**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, 2006


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 15****th****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 3 rd 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
                registered**NONE
            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.





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





Large
      Accelerated filer  ̈    Accelerated
      filer  ̈   Non-accelerated
      filer x





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, 2006. 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 2, 2007 the aggregate number of the shares of the Registrant’s Common
      Stock outstanding was 1,068,588 (including 191,667 Class B non-voting). There
      are 33,500 shares of Common Stock held in treasury stock at March 2, 2007.





**DOCUMENTS
      INCORPORATED BY REFERENCE** :





Document      Parts
      Into Which Incorporated


None







The
      exhibit index is on pages 47 through 48. There are 74 pages in this report.






2










**FORM
      10-K**


**United
      Bancshares, Inc.**


**Index**




Item
              No.
            
            PagePART
                I1.
            Business
            41A.
            Risk
                Factors
            121B.
            Unresolved
                Staff Comments
            142.
            Properties
            143.
            Legal
                Proceedings
            144.
            Submission
                of Matters to a Vote of Security
                Holders
            15PART
                II5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters
            156.
            Selected
                Financial Data
            177.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            177A.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            358.
            Financial
                Statements and Supplementary
                Data
            359.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            359A.
            Controls
                and Procedures
            359B.
            Other
                Information
            36PART
                III10.
            Directors
                and Executive Officers, Promoters, Control
                persons and CorporateGovernance;
                Compliance with Section 16(a) of the Exchange
                Act
            3611.
            Executive
                Compensation
            4112.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            4413.
            Certain
                Relationships and Related Transactions, and
                Director Independence
            4514.
            Principal
                Accountant Fees and Services
            46PART
                IV15.
            Exhibits
                and Financial Statements
                Schedules
            47





**UNLESS
      OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 2,
      2007.**


3





**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 15 th Street,
      Suite 1200, Philadelphia, Pennsylvania 19102. The Registrant’s telephone number
      is (215) 351-4600.





As
      of
      March 2, 2007, UBS and the Bank had a total of 31 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
      and
      a member of the Federal Reserve System. 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 a mortgage brokerage 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 the Bank
      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, 2006, the
      Bank had total deposits aggregating approximately $64.9 million and had total
      net loans outstanding of approximately $42.5 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 2000 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 to be a player in providing 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
      will leverage its CDFI (community development financial institution) designation
      as established by the United States Department of Treasury to attract deposits
      from entities seeking Community Reinvestment Act (the “CRA Act”) credit as well
      as grants and/or equity from the US Treasury CDFI Fund and other agencies of
      the
      U.S. Government.





The
      Bank
      will seek to strengthen communities in the Philadelphia region with innovative
      products and services including new Check 21 technology—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 2, 2007, the Bank’s maximum legal lending limit was
      approximately $1,157,000 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.





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.






5





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 itself
      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.unitedbankofphiladelphia.com under
      the “shareholders corner” section. These files are also accessible on the
      Commission’s web site@www. se c.gov ”





*Competition*





There
      is
      increasing competition among financial institutions in the Bank’s service area.
      Money center banks have positioned new branches in once abandoned neighborhoods
      seeking to tap into wealth and profitable business 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.





In
      the
      past, the principal competition for deposits and loans has been other depository
      institutions. However, 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.





A
      strategy the Bank will use to attract new core customers is the introduction
      of
      a new premium rate interest checking product aimed at capturing the deposits
      of
      non-profit organizations. These organizations are believed to be the cornerstone
      of the communities and neighborhoods the Bank serves. The Bank will also offer
      bridge loans to these entities until grants and other contract funds are
      received. Although delayed from 2006, the Bank will launch “Check 21”
technology—remote deposit capture in 2007. This service will allow customers who
      are not located in close proximity to the Bank’s branches to scan and transmit
      deposit information remotely versus physically depositing paper checks. Remote
      deposit capture will allow the Bank to better compete with other financial
      institutions in the region.






6








*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 find an applicable exemptions
      from
      such registration.





*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 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.





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.






7





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 Federal Reserve Board because the Bank is a member
      bank of the Federal Reserve System. The FDIC insures the Bank’s deposits and
      thus the Bank is subject to certain FDIC regulations. 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 a 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.





*Federal
      Reserve Membership Regulations*





Since
      the
      Bank is a member bank of the Federal Reserve System, the Federal Reserve Board
      possesses the power to prohibit institutions regulated by it, such as the Bank,
      from engaging in any activity that would be an unsafe and unsound banking
      practice or violate the law. Moreover, the Board has: (i) empowered the Federal
      Deposit Insurance Corporation (the “FDIC”) 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) authorized the FDIC to remove executive officers who
      have participated in such violations or unsound practices; (iii) restricted
      lending by the Bank to its executive officers, directors, principal shareholders
      or related interests thereof; (iv) 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 Federal
      Reserve Board 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.






8





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 semiannual 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
      will
      take effect at the beginning of 2007. The new assessment rates for nearly all
      banks will vary between five and seven 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 is projected to be twenty-eight cents for every $100 of deposits.
      Applied to United Bank of Philadelphia’s assessment base of approximately $64.9
      million, this translates to an annual deposit premium estimated to be $181
      thousand. 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 will have an assessment credit to
      initially offset a portion of its premium in 2007. The preliminary assessment
      credit for United Bank of Philadelphia was calculated at $122 thousand. The
      assessment credit will be used to reduce future deposit premiums that would
      otherwise be due. Further, 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. Accordingly, the maximum premium the Bank is projected to pay is
      twenty-three cents per $100, or $142,780--an increase of 29%, 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.





*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. **






9





*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.





*Consumer
      Protection Rules - Sale of Insurance Products*





In
      addition, as mandated by FSA Act, the bank regulators have published consumer
      protection rules (the “Rules”) which apply to the retail sales practices,
      solicitation, advertising or offers of insurance products, including annuities,
      by depository institutions such as the Bank.





The
      Rules
      provide that before the sale of insurance or annuity products can be completed,
      disclosures must be made that such insurance products are not deposits or other
      obligations of or guaranteed by the FDIC or any other agency of the United
      States, the Bank or any affiliate and that insurance products, including an
      annuities, may involve an investment risk, including a possible loss of
      value.





The
      Rules
      also provide that the Bank may not condition an extension of credit on the
      consumer’s purchase of an insurance product or annuity from the Bank or any
      affiliate or on the consumer’s agreement not obtain or prohibit the consumer
      from obtaining an insurance product or annuity from an unaffiliated
      entity.





Finally
      the Rules also require formal acknowledgment by the consumer that such
      disclosures have been received. In addition, to the extent practical, the Bank
      must keep insurance and annuity sales activities physically separate from the
      areas where retail sales are routinely accepted from the general public. The
      Bank currently does not market insurance products.





*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, including the Bank, 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
      Sarbanes-Oxley Act of 2002 (The” SOX Act”)*





The
      SOX Act addresses, among other matters, directors’ audit committees;
      certification of financial statements by the chief executive officer and chief
      financial officer; forfeiture of bonuses and profits made by directors and
      senior officers in the twelve (12) month period covered by restated financial
      statements; a prohibition on insider trading during pension blackout periods;
      disclosure of off-balance sheet transactions; a prohibition by companies, other
      than federally insured financial institutions, on personal loans to their
      directors and officers; expedited filing of reports concerning stock
      transactions by directors and executive officers; formation of a public
      accounting oversight board; auditor independence; and increased criminal
      penalties for violation of certain the securities laws.





To
      implement the requirements of SOX Act and regulations, UBS’ management has
      instituted a series of actions to strengthen and improve UBS’, corporate
      governance practices. Included in those actions was the development of a system
      designed to evaluate and monitor the continued effectiveness of the design
      and
      operation of UBS’ internal controls and procedures for financial reporting.






10





These series of actions by UBS’ management improves UBS’ and the Bank’s Audit
      Committees and Risk Management Committees of the Boards, and UBS’ and Bank’s
      structures and processes which are intended to provide tools to strengthen
      internal controls, communications and disclosure of necessary information to
      those who must know and use it. UBS’ system of internal controls and procedures,
      which are in place, are designed to capture information from all segments of
      its
      business. At UBS and the Bank, each key material element of their operation
      is
      subject to oversight to help insure proper internal controls and procedures,
      administration, risk management and delivery of critical information disclosures
      to appropriate audit and financial officers, executive management, Board
      committees and the Boards of directors. UBS’ management believes that the
      addition of these new controls and processes has brought with it a broader
      and
      more in depth analysis to UBS’ systems of controls and procedures and corporate
      governance.





*Compliance
      with Section 404 of the Sarbanes-Oxley Act*





Section 404 (“SOX-404”) of the Sarbanes-Oxley Act requires that UBS put internal
      controls for public financial reporting in place to gain assurance that UBS
      properly presents its financial statements and related footnotes, under
      generally accepted accounting principles of the United States (“GAAP”). The
      Commission has postponed the effective date of SOX-404 for companies, such
      as
      UBS, with less than $75,000,000 in market capitalization until July 15, 2007.





As required by SOX-404, UBS has undertaken a project to determine (1) what
      internal controls for public financial reporting are in place and (2) what
      additional internal controls need to be implemented in order to gain assurance
      that UBS properly presents its financial statements and related footnotes under
      GAAP. To accomplish this task UBS has devoted staff to assist UBS’ management in
      completing the project and thereby enabling UBS’ chief executive officer and
      chief financial officer to certify, in a timely fashion, whether or not there
      are any significant deficiencies or material weaknesses in internal controls,
      established to assure that the UBS’ financial statements will be prepared under
      GAAP.





Upon completion of management’s assessments of the adequacy of its internal
      controls, its Independent Registered Public Accounting Firm, McGladrey &
Pullen, LLP (“McGladrey & Pullen”), will be required to audit management’s
      assessment of internal controls and issue an opinion stating whether (1)
      management’s assessment of the internal controls was fairly stated and (2)
      whether UBS maintains effective internal control over financial reporting.
      Based
      on UBS’ management’s assessment, the chief executive officer and chief financial
      officer will then attest whether the UBS’ internal control over financial
      reporting is effective. McGladrey & Pullen will then issue a report stating
      whether in their opinion management’s assessment of UBS’ internal control over
      financial reporting is fairly stated and whether UBS maintains effective
      internal control over financial reporting as of December 31, 2007.





The
      rules
      and regulations, discussed above, which implement the Sarbanes-Oxley Act could
      have a significant economic impact on the compliance costs of UBS and all
      publicly held companies.





*Future
      Legislation and Governmental Policies*





As
      the
      enactment of the FSA Act and the Sarbanes-Oxley Act confirm, from time to time,
      various proposals are enacted in the United States Congress as well as
      Pennsylvania legislature and issued by various bank regulatory authorities
      that
      alter the powers of, and place restrictions on, different types of bank
      organizations. As a consequence of the extensive regulation of commercial
      banking activities in the United States, the Bank’s business is particularly
      susceptible to being affected by federal and state legislation and regulations
      that may increase the costs of doing business. Bank management cannot anticipate
      the changes in laws and regulations and their impact on the Bank’s business,
      financial position and reported results of operation.








11





**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. The current Agreement
      requires 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,
      2006, the Bank’s Tier 1 leverage ratio was 9.93%--293 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.





Management continues to focus on increasing core profitability by developing
      growth strategies for loans and deposits. These strategies include the
      introduction of deposit products with premium interest rates coupled with
      alternate service delivery channels including internet banking and remote
      deposit capture. These strategies will allow the Bank to penetrate the
      marketplace without adding additional branches to its network. While expense
      reductions will continue to be sought, management believes improved results
      will
      be realized with increased deposit levels and loan originations that result
      increased net interest income.





**ITEM1A--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.





*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.






12




*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.




*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.










13






**ITEM
      1B—UNRESOLVED STAFF COMMENTS**






None.






**ITEM
      2** — **PROPERTIES**





*Corporate
      Headquarters*





United
      Bank of Philadelphia’s corporate offices is located in The Graham Building, 30
      S. 15 th 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
      12 th Floor,
      including executive offices, operations, finance, human resource, 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 a regional mortgage brokerage 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 $4,858 of which the tenant pays an average monthly rent of
      $3,358. 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. A business-to-business calling
      program will be utilized to increase the Bank’s visibility in the neighborhood
      in which the branch is located. 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, vault and storage space is currently leased at a monthly rental of
      $3,958.





*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 facelifts
      are planned for this branch in 2007. 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 a teller and customer service area, lobby and vault. The aggregate
      monthly rental for this facility is $3,875 per month. This lease expired in
      October 2003. Extensive improvements to the shopping plaza in which this branch
      is located are planned for 2007. The Bank will be relocated within the shopping
      plaza in a space to be constructed by the Fall of 2007. It is currently leasing
      this facility on a month-to-month basis. Terms of the new lease for the new
      space have been negotiated to include a term of ten years with average aggregate
      gross monthly rent of $5,552.




**ITEM
      3 — LEGAL PROCEEDINGS**





No
      material claims have been instituted or threatened by or against UBS or the
      Bank
      other than in the ordinary course of business.






14





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





A            A
      shareholders’ annual meeting of UBS was held on November 21, 2006. 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 three (3) Class C 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 2005.





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:





**50.326%
                Shares Voted**
            **439,441.66
                of 873,192.32 Shares****15.717%
                Accounts Voted**
            **494
                of 3,143 Accounts**







**Question**
            **YES**
            **NO**
            **WITHHOLD/ABSTAIN**Bernard
                E. Anderson
              (CLASS
                C)
            95.580%
              420,018.33
            0.00%
              0.00
            4.420%
              19,423.33David
                R. Bright
              (CLASS
                C)
            99.216%
              435,998.33
            0.00%
              0.00
            0.784%
              3,443.33Joseph
                T. Drennan
              (CLASS
                C)
            93.418%
              410,518.33
            0.00%
              0.00
            6.582%
              28,923.33Ratify
                McGladrey and Pullen, LLP
            95.148%
              418,118.33
            4.213%
              18,513.33
            0.639%
              2,810.00








**PART
      II**





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


**RELATED
      STOCKHOLDER MATTERS**


*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 2006 and 2005.





As
      of
      March 2, 2007 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.






15





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 approvedby
                security holders
            -
            
            -
            
            -Total
            29,694
            
            $8.54
            
            70,306





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





16





**ITEM
      6 — SELECTED FINANCIAL DATA**




**Selected
      Financial Data**




Year
                  ended December 31,(Dollars
                  in thousands, except per share data)
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Net
                  interest income
              
              $
              3,622
              
              $
              3,571
              
              $
              3,279
              
              $
              3,290
              
              $
              3,726Provision
                  for loan losses
              
              
              137
              
              
              558
              
              
              45
              
              
              565
              
              
              175Noninterest
                  income
              
              
              1,415
              
              
              1,582
              
              
              3,655
              
              
              1,891
              
              
              2,327Noninterest
                  expense
              
              
              4,780
              
              
              4,864
              
              
              5,242
              
              
              5,732
              
              
              6,09Net
                  income (loss)
              
              
              119
              
              
              (269
              )
              
              1,647
              
              
              (1,115
              )
              
              (217
              )Net
                  income (loss) per share - basic
              
              
              0.11
              
              
              (0.25
              )
              
              1.54
              
              
              (1.03
              )
              
              (0.20
              )Net
                  income (loss) per share - fully diluted
              
              
              0.1
              
              
              (0.25
              )
              
              1.50
              
              
              (1.03
              )
              
              (0.20
              )Balance
                  sheet totals:Total assets
              
              $
              73,936
              
              $
              72,210
              
              $
              72,301
              
              $
              74,717
              
              $
              86,044Net loans
              
              
              41,957
              
              
              45,950
              
              
              46,490
              
              
              46,690
              
              
              43,459Investment securities
              
              
              16,154
              
              
              13,706
              
              
              13,560
              
              
              15,637
              
              
              21,518Deposits
              
              
              64,924
              
              
              63,324
              
              
              63,172
              
              
              67,117
              
              
              76,929Shareholders’
                  equity
              
              
              8,624
              
              
              8,492
              
              
              8,811
              
              
              7,235
              
              
              8,500Ratios:Tangible
                  Equity to assets
              
              
              9.93
              %
              
              9.87
              %
              
              9.89
              %
              
              6.85
              %
              
              7.45
              %Return
                  on assets
              
              
              0.16
              %
              
              (0.37
              )%
              
              2.38
              %
              
              (1.38
              )%
              
              (0.25
              )Return
                  on equity
              
              
              1.63
              %
              
              (3.78
              )%
              
              26.96
              %
              
              (13.03
              )%
              
              (2.55
              )%






**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 infor-mation
      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.






17








***Executive
      Summary***





United Bank of Philadelphia is the only minority-owned and controlled community
      development financial institution headquartered in Philadelphia. With the
      stabilization of the Bank’s capital position, management can now maximize this
      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. Understanding of the
      regulatory climate in which the Bank operates, the primary focus of management
      is to continue to increase core profitability and build franchise/shareholder
      value by:





·
            Growing
                and diversifying the deposit mix


·
            Growing
                and diversifying the loan mix


·
            Enhancing
                the branch network and alternative delivery
                options







During 2006, the Bank’s total assets increased by $1.7 million, or 2.38% and
      modest profitability of $119,000 was achieved. Even though the Bank’s net
      interest margin remained strong, the 2006 financial results were significantly
      impacted by competition from money center banks entering the region placing
      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. There are
      now strategic initiatives by these institutions to capture of the “new markets”
business consisting of blacks, Hispanics and women. These markets have always
      been included in the Bank’s mission. With significantly more capital, these
      Bank’s are often able to offer higher interest rates, longer hours, and state of
      the art branches with new technology. As a result, growth in deposits and loans
      remain management’s challenge. Strategies that will be used to achieve growth
      include the following:





** *Implementation of New Deposit Products* —A
      new
      signature savings product was introduced in 2006 that has a low minimum balance
      requirements and a constant premium interest rate. The product was rolled out
      via a targeted direct mail campaign, newspaper advertisements, and distribution
      in church bulletins. However, because of the rapidly increasing interest rate
      environment during 2006, competitive interest rates from other financial
      institutions made the Bank’s product less attractive than projected. As a
      result, the Bank did not experience significant deposit growth. This strategy
      will be re-introduced in 2007 with higher rates and more robust marketing
      including radio and billboard advertising. In addition, a new high interest
      checking product will be introduced to attract the deposits of the many
      non-profit organizations in the region.




** *Implementation
      of Remote Deposit Capture* —New
      technology evolved from the introduction of “Check 21” in October 2004. This new
      banking legislation allows for expedited clearing of check deposits through
      the
      use of images. Although planned for 2006, the Bank is currently working with
      its
      core service provider to implement a remote deposit capture service delivery
      option early in 2007. This new technology will allow customers near and far
      from
      the Bank’s branch network to conveniently make deposits using a scanner. The
      implementation of remote deposit capture is a must to remain competitive in
      the
      marketplace. The initial target market for this product will be religious
      organizations to allow for expedited deposit processing and availability of
      tithes and offerings. Remote deposit capture is projected to increase the level
      of core noninterest-bearing checking accounts.




** *New
      Senior Lending Officer* **—** In
      October 2006, a new senior lending officer was hired to increase business
      development and strengthen the Bank’s credit risk management practices. The
      tight market for lenders and desire to have an individual with both credit
      administration and loan origination background delayed this hiring. Therefore,
      the full impact of this strategy was not realized in 2006. Momentum is expected
      to be gained moving into 2007 with increased loan origination activity. The
      focus of the lending officer is proactive relationship management to attract
      and
      retain a strong core customer base. While the Bank originated more than $7
      million in commercial loans during 2006, it experienced more than $10 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.





In addition to these strategies, the Bank will seek to improve customer service
      through more efficient and effective use of its technology. A new e-banking
      platform will be introduced in 2007 that will allow for more robust cash
      management by its customers including automated clearing house (ACH)
      origination. In addition, a new loan origination platform will be implemented
      to
      expedite the loan underwriting process as well as streamline backroom operations
      by integration with the Bank’s core system. The Bank will also better use its
      website to provide information and “fillable” applications for loans and
      deposits.






18




Finally, management will engage in a more aggressive marketing and advertising
      campaign to get the Bank back into the marketplace and in the minds of the
      customers. Branding and visibility are critical to the success of the Bank’s
      strategies. Full advantage will be taken of the co-branding opportunities with
      the Bank’s strategic alliances to increase the Bank’s consumer loan business
      including brochures, joint seminars, and other business development
      opportunities. In addition, newspaper (advertising/articles), radio
      (interviews/advertising), billboards, and direct mail solicitation will be
      utilized.




***Results
      of Operations***





In 2006, the Company recorded net income of $119,000 ($0.11 per share) compared
      to a net loss of $269,000 ($0.25 per share) in 2005 and net income of $1,647,000
      ($1.54 per share) in 2004. The financial results for 2006 reflect a
      significantly lower provision for loan losses of $137,000 compared to $558,000
      in 2005 because of improved asset quality and recoveries of previously
      charged-off loans. The financial results for the year ended December 31, 2004
      included non-recurring income of $1.9 million from the gain on the sale of
      the
      Bank’s corporate headquarters and an adjacent parking lot. 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***





2006
            
            2005
            
            2004Average
                balance
            
            Interest
            
            Yield/rate
            
            Average
                balance
            
            Interest
            
            Yield/rate
            
            Average
                balance
            
            Interest
            
            Yield/rateAssets:Interest-earning
                assets:Loans
            
            $
            45,863
            
            
            3,626
            
            
            7.91
            %
            $
            47,861
            
            
            3,429
            
            
            7.16
            %
            $
            46,037
            
            $
            3,009
            
            
            6.54
            %Investment securities held-to-
              maturity
            
            
            9,513
            
            
            427
            
            
            4.49
            
            
            8,636
            
            
            357
            
            
            4.13
            
            
            7,273
            
            
            308
            
            
            4.23Investment securities
              available-for-sale
            
            
            3,119
            
            
            150
            
            
            4.81
            
            
            3,852
            
            
            180
            
            
            4.67
            
            
            5,488
            
            
            252
            
            
            4.59Interest bearing balances with
              other banks
            
            
            281
            
            
            8
            
            
            2.85
            
            
            584
            
            
            10
            
            
            1.71
            
            
            880
            
            
            30
            
            
            3.41Federal funds sold
            
            
            7,140
            
            
            357
            
            
            5.00
            
            
            5,482
            
            
            180
            
            
            3.29
            
            
            6,244
            
            
            87
            
            
            1.39Total
                interest-earning assets
            
            
            65,916
            
            
            4,568
            
            
            6.93
            
            
            66,415
            
            
            4,156
            
            
            6.26
            
            
            65,922
            
            
            3,685
            
            
            5.59Noninterest-earning
                assets:Cash and due from banks
            
            
            3,606
            
            
            
            
            
            
            
            
            3,772
            
            
            
            
            
            
            
            
            3,708Premises
                and equipment,
              net
            
            
            1,046
            
            
            
            
            
            
            
            
            1,073
            
            
            
            
            
            
            
            
            2,006Other assets
            
            
            2,573
            
            
            
            
            
            
            
            
            2,648
            
            
            
            
            
            
            
            
            2,726Less
                allowance for
              loan losses
            
            
            (510
            )
            
            
            
            
            
            
            
            (683
            )
            
            
            
            
            
            
            
            (
              542
            )Total
            
            $
            72,631
            
            
            
            
            
            
            
            $
            73,225
            
            
            
            
            
            
            
            $
            73,820Liabilities
                and shareholders’ equity:Interest-bearing
                liabilities:Demand deposits
            
            $
            9,906
            
            
            111
            
            
            1.12
            %
            $
            9,204
            
            
            64
            
            
            0.71%
            
            $
            9,315
            
            $
            49
            
            
            0.
                  53
            %Savings deposits
            
            
            17,759
            
            
            138
            
            
            0.78
            
            
            17,069
            
            
            58
            
            
            0.34
            
            
            18,693
            
            
            62
            
            
            0.33Time
                deposits
            
            
            22,264
            
            
            697
            
            
            3.13
            
            
            23,344
            
            
            463
            
            
            1.98
            
            
            21,559
            
            
            295
            
            
            1.37Total interest-bearing
              liabilities
            
            
            49,929
            
            
            946
            
            
            1.89
            
            
            49,617
            
            
            585
            
            
            1.18
            
            
            49,567
            
            
            406
            
            
            0.82Noninterest-bearing
                liabilities:Demand deposits
            
            
            13,993
            
            
            
            
            
            
            
            
            14,668
            
            
            
            
            
            
            
            
            16,306Other
            
            
            520
            
            
            
            
            
            
            
            
            444
            
            
            
            
            
            
            
            
            193Shareholders’ equity
            
            
            8,189
            
            
            
            
            
            
            
            
            8,496
            
            
            
            
            
            
            
            
            7,754Total
            
            
            72,631
            
            
            
            
            
            
            
            
            73,225
            
            
            
            
            
            
            
            $
            73,820Net interest earnings
            
            
            
            
            $
            3,622
            
            
            
            
            
            
            
            $
            3,571
            
            
            
            
            
            
            
            $
            3,279Net
                yield on interest-earning assets
            
            
            
            
            
            
            
            
            5.50
            %
            
            
            
            
            
            
            
            5.38
            %
            
            
            
            
            
            
            
            4.98
            %






For
      purposes of computing the average balance, loans are not reduced for
      nonperforming 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 $3,622,000 in 2006, an increase of $51,000, or 1.43%,
      compared to 2005. Net interest income was $3,571,000 in 2005, an increase of
      $291,000, or 8.87%, compared to 2004.




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


(Dollars
                  in thousands)
              
              2006
                  compared to 2005
                Increase
                  (decrease) due to
              
              2005
                  compared to 2004
                Increase
                  (decrease) due toVolume
              
              Rate
              
              Net
              
              Volume
              
              Rate
              
              NetInterest
                  earned on:Loans
              
              $
              (160
              )
              
              357
              
              
              197
              
              $
              133
              
              $
              287
              
              $
              420Investment
                  securities held-to-maturity
              
              
              39
              
              
              31
              
              
              70
              
              
              56
              
              
              (7
              )
              
              49Investment
                  securities available-for-sale
              
              
              (35
              )
              
              5
              
              
              (30
              )
              
              (77
              )
              
              5
              
              
              (72
              )Interest-bearing
                  deposits with other banks
              
              
              (9
              )
              
              7
              
              
              (2
              )
              
              (5
              )
              
              (15
              )
              
              (20
              )Federal
                  funds sold
              
              
              83
              
              
              94
              
              
              177
              
              
              (25
              )
              
              118
              
              
              93Total Interest-earning assets
              
              
              (82
              )
              
              494
              
              
              412
              
              
              82
              
              
              388
              
              
              470Interest
                  paid on:Demand
                  deposits
              
              $
              8
              
              
              39
              
              
              47
              
              $
              (2
              )
              
              17
              
              
              15Savings
                  deposits
              
              
              5
              
              
              75
              
              
              80
              
              
              (6
              )
              
              2
              
              
              (4
              )Time
                  deposits
              
              
              (34
              )
              
              268
              
              
              234
              
              
              36
              
              
              132
              
              
              168Total
                  interest-bearing liabilities
              
              
              (21
              )
              
              382
              
              
              361
              
              
              28
              
              
              151
              
              
              179Net
                  interest income
              
              $
              (61
              )
              $
              112
              
              $
              51
              
              $
              54
              
              $
              237
              
              $
              291





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
      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. In 2005, there was an
      increase in net interest income of $54,000 due to changes in volume and an
      increase of $237,000 due to changes in rate.





Although
      average earning assets decreased to $65.9 million in 2006 from $66.4 million
      in
      2005, the net interest margin of the Bank increased to 5.50% from 5.38% in
      2005,
      and 4.98% in 2004. Management actively manages its exposure to interest rate
      changes. Because of the current inverted Treasury yield curve, many banks are
      contending with a significant level of margin compression. The Bank’s deposit
      base includes many low cost core checking and savings deposits that are not
      sensitive to rate changes. Thus, although there were a series of short-term
      rate
      increases by the Federal Reserve in 2006 and 2005, the Bank’s cost of funds did
      not increase at the same pace while floating rate assets including loans,
      investments and Federal Funds Sold did increase.





During
      2006, the average federal funds yield was 5.00% compared to 3.29% in 2005 and
      1.39% in 2004. During 2006, the average investment in federal funds increased
      by
      $1,658,000—this, coupled with an increase in the Federal Funds rate, resulted in
      an increase of $177,000 in interest income.





The yield on the investment portfolio increased 27 basis points to 4.57%
      compared to 4.30% in 2005 and 4.39%. 2004. 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.
      In
      addition, some of the Bank’s floating rate mortgage-backed securities that had
      Treasury and LIBOR indices repriced in 2006 in a higher interest rate
      environment. The average yield is projected to further increase in 2007 to
      at
      least 5.00% with the purchase of additional securities in the current higher
      interest rate environment.






20




The cost of interest-bearing liabilities increased to 1.89% in 2006 from 1.18%
      in 2005 and 0.82% in 2004. In 2006, the Bank introduced a premium rate statement
      savings account for which the rate was 3.50% compared to its normal statement
      savings rate of .50%. In addition, the Bank increased the rate on its
      certificates of deposit consistent with the average price in the market.
      Although short-term interest rates increased in 2006 by 100 basis points,
      increases in rates on the Bank’s core deposits did not change at the same pace.
      When setting the rates for its deposits, the Bank generally uses the median
      rate
      paid by its competitors in the region. Because most of the Bank’s deposits are
      considered core, they were not sensitive to rising interest rates and generally
      lag market changes.





*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 2006 was $137,000
      compared to $558,000 in 2005 and $45,000 in 2004. The decrease in the provision
      in 2006 was due to a review and analysis of the Bank’s loan portfolio, an
      increased level of recoveries on previously charged-off loans and a decrease
      in
      charge-offs during the year. *Refer
      to the Allowance for Loan Loss section below for further discussion/analysis
      of
      the Bank’s credit quality.*





Management continues to monitor its credit quality very 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. Management believes the level of the allowance for
      loan
      losses is adequate as of December 31, 2006.





*Noninterest
      Income*





Noninterest
      income decreased $168,000 in 2006 compared to 2005 and decreased $2,072,000
      in
      2005 compared to 2004.





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 2006, customer service fees declined by $79,000,
      11.54%, compared to 2005 and decreased $171,000, or 20.03%, in 2005 compared
      to
      2004. From 2004 to 2006, there has been $2.3 million decline in the Bank’s
      average noninterest bearing demand deposits. This decline resulted in less
      overdraft fees, activity service charges and low balance fees.




During 2006, surcharge income on the Bank’s ATM network declined by $53,000, or
      9.28%, compared to 2005 and declined $28,000, or 4.63%, in 2005 compared to
      2004. Some of the Bank’s ATMs have experienced a drop in volume as competitors
      placed machines in close proximity to existing high volume ATMs of the Bank
      and
      several of the Bank’s high volume ATMs were replaced with those of competitors
      that paid significantly higher transactional fees to site owners. New
      competition offering “no fee” ATM service has moved into the Philadelphia
      market. Volume was also impacted by down-time experienced on several machines
      as
      a result of equipment/network upgrades. Management continues to seek high volume
      locations where the Bank would have a captive audience as it relates to ATM
      service (i.e. casinos, transportation hubs, etc) to offset competitive
      pressures.





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 2006, these fees totaled $150,000 compared to
      $202,000 in 2005 and $178,000 in 2004. The decline in 2006 was the result of
      the
      non-renewal of one credit facility in June 2006 for which the Bank’s fees were
      $50,000. The Bank continues to serve as agent/arranger for three (3) facilities.
      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 connection with its 2004 re-capitalization plan, the Bank sold bank-owned
      real estate including a remote bank-owned parking lot and its corporate
      headquarters building located at 300 N. Third Street. The sale of these assets
      resulted in a non-recurring gain of approximately $1,874,000 million in
      2004.






21





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.
      This grant is included in other income.





*Noninterest
      Expense*





Noninterest
      expense decreased $84,000, or 1.72%, in 2006 compared to 2005 and decreased
      $379,000, or 7.23%, in 2005 compared to 2004.





Salaries and benefits decreased $84,000, or 4.59%, in 2006 compared to 2005
      and
      decreased $105,000, or 5.42% in 2005 compared to 2004. As part of the Bank’s
      continued effort to reduce/control expenses, there have been strategic
      reductions in staff and job consolidations. In addition, during 2006 there
      was
      attrition in several management and line positions. Management continues the
      review of its staffing model to ensure the Bank is operating with the most
      efficient organizational structure.





Occupancy
      and equipment expense decreased $1,200, or 0.13%, in 2006 compared to 2005
      and
      decreased $108,000, or 9.79%, in 2005 compared to 2004. For the past several
      years, management has implemented strategies to reduce its occupancy expense
      including the closure/consolidation of its Two Penn Center Center City branch
      office and sale of its corporate headquarters building in 2004. These actions
      resulted in a reduction in property taxes, insurance, repairs and maintenance,
      and depreciation expense on leasehold improvements associated with these
      locations. In February 2005, the Bank began to lease a new corporate
      headquarters on a 10,000 square foot floor of a full service high rise office
      building located in center city Philadelphia. This move resulted in the
      stabilization of the Bank’s occupancy expense during 2006.





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 are planned for 2007 to the exterior
      of
      this branch building. Similar interior and exterior improvements are planned
      for
      the Bank’s West Philadelphia branch in 2007. These renovations and relocations
      will result in increased leasehold/furniture depreciation expense. In addition,
      the Bank’s Progress Plaza branch is scheduled to be re-located in the Fall of
      2007 to 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 annual
      increase of $20,000 in the Bank’s rent expense.





Office operations and supplies expense decreased $36,000, or 10.43% in 2006
      compared to 2005 and decreased $67,000, or 16.18%, in 2005 compared to 2004.
      During 2006, the Bank’s telephone expense declined by $29,000 as a result of a
      review and analysis that resulted in the elimination of unused lines and move
      to
      a new long distance carrier. Management continues to review all office
      operations expenses including supplies, storage, security, etc. to determine
      if
      additional expense reductions can be made.





Marketing and public relations expense increased $15,000, or 15.27%, in 2006
      compared to 2005, and increased $18,000, or 21.5%, in 2005 compared to 2004.
      In
      2006, the Bank launched a marketing campaign for its new signature savings
      account including a direct mail solicitation, ongoing newspaper advertisements,
      and other promotional give-aways. In 2007, the Bank will embark on a robust
      marketing/re-branding campaign including the use of co-branded marketing
      materials with its strategic alliances, advertising in community-based
      newspapers and church bulletins., radio, billboards, and other business
      periodicals.





Professional services increased $25,000, or 9.49%, in 2006 compared to 2005
      and
      increased $26,000, or 11.06%, in 2005 compared to 2004. The increase in 2006
      is
      primarily related to increased audit fees associated with the Company’s risk
      profile and quarterly public filings. In addition, there was an increase in
      consulting expense related to the use of consultants to assist the Bank in
      the
      evaluation of several business transactions.





Data processing expenses are a result of the management 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.






22





Data processing expenses increased $14,000, or 3.53%, in 2006 compared to2005
      and decreased $155,000, or 27.61%, in 2005 compared to 2004. The increase in
      2006 is primarily in the Bank’s ATM processing expense associated with net
      interchange expenses—more Bank customers 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. Transaction volume for the Bank’s ATM network declined
      during 2006 as the result of new competition and ATM down-time for
      repairs/upgrades. In 2005, data processing expenses declined as a result of
      the
      re-negotiation of the Bank’s core processing contract with FiSERV.





Federal
      deposit insurance premiums were $111,000 in 2006, $113,000 in 2005, and $72,000
      in 2004. 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 strength, 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 is 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 will result 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.


23





**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 decreased
      $499,000, or 0.75% in 2006 compared to 2005 and increased approximately
      $493,000, or 0.75% in 2005 compared to 2004.




***Table
      3—Sources and Use of Funds Trends***




2006
              
              2005(Dollars
                  in thousands)
              
              Average
                Balance
              
              Increase
                (decrease)
                Amount
              
              Percent
              
              Average
                balance
              
              Increase
                (decrease)
                amount
              
              PercentFunding
                  uses:Loans
              
              $
              45,863
              
              $
              (1,998
              )
              
              (4.17
              )%
              $
              47,861
              
              $
              1,824
              
              
              3.96
              %Investment
                  securitiesHeld-to-maturity
              
              
              9,513
              
              
              877
              
              
              10.16
              
              
              8,636
              
              
              1,363
              
              
              18.74Available-for-sale
              
              
              3,119
              
              
              (733
              )
              
              (19.03
              )
              
              3,852
              
              
              (1,636
              )
              
              (29.81
              )Interest-bearing
                  balances with other banks
              
              
              281
              
              
              (303
              )
              
              (51.88
              )
              
              584
              
              
              (296
              )
              
              (33.64
              )Federal
                  funds sold
              
              
              7,140
              
              
              1,658
              
              
              30.24
              
              
              5,482
              
              
              (762
              )
              
              (12.20
              )Total
                  uses
              
              $
              65,916
              
              $
              (499
              )
              
              
              
              $
              66,415
              
              $
              493Funding
                  sources:Demand
                  deposits:Noninterest-bearing
              
              $
              13,993
              
              $
              (675
              )
              
              (4.60
              )%
              $
              14,668
              
              $
              (1,638
              )
              
              (10.05
              )%Interest-bearing
              
              
              9,906
              
              
              702
              
              
              7.63
              
              
              9,204
              
              
              (111
              )
              
              (1.19
              )Savings
                  deposits
              
              
              17,759
              
              
              690
              
              
              4.04
              
              
              17,069
              
              
              (1,624
              )
              
              (8.69
              )Time
                  deposits
              
              
              22,264
              
              
              (1,080
              )
              
              (4.63
              )
              
              23,344
              
              
              1,785
              
              
              8.28Total
                  sources
              
              $
              63,922
              
              $
              (363
              )
              
              
              
              $
              64,285
              
              $
              (1,588
              )


*Includes
      held-to-maturity and available-for-sale securities




*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 $144,000, or 1.15%, in 2006 and decreased
      $273,000, or 2.14%, in 2005 compared to 2004. 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 2.90 years
      in 2006 compared to 3.25 years in 2005. 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 currently
      have an average life of 2.2 years. These securities are typically used as
      collateral for short-term jumbo governmental certificates of
      deposit.





At December 31, 2006, approximately 41% of the portfolio consists of
      mortgage-backed pass-through securities that have longer-term con-tractual
      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 of these pools. 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
      rising interest rate environment, the prepayment speed decreased on this
      component of the portfolio. The constant one year prepayment rate (CPR) at
      December 31, 2006 was 14.42% compared to 20.60% at December 31, 2005. This
      translates into only 14.42% of the mortgage-backed pools repaying on an annual
      basis. This results in less monthly cash flow than was received in 2005.






24





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 cashflow to be reinvested in the projected current
      rising rate environment.




***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
              
              $
              3,248
              
              
              4.73
              %
              $
              5,749
              
              
              4.70
              %
              $
              250
              
              
              4.67
              %
              $
              -
              
              
              
              %
              $
              9,247Mutual
                  funds and other
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              379Mortgage-backed
                  securities
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              6,527Total
                  securities
              
              $
              3,248
              
              
              
              
              $
              5,749
              
              
              
              
              $
              250
              
              
              
              
              
              -
              
              
              
              
              $
              16,153Average
                  maturity
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.90
                  years


The
      above
      table sets forth the maturities of investment securities at December 31, 2006
      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 $1,998,000, or 4.17%, in 2006 and increased $1,824,000,
      or 3.96%, in 2005 compared to 2004. During 2006, the Bank funded $7 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. In addition, the Bank’s mortgage loan portfolio declined by $2
      million as a result of customers with interest-only or adjustable rate loans
      refinancing into fixed rate mortgages to avoid the negative impact of future
      interest rate increases.




The Bank has relationships with other financial institutions in the region
      with
      which it participates in loans to supplement activity in the commercial loan
      portfolio. This strategy continues to be utilized while the Bank enhances it
      own
      business development capacity. At December 31, 2006, the Bank had $8 million
      in
      loan participations with other financial institutions most of which are secured
      by real estate.




In December 2006, the Bank sold $568,000 of its student loan portfolio and
      recorded a gain of $10,700. These loans were sold to make liquidity available
      for the funding of higher yielding less costly to service commercial loans.
      Student loans are typically held in the consumer loan portfolio.





As a result of the payoffs and sale of loans noted above, the Bank’s
      loan-to-deposit ratio declined to 64.62% at December 31, 2006 compared to 72.8%
      at December 31, 2005. 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 commercial real estate loans that comprise approximately $22 million, or
      51.73%, of total loans. Of the $7 million in 2006 of new commercial loan
      originations, many were commercial real estate transactions, including $1.3
      million in loans made to religious organizations. Continued payoffs resulted
      in
      a reduction of the residential mortgage loan component of the portfolio from
      $7.5 million at December 31, 2005 to $5.5 million at December 31, 2006. The
      Bank
      does not originate residential mortgage loans for its portfolio.






25





As reflected in Table 6 below, approximately 47.30% of the Bank’s loan portfolio
      have 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.




***Table
      5—Loans Outstanding, Net of Unearned Income***


December
                  31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Commercial
                  and industrial
              
              $
              10,343
              
              $
              7,176
              
              $
              15,217
              
              $
              11,361
              
              $
              10,855Commercial
                  real estate
              
              
              21,996
              
              
              25,809
              
              
              13,070
              
              
              11,862
              
              
              11,898Residential
                  mortgages
              
              
              5,551
              
              
              7,546
              
              
              10,665
              
              
              15,110
              
              
              13,560Consumer
                  loans
              
              
              4,628
              
              
              5,891
              
              
              6,729
              
              
              8,695
              
              
              7,820Total
                  loans
              
              $
              42,518
              
              $
              46,422
              
              $
              45,681
              
              $
              47,028
              
              $
              44,133


***Table
      6—Loan Maturities and Repricing***




(Dollars
                  in thousands)
              
              Within
                one
                  year
              
              After
                  one but
                within
                  five years
              
              After
                five
                  years
              
              TotalCommercial
                  and industrial
              
              $
              6,312
              
              $
              4,031
              
              $
              -
              
              $
              10,343Commercial
                  real estate
              
              
              1,272
              
              
              5,792
              
              
              14,932
              
              
              21,996Residential
                  mortgages
              
              
              343
              
              
              1,476
              
              
              3,732
              
              
              5,551Consumer
                  loans
              
              
              2,349
              
              
              831
              
              
              1,448
              
              
              4,628Total
                  loans
              
              $
              10,276
              
              $
              12,130
              
              $
              20,112
              
              $
              42,518Loans
                  maturing after one year with:Fixed interest rates
              
              $
              11,404Variable
                interest rates
              
              
              20,835


*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)
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Nonaccrual
                  loans
              
              $
              626
              
              $
              683
              
              $
              1,366
              
              $
              1,588
              
              $
              651Interest
                  income included in net incomefor the year
              
              
              39
              
              
              37
              
              
              22
              
              
              62
              
              
              25Interest
                  income that would have beenrecorded under original terms
              
              
              51
              
              
              56
              
              
              143
              
              
              120
              
              
              49Loans
                  past due 90 days and still accruing
              
              
              170
              
              
              -
              
              
              65
              
              
              560
              
              
              797Restructured
                  loans
              
              
              1,311
              
              
              554
              
              
              1,411
              
              
              569
              
              
              1266





26




At December 31, 2006, nonaccrual loans totaled $626,000 compared to $683,000
      at
      December 31, 2005. The non-accrual loans include commercial loans with SBA
      guarantees or strong loan-to-values that help to mitigate potential losses.
      At
      December 31, 2006, $152 ,000 of the Bank’s nonaccrual loans carried some level
      of guarantee from the SBA that provide credit enhancement to these loans.





The
      balance of impaired loans was $896,000 and $386,000 at of December 31, 2006
      and
      2005, respectively. 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 allowance for loan loss associated with these
      loans was $101,000 and $113,000 at December 31, 2006 and 2005, 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.





Interest income recognized on impaired loans during the year ended December
      31,
      2006 and 2005 was $76,000 and $37,000, 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, 2006,
      restructured loans totaled $1,311,000, an increase of $757,000, or 137%,
      compared to 2005. The loans restructured in 2006 relate to consolidations and/or
      extensions in terms to enable the borrowers to better meet debt service
      requirements.





There
      is
      no known information about possible credit problems other than those classified
      as nonaccrual or impaired that causes management to be uncertain as to the
      ability of any borrower to comply with present loan terms.





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, 2006, approximately 33% of the commercial loan portfolio of the
      Bank was concentrated in loans made to religious organizations. This represents
      an increase from a 25% concentration at December 31, 2005. During 2006, the
      Bank
      funded and/or originated $2.1 million in loans 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, 2006, several of these loans are
      now showing signs of weakness and are included in the Bank’s classified loans.
      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 con-sequently may be
      reallocated in the future to reflect then current conditions.




The allowance for loan losses as a percentage of total loans was 1.31% at
      December 31, 2006 compared to 1.02% at December 31, 2005. 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.





The level of classified loans increased from $1,018,000 in 2005 to $2,671,000
      in
      2006. This increase is not indicative of a trend but rather several large loans
      that were shifted to an *Other
      Loans Especially Mentioned* (OLEM)
      classification. *“Other
      Loans Especially Mentioned”* are
      defined as loans that do not presently expose the Bank to a significant degree
      of risk, but have potential weaknesses/deficiencies deserving management’s
      closer attention. If left uncorrected, these potential weaknesses may result
      in
      deterioration of the repayment prospects at some future date. No significant
      loss of principal or interest is envisioned on these loans. The borrowers may
      be
      experiencing adverse operating trends, which potentially could impair debt
      service capacity, but secondary sources of repayment are accessible and
      considered adequate to cover the Bank's exposure. This category may include
      credits with inadequate loan agreements or control over collateral. These
      borrowers may have limited ability to obtain credit elsewhere. Management is
      working proactively with these borrowers to prevent any further deterioration
      in
      credit quality.






27





***Table
      8—Allocation of Allowance for Loan Losses***




2006
              
              
              
              2005
              
              
              
              2004
              
              
              
              2003
              
              
              
              2002Amount
              
              Percent
                  of loans in each category total loans
              
              Amount
              
              Percent
                  of loans in each category total loans
              
              Amount
              
              Percent
                  of loans in each category total loans
              
              Amount
              
              Percent
                  of loans in each category total loans
              
              Amount
              
              Percent
                  of loans in each category total loans(Dollars
                  in thousands)Commercial
                  and industrial
              
              $
              362
              
              
              24.33
              %
              $
              267
              
              
              15.46
              %
              $
              424
              
              
              32.31
              %
              $
              267
              
              
              24.16
              %
              $
              565
              
              
              24.60
              %Commercial
                  realestate
              
              
              140
              
              
              51.73
              
              
              66
              
              
              55.59
              
              
              49
              
              
              27.75
              
              
              -
              
              
              25.22
              
              
              37
              
              
              26.96Residential
                  mortgages
              
              
              22
              
              
              13.06
              
              
              17
              
              
              16.25
              
              
              14
              
              
              17.29
              
              
              35
              
              
              32.13
              
              
              45
              
              
              17.72Consumer
                  loans
              
              
              37
              
              
              10.88
              
              
              79
              
              
              12.69
              
              
              110
              
              
              22.65
              
              
              37
              
              
              18.49
              
              
              28
              
              
              30.72Unallocated
              
              
              -
              
              
              -
              
              
              43
              
              
              -
              
              
              6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**$**
              **561**
              
              
              **100.00**
              **%**
              $
              472
              
              
              100.00
              %
              $
              603
              
              
              100.00
              %
              $
              339
              
              
              100.00
              %
              $
              675
              
              
              100.00


Management
      believes that the allowance for loan losses is adequate at December 31, 2006.
      While management uses available information 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)
                
                2006
                
                2005
                
                2004
                
                2003
                
                2002Balance
                    at January 1
                
                $
                472
                
                $
                603
                
                $
                339
                
                $
                675
                
                $
                708Charge-offs:Commercial
                    and
                    industrial
                
                
                (70
                )
                
                (762
                )
                
                -
                
                
                (799
                )
                
                -Commercial
                    real
                    estate
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (100
                )Residential
                    mortgages
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                **-**Consumer
                    loans
                
                
                (202
                )
                
                (219
                )
                
                (
                    240
                )
                
                (174
                )
                
                (261
                )(272
                )
                
                (981
                )
                
                (240
                )
                
                (973
                )
                
                (361
                )Recoveries—commercial
                    loans
                
                
                57
                
                
                165
                
                
                265
                
                
                -
                
                
                27Recoveries—consumer
                    loans
                
                
                168
                
                
                127
                
                
                194
                
                
                72
                
                
                126225
                
                
                292
                
                
                459
                
                
                72
                
                
                153Net
                    recoveries(charge-offs)
                
                
                (47
                )
                
                (689
                )
                
                219
                
                
                (901
                )
                
                (208
                )Provisions
                    charged to operations
                
                
                137
                
                
                558
                
                
                45
                
                
                565
                
                
                175Balance
                    at December 31
                
                **$**
                **561**
                
                $
                472
                
                $
                603
                
                $
                339
                
                $
                675Ratio
                    of net (recoveries) charge-offs to average loansoutstanding
                
                
                0.10
                %
                
                1.50
                %
                
                (0.48
                )%
                
                1.99
                %
                
                0.49
                %




28





*Deposits*





Average deposits declined $363,000, or .56% in 2006 and declined $1.6 million,
      or 2.41%, in 2005 compared to 2004. In 2006, the primary areas of decline were
      noninterest bearing demand deposit balances that decreased on average by
      $675,000, or 4.60%, compared to 2005 and certificates of deposit that decreased
      $1,080,000, or 4.63%, compared to 2005. These reductions were primarily related
      to the shift to the Bank’s higher yielding signature savings account. Savings
      deposits increased on average $690,000, or 4.04%, compared to 2005. In addition,
      several jumbo certificates of deposit with corporations did not renew at
      maturity.





To grow and stabilize its deposit base, management will re-introduce its
      signature savings product with an increased interest rate along with a new
      high
      interest checking product designed to attract non-profit customers. In addition,
      remote deposit capture will be introduced to increase the level of core
      deposits.




***Table
      10—Average Deposits by Class***




2006
              
              
              2005
              
              
              2004(Dollars
                  in thousands)
              
              
              Amount
              
              
              Rate
              
              
              Amount
              
              
              Rate
              
              
              Amount
              
              
              RateNoninterest-bearing demand deposits
              
              $
              13,993
              
              
              -
              %
              $
              14,668
              
              
              -
              %
              $
              16,306
              
              
              -
              %Interest-bearing demand deposits
              
              
              9,906
              
              
              0.89
              
              
              9,204
              
              
              0.71
              
              
              9,315
              
              
              0.53Savings deposits
              
              
              17,759
              
              
              0.59
              
              
              17,069
              
              
              0.34
              
              
              18,695
              
              
              0.33Time
                  deposits
              
              
              22,264
              
              
              2.79
              %
              
              23,344
              
              
              1.98
              
              
              21,559
              
              
              1.37


*Other
      Borrowed Funds*





The
      Bank
      did not borrow funds during 2006. 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:




2006
              
              2005Commitments
                  to extend credit
              
              $
              12,995,600
              
              $
              12,727,370Outstanding
                  letters of credit
              
              
              -
              
              
              10,000





Commitments to extend credit are agreements to lend to a customer as long as
      there is no violation of any condition established in the contract 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.






29








*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 com-position 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, 2006, 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, 2006, approximately $11.4
      million in 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. 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, 2006 and 2005,
      the Bank had no borrowings outstanding.





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.




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




(Dollars
                  in thousands)3
                  months or less
              
              $
              10,253Over
                  3 through 6 months
              
              
              2,903Over
                  6 months through 1 year
              
              
              -Over
                  1 through five years
              
              
              158Over
                  five years
              
              
              -Total
              
              $
              13,314





The following table sets forth contractual obligation and other commitments
      representing required and potential cash outflows as of December 31,
      2006:








30


***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
              
              $
              22,199
              
              $
              21,896
              
              $
              830
              
              $
              366
              
              $
              107Rental
                  Obligations
              
              
              2,028
              
              
              317
              
              
              579
              
              
              203
              
              
              929Total
              
              $
              24,227
              
              $
              22,213
              
              $
              1,409
              
              $
              569
              
              $
              1,036


In
      April
      2006, the Bank entered into a 10-year lease for a new branch in the Progress
      Plaza shopping center that is scheduled to be constructed by the Fall of 2007.
      The lease requires annual rental payments of $60,000 for Year 1, $62,500 for
      years 2-5, and $71,250 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.




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, 2006, 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, 2006, an
      asset-sensitive position is maintained on a cumulative basis through one year
      of
      5.91%. 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. This level is well within the Bank’s policy guidelines of
      +/-15% on a cumulative one-year basis. Interest rate risk is minimized by the
      Bank’s high level of core deposits that have been placed in shorter repricing
      intervals.





For
      purposes of the gap analysis, 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.





31


***Table
          13—Interest Sensitivity Analysis***
 
 Interest
                    rate sensitivity gaps as of December 31, 2006(Dollars
                    in thousands)
                
                3
                    months
                  or
                    less
                
                Over
                  3
                    through
                  12
                    months
                
                Over
                  1
                    year
                  through
                  3
                    years
                
                Over
                  3
                    through
                  5
                    years
                
                Over
                  5
                    years
                
                CumulativeInterest-sensitive
                    assets:Interest-bearing
                    deposits with banks
                
                
                
                
                $
                $282
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                282Investment
                    securities
                
                
                4,328
                
                
                2,017
                
                
                3,288
                
                
                3,897
                
                
                2,244
                
                
                15,774Federal
                    funds sold
                
                
                9,158
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                9,158Loans
                
                
                12,589
                
                
                10,851
                
                
                5,802
                
                
                3,453
                
                
                9,824
                
                
                42,519Total
                    interest-sensitive assets
                
                
                26,075
                
                
                13,150
                
                
                9,090
                
                
                7,350
                
                
                12,068
                
                $
                67,733Cumulative
                    totals
                
                
                26,075
                
                
                39,225
                
                
                48,315
                
                
                55,665
                
                
                67,733Interest-sensitive
                    liabilities:Interest
                    checking accounts
                
                
                2,190
                
                
                -
                
                
                2,190
                
                
                -
                
                
                -
                
                
                4,380Savings
                    accounts
                
                
                12,130
                
                
                -
                
                
                12,130
                
                
                -
                
                
                -
                
                
                24,260Certificates
                    $100,000 or more
                
                
                10,253
                
                
                2,903
                
                
                158
                
                
                -
                
                
                -
                
                
                13,314Certificates
                    of less than $100,000
                
                
                3,324
                
                
                4,418
                
                
                671
                
                
                472
                
                
                -
                
                
                8,885Total
                    interest-sensitive liabilities
                
                $
                27,897
                
                $
                7,321
                
                $
                15,149
                
                $
                472
                
                $
                -
                
                $
                50,839Cumulative
                    totals
                
                $
                27,897
                
                $
                35,218
                
                $
                50,367
                
                $
                50,839
                
                $
                50,839Interest
                    sensitivity gap
                
                $
                (1,822
                )
                $
                5,829
                
                $
                (6,059
                )
                $
                6,878
                
                $
                12,068Cumulative
                    gap
                
                
                (1,822
                )
                
                4,007
                
                
                (2,052
                )
                
                4,826
                
                
                18,894Cumulative
                    gap/total earning assets
                
                
                (2.68
                %)
                
                5.91
                %
                
                (0.18
                %)
                
                7.12
                %
                
                24.94
                %Interest-sensitive
                    assets to interest-sensitiveliabilities
                
                
                0.93
                
                
                1.80
                
                
                0.60
                
                
                15.57
                
                
                -
                
                
                -
  Core
          deposits such as checking and savings deposits have been placed in repricing
          intervals based on historical trends and management’s
          estimates.





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 income or “earnings” at risk at
      December 31, 2006 are as follows:


(Dollars
                  in
                  thousands)Net
                    interest
                Percent
                    ofChanges
                    in rate
                income
                risk+200
                    basis points
                $ 
                    3,499
                0.26%+100
                    basis points
                3,497
                0.20Flat
                    rate
                3,490
                --100
                    basis points
                3,469
                (0.60)-200
                    basis points
                3,435
                (1.58)





32





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, 2006 are as
      follows:




(Dollars
        in thousands)


MV
                    of equityChanges
                    in rate
                MV
                    equity
                Risk
                    change+200
                    basis points
                $ 
                    5,239
                (23.5)%+100
                    basis points
                6,064
                (11.50)Flat
                    rate
                6,849
                --100
                    basis points
                7,410
                8.20-200
                    basis points
                7,855
                14.70


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, 2006. 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.





*Capital
      Resources*





Total shareholders’ equity increased $133,000 in 2006 compared to 2005 and
      decreased $320,000 in 2005 compared to 2004. The increase in capital in 2006
      is
      attributable to the net income of $119,000 as well as other comprehensive income
      related to a decline in the unrealized loss on the securities classified as
      available-for-sale.




The decline in capital in 2005 is primarily attributable to the net loss of
      $269,000 for the year as well as other comprehensive loss related to an increase
      in the unrealized loss on securities classified as available-for-sale.




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






33




The FRB 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)
                
                2006
                
                2005
                
                2004Total
                    Capital
                
                $
                8,624
                
                $
                8,491
                
                $
                8,812Less:
                    Intangible Assets/Net unrealized gains (losses) on available
                    forsale
                    securities
                
                
                (1,185
                )
                
                (1,382
                )
                
                (
                    1,578
                )Tier
                    I capital
                
                
                7,433
                
                
                7,109
                
                
                7,234Tier
                    II capital
                
                
                556
                
                
                472
                
                
                544Total
                    qualifying capital
                
                $
                7,995
                
                $
                7,581
                
                $
                7,778Risk-adjusted
                    total assets (including off-balance-sheet exposures)
                
                $
                44,464
                
                $
                44,503
                
                $
                43,436Tier
                    I risk-based capital ratio
                
                
                16.73
                %
                
                15.97
                %
                
                16.65
                %Total
                    (Tier I and II) risk-based capital ratio
                
                
                17.98
                
                
                17.03
                
                
                17.91
                %Tier
                    I leverage ratio
                
                
                10.33
                
                
                9.87
                
                
                9.89
                %


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 February 2006, FASB issued SFAS 155, "Accounting for Certain Hybrid Financial
      Instruments", which permits, but does not require, fair value accounting for
      any
      hybrid financial instrument that contains an embedded derivative that would
      otherwise require bifurcation in accordance with SFAS 133, "Accounting for
      Derivative Instruments and Hedging Activities". The statement also subjects
      beneficial interests in securitized financial assets to the requirements of
      SFAS
      133. For the Company, this statement is effective for all financial instruments
      acquired, issued, or subject to re-measurement after the beginning of its fiscal
      year that begins after September 15, 2006, with earlier adoption permitted.
      The
      Company is currently evaluating the impact that the adoption of this Statement
      will have on its financial position, results of operation and cash flows. The
      Company does not expect that the adoption of this Statement will have a material
      impact on its financial position, results of operation and cash
      flows.




In March 2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”* The
      statement amends SFAS no. 140 by  (1) requiring the separate accounting for
      servicing assets and servicing liabilities, which arise from the sale of
      financial assets; (2) requiring all separately recognized serving assets and
      servicing liabilities to be initially measured at fair value, if practicable;
      and (3) permitting an entity to choose between an amortization method or a
      fair
      value method for subsequent measurement for each class of separately recognized
      servicing assets and servicing liabilities.  This statement is effective
      for fiscal years beginning after September 15, 2006, with earlier adoption
      permitted. The Company is currently evaluating the impact that the adoption
      of
      this Statement will have on its financial position, results of operation and
      cash flows. The Company does not expect that the adoption of this Statement
      will
      have a material impact on its financial position, results of operation and
      cash
      flows.






34





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 Company is currently evaluating the impact that
      the adoption of this interpretation will have on its financial position, results
      of operation and cash flows. The Company does not expect that the adoption
      of
      this interpretation will have a material impact on its financial position,
      results of operation and cash flows.




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 Company is currently
      evaluating the impact that the adoption of this Statement will have on its
      financial position, results of operation and cash flows. The Company does not
      expect that the adoption of this Statement will have a material impact on its
      financial position, results of operation and cash flows.





In February 2007 the FASB issued FAS No. 159 - “The Fair Value Option for
      Financial Assets and Liabilities including an Amendment of FASB Statement
      No. 115” (“FAS 159”). FAS 159 permits entities 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 without having to apply complex hedge accounting
      provisions.  FAS
      159
      is effective as of the beginning of an entity’s first fiscal year that begins
      after November 15, 2007. Early adoption is available subject to certain
      conditions. The Corporation did not early adopt FAS 159, and has not yet
      determined whether this statement will have a material impact on its
      consolidated financial statements upon adoption.







**ITEM
      7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





The financial information required by this Item 7A is incorporated by reference
      to page 33 of this Report, the Liquidity and Interest Rate Sensitivity
      Management provisions and pages 33 to 37 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 49 to 74 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, 2006.





**ITEM
      9A—CONTROLS AND PROCEDURES**





UBS carried out an evaluation, under the supervision and with the participation
      of the UBS’ management, including the UBS’ Chief Executive Officer, Evelyn F.
      Smalls and Chief Financial Officer, Brenda Hudson-Nelson, of the effectiveness
      of the design and operation of the UBS’ disclosure controls and procedures (as
      such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act),
      as of December 31, 2006 pursuant to Exchange Act Rule 13a-15. Based upon that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that UBS’ disclosure controls and procedures as of December 31, 2006, are
      effective and timely in alerting them to material information relating to UBS
      (including its consolidated subsidiaries) required to be included in UBS’
periodic SEC filings.






35





During the last fiscal quarter, there have not been any significant changes
      in
      UBS’ internal control over financial reporting that have materially affected or
      are reasonably likely to materially affect the UBS’ internal control over
      financial reporting.





**ITEM9B—OTHER
      INFORMATION**





None.





**PART
      III**





**ITEM
      10— DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
      CONTROL PERSONS
      AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE
      ACT**





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
              68
              Professor
                  of Management/Economist
              2002
              2010At
                  the Wharton School,Philadelphia,
                  PADavid
                  R. Bright
              67
              Retired,
                  Executive Vice President
              2002
              2010Meridian
                  BancorpPhiladelphia,
                  PAJoseph
                  T. Drennan
              61
              Universal
                  Capital Management, Inc.
              2004
              2010Wilmington,
                  DEL.
                  Armstead Edwards
              64
              Chairman
                  of the Board,
              1993
              2008United
                  Bancshares, Inc.Owner
                  and President,Edwards
                  Entertainment., Inc.Philadelphia,
                  PennsylvaniaMarionette
                  Y. Wilson(Frazier)
              62
              Retired
                  as co-Founder,
              1996
              2008John
                  Frazier, Inc.Philadelphia,
                  PennsylvaniaWilliam
                  B. Moore
              64
              Vice
                  Chairman of the Board,
              1993
              2007United
                  Bancshares, Inc.Pastor,
                  Tenth MemorialBaptist
                  ChurchPhiladelphia,
                  Pennsylvania
   
 36
 
 Principal
                  occupation and
              Year
                  first
              TermName
              Age
              other
                  directorships
              became
                  director
              will
                  expireAshan
                  M. Nasratullah
              49
              President,
              2004
              2009JNA
                  Capital, Inc.Philadelphia,
                  PAEvelyn
                  F. Smalls
              61
              President
                  and CEO of Registrant
              2000
              2007and
                  United Bank of PhiladelphiaErnest
                  L. Wright
              78
              Founder,
                  President and
              1993
              2008CEO
                  of Ernest L. WrightConstruction
                  CompanyPhiladelphia,
                  Pennsylvania
 
 (b)  Executive
        Officers of Registrant and Bank
 
 Name
              Age
              OfficeEvelyn
                  F. Smalls
              61
              President
                  and Chief Executive OfficerBrenda
                  M. Hudson-Nelson
              45
              Executive
                  Vice President/Chief Financial OfficerTerrence
                  D. Barclift
              32
              Senior
                  Vice President/Senior Lending
                  Officer


(c)  Family
      Relationships .





There
      are
      no family relationships between any director, executive officer or person
      nominated or chosen by the UBS or the Bank to become a director or executive
      officer.





(d)  Other





There
      have been no events under any bankruptcy act, no criminal proceedings and no
      judgments or injunctions material to the evaluation of the ability and integrity
      of any director or executive officer during the past five years.





**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.





UBS’
      Board of Directors meets when necessary and during 2006 held eleven (11)
      meetings, including UBS’ organization meeting. In 2006, the Bank’s Board of
      Directors was scheduled to meet at least monthly, except in August and during
      2006 held eleven (11) meetings. The independent directors of the UBS’ and the
      Bank’s Board of Directors will hold regularly scheduled executive sessions on a
      regular basis, but, in any event, not less than twice a year.




The Executive Committee, without Evelyn Smalls, who is not independent,
      serves as the Compensation Committee.  (Refer to Item 11 for Executive
      Compensation discussion.)  Currently, there is no Compensation Committee
      Charter.




**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 November 21, 2006, eight (8) of UBS’ ten (10)
      directors attended the meeting.








37








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





The
      Audit/Compliance Committee of UBS’ Board of Directors 1 is
      comprised of Joseph T. Drennan 2 (Chairman), L. Armstead Edwards, Marionette Y. Wilson (Frazier) and William
      B.
      Moore, meets when necessary at the call of the





1 The
      Audit
      Committees of UBS and the Bank are operating standing committees established
      in
      accordance with Section 3(a)58(A) of the Exchange Act.





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 seven (7) meetings during 2006.





Each
      member of the Audit/Compliance Committee is independent and 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
      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 quarterly through September 2006 and monthly thereafter 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 seven (7) meetings during
      2006.





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, 2006, the Audit Committee (i) reviewed and
      discussed the 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 financial statements be included in UBS’ Annual
      Report on Form 10-K for the year ending December 31, 2006.





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)






38





**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 2006.




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 2006. Directors standing for re-election were nominated
      by
      the Executive Committee of the Board, without the participation of Evelyn
      Smalls, who is not independent.





**Meetings
      of UBS’ Board and its Committees**







The
      total
      number of meetings of UBS’ Board of Directors that were held in 2006 was eleven
      (11). All of the incumbent directors, who were directors during 2006 (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.




**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 2006. 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.





The
      Asset
      Liability Management Committee, comprised of Bernard E. Anderson (Chairman),
      L.
      Armstead Edwards, Angela M. Huggins 3 ,
      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 2006, the Asset and Liability
      Management Committee held four (4) meetings.






39





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
      2006, 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 2006 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, 2006. ****


**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 2, 2007:





**Name,
                Principal Occupation and**
              **Business
                Experience For Past 5 Years**
            **Age
                as of**
              **March
                2, 2007**
            **Office
                with the UBS and/or Bank**
            **UBS
                Stock**
              **Beneficially**
              **Owned**Evelyn
                F. Smalls(1)(2)
            61
            President
                and Chief Executive Officer and
              Director
                of UBS and Bank
            600Brenda
                M. Hudson-Nelson (3)
            45
            Executive
                Vice President and Chief Financial Officer
              of
                UBS and Bank
            50Terrence
                D. Barclift(4)
            32
            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.








40





**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.
      15 th 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, 2006. 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 2006, the
      Executive Committee held two (2) meetings as the Compensation
      Committee.





**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.





**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.






41




**The
      Committee’s Process**




Because of the inability of management to attain the goals outlined in the
      2005
      Strategic Plan, there were no salary increase given to executive officers in
      2006. Therefore, there were no deliberations by the committee in reference
      to
      salary increases.  During 2006, the committee met to determine the
      compensation to be offered to Terrence Barclift.  In doing so, the
      committee considered all relevant factors including experience and comparable
      salaries in the region.





**Components
      of Compensation for 2006**




For
      the
      fiscal year ended December 31, 2006, 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.





**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,
      2006.




Respectfully
      submitted:





L.
      Armstead Edwards


William
      B. Moore


Marionette
      Y. Wilson


Joseph
      T.
      Drennan


David
      R.
      Bright











42


**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, 2006.


**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
              
              
              2006
              
              $
              164,307
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              6,209
              
              $
              170,307President
                  and Chief Executive OfficerBrenda
                  Hudson-Nelson,
              
              
              2006
              
              
              118,390
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              6,095
              
              $
              124,390Executive
                  Vice President and Chief Financial OfficerTerrence
                  Barclift**(3**)
              
              
              2006
              
              
              26,230
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              500
              
              $
              26,730Senior Vice President
                  and Senior Lending Officer




**(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
                $98/annually for Brenda
                Hudson-Nelson


**(3)**
            Terrence
                Barclift became employed by the Bank in October
                2006.





**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 is three (3) years, unless extended or terminated.
      The Employment Agreement provides 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 is three (3) years,
      unless extended or terminated. The Employment Agreement provides 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 is two (2) years, unless extended or
      terminated. The Employment Agreement provides for an annual base salary of
      $110,000 that may be increased, but not decreased as well as life insurance
      equivalent to two times his base salary, and a $500 per month automobile
      allowance.








43








**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 2006.





**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.





**ITEM12— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      following table sets forth certain information known to UBS, as of March 2,
      2007
      (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**
              **Owned**Philadelphia
                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 2, 2007, 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.




44







The following table lists the beneficial ownership of shares of the UBS’ Common
      Stock as of March 2, 2007 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**
              **Stock****9,10,11,
                12******
            **Percent
                of**
              **Outstanding
                Stock****Current
                Directors**L.
                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
            *Ahsan
                M. Nasratullah
            833
            *William
                B. Moore
            1,834
            *Evelyn
                F. Smalls
            600
            *





**Certain
                Executive Officers**Evelyn
                F. Smalls
            500**
            *Brenda
                M. Hudson-Nelson
            50
            ***All
                Current Directors and Executive Officers as a Group**
            **41,517**
            **4.75%
                *****


__________________


**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 2, 2007, plus the
                shares
                subject to the exercisable option.





(9)
            Stock
                ownership information is given as of March 2, 2007, and includes
                shares
                that the individual has the right to acquire (other than by exercise
                of
                stock options) within sixty (60) days of March 2. 2007. 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 are pledged
                to
                secure a debt.





**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 2006 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.






45





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.





**ITEM14—** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




2006
              
              2005Audit
                  Fees
              
              $
              93,274
              
              $
              86,703Audit-related
                  fees
              
              
              -
              
              
              -Tax
                  fees
              
              
              10,794
              
              
              8,304All
                  other fees
              
              
              -
              
              
              -Total
                  fees
              
              $
              104,068
              
              $
              95,007


**Services
      Provided by McGladrey and Pullen, LLP**




1)
            Audit
                Fees—These are fees for professional services performed by McGladrey and
                Pullen, LLP in 2006 and 2005 for the audit, including an audit of
                consolidated financial statements reporting, and review of
                consolidated 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.


46




**PART
      IV**





**ITEM
      15— EXHIBITS AND FINANCIAL STATEMENTS
      SCHEDULES**




The
                  following documents are filed as part of this report of United
                  Bancshares,
                  Inc.:
              Page1.Financial
                  Reports of United Bancshares, Inc.Report
                  of Independent Registered Public Accounting Firm.
              50Consolidated
                  Balance Sheets at December 31, 2006 and 2005.
              51Consolidated
                  Statements of Operations for the three years ended December 31,
                  2006.
              52Consolidated
                  Statements of Changes in Shareholders’ Equity for the three years endedDecember
                  31, 2006.
              53Consolidated
                  Statements of Cash Flows for the three years ended December 31,
                  2006.
              54Notes
                  to Consolidated Financial Statements
              552.            
                  Financial Statement SchedulesFinancial Statement Schedules are omitted because the required
                  information
                  is eithernot applicable, not required or is shown in the respective financial
                  statements or in thenotes
                  thereto.3.  
                  The following Exhibits are filed herewith or incorporated by reference
                  as
                  a part ofthis
                  Annual
                  Report:








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
      Contracts


a)
            Lease
                for corporate headquarters office located at The Graham Building,
                30 S.
                15thStreet, 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)








47




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. 15thStreet, Philadelphia, PA, , (Incorporated by reference to Registrant’s
                2005 Form 10-K)


h)
            Sublease
                for Retail office located at The Graham Building, 30 S. 15thStreet, 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, is attached hereto
                as Exhibit (10)k.





(11)
            
            
            Statement
                of Computation of Earnings Per Share. Included at Note 16 of the
                Financial
                Statements hereof.





(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 Registrant


Name      State
      of Incorporation


United
      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
      32.1


Certification
      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
                32.2


Certification
      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.




48


**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/ 
                  Evelyn F. Smalls
              April
                  5, 2007Evelyn
                  F. Smalls, President & CEO, Director/s/
                  Brenda M. Hudson-Nelson
              April
                  5, 2007Brenda
                  M. Hudson-Nelson, EVP, CFO/s/
                  L. Armstead Edwards
              April
                  5, 2007L.
                  Armstead Edwards, Chairman, Director/s/
                  Marionette Y. Wilson(Frazier)
              April
                  5, 2007Marionette
                  Y. Wilson(Frazier), Secretary, Director/s/
                  William B. Moore
              April
                  5, 2007William
                  B. Moore, Secretary, Vice Chairman, Director/s/
                  Bernard E. Anderson
              April
                  5, 2007Bernard
                  E. Anderson, Director/s/
                  David R. Bright
              April
                  5, 2007David
                  R. Bright, Director/s/
                  Joseph T. Drennan
              April
                  5, 2007Joseph
                  T. Drennan, Treasurer, Director/s/ Ashan
                  M. Nasratullah
              April
                  5, 2007Ashan
                  M. Nasratullah, Director/s/
                  Ernest L. Wright
              April
                  5, 2007Ernest L. Wright,
                Director











49




**Report
      of Independent Registered Public Accounting Firm**





Shareholders
        and Board of Directors
 United
        Bancshares, Inc.
 Philadelphia,
        Pennsylvania
 
 
 We
        have
        audited the consolidated balance sheets of United Bancshares, Inc. as of
        December 31, 2006 and 2005, and
        the
        related consolidated statements of income, changes in stockholders’ equity and
        cash flows for each of the three years in the period ended December 31,
        2006 .
        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 provided a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of United Bancshares,
        Inc. as of December 31, 2006 and 2005, and
        the
        related consolidated statements of income, changes in stockholders’ equity and
        cash flows for each of the three years in the period ended December 31,
        2006 ,
        in
        conformity with U.S. generally accepted accounting principles.
 
 As
        discussed in Note 1 to the financial statements, in 2006 United Bancshares,
        Inc.
        adopted Statement of Financial Accounting Standards No. 123R, “Share-Based
        Payment.”
 
 /s/
        McGladrey & Pullen, LLP
 
 
 Blue
        Bell, Pennsylvania
 April
        4,
        2007
  McGladrey
          & Pullen, LLP is a member firm of RSM International -
 an
          affiliation of separate and independent legal entities.





50




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**CONSOLIDATED
      BALANCE SHEETS**


December
      31,


Assets
                
                **2006**
                
                2005Cash
                    and due from banks
                
                **$**
                **3,179,239**
                
                $
                3,657,763Interest-bearing
                    deposits with banks
                
                
                **281,920**
                
                
                290,030Federal
                    funds sold
                
                
                **9,158,000**
                
                
                5,292,000Cash
                    and cash equivalents
                
                
                **12,619,159**
                
                
                9,239,793Investment
                    securities:Available-for-sale,
                    at fair market value
                
                
                **3,349,606**
                
                
                3,627,425Held-to-maturity,
                    at amortized cost (fair market value of $12,683,809and $9,906,420 in 2006 and 2005, respectively)
                
                
                **12,804,351**
                
                
                10,078,441Loans,
                    net of unearned discount of $5,204 and $21,781 in 2006and
                    2005, respectively
                
                
                **42,518,151**
                
                
                46,422,378Less
                    allowance for loan losses
                
                
                **(561,409**
                **)**
                
                (472,198
                )Net
                    loans
                
                
                **41,956,742**
                
                
                45,950,180Bank
                    premises and equipment, net
                
                
                **1,099,524**
                
                
                1,038,081Accrued
                    interest receivable
                
                
                **422,216**
                
                
                336,466Other
                    real estate owned
                
                
                **-**
                
                
                164,500Intangible
                    assets
                
                
                **1,204,202**
                
                
                1,382,279Prepaid
                    expenses and other assets
                
                
                **479,959**
                
                
                392,564Total
                    assets
                
                **$**
                **73,935,759**
                
                $
                72,209,729Liabilities
                    and Shareholders’ EquityLiabilities:Demand
                    deposits, noninterest-bearing
                
                **$**
                **14,082,940**
                
                $
                14,469,063Demand
                    deposits, interest-bearing
                
                
                **10,585,080**
                
                
                9,788,131Savings
                    deposits
                
                
                **18,056,849**
                
                
                16,396,073Time
                    deposits, under $100,000
                
                
                **8,885,199**
                
                
                9,665,743Time
                    deposits, $100,000 and over
                
                
                **13,313,571**
                
                
                13,004,506Total
                    deposits
                
                
                **64,923,639**
                
                
                63,323,516Accrued
                    interest payable
                
                
                **132,785**
                
                
                150,777Accrued
                    expenses and other liabilities
                
                
                **254,906**
                
                
                243,657Total
                    liabilities
                
                
                **65,311,330**
                
                
                63,717,950Commitments
                    and Contingencies (Notes 6, 10, 14 and 15)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
                
                
                **(6,118,867**
                **)**
                
                (6,237,557
                )Accumulated
                    other comprehensive loss
                
                
                **(18,610**
                **)**
                
                (32,570
                )Total
                    shareholders’ equity
                
                
                **8,624,429**
                
                
                8,491,779Total
                    liabilities and shareholders’ equity
                
                **$**
                **73,935,759**
                
                $
                72,209,729
   The
        accompanying notes are an integral part of these
        statements.


51


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Years
      ended December 31,


2006
              
              2005
              
              2004Interest
                  income:Interest
                  and
                  fees on loans
              
              $
              3,625,617
              
              $
              3,428,778
              
              $
              3,008,532Interest
                  on
                  investment securities
              
              
              577,224
              
              
              537,077
              
              
              560,255Interest
                  on
                  federal funds sold
              
              
              357,080
              
              
              180,258
              
              
              86,935Interest
                  on
                  time deposits with other banks
              
              
              7,843
              
              
              9,717
              
              
              30,087Total
                  interest income
              
              
              4,567,764
              
              
              4,155,830
              
              
              3,685,809Interest
                  expense:Interest
                  on
                  time deposits
              
              
              696,901
              
              
              462,910
              
              
              294,863Interest
                  on
                  demand deposits
              
              
              111,128
              
              
              64,224
              
              
              48,602Interest
                  on
                  savings deposits
              
              
              137,958
              
              
              57,940
              
              
              62,464Total interest expense
              
              
              945,987
              
              
              585,074
              
              
              405,929Net
                  interest income
              
              
              3,621,777
              
              
              3,570,756
              
              
              3,279,880Provision
                  for
                  loan losses
              
              
              137,000
              
              
              558,000
              
              
              45,000Net
                  interest income after provision for loan losses
              
              
              3,484,777
              
              
              3,012,756
              
              
              3,234,880Noninterest
                  income:Gain
                  on
                  sale of loans
              
              
              10,656
              
              
              33,679
              
              
              6,299Customer
                  service fees
              
              
              603,259
              
              
              681,919
              
              
              852,806ATM
                  Fee
                  Income
              
              
              517,302
              
              
              570,274
              
              
              597,965Loan
                  Syndication Fee Income
              
              
              150,000
              
              
              202,171
              
              
              178,802Gain
                  on
                  sale of investments
              
              
              -
              
              
              -
              
              
              31,115Gain
                  on
                  sale of fixed assets
              
              
              -
              
              
              -
              
              
              1,874,203Other
                  income
              
              
              133,285
              
              
              94,011
              
              
              113,837Total
                  noninterest income
              
              
              1,414,502
              
              
              1,582,054
              
              
              3,655,027Noninterest
                  expense:Salaries,
                  wages
                  and employee benefits
              
              
              1,746,539
              
              
              1,830,572
              
              
              1,935,421Occupancy
                  and
                  equipment
              
              
              993,397
              
              
              994,690
              
              
              1,102,627Office
                  operations and supplies
              
              
              309,268
              
              
              345,265
              
              
              411,920Marketing
                  and
                  public relations
              
              
              115,756
              
              
              100,421
              
              
              82,652Professional
                  services
              
              
              290,687
              
              
              265,487
              
              
              239,050Data
                  processing
              
              
              421,699
              
              
              407,324
              
              
              562,655Deposit
                  insurance assessments
              
              
              110,687
              
              
              113,144
              
              
              72,238Other
                  operating
              
              
              792,556
              
              
              807,324
              
              
              836,822Total noninterest expense
              
              
              4,780,589
              
              
              4,864,227
              
              
              5,243,385Net income (loss) before income taxes
              
              $
              118,690
              
              $
              (269,417
              )
              $
              1,646,522Provision
                  for
                  income taxes
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              118,690
              
              $
              (269,417
              )
              $
              1,646,522Net
                  income (loss) per common share—basic
              
              $
              0.11
              
              $
              (0.25
              )
              $
              1.54Net
                  income (loss) per common share—diluted
              
              $
              0.11
              
              $
              (0.25
              )
              $
              1.54Weighted
                  average number of common shares
              
              
              1,068,588
              
              
              1,068,588
              
              
              1,068,588


The
      accompanying notes are an integral part of these statements.






52




UNITED
          BANCSHARES, INC. AND SUBSIDIARY
 
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**
 
 Years
          ended December 31, 2006, 2005 and 2004
  Series
                  A Preferred Stock
              
              Common
                  Stock
              
              Additional
                  paid-in
              
              Accumulated
              
              Accumulated
                  other
                  comprehensive  income
              
              Total
                  shareholders’
              
              ComprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              deficit
              
              (loss)
              
              equity
              
              income
                  (loss)Balance
                  at December 31, 2003
              
              
              136,842
              
              $
              1,368
              
              
              1,068,588
              
              $
              10,686
              
              $
              14,749,852
              
              $
              (7,614,662
              )
              
              87,649
              
              $
              7,234,893Unrealized
                  losses on investmentsecurities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (70,087
              )
              
              (70,087
              )
              $
              (70,087
              )Net income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,646,522
              
              
              
              
              
              1,646,522
              
              
              1,646,522Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,576,435Balance
                  at December 31, 2004
              
              
              136,842
              
              $
              1,368
              
              
              1,068,588
              
              $
              10,686
              
              $
              14,749,852
              
              $
              (
                  5,968,140
              )
              $
              17,562
              
              $
              8,811,328Unrealized
                  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
              
              $
              (
                  6,237,557
              )
              $
              (32,570
              )
              $
              8,491,779Unrealized
                  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
              
              $
              (6,118,867
              )
              $
              (18,610
              )
              $
              8,624,429





The
        accompanying notes are an integral part of these statements.


53




UNITED
        BANCSHARES, INC. AND SUBSIDIARY
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 Years
        ended December 31,
  2006
              
              2005
              
              2004Cash
                  flows from operating activities:Net income (loss)
              
              $
              118,690
              
              $
              (269,417
              )
              $
              1,646,522Adjustments to reconcile net income (loss) to net cashprovided by operating activities:Provision
                  for
                  loan losses
              
              
              137,000
              
              
              558,000
              
              
              45,000Gain
                  on
                  sale of loans
              
              
              (10,656
              )
              
              (33,679
              )
              
              (6,299
              )Gain
                  on
                  sale of fixed assets
              
              
              -
              
              
              -
              
              
              (1,874,203
              )Gain
                  on
                  sale of investment securities
              
              
              -
              
              
              -
              
              
              (31,115
              )Depreciation
                  and amortization
              
              
              447,189
              
              
              480,976
              
              
              610,440(Increase)
                  decrease in accrued interest receivable andother assets
              
              
              (173,145
              )
              
              (211,387
              )
              
              505,173Increase
                  (decrease) in accrued interest payable andother liabilities
              
              
              6,742
              
              
              77,082
              
              
              (48,299
              )Net
                  cash provided by operating activities
              
              
              525,821
              
              
              601,575
              
              
              847,219Cash
                  flows from investing activities:Purchase
                  of
                  available-for-sale investments
              
              
              (503,125
              )
              
              -
              
              
              (496,421
              )Purchase
                  of
                  held-to-maturity investments
              
              
              (5,116,828
              )
              
              (4,762,327
              )
              
              (3,986,354
              )Proceeds
                  from
                  maturity and principal reductions ofavailable-for-sale investments
              
              
              833,197
              
              
              1,084,929
              
              
              3,774,398Proceeds
                  from
                  maturity and principal reductions ofheld-to-maturity investments
              
              
              2,380,686
              
              
              3,440,765
              
              
              1,917,765Proceeds
                  from
                  sale of investments available-for-sale
              
              
              -
              
              
              -
              
              
              786,526Proceeds
                  from
                  the sale of fixed assets
              
              
              -
              
              
              -
              
              
              3,283,536Proceeds
                  from
                  sale of student loans
              
              
              568,166
              
              
              1,806,173
              
              
              -Net
                  decrease (increase) in loans
              
              
              3,277,616
              
              
              (1,771,882
              )
              
              161,493Purchase
                  of
                  premises and equipment
              
              
              (196,945
              )
              
              (244,306
              )
              
              (102,935
              )Net
                  cash provided by (used in) investing activities
              
              
              1,253,123
              
              
              (446,648
              )
              
              5,338,008Cash
                  flows from financing activities:Net increase (decrease) in deposits
              
              
              1,600,123
              
              
              151,297
              
              
              (3,944,604
              )Net
                  cash
                  provided by (used in) financing activities
              
              
              1,600,123
              
              
              151,297
              
              
              (3,944,604
              )Net increase in cash and cash equivalents
              
              
              3,379,366
              
              
              306,224
              
              
              2,240,623Cash
                  and cash equivalents at beginning of year
              
              
              9,239,793
              
              
              8,933,569
              
              
              6,692,946Cash
                  and cash equivalents at end of year
              
              $
              12,619,159
              
              $
              9,239,793
              
              $
              8,933,569Supplemental
                  disclosure of cash flow information:Cash paid during the year for interest
              
              $
              963,979
              
              $
              512,493
              
              $
              405,508
 
 The
        accompanying notes are an integral part of these statements.





54


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





December
      31, 2006, 2005, and 2004





**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, and certain equity
                securities 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)






55








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004








**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 collectibility 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)











56








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**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.





***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, 2006, 2005and 2004 as
      no
      options were granted under the Plan during these periods. All options were
      fully
      vested at December 31, 2006.






At
      December 31, 2006, the Company had one stock-based employee compensation plan
      which is more fully described in Note 12. Through December 31, 2005, the Company
      accounted for this plan under the recognition and measurement principles of
      APB
      No. 25, Accounting for Stock Issued to Employees and related
      interpretations.






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, 2006.










(Continued )








57








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004











**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 pre-payments 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 )








58





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004




**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.


2006
              
              2005Core
                  Deposit Premium (cost)
              
              $
              2,449,488
              
              $
              2,449,488Less
                  accumulated amortization
              
              
              (1,245,286
              )
              
              (1,067,209
              )$
              1,204,202
              
              $
              1,382,279






Amortization
                of the intangible totaled $178,078 for each of the years ended December
                31, 2006, 2005, 2004. 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, and
                consideration of impairment of other intangible
                assets.





***Segments***





SFAS
      No.
      131 establishes standards for the way public business enterprises report
      information about operating segments in annual financial statements and requires
      that those enterprises report selected information about operating segments
      in
      subsequent interim financial reports issued to shareholders. It also establishes
      standards for related





( Continued )






59





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**1.** **SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





disclosures
      about products and services, geographic areas, and major customers. The
      statement requires that a public business enterprise report financial and
      descriptive information about its reportable operating segments. Operating
      segments are components of an enterprise about which separate financial
      information is available that is evaluated regularly by the chief operating
      decision-maker in deciding how to allocate resources and assess performance.
      The
      statement also requires that public enterprises report a measure of segment
      profit or loss, certain specific revenue and expense items and segment assets.
      It also requires that information be reported about revenues derived from the
      enterprises’ products or services, or about the countries in which the
      enterprises earn revenues and hold assets, and about major customers, regardless
      of whether that information is used in making operating decisions.





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 itself 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 2006
                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 (loss) are as follows:





December
                    31, 2006Before
                    tax amount
                
                Tax
                    (expense)
                
                Net
                    of tax amountUnrealized
                    gains on securities
                  Unrealized 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
                )
                $
                13,960





(Continued)








60





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**1.** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





December
                    31, 2005Before
                    tax amount
                
                Tax
                    benefit (expense)
                
                Net
                    of tax 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
                )
  
 December
                    31, 2004Before
                    tax amount
                
                Tax
                    benefit (expense)
                
                Net
                    of tax amountUnrealized
                    losses on securitiesUnrealized holding losses arising during period
                
                $
                (74,015
                )
                $
                24,776
                
                $
                (49,240
                )Less: reclassification adjustment for gainsrealized in net income
                
                
                31,115
                
                
                (10,267
                )
                
                20,847Other
                    comprehensive income(loss), net
                
                $
                (105,130
                )
                $
                35,043
                
                $
                (70,087
                )


***Recent
      Accounting Pronouncements***




In
      February 2006, FASB issued SFAS 155, "Accounting for Certain Hybrid Financial
      Instruments", which permits, but does not require, fair value accounting for
      any
      hybrid financial instrument that contains an embedded derivative that would
      otherwise require bifurcation in accordance with SFAS 133, "Accounting for
      Derivative Instruments and Hedging Activities". The statement also subjects
      beneficial interests in securitized financial assets to the requirements of
      SFAS
      133. For the Company, this statement is effective for all financial instruments
      acquired, issued, or subject to re-measurement after the beginning of its fiscal
      year that begins after September 15, 2006, with earlier adoption permitted.
      The
      Company is currently evaluating the impact that the adoption of this Statement
      will have on its financial position, results of operation and cash flows. The
      Company does not expect that the adoption of this Statement will have a material
      impact on its financial position, results of operation and cash
      flows.




In
      March
      2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”* The
      statement amends SFAS no. 140 by  (1) requiring the separate accounting for
      servicing assets and servicing liabilities, which arise from the sale of
      financial assets; (2) requiring all separately recognized serving assets and
      servicing liabilities to be initially measured at fair value, if practicable;
      and (3) permitting an entity to choose between an amortization method or a
      fair
      value method for subsequent measurement for each class of separately recognized
      servicing assets and servicing liabilities.  This statement is effective
      for fiscal years beginning after September 15, 2006, with earlier adoption
      permitted. The Company is currently evaluating the impact that the adoption
      of
      this Statement will have on its financial position, results of operation and
      cash flows. The Company does not expect that the adoption of this Statement
      will
      have a material impact on its financial position, results of operation and
      cash
      flows.





(Continued)




61





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004




**1.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





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 Company is currently evaluating the impact that
      the adoption of this interpretation will have on its financial position, results
      of operation and cash flows. The Company does not expect that the adoption
      of
      this interpretation will have a material impact on its financial position,
      results of operation and cash flows.





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 Company is currently
      evaluating the impact that the adoption of this Statement will have on its
      financial position, results of operation and cash flows. The Company does not
      expect that the adoption of this Statement will have a material impact on its
      financial position, results of operation and cash flows.





In
      February 2007 the FASB issued FAS No. 159 - “The Fair Value Option for
      Financial Assets and Liabilities including an Amendment of FASB Statement
      No. 115” (“FAS 159”). FAS 159 permits entities 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 without having to apply complex hedge accounting
      provisions.  FAS
      159
      is effective as of the beginning of an entity’s first fiscal year that begins
      after November 15, 2007. Early adoption is available subject to certain
      conditions. The Corporation did not early adopt FAS 159, and has not yet
      determined whether this statement will have a material impact on its
      consolidated financial statements upon adoption.





**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, 2006 and 2005, the Bank’s tier one leverage ratio
      was 9.93% and 9.47%, respectively.




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






62











UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**3.
      CASH AND DUE FROM BANK BALANCES**









**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, 2006 and 2005 are as
        follows:


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
              
              
              
              
              
              
              
              
              117,662Other
                  investments
              
              
              262,550
              
              
              
              
              
              
              
              
              262,550$
              3,377,382
              
              $
              14,335
              
              $
              (
                  42,111
              )
              $
              3,349,606Held-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
              )
              $
              12,683,8092005Gross
              
              
              GrossAmortized
              
              
              unrealized
              
              
              unrealized
              
              
              Marketcost
              
              
              gains
              
              
              losses
              
              
              valueAvailable-for-sale:U.S.Government
                  agency securities
              
              $
              250,000
              
              $
              
              
              $
              (3,515
              )
              $
              246,485Mortgage-backed
                  securities
              
              
              3,085,436
              
              
              18,348
              
              
              (63,445
              )
              
              3,040,339Total
                  debt securities
              
              
              3,335,436
              
              
              18,348
              
              
              (66,960
              )
              
              3,286,824Investments
                  in mutual funds
              
              
              112,151
              
              
              
              
              
              
              
              
              112,151Other
                  investments
              
              
              228,450
              
              
              
              
              
              
              
              
              228,450$
              3,676,037
              
              $
              18,348
              
              $
              (66,960
              )
              $
              3,627,425Held-to-maturity:U.S.Government
                  agency securities
              
              $
              6,997,720
              
              $
              235
              
              $
              (133,292
              )
              $
              6,864,663Mortgage-backed
                  securities
              
              
              3,080,721
              
              
              23,875
              
              
              (62,839
              )
              
              3,041,757$
              10,078,44
              
              $
              24,110
              
              $
              (196,131
              )
              $
              9,906,420




63








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**4.
      INVESTMENTS--Continued**





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
              )
 
 
 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, 2005 (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
              
              
              17
              
              $
              1,723
              
              $
              (25
              )
              $
              2,569
              
              $
              (172
              )
              $
              4,555
              
              $
              (197
              )Mortgage
                  backedsecurities
              
              
              20
              
              
              970
              
              
              (12
              )
              
              7,441
              
              
              (54
              )
              
              8,411
              
              
              (66
              )Total
                  temporarilyimpaired
                  investmentsecurities
              
              
              37
              
              $
              2,693
              
              $
              (37
              )
              $
              10,010
              
              $
              (226
              )
              $
              12,966
              
              $
              (263
              )


Management
      does not believe any individual unrealized loss as of December 31, 2006 and
      2005
      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.


64





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**4.**
            **INVESTMENTS-
                Continued**




Maturities
      of investment securities classified as available-for-sale and held-to-maturity
      at December 31, 2006 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
                
                
                -
                
                
                -Mortgage-backed
                    securities
                
                
                2,997,170
                
                
                2,969,394Total
                    debt securities
                
                
                2,997,170
                
                
                2,969,394Investments
                    in mutual funds
                
                
                117,662
                
                
                117,662Other
                    investments
                
                
                262,550
                
                
                262,550$
                3,377,382
                
                $
                3,349,606Held-to-maturity:Due
                    in one month through three years
                
                $
                5,747,342
                
                $
                5,703,084Due
                    after three years through five years
                
                
                3,250,000
                
                
                3,201,253Due
                    after five years through fifteen years
                
                
                250,000
                
                
                250,000Mortgage-backed
                    securities
                
                
                3,557,009
                
                
                3,529,472$
                12,804,351
                
                $
                12,683,809
 No
          securities were sold during 2006 and 2005. The Bank recorded a gross gain
          of
          $31,115 on the sale of investments during the year ended December 31,
          2004.





As
        of
        December 31, 2006 and 2005, investment securities with a book value of
        $10,769,296 and $11,780,583, 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:




2006
                
                2005Commercial
                    loans
                
                $
                32,339,517
                
                $
                32,985,265Residential
                    mortgages
                
                
                5,551,098
                
                
                7,545,858Consumer
                    loans
                
                
                4,627,536
                
                
                5,891,256Total
                    loans
                
                
                42,518,151
                
                
                46,422,378Less
                    allowance for loan losses
                
                
                (561,409
                )
                
                (472,198
                )Net
                    loans
                
                $
                41,956,742
                
                $
                45,950,180
  At
        December 31, 2006 and 2005, unamortized net deferred fees totaled $128,552
        and
        $127,714, respectively.





As
      of
      December 31, 2006 and 2005, the Bank had loans to certain officers and directors
      and their affiliated interests






65


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**5.
      LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**





in
        aggregate dollar amounts of $1,023,076 and $856,473, respectively. During
        2006,
        there were $212,176 in new loans to related parties and repayments amounted
        to
        $95,299. During 2005, there were $125,000 in new loans to related parties
        and
        repayments amounted to $258,000.





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:2006
                
                2005
                
                2004Total
                    non-accrual loans
                
                $
                626,000
                
                $
                683,000
                
                $
                1,366,000Total
                    impaired loans
                
                
                896,000
                
                
                386,000
                
                
                1,034,000Average
                    impaired loans
                
                
                538,000
                
                
                903,000
                
                
                1,079,000Specific
                    allowance allocated to impaired loans
                
                
                105,000
                
                
                113,000
                
                
                259,000Non-accrual/impaired
                    loans with SBA Guarantees
                
                
                152,000
                
                
                190,000
                
                
                888,000Interest
                    recognized on impaired loans
                
                
                76,000
                
                
                37,000
                
                
                -Loans
                    past due 90 days and still accruing
                
                
                170,000
                
                
                -
                
                
                65,000Changes
                    in the allowance for possible loan losses are as
                    follows:2006
                
                
                2005
                
                
                2004Balance,
                    beginning of year
                
                $
                472,198
                
                $
                602,939
                
                $
                338,574Provision
                
                
                137,000
                
                
                558,000
                
                
                45,000Charge-offs
                
                
                (272,459
                )
                
                (981,355
                )
                
                (
                    239,757
                )Recoveries
                
                
                224,670
                
                
                292,614
                
                
                459,122Balance,
                    end of year
                
                $
                561,409
                
                $
                472,198
                
                $
                602,939


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, 2006, 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
                
                2006
                
                2005Buildings
                    and leasehold improvements
                
                
                10-15
                    years
                
                $
                1,005,923
                
                $
                853,066Furniture
                    and equipment
                
                
                3-
                    7 years
                
                
                1,236,978
                
                
                1,068,2232,242,901
                
                
                1,921,289Less
                    accumulated depreciation
                
                
                
                
                
                (1,143,377
                )
                
                (833,208
                )$
                1,099,524
                
                $
                1,038,081


66





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004




**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, 2006, 2005, and 2004 was $387,144, $340,638, and $277,850. Future
        minimum lease payments under operating leases are as follows:




OperatingleasesYear
                  ending December 31,2007
              
              $
              316,8082008
              
              
              312,5992009
              
              
              266,3892010
              
              
              202,5302011
              
              
              202,784Thereafter
              
              
              727,132Total
                  minimum lease payments
              
              $
              2,028,242




In
      April
      2006, the Bank entered into a 10-year lease for a new Progress Plaza branch
      that
      is scheduled to be constructed by the Fall of 2007. The lease requires annual
      rental payments of $60,000 for Year 1, $62,500 for Years 2-5, and $71,250 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, 2006, the scheduled maturities of time deposits (certificates
        of
        deposit) are as follows (dollars in thousands):


2007
              
              $
              20,8962008
              
              
              7182009
              
              
              1122010
              
              
              1042011
              
              
              262Thereafter
              
              
              107**8.  
                    BORROWINGS**
              
              $
              22,199




At
      December 31, 2006, 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, 2006 and 2005, the Bank had no borrowings outstanding.




**9.**  **INCOME
      TAXES**




At
      December 31, 2006, the Bank has net operating loss carryforwards of
      approximately $4,718,000 for income tax purposes that expire in 2011 through
      2025.




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


67


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**9.**
            **INCOME
                TAXES - Continued**





purposes,
        a valuation allowance of $2,171,780 and $2,228,388 as of December 31, 2006
        and
        2005, respectively, has been recognized to offset the deferred tax assets
        related to the cumulative temporary differences and the tax loss carryforwards.
        Significant components of the Bank’s deferred tax assets are as
        follows:




2006
              
              2005Deferred
                  tax assets(liabilities):Provision
                  for
                  loan losses
              
              $
              9,224
              
              $
              (13,058
              )Unrealized
                  (gains) losses on investment securities
              
              
              43,444
              
              
              16,528Depreciation
              
              
              424,521
              
              
              435,472Net
                  operating loss carryforwards
              
              
              1,600,303
              
              
              1,634,822Other
              
              
              90,269
              
              
              154,623Valuation
                  allowance for deferred tax assets
              
              
              (2,171,782
              )
              
              (2,228,388
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -


2006
              
              2005Effective
                  rate reconciliation:Tax
                  at
                  statutory rate(34%)
              
              $
              40,355
              
              $
              (91,601
              )Nondeductible
                  expenses
              
              
              5,741
              
              
              4,513(Decrease)Increase
                  in valuation allowance
              
              
              (58,807
              )
              
              298,326Other
              
              
              10,511
              
              
              (211,238
              )Total tax expense
              
              $
              -
              
              $
              -




**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:




2006
              
              2005Commitments
                  to extend credit
              
              $
              12,995,600
              
              $
              12,727,370Outstanding
                  letters of credit
              
              
              -
              
              
              10,000


Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract 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.


68


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**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.


2006
                
                2005Carrying
                
                Fair
                
                Carrying
                
                Fairamount
                
                value
                
                amount
                
                value(Dollars
                      in thousands)Assets:Cash
                    and cash equivalents
                
                $
                12,619
                
                $
                12,619
                
                $
                9,240
                
                $
                9,240Investment
                    securities
                
                
                16,154
                
                
                16,032
                
                
                13,705
                
                
                13,533Loans,
                    net of allowance for loan losses
                
                
                41,957
                
                
                41,795
                
                
                45,950
                
                
                45,998Interest
                    receivable
                
                
                422
                
                
                422
                
                
                336
                
                
                336Liabilities:Demand
                    deposits
                
                
                24,688
                
                
                24,688
                
                
                24,257
                
                
                24,257Savings
                    deposits
                
                
                18,057
                
                
                18,057
                
                
                16,396
                
                
                16,396Time
                    deposits
                
                
                22,199
                
                
                22,199
                
                
                22,670
                
                
                22,670Interest
                    Payable
                
                
                133
                
                
                133
                
                
                150
                
                
                150


**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. In
      October 2006, the Bank entered into a two year employment agreement with its
      senior lending officer covering similar terms. These agreements provide for
      guaranteed minimum annual compensation over the term of the contracts. A summary
      of the status of the Bank’s stock options as of December 31, 2006 and 2005 and
      the changes during the years ended on those dates is as presented
      below:







**2006**
            
            **2005****#
                Shares of UnderlyingOptions**
            
            **Exercise
                Price**
            
            **#
                Shares of UnderlyingOptions**
            
            **Exercise
                Price**Outstanding
                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
            
            $
            8.54
            
            
            29,694
            
            $
            8.54Exercisable
                at the end of the period
            
            
            29,694
            
            $
            8.54
            
            
            29,694
            
            $
            8.54









69


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004




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





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, 2006 and have no intrinsic value
        as
        of that date. These options expire in 2008. There are 70,306 additional shares
        authorized under the Plan.





The
        Company made no stock-based compensation awards to any employee during 2006,
        2005, and 2004.





**13.
      CONSOLIDATED FINANCIAL INFORMATION—PARENT COMPANY ONLY**





***Condensed
      Balance Sheets***




December
                  31,(Dollars
                  in thousands)
              
              2006
              
              2005Assets:Due
                  from banks (subsidiary)
              
              $
              289
              
              $
              289Investment
                  in
                  United Bank of Philadelphia
              
              
              8,335
              
              
              8,202Total assets
              
              
              8,624
              
              $
              8,491Shareholders’
                  equity:Series
                  A preferred stock
              
              $
              1
              
              $
              1Common
                  stock
              
              
              11
              
              
              11Additional
                  paid-in capital
              
              
              14,750
              
              
              14,750Accumulated
                  deficit
              
              
              (6,119
              )
              
              (6,238
              )Net
                  unrealized holding gains on securities available-for-sale
              
              
              (19
              )
              
              (33
              )Total shareholders’ equity
              
              $
              8,624
              
              $
              8,491





***Condensed
      Statements of Operations***


Years
                  ended December 31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              2004Equity
                  in net (loss) income of subsidiary
              
              $
              119
              
              $
              (269
              )
              $
              1,646Net
                  (loss) income
              
              $
              119
              
              $
              (269
              )
              $
              1,646











70





U NITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004




**13. 
      CONSOLIDATED FINANCIAL INFORMATION—PARENT COMPANY
      ONLY--Continued**


***Condensed
      Statements of Cash Flows***




Years
                  ended December 31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              2004Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              119
              
              $
              (269
              )
              $
              1,646Equity
                  in net income (loss) of subsidiary
              
              
              (119
              )
              
              269
              
              
              (1,646
              )Net cash provided by operating activities
              
              
              -
              
              
              -
              
              
              -Cash
                  and cash equivalents at beginning of year
              
              
              289
              
              
              289
              
              
              289Cash
                  and cash equivalents at end of year
              
              $
              289
              
              $
              289
              
              $
              289


**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 Federal Reserve Board and the Pennsylvania Department of
        Banking and are required to maintain capital requirements established by
        those
        regulators. 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 Federal Reserve Bank 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 Written
      Agreement, 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** )





71





UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**14.
      REGULATORY MATTERS--Continued**




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


To
                    be wellcapitalized
                    underFor
                    capital
                
                prompt
                    correctiveActual
                
                adequacy
                    purposes
                
                action
                    provisionsAmount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                Ratio**As
                    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
                
                
                6.00
                %Tier
                    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
                %**As
                    of December 31, 2005:**Total
                    capital to risk-weighted
                    assets:Consolidated
                
                $
                7,581
                
                
                17.03
                %
                $
                3,583
                
                
                8.00
                %
                
                N/ABank
                
                
                7,292
                
                
                16.39
                
                
                3,560
                
                
                8.00
                
                $
                4,450
                
                
                10.00
                %Tier
                    I capital to risk-weighted
                    assets:Consolidated
                
                
                7,109
                
                
                15.97
                
                
                1,792
                
                
                4.00
                
                
                N/ABank
                
                
                6,820
                
                
                15.32
                
                
                1,780
                
                
                4.00
                
                $
                2,670
                
                
                6.00Tier
                    I capital to average assets:Consolidated
                
                
                7,109
                
                
                9.87
                
                
                2,891
                
                
                4.00
                
                
                N/ABank
                
                
                6,820
                
                
                9.47
                
                
                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.







72











UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004





**16.
      EARNINGS PER SHARE COMPUTATION**





Year
                      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
                  
                  
                  1,068,588
                  
                  $
                  0.11Year
                      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
                  )Year
                      ended December 31, 2004Loss
                  
                  
                  Shares
                  
                  
                  Per
                      share(numerator)
                  
                  
                  (denominator)
                  
                  
                  amountNet
                      income
                  
                  $
                  1,646,522Basic EPSIncome
                      available to common stockholders
                  
                  $
                  1,646,522
                  
                  
                  1,068,588
                  
                  $
                  1.54Fully Diluted EPSIncome
                      available to common stockholders
                  
                  $
                  1,646,522
                  
                  
                  1,068,588
                  
                  $
                  1.54


Options
        to purchase 29,694 shares of common stock are not included in the computation
        of
        diluted EPS for the years ended December 31, 2006 and December 31, 2004,
        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.







73




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**





December
      31, 2006, 2005, and 2004








**17.
      SUMMARY OF QUARTERLY RESULTS (UNAUDITED)**




The
        following summarizes the consolidated results of operations during 2006 and
        2005, on a quarterly basis, for United Bancshares, Inc. and
        Subsidiary:




(Dollars
                    in thousands)2006Fourth
                
                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
                
                $
                0.062005Fourth
                
                
                Third
                
                
                Second
                
                
                Firstquarter
                
                
                quarter
                
                
                quarter
                
                
                quarterInterest
                    income
                
                $
                1,063
                
                $
                1,075
                
                $
                1,031
                
                $
                986Interest
                    expense
                
                
                183
                
                
                157
                
                
                130
                
                
                115Net
                    interest income
                
                
                880
                
                
                918
                
                
                901
                
                
                871Provision
                    for loan losses
                
                
                398
                
                
                50
                
                
                70
                
                
                40Net
                    interest after provisions for loan losses
                
                
                482
                
                
                868
                
                
                831
                
                
                831Noninterest
                    income
                
                
                390
                
                
                362
                
                
                416
                
                
                414Noninterest
                    expense
                
                
                1,239
                
                
                1,193
                
                
                1,197
                
                
                1,234Net
                    (loss) income
                
                $
                (367
                )
                $
                37
                
                $
                50
                
                $
                11Basic
                    earnings (loss) per common share
                
                $
                (0.34
                )
                $
                0.03
                
                $
                0.05
                
                $
                0.01Diluted
                    earnings (loss) per common share
                
                $
                (0.34
                )
                $
                0.03
                
                $
                0.05
                
                $
                0.01







74







Commission
      File No. 0-25976











SECURITIES
      AND EXCHANGE COMMISSION











FORM
      10-K





ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF





THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the Year Ended December 31, 2006














UNITED
      BANCSHARES, INC.








EXHIBITS