            891Provision
      for loan losses
            
            
            50
            
            
            
            10
            
            
            
            50
            
            
            
            10Net
      interest after provision for loan losses
            
            
            839
            
            
            
            899
            
            
            
            860
            
            
            
            881Noninterest
      income
            
            
            342
            
            
            
            302
            
            
            
            395
            
            
            
            281Noninterest
      expense
            
            
            1,208
            
            
            
            1,196
            
            
            
            1,212
            
            
            
            1,136Net  income(loss)
            
            $
            (27
            )
            
            $
            5
            
            
            $
            43
            
            
            $
            26Basic
      earnings(loss) per common share
            
            $
            (0.03
            )
            
            $
            0.01
            
            
            $
            0.04
            
            
            $
            0.02Diluted
      earnings per common share
            
            $
            (0.03
            )
            
            $
            0.01
            
            
            $
            0.04
            
            
            $
            0.022006Fourth
            
            
            Third
            
            
            Second
            
            
            Firstquarter
            
            
            quarter
            
            
            quarter
            
            
            quarterInterest
      income
            
            $
            1,161
            
            
            $
            1,169
            
            
            $
            1,124
            
            
            $
            1,113Interest
      expense
            
            
            272 255
            
            
            
            224
            
            
            
            195Net
      interest income
            
            
            889
            
            
            
            914
            
            
            
            900
            
            
            
            918Provision
      for loan losses
            
            
            22
            
            
            
            40
            
            
            
            35
            
            
            
            40Net
      interest after provision for loan losses
            
            
            867
            
            
            
            874
            
            
            
            865
            
            
            
            878Noninterest
      income
            
            
            398
            
            
            
            314
            
            
            
            357
            
            
            
            345Noninterest
      expense
            
            
            1,232
            
            
            
            1,179
            
            
            
            1,216
            
            
            
            1,153Net  income
            
            $
            33
            
            
            $
            9
            
            
            $
            6
            
            
            $
            70Basic
      earnings per common share
            
            $
            0.03
            
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.06Diluted
      earnings per common share
            
            $
            0.03
            
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.06




76