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, 2008


OR





 ̈


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


SECURITIES
EXCHANGE ACT OF 1934





for the
transition period from 
to





Commission
file number: 0-25976





UNITED
BANCSHARES, INC.


(Exact
name of registrant as specified in its charter)




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





(215)
351-4600


[Registrant’s
telephone number, including area code]





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


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





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


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





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





1


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    Smaller Reporting Company 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 [_not applicable ] on
June 30, 2008.   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, 2009 the aggregate number of the shares of the Registrant’s Common
Stock outstanding was 1,068,588 (including 191,667 Class B
non-voting).





DOCUMENTS
INCORPORATED BY REFERENCE:





Document
              Parts Into Which
    IncorporatedNone





The
exhibit index is on pages 50 through 51.  There are 79 pages in
this report.





2





FORM
10-K


United
Bancshares, Inc.


Index





Item No.
            
            PagePART
      I1.
            Business
            41A.
            Risk
      Factors
            121B.
            Unresolved
      Staff Comments
            152.
            Properties
            153.
            Legal
      Proceedings
            154.
            Submission
      of Matters to a Vote of Security Holders
            16PART
      II5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            166.
            Selected
      Financial Data
            187.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            187A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            368.
            Financial
      Statements and Supplementary Data
            369.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            369A.
            Controls
      and Procedures
            369B.
            Other
      Information
            37PART
      III10.
            Directors,
      Executive Officers, and Corporate Governance; Compliance with Section
      16(a) of the Exchange Act
            3711.
            Executive
      Compensation
            4312.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            4713.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            4814.
            Principal
      Accountant Fees and Services
            49PART
      IV15.
            Exhibits
      and Financial Statements Schedules
            50




UNLESS
OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 2, 2009.


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.  These forward
looking statements include: (a) statements of goals, intentions and
expectations; (b) statements regarding business prospects, asset quality, credit
risk, reserve adequacy and liquidity.  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.




ITEM1 — BUSINESS


United
Bancshares, Inc.





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





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





As of March 2, 2009, UBS and the Bank
had a total of 30 employees.





4





United
Bank of Philadelphia





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





The Bank conducts all its banking
activities through its three offices located as follows:  West
Philadelphia Branch 38th and Lancaster Avenue, Philadelphia,
Pennsylvania, (iii) Mount
Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (iv)
Progress
Plaza Branch 1015 North Broad Street, Philadelphia,
Pennsylvania.  In addition, the Bank leases and concurrently subleases
to another company, the retail space on the bottom floor of its Center City
Graham Building corporate office. The Bank has an automated teller machine in
the lobby of this space that allows it to have a branding presence in Center
City Philadelphia without incurring additional occupancy expense. Through its
locations, the Bank offers a broad range of commercial and consumer banking
services.  At December 31, 2008, the Bank had total deposits
aggregating approximately $60.9 million and had total net loans outstanding of
approximately $48.1 million.  Although the Bank’s primary service area
for Community Reinvestment Act purposes is Philadelphia County, it also
services, generally, the Delaware Valley, which consists of portions of
Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle
County in Delaware; and Camden, Burlington, and Gloucester Counties in New
Jersey.





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





United Bank of Philadelphia, while
state chartered as a commercial bank, is uniquely structured to provide retail
services to its urban communities, while maintaining and establishing a solid
portfolio of commercial relationships that include small businesses, churches
and corporations.  The Bank has leveraged its CDFI (community
development financial institution) designation as established by the United
States Department of Treasury to attract deposits from universities and
corporations in the region seeking Community Reinvestment Act (the “CRA Act”)
credit.  In prior years, it was awarded grants from the Commonwealth
of Pennsylvania and City of Philadelphia for loan activity in low to moderate
income communities.  No grants were received in 2008, however,
management intends to actively pursue CDFI and other government funding in 2009
to support its lending activity.





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





5


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,
2009, the Bank’s maximum legal lending limit was approximately $1,141,000 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.





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





Segments





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





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





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





Competition





There is increasing competition among
financial institutions in the Bank’s service area.  Money center banks
have positioned new branches in once abandoned neighborhoods seeking to grow
market share in minority communities.  The Bank competes with local,
regional and national commercial banks, as well as savings banks, credit unions
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.  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.  In addition, the recent flurry of bank failures and the
financial troubles of some of the nation’s largest financial institutions have
created a “movement back to community banking” in which the Bank seeks to
capitalize.





6


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. In addition, major
corporations with operations in the Philadelphia region will continue to be
targeted for business including deposits and other banking
services.




Supervision
and Regulation





Regulation of United
Bancshares, Inc.





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





The
Bank Holding Company Act





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





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.





7


Under Federal Reserve Board Policy, UBS
is expected to serve as a source of financial strength to the Bank and to commit
resources to support the Bank.  Consistent with its “source of
strength” policy, the Federal Reserve Board has stated that as a matter of
prudent banking, the bank holding company generally should not maintain a rate
of cash dividends unless its net income available to common shareholders has
been sufficient to fully fund the dividends and the perspective rate of earnings
retention appears to be consistent with UBS’s capital needs, asset quality and
overall financial condition.





Federal Law also grants to the federal
banking agencies the power to issue cease and desist orders when a bank or bank
holding company, or an officer or director thereof, is engaged in or is about to
engage in unsafe and unsound practices.





Regulatory
Restrictions on Dividends





Dividend
payments by the Bank to UBS are subject to the Pennsylvania Banking Code and the
FDIC Act.  Under the Banking Code, no dividends may be paid except
from “accumulating net earnings” (generally undivided profits).  Under
the FDIC, an insured bank may not pay dividends if the bank is in arrears and
the payment of any insurance assessment due to the FDIC.  See dividend
restrictions under Item
5 below.





The
Financial Services Act





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





The FSA Act authorizes the
establishment of “financial holding companies” (“FHC”) to engage in new
financial activities offering and banking, insurance, securities and other
financial products to consumers. Bank holding companies may elect to become a
FHC, if all of its subsidiary depository institutions are well capitalized and
well managed. See “Regulatory
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.





Regulation of the
Bank





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





8


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.





FDIC
Membership Regulations





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





Federal Law also grants to the federal
banking agencies the power to issue cease and desist orders when a bank or bank
holding company, or an officer or director thereof, is engaged in or is about to
engage in unsafe and unsound practices.





The
Federal Deposit Insurance Corporation Act





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





The Bank is insured by the FDIC, which
currently insures the Bank’s deposits to applicable levels per insured
depositor, up to $250,000. For this protection, each insured bank pays a
quarterly statutory insurance assessment and is subject to certain rules and
regulations of the FDIC. The amount of FDIC assessments paid by individual
insured depository institutions, such as the Bank, is based on their relative
risk as measured by regulatory capital ratios and certain other factors. Under
this system, in establishing the insurance premium assessment for each bank, the
FDIC will take into consideration the probability that the deposit insurance
fund will incur a loss with respect to an institution, and will charge an
institution with perceived higher inherent risks a higher insurance
premium.  The FDIC will also consider the different categories and
concentrations of assets and liabilities of the institution, the revenue needs
of the deposit insurance fund, and any other factors the FDIC deems
relevant.  A significant increase in the assessment rate or a special
additional assessment with respect to insured deposits could have an adverse
impact on the results of operations and capital levels of the Bank and/or
UBS.





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





In November 2006, the FDIC adopted
final regulations to implement the Reform Act. The final regulations include the
annual assessment rates that took effect at the beginning of 2007. The new
assessment rates for all banks varied between five and forty-five cents for
every $100 of domestic deposits based on a bank’s risk
category.   However, although the Bank is adequately capitalized,
because of its prior regulatory rating and designation as a “troubled financial
institution”, its rate was twenty-eight cents for every $100 of deposits in
2008.  As part of the Reform Act, Congress provided credits to
institutions that paid high premiums in the past to bolster the FDIC’s insurance
reserves. As a result, according to the FDIC, the Bank had an assessment credit
to initially offset a portion of its premium. The assessment credit will
continue to be used to reduce deposit premiums that would otherwise be due. The
Bank’s usage of the credit is limited to the average assessment of all
institutions of between five and seven cents for every $100.  With
this credit, the net premium for the Bank in 2008 was twenty-three cents per
$100, or $153,193.





9


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 rate as of the first quarter of 2009 for all insured
institutions is $0.114 and for the second quarter $0.104 for every $1,000 in
domestic deposits. These assessments are revised quarterly and will continue
until the bonds mature in the year 2017.





The FDIC
(1) adopted final regulations modifying the risk-based assessment system and
setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis
points; (2) due to extraordinary circumstances, extended the period of the plan
established in October 2008 to seven years by when the reserve ratio must be
returned to 1.15 percent.; and (3) adopted an interim rule imposing an emergency
20 basis point special assessment on June 30, 2009 to be collected September 30,
2009 and allowing for the imposition of additional special assessments up to 10
basis points thereafter to maintain public confidence in the Deposit Insurance
Fund.  The final rule provides for the following adjustments to an
institution’s assessment rate: (1) a decrease for long-term unsecured debt,
including most senior and subordinated debt and, for small institutions, a
portion of Tier 1 capital; (2) an increase for secured liabilities above a
threshold amount; and (3) for non-Risk Category I institutions, an increase for
brokered deposits above a threshold.  As a result of these changes and
many other factors, including the Bank’s current safety and soundness (CAMELS)
rating and other financial ratios, the assessment rate for 2009 is not
estimable.





The FDIC
insurance premiums are “risk based.”  Accordingly, higher premiums
would be charged to banks that have lower capital ratios or higher risk
profiles.  As a result, a decrease in the bank’s capital ratios, or a
negative evaluation by the FDIC, the Bank’s primary federal banking regulator,
may increase the bank’s net funding cost and reduce its net income.





Economic
Stabilization Act





In response to the financial crisis
affecting the overall banking system and financial markets, on October 3, 2008,
the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted.  On October 14, 2008 the United States Treasury and banking
regulators announced in a joint statement the details of new government programs
under EESA.  These programs are the Trouble Asset Relief Program
(“TARP”) and the FDIC Temporary Liquidity Guaranty Program (“TLGP”). Under TARP,
the Treasury will use $250 billion of its $700 billion available under EESA to
purchase $125 billion of preferred stock in nine major financial
institutions.  The remaining $125 billion will be available for the
purchase of preferred stock in qualified smaller financial
institutions.  The preferred stock pays a five percent per annum
dividend for the first five years and a nine percent per annum dividend
thereafter.  The Treasury will receive warrants to purchase a
participating institution’s common stock equal to fifteen percent of the
Treasury’s total investment in the participating institution.  The
participating institution’s executives must agree to certain compensation
restrictions and the participating institutions must agree to certain other
restrictions.   While the Bank has submitted an application for a
$1.4 million preferred stock investment under this program, it will not be
relied upon as a primary source of capital but instead used to supplement and
provide a “cushion” for unforeseen economic events that may negatively impact
the Bank’s capital position. The status of the application is not yet
known.





In addition to creation of TARP, the
EESA included a provision increasing the amount of deposits insured by the FDIC
from $100,000 to $250,000 until December, 2009.  Under TLGP, the FDIC
is temporarily providing a one hundred percent guaranty of the senior debt of
all FDIC insured institutions and their holding companies, as well as deposits
in non-interest bearing transaction deposit accounts.  Non-interest
bearing deposit transaction accounts under this program will have full insurance
coverage through December 31, 2009.  All FDIC institutions will be
immediately covered for the first thirty days at no charge.  After the
initial thirty days or December 5, 2008, institutions may elect to opt out of
the program by giving notice to the FDIC.





10


Also, under TLGP, senior unsecured debt
issued before June 30, 2009 will be fully insured.  All FDIC insured
institutions were covered immediately under this program for the first
thirty days at no charge.  After thirty days or December 5, 2008, an
institution had to make an election to opt out or incur an annualized fee of
seventy-five basis points on the amount of debt insured under this
program.  Coverage of newly issued debt will extend to June 30, 2012,
even if the maturity of the debt is after that date.  The newly issued
unsecured senior debt covered by the program includes promissory notes,
commercial paper, interbank funding and any unsecured portion of secured
debt.





The Bank
has elected to “opt-in” to the TLGP program to generate deposit growth from
existing and potential customers who seek to deposit up to the increased FDIC
insurance limit.





The
Community Reinvestment Act





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





The
Bank Secrecy Act





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





Privacy
of Consumer Financial Information





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





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





The
Patriot Act





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





11





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





The Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley Act”)  represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity or debt
securities registered under the Securities Exchange Act of 1934. In accordance
with the requirements of Section 404(a) of the Sarbanes-Oxley Act, management’s
report on internal controls is included herein at Part 9. In June 2008, the SEC
adopted a further one-year delay from fiscal years ending after December 15,
2008 to fiscal years ending after December 15, 2009 for the auditor’s
attestation report on internal controls over financial reporting.





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





The Bank has a Code of Ethics for the
Chief Executive Officer and Chief Financial Officer of the Bank in compliance
with the Sarbanes-Oxley Act.





Regulatory
Matters





Effective
December 31, 2007, the Bank voluntarily surrendered its Federal Reserve
membership and applied for and received approval to have the FDIC be its primary
regulator effective as of January 1, 2008.  The FDIC and the
Commonwealth of Pennsylvania issued regulatory orders that paralleled the prior
written agreement entered into in February, 2000 with the Federal Reserve
Board.  On November 12, 2008, the FDIC and the Pennsylvania Department
of Banking terminated the regulatory orders as a result of satisfactory
compliance with the material provisions of the order including but not limited
to management, capital adequacy and internal controls.  As a result of
the termination of regulatory orders, the Bank is no longer designated as a
“troubled financial institution”.








ITEM1A--RISK FACTORS





Below is a list of the significant
risks that concern UBS, the Bank and the banking industry.  The list
should not be considered an all inclusive list and has not been prepared in any
certain order.





There is
no assurance that the recently enacted legislation discussed in regulatory
matters above will stabilize the financial industry as
intended.  Because these programs are relatively new and are
continuously changing, it is difficult to accurately determine the impact of
participating or not participating in these programs on USB and the
Bank.





Changes in the economy,
especially in the Philadelphia region, could have an adverse affect on the
Company





Economic conditions have continued to
worsen creating historic levels of financial institution failures and increased
unemployment rates. The economic turmoil has led to elevated levels of
commercial and consumer loan delinquencies.  The business and earnings
of the Bank and UBS 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, increase in unemployment rates, all
of which are beyond the Bank’s control.  Continued weakness in the
economy could result in a decrease in products and service demand, decrease in
deposits and deterioration of customer credit quality, an increase in loan
delinquencies, non-accrual loans 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.  Because of the Bank’s concentration
in the Philadelphia region, it is less able to respond or diversify credit risk
among multiple markets.  These factors could result in an increase in
the provision for loan losses, thus reducing net income.





12


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







The Bank and UBS are 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.  The downturn in the
economy and the real estate market in Bank’s market area could have a negative
effect on collateral values and borrowers’ ability to repay. This downturn 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.




Exposure to Credit Risk on
Commercial Lending can Adversely Affect Earnings and Financial
Condition





The Bank’s loan portfolio contains a
significant number of commercial real estate and commercial and industrial
loans.  These loans may be viewed as having a higher credit risk than
residential real estate or consumer loans because they usually involve larger
loan balances to a single borrower and are more susceptible to a risk of a
default during an economic down turn.  A deterioration of these loans
may cause a significant increase in non-performing loans.  An increase
in non-performing loans could cause an increase in loan charge offs and a
corresponding increase in the provision for loan losses which could adversely
impact the Bank’s earning and financial condition.




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 and therefore UBS’ 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. Decreases or increases in interest rates could have a negative effect
on the spreads between the interest rates earned on assets and the rates of
interest paid on liabilities, and therefore decrease net interest
income.




Government regulation can
result in limitations on operations




The Bank operates in a highly regulated
environment and is subject to supervision and regulation by a number of
governmental regulatory agencies.  Regulations adopted by these
agencies are generally intended to provide protection for depositors and
customers rather than for the benefit of the shareholders, establish permissible
activities for the Bank to engage in, maintenance of adequate capital levels,
and other aspects of operations.  The laws and regulations applicable
to the banking industry could change at any time, and we cannot predict the
effect of these changes on the Bank’s business and profitability.  The
current economic crisis creates the potential for increased regulation, new
federal or state laws and regulations regarding lending and funding practices
and liquidity standards that could negatively impact the Bank’s operations by
restricting the Bank’s business operations, increase the cost of compliance and
adversely affect profitability.  Losses from operations may result in
deterioration of the Bank’s capital levels below required levels and could
result in severe regulatory action.




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, including access to
capital markets, 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.




13


Higher FDIC assessments
could negatively impact profitability





The FDIC
insurance premiums are “risk based.”  Accordingly, higher premiums
would be charged to banks that have lower capital ratios or higher risk
profiles.  As a result, a decrease in the Bank’s capital ratios, or a
negative evaluation by the FDIC, the Bank’s primary federal banking regulator,
may increase the bank’s net funding cost and reduce its net income.




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. The inability to increase
deposits to fund asset growth represents a potential liquidity risk. The Bank
may need to reduce earning asset growth through the reduction of current
production, sale of assets and/or the participating out of future and current
loans.  This might reduce future net income of the Bank.





Lack of
Deposit Growth Could Increase the Bank’s Cost of Funds





A decline
in deposits or the failure of deposits to grow at a rate comparable to loan
growth could require the Bank to obtain other sources of loan funds at higher
costs, thus reducing the Bank’s net interest income.




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




The success of UBS and the Bank 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.




The ability to maintain
adequate levels of capital to meet regulatory minimums and support
growth





The Bank and UBS may not be able to
maintain the requisite minimum regulatory capital levels to support asset
growth.  While management may seek additional capital through
available government programs including TARP and CDFI funding, unforeseen
economic events may negatively impact the Bank’s and UBS’ profitability and
result in erosion of capital. This might restrict growth and reduce future net
income of the Company.




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.





14




ITEM1B—UNRESOLVED STAFF COMMENTS






None.







ITEM2 —
PROPERTIES





Corporate
Headquarters





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





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





Mt.
Airy Branch





The Bank operates a branch at 1620
Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is
located in a densely populated residential neighborhood and in close proximity
to small businesses/retail stores. To further enhance its appeal, the internal
appearance of this branch was updated in 2006 to include new paint, flooring,
and furnishings.  This facility, includes a retail banking lobby,
teller area, offices, and vault and storage space.  In December 20008,
the Bank began a new 10-year lease term for which the average monthly rent is
$5,285.




West
Philadelphia Branch





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





Progress
Plaza Branch





The Bank leases a branch facility
located at 1015 North Broad Street, Philadelphia, Pennsylvania.  The
Progress Plaza branch is a very active branch with the largest number of
customers seeking service on a daily basis.   This area of North
Philadelphia is an important area for the Bank and its mission. The facility is
comprised of teller and customer service areas, lobby and
vault.  Extensive improvements to the shopping plaza in which this
branch is located are well underway.   In April 2008, the Bank’s
branch was relocated within the shopping plaza to a newly constructed space at
which time it began a 10-year lease for which the average aggregate gross
monthly rent is $5,913.





ITEM3 — LEGAL PROCEEDINGS





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





15


ITEM4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





A shareholders’ annual meeting of UBS
was held on December 5, 2008.  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 A
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 2008.





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:


55.147%
      Shares Voted
            481,539.33
      of 873,192.32 Shares13.001%
      Accounts Voted
            409
      of 3,146 Accounts





Question
            YES
            NO
            WITHHOLD/ABSTAINL.
      Armstead Edwards
              (CLASS
      A)
            98.976%
              476,606.00
            0.00%
              0.00
            1.024%
              4,933.33Marionette
      Y. Frazier
              (CLASS
      A)
            90.029%
              433,523.00
            0.00%
              0.00
            9.971%
              48,016.33Ernest
      L. Wright
              (CLASS
      A)
            99.079%
              477,106.00
            0.00%
              0.00
            0.921%
              4,433.33Ratify
      McGladrey and Pullen, LLP
            93.358%
              459,862.33
            0.244%
              1,200.00
            0.639%
              31,517.33





PART II





ITEM5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY,


RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Common
Stock





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





There were no capital stock
transactions during 2008 and 2007.





As of March 2, 2009 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.





16


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.  All outstanding options
expired and no new options were granted during the year ended December 31,
2008.





Equity
Compensation Plan Table


Plan
      Category
                  
                  
                  
                  Number
      of securities remaining available for future issuance under equity
      compensation plansEquity
      compensation plans approved by security holders
                  
                  
                  
                  70,306Equity
      compensation plans not approved by security holders
                  
                  
                  
                  -Total
                  
                  
                  
                  70,306





17




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





ITEM6 — SELECTED FINANCIAL DATA




Selected
Financial Data





Year ended(Dollars
      in thousands, except per share data)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Net
      interest income
                  
                  $
                  3,291
                  
                  
                  $
                  3,600
                  
                  
                  $
                  3,622
                  
                  
                  $
                  3,571
                  
                  
                  $
                  3,279Provision
      for loan losses
                  
                  
                  368
                  
                  
                  
                  120
                  
                  
                  
                  137
                  
                  
                  
                  558
                  
                  
                  
                  45Noninterest
      income
                  
                  
                  1,209
                  
                  
                  
                  1,320
                  
                  
                  
                  1,415
                  
                  
                  
                  1,582
                  
                  
                  
                  3,655Noninterest
      expense
                  
                  
                  4,785
                  
                  
                  
                  4,753
                  
                  
                  
                  4,780
                  
                  
                  
                  4,864
                  
                  
                  
                  5,242Net
      income (loss)
                  
                  
                  (653
                  )
                  
                  
                  47
                  
                  
                  
                  119
                  
                  
                  
                  (269
                  )
                  
                  
                  1,647Net
      income (loss) per share – basic
                  
                  
                  (0.61
                  )
                  
                  
                  0.04
                  
                  
                  
                  0.11
                  
                  
                  
                  (0.25
                  )
                  
                  
                  1.54Net
      income (loss) per share – fully diluted
                  
                  
                  (0.61
                  )
                  
                  
                  0.04
                  
                  
                  
                  0.11
                  
                  
                  
                  (0.25
                  )
                  
                  
                  1.50Balance
      sheet totals:Total
      assets
                  
                  $
                  69,435
                  
                  
                  $
                  75,232
                  
                  
                  $
                  73,935
                  
                  
                  $
                  72,210
                  
                  
                  $
                  72,301Net
      loans
                  
                  
                  48,077
                  
                  
                  
                  44,594
                  
                  
                  
                  41,957
                  
                  
                  
                  45,950
                  
                  
                  
                  46,490Investment
      securities
                  
                  
                  12,562
                  
                  
                  
                  13,921
                  
                  
                  
                  15,891
                  
                  
                  
                  13,706
                  
                  
                  
                  13,560Deposits
                  
                  
                  60,904
                  
                  
                  
                  66,084
                  
                  
                  
                  64,924
                  
                  
                  
                  63,324
                  
                  
                  
                  63,172Shareholders’
      equity
                  
                  
                  8,050
                  
                  
                  
                  8,685
                  
                  
                  
                  8,614
                  
                  
                  
                  8,492
                  
                  
                  
                  8,811Ratios:Tangible
      Equity to assets
                  
                  
                  10.27
                  %
                  
                  
                  10.17
                  %
                  
                  
                  9.93
                  %
                  
                  
                  9.87
                  %
                  
                  
                  9.89
                  %Return
      on assets
                  
                  
                  (0.91
                  )%
                  
                  
                  0.06
                  %
                  
                  
                  0.16
                  %
                  
                  
                  (0.37
                  )%
                  
                  
                  2.38
                  %Return
      on equity
                  
                  
                  (8.61
                  )%
                  
                  
                  0.62
                  %
                  
                  
                  1.63
                  %
                  
                  
                  (3.78
                  )%
                  
                  
                  26.96
                  %





ITEM7 — 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 UBS and the Bank.  The
purpose of this discussion is to focus on infor­mation about the Bank’s
financial condition and results of operations, which is not otherwise apparent
from the consolidated financial statements included in this annual
report.  This discussion and analysis should be read in conjunction
with the financial statements presented elsewhere in this report.





Critical
Accounting Policies


Allowance
for Credit Losses





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





Income
Taxes





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





18


Executive
Brief





United Bank of Philadelphia is the only
African American-owned and controlled community development financial
institution headquartered in Philadelphia. With increased competition in the
marketplace from money center banks and other African American-owned and
controlled banks with headquarters in other states, management seeks to maximize
its “community bank” 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. The recent fallout in the financial markets with money center banks
presents a tremendous opportunity for the Bank to attract new customers who may
be uncertain about the financial stability of some of the nation’s largest
banks.





To build
franchise value, management’s priorities include:





·
            Increasing
      deposits


·
            Managing
      and controlling credit risk


·
            Managing
      and controlling interest rate risk


·
            Maintaining
      adequate levels of capital





Increasing
deposits




Deposit growth remains one of
management’s primary challenges.  This challenge is compounded by the
low interest rate environment and the current regulatory
environment.  Recent financial institution failures (including Freddie
Mac and Fannie Mae) although not directly related to the Bank, create more
concern with depositors that may have balances in excess of  the
FDIC’s insurance limit that was increased to $250,000 per depositor in October
2008.   For the year ended December 31, 2008, the Bank
experienced deposit attrition totaling $5.2 million primarily in its savings
deposit balances that declined by $3.2 million.  Deposit reductions
were the result of normal business use of funds for several construction
contractors and not-for-profit entities.  Also, the current
recessionary economy has resulted in historical levels of unemployment that has
led to negative savings trends of many consumers.   Management
intends to capitalize on “the movement back to community banking”, increased
FDIC limits and its relationships with regional corporations, small businesses
service providers and the community to achieve deposit growth.




Managing and controlling
credit risk





The fallout resulting from the subprime
mortgage market continues to create credit quality challenges and significant
write downs by financial institutions across the nation. In addition, there is
tightness in the commercial sector. Subprime foreclosures have continued to
increase. Falling home values and over-leveraged consumers are contributing to
increased delinquencies and charge-offs of consumer credits. The Bank did not
originate a high volume of home equity loans/lines of credit or residential
mortgage loans during the last 5 years of home price escalation. Home equity
loans originated during this period were underwritten within the Bank’s LTV
policy limits. Also, the Bank’s loan portfolio is heavily concentrated in owner
occupied commercial real estate which serves to minimize credit risk. Because of
these factors, the Bank is somewhat insulated from negative industry trends
related to home loans.  However, the “trickle down” effect is always a
concern in a recessionary economy with reduced employment and reduced spending
that may result in less cash flow for the Bank’s business customers to repay
their loans.





The Bank’s level of noncurrent loans is
trending upward.  Proactive collection strategies are being
implemented to control delinquencies and reverse the negative
trend.  Noncurrent loans are primarily concentrated in the commercial
loan portfolio.  Based on individual credit impairment analysis,
strong real estate collateral and/or SBA guarantees mitigate the exposure for
many of these credits.  Also, at December 31, 2008, approximately 37%,
or $13.5 million, of the commercial loan portfolio of the Bank was concentrated
in loans made to religious organizations.  From inception, the Bank
has received support in the form of investments and deposits and has developed
strong relationships with the Philadelphia region’s religious
community.  Loans made to these organizations were primarily for
expansion and repair of church facilities.  These loans are being
closely monitored to ensure continued satisfactory performance in the current
economic environment that could negatively impact tithes and
offerings.





19


To avoid further deterioration in
credit quality, management will convene frequent asset quality meetings to
identify and proactively manage identified risks before they become severe
problems.  Also, loans will be underwritten to ensure that they meet
the Bank’s tightened risk tolerance standards.




Managing and controlling
interest rate risk





To
stimulate the economy in 2008, the Federal Reserve reduced interest rates to
historic lows.  This reduction resulted in the immediate repricing of
all of the Bank’s adjustable rate loans that are indexed to prime as well as a
reduction in the interest earned on Federal Funds Sold, the Bank’s overnight
investments.   To minimize margin compression, the Bank reduced
the rates on its deposit products.  The Bank currently has a
“positive” gap position which makes it more vulnerable to declining interest
rates.  This position is due largely to the high level of investments
and loans with immediate repricing characteristics.  Management will
actively manage the Bank’s exposure to interest rate risk by modifying the mix
of investments and loan structures, including floors on interest rates, to lock
in yields to minimize further compression in the low rate
environment.





Maintain adequate levels of
capital





United Bank of Philadelphia will seek
to maintain the requisite minimum regulatory capital levels by internal capital
generation (retained earnings) and by monitoring its asset
growth.  Management may seek additional capital through available
government programs including TARP and CDFI funding to supplement and provide a
“cushion” for unforeseen economic events that may negatively impact the Bank’s
capital position.





Results
of Operations





In 2008, the Company recorded a net
loss of $653,000 ($0.61 per share) compared to net income of $47,000 ($0.04 per
share) in 2007 and net income of $119,000 ($0.11 per share) in
2006.  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





2008
                      
                      
                      2007
                      
                      
                      2006Average
                      
                      
                      
                      
                      
                      Yield/
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Yield/
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Yield/(Dollars
      in thousands)
                      
                      balance
                      
                      
                      Interest
                      
                      
                      rate
                      
                      
                      balance
                      
                      
                      Interest
                      
                      
                      rate
                      
                      
                      balance
                      
                      
                      Interest
                      
                      
                      rateAssets:Interest-earning
      assets:Loans
                      
                      $
                      48,199
                      
                      
                      $
                      3,335
                      
                      
                      
                      6.92
                      %
                      
                      $
                      43,674
                      
                      
                      $
                      3,516
                      
                      
                      
                      8.05
                      %
                      
                      $
                      45,863
                      
                      
                      $
                      3,626
                      
                      
                      
                      7.91
                      %Investment
      securities held-to-maturity
                      
                      
                      9,366
                      
                      
                      
                      447
                      
                      
                      
                      4.77
                      
                      
                      
                      11,917
                      
                      
                      
                      585
                      
                      
                      
                      4.91
                      
                      
                      
                      9,513
                      
                      
                      
                      427
                      
                      
                      
                      4.49Investment
      securities available-for-sale
                      
                      
                      3,040
                      
                      
                      
                      161
                      
                      
                      
                      5.30
                      
                      
                      
                      3,249
                      
                      
                      
                      170
                      
                      
                      
                      5.23
                      
                      
                      
                      3,119
                      
                      
                      
                      150
                      
                      
                      
                      4.81Interest
      bearing balances with other banks
                      
                      
                      292
                      
                      
                      
                      8
                      
                      
                      
                      2.40
                      
                      
                      
                      281
                      
                      
                      
                      16
                      
                      
                      
                      5.69
                      
                      
                      
                      281
                      
                      
                      
                      8
                      
                      
                      
                      2.85Federal
      funds sold
                      
                      
                      5,398
                      
                      
                      
                      130
                      
                      
                      
                      2.41
                      
                      
                      
                      10,294
                      
                      
                      
                      525
                      
                      
                      
                      5.10
                      
                      
                      
                      7,140
                      
                      
                      
                      357
                      
                      
                      
                      5.00Total
      interest-earning assets
                      
                      
                      66,295
                      
                      
                      
                      4,081
                      
                      
                      
                      6.15
                      
                      
                      
                      69,415
                      
                      
                      
                      4,812
                      
                      
                      
                      6.93
                      
                      
                      
                      65,916
                      
                      
                      
                      4,568
                      
                      
                      
                      6.93Noninterest-earning
      assets:Cash
      and due from banks
                      
                      
                      2,603
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,052
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,606Premises
      and equipment, net
                      
                      
                      1,417
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,046
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,046Other
      assets
                      
                      
                      1,925
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,349
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,573Less
      allowance for loan losses
                      
                      
                      ( 697
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (561
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (510
                      )Total
                      
                      $
                      71,543
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      75,301
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      72,631Liabilities
      and shareholders’ equity:Interest-bearing
      liabilities:Demand
      deposits
                      
                      $
                      10,836
                      
                      
                      
                      122
                      
                      
                      
                      1.12
                      %
                      
                      $
                      10,576
                      
                      
                      
                      171
                      
                      
                      
                      1.61
                      %
                      
                      
                      9,906
                      
                      
                      
                      111
                      
                      
                      
                      1.12
                      %Savings
      deposits
                      
                      
                      17,952
                      
                      
                      
                      103
                      
                      
                      
                      0.52
                      
                      
                      
                      20,302
                      
                      
                      
                      287
                      
                      
                      
                      1.41
                      
                      
                      
                      17,759
                      
                      
                      
                      138
                      
                      
                      
                      0.78Time
      deposits
                      
                      
                      20,793
                      
                      
                      
                      565
                      
                      
                      
                      2.72
                      
                      
                      
                      21,640
                      
                      
                      
                      754
                      
                      
                      
                      3.49
                      
                      
                      
                      22,264
                      
                      
                      
                      697
                      
                      
                      
                      3.13Total
      interest-bearing liabilities
                      
                      
                      49,581
                      
                      
                      
                      790
                      
                      
                      
                      1.59
                      
                      
                      
                      52,518
                      
                      
                      
                      1,212
                      
                      
                      
                      2.31
                      
                      
                      
                      49,929
                      
                      
                      
                      946
                      
                      
                      
                      1.89Noninterest-bearing
      liabilities:Demand
      deposits
                      
                      
                      13,117
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,885
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,993Other
                      
                      
                      388
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      570
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      520Shareholders’
      equity
                      
                      
                      8,457
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,328
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,189Total
                      
                      $
                      71,543
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      75,301
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      72,631Net
      interest income
                      
                      
                      
                      
                      
                      $
                      3,291
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      3,600
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      3,622Net
      yield on interest-earning assets
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.96
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5.19
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5.50
                      %


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


20





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 $3,291,000
in 2008, a decrease of $309,000, or 8.59%, compared to 2007.  Net
interest income totaled $3,600,000 in 2007, a decrease of $22,000, or 0.61%,
compared to 2006.








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


2008 compared to 2007
                
                
                2007 compared to 2006Increase (decrease) due to
                
                
                Increase (decrease) due to(Dollars
      in thousands)
                
                Volume
                
                
                Rate
                
                
                Net
                
                
                Volume
                
                
                Rate
                
                
                NetInterest
      earned on:Loans
                
                $
                313
                
                
                $
                (494
                )
                
                $
                (181
                )
                
                $
                (174
                )
                
                $
                64
                
                
                $
                (110
                )Investment
      securities held-to-maturity
                
                
                (122
                )
                
                
                (16
                )
                
                
                (138
                )
                
                
                118
                
                
                
                40
                
                
                
                158Investment
      securities available-for-sale
                
                
                (11
                )
                
                
                3
                
                
                
                (8
                )
                
                
                7
                
                
                
                13
                
                
                
                20Interest-bearing
      deposits with other banks
                
                
                -
                
                
                
                (8
                )
                
                
                (8
                )
                
                
                -
                
                
                
                8
                
                
                
                8Federal
      funds sold
                
                
                (118
                )
                
                
                (279
                )
                
                
                (397
                )
                
                
                161
                
                
                
                7
                
                
                
                168Total
      Interest-earning assets
                
                
                62
                
                
                
                (794
                )
                
                
                (732
                )
                
                
                112
                
                
                
                132
                
                
                
                244Interest
      paid on:Demand
      deposits
                
                
                2
                
                
                
                (51
                )
                
                
                (49
                )
                
                
                14
                
                
                
                45
                
                
                
                59Savings
      deposits
                
                
                (13
                )
                
                
                (172
                )
                
                
                (185
                )
                
                
                41
                
                
                
                109
                
                
                
                150Time
      deposits
                
                
                (22
                )
                
                
                (167
                )
                
                
                (189
                )
                
                
                (26
                )
                
                
                83
                
                
                
                57Total
      interest-bearing liabilities
                
                
                ( 33
                )
                
                
                (390
                )
                
                
                (423
                )
                
                
                29
                
                
                
                237
                
                
                
                266Net
      interest income
                
                
                95
                
                
                
                (404
                )
                
                
                (309
                )
                
                $
                83
                
                
                $
                (105
                )
                
                $
                (22
                )





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 2008, there was an increase in net
interest income of $95,000 due to changes in volume but a decrease of $404,000
due to changes in rate.   In 2007, there was an increase in net
interest income of $83,000 due to changes in volume but a decrease of $105,000
due to changes in rate.





In 2008, average earning assets
declined to $66.3 million from $69.4 million in 2007.  In addition,
the net interest margin of the Bank declined to 4.96% from 5.19% in 2007 and
5.50% in 2006. The margin compression in 2008 was driven by the sharp reduction
in the prime rate and the federal funds sold rate to historical lows of 3.25%
and 0.25%, respectively.  Therefore, while the volume of loans
increased on average by $4.5 million in 2008, the reduction in the prime
interest rate resulted in a $150,000 net reduction in interest income on
loans.   The average federal funds yield fell to 2.41% in 2008
from 5.10% in 2007 and 5.00% in 2006.  In 2008, the average investment
in federal funds declined by $4,896,000—this, coupled with the reduction in the
federal funds rate, resulted in a decrease of $395,000 in interest income on
federal funds sold.





21


In 2008, the Bank reduced the rates
paid on deposit products to mitigate margin compression.  The average
rate paid on interest-bearing deposit liabilities declined to 1.59% in 2008 from
2.31% in 2007. When setting the rates for its deposits, the management generally
uses the median rate paid by its competitors in the region.





The average yield on the investment
portfolio declined to 4.90% in 2008 compared to 4.98% in 2007 and 4.57% in
2006.  The decline in yield was the result of the call of higher
yielding agency securities purchased in 2006 and 2007 that were replaced with
lower yielding agency and mortgage-backed securities available in the current
market.  In addition, some of the Bank’s floating rate mortgage-backed
securities that had Treasury and LIBOR indices repriced in 2008 in a lower
interest rate environment.  The average yield is projected to continue
to decline in 2009 to 4.00% or less because of the projected call of more than
$4 million higher yielding agency securities and their replacement in the
current low interest rate environment.




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 2008 was $368,000 compared to $120,000 in 2007 and
$137,000 in 2006. The Bank’s provision is based on a review and analysis of the
loan portfolio, and is therefore subject to fluctuation based on qualitative
factors like delinquency trends, charge-offs, economic conditions,
concentrations, etc. Management monitors its credit quality closely by working
with borrowers in an effort to identify and control credit risk. Systematic
provisions are made to the allowance for loan losses to cover potential credit
losses in the portfolio.  Based on its analysis, management believes
the level of the allowance for loan losses is adequate as of December 31,
2008.Refer to the Allowance
for Loan Loss section below for further discussion/analysis of the Bank’s credit
quality.





Noninterest
Income





Noninterest income declined $111,000,
or 8.44%, in 2008 compared to 2007, and declined $94,000, or 6.65%, in 2007
compared to 2006.





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 2008, customer service fees declined $36,000, or 6.11%,
compared to 2007 and declined $12,000, or 2.06%, in 2007 compared to 2006.
Average noninterest bearing demand deposits have declined which results in less
overdraft fees, activity service charges and low balance fees.





During 2008, surcharge income on the
Bank’s ATM network remained flat compared to 2007 at $454,000.  In
2007, surcharge income declined $63,000, or 12.17%, compared to
2006.  Many of the Bank’s ATMs have experienced significant reductions
in volume because competitors have placed machines in close proximity to
existing high volume ATMs of the Bank. In addition, studies show that consumers
are moving towards the use of non-cash payment systems including debit cards and
credit cards.  In July 2008, management imposed a 50% increase in its
surcharge fee in to offset the reduction in volume and stabilize the overall
profitability of the network.





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 2008, these fees totaled $130,000
compared to $120,000 in 2007 and $150,000 in 2006.  The decline in
2007 was the result of the non-renewal of one credit facility for which the
Bank’s fees were $30,000.  In 2008, the Bank served and is expected to
continue to serve as agent/arranger for two (2) facilities.  Fees on
these facilities will be received annually for the administration of the credit
facilities.   Due to the fallout in the capital/credit markets in
2008 and continued economic uncertainty, management does not anticipate growth
in this line of business.





22


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





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





Noninterest
Expense





Noninterest expense increased $32,000,
or 0.67%, in 2008 compared to 2007 and decreased $27,000, or 0.57%, in 2007
compared to 2006.





Salaries and benefits decreased
$69,000, or 4.26%, in 2008 compared to 2007 and decreased $120,000, or 6.87%, in
2007 compared to 2006.  In 2008, the decline is primarily related to
an open Senior Lending Officer position that became vacant in March
2008.  A search is underway to fill this
position.  Management continues to review the organizational structure
to maximize efficiencies and increase business development
activity.





Occupancy and equipment expense
increased $103,000, or 10.08%, in 2008 compared to 2007, and increased $25,000,
or 2.50%, in 2007 compared to 2006. The increases are primarily attributable to
branch improvements to enhance the Bank’s brand appeal.  In 2007, the
Bank completed renovations to the interior/exterior of the Wadsworth Avenue
branch. In March 2008, the Bank completed leasehold improvements on its new
branch located in Progress Plaza to which it relocated in April 2008 and began
paying higher rent expense. The new 10-year lease results in an increase of
$25,000, on an annualized basis, in the Bank’s rent expense.  Interior
and exterior improvements were also completed at the Bank’s West Philadelphia
branch in December 2008.  These leasehold improvements have resulted
in increased depreciation expense.





Office operations and supplies expense
decreased $1,000, or 0.33%, in 2008 compared to 2007 and increased $10,000, or
3.27%, in 2007 compared to 2006. Management continues to review all office
operations expenses including supplies, storage, security, etc. to determine if
expense reductions can be made.





Marketing and public relations expense
decreased $17,000, or 13.90%, in 2008 compared to 2007 and increased $5,000, or
4.39%, in 2007 compared to 2006.  In 2007, the Bank utilized a
marketing consultant to assist with the implementation of its marketing campaign
to re-brand and introduce new products and services including a direct mail
solicitation, newspaper advertisements, and billboards. In 2008, the Bank
reduced its spending and narrowed its strategic focus to ad placements and
inserts with local newspapers and radio stations to promote its “banking that
matters” tag line.





Professional services expense decreased
$12,500, or 4.87% in 2008 compared to 2007, and decreased $35,000, or 11.87%, in
2007 compared to 2006. Expenses are lower in 2008 because the Bank used
consultants in 2007 to assist with information technology matters to ensure
compliance with new regulations around safeguarding customer
information.





Data processing expenses are a result
of the management’s decision to outsource a majority of its data processing
operations to third party processors.  Such expenses are reflective of
the high level of accounts being serviced for which the Bank is charged a per
account charge by processors.  The Bank experiences a higher level of
data processing expenses relative to its peer group because of the nature of its
deposit base--low average balance and high transaction volume.  In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, and student loan portfolios.  To better serve
its customers, the Bank also has an extensive ATM network of twenty-seven (27)
machines for which it pays processing fees.  This network is larger
than most banks in its peer group.





23


Data processing expenses increased
$57,000, or 12.48%, in 2008 compared to 2007 and increased$35,000, or 8.24%, in
2007 compared to 2006. The increase relates to an annual increase of 6% by the
Bank’s core service provider and the implementation of a new e-banking platform
that is integrated with the Bank’s core system.  This platform is used
by the Bank’s consumer and corporate customers to perform cash management
transactions.  The increase is also related to the Bank’s ATM
processing expense—specifically, net interchange expense.





Federal deposit insurance premiums
decreased $1,400, or 0.91%, in 2008 compared to 2007 and increased $44,000, or
39.67%, in 2007 compared to 2006.  FDIC insurance premiums are applied
to all financial institutions based on a risk based premium assessment
system.  Under this system, bank strength is based on three factors:
1) asset quality, 2) capital level, and 3) management.  Premium
assessments are then assigned based on the institution’s overall rating, with
the stronger institutions paying lower rates.  The FDIC adopted new
rules in 2006 to re-capitalize the deposit insurance fund that resulted in
increased deposit insurance premiums in 2007. The reduction in 2008 resulted
from the Bank’s lower deposit levels.  In February 2009, the FDIC
adopted new rules, including a special assessment to stabilize the Deposit
Insurance Fund that will result in higher assessment rates for the Bank.(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.





24


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 $3,120,000, or
4.49%, in 2008 compared to 2007 and increased $3,499,000, or 5.31% in 2007
compared to 2006.




Table
3—Sources and Use of Funds Trends


2008
                                      
                                      
                                      2007Increase
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      IncreaseAverage
                                      
                                      
                                      (decrease)
                                      
                                      
                                      
                                      
                                      
                                      Average
                                      
                                      
                                      (decrease)(Dollars
      in thousands)
                                      
                                      balance
                                      
                                      
                                      amount
                                      
                                      
                                      Percent
                                      
                                      
                                      balance
                                      
                                      
                                      amount
                                      
                                      
                                      PercentFunding
      uses:Loans
                                      
                                      $
                                      48,199
                                      
                                      
                                      $
                                      4,525
                                      
                                      
                                      
                                      10.36
                                      %
                                      
                                      $
                                      43,674
                                      
                                      
                                      $
                                      (2,189
                                      )
                                      
                                      
                                      (4.77
                                      %)Investment
      securitiesHeld-to-maturity
                                      
                                      
                                      9,366
                                      
                                      
                                      
                                      (2,551
                                      )
                                      
                                      
                                      (21.41
                                      )
                                      
                                      
                                      11,917
                                      
                                      
                                      
                                      2,404
                                      
                                      
                                      
                                      25.27Available-for-sale
                                      
                                      
                                      3,040
                                      
                                      
                                      
                                      (209
                                      )
                                      
                                      
                                      (6.43
                                      )
                                      
                                      
                                      3,249
                                      
                                      
                                      
                                      130
                                      
                                      
                                      
                                      4.17Interest-bearing
      balances with other banks
                                      
                                      
                                      292
                                      
                                      
                                      
                                      11
                                      
                                      
                                      
                                      3.91
                                      
                                      
                                      
                                      281
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0Federal
      funds sold
                                      
                                      
                                      5,398
                                      
                                      
                                      
                                      (4,896
                                      )
                                      
                                      
                                      (47.56
                                      )
                                      
                                      
                                      10,294
                                      
                                      
                                      
                                      3,154
                                      
                                      
                                      
                                      44.17Total
      uses
                                      
                                      $
                                      66,295
                                      
                                      
                                      $
                                      (3,120
                                      )
                                      
                                      
                                      
                                      
                                      
                                      $
                                      69,415
                                      
                                      
                                      $
                                      3,499Funding
      sources:Demand
      deposits:Noninterest-bearing
                                      
                                      $
                                      13,117
                                      
                                      
                                      
                                      (768
                                      )
                                      
                                      
                                      (5.53
                                      )%
                                      
                                      $
                                      13,885
                                      
                                      
                                      $
                                      ($108
                                      )
                                      
                                      
                                      (0.77
                                      %)Interest-bearing
                                      
                                      
                                      10,836
                                      
                                      
                                      
                                      260
                                      
                                      
                                      
                                      2.46
                                      
                                      
                                      
                                      10,576
                                      
                                      
                                      
                                      670
                                      
                                      
                                      
                                      6.76Savings
      deposits
                                      
                                      
                                      17,952
                                      
                                      
                                      
                                      (2,350
                                      )
                                      
                                      
                                      (11.58
                                      )
                                      
                                      
                                      20,302
                                      
                                      
                                      
                                      2,543
                                      
                                      
                                      
                                      14.32Time
      deposits
                                      
                                      
                                      20,793
                                      
                                      
                                      
                                      (847
                                      )
                                      
                                      
                                      (
      3.91
                                      )
                                      
                                      
                                      21,640
                                      
                                      
                                      
                                      (624
                                      )
                                      
                                      
                                      (2.80
                                      )Total
      sources
                                      
                                      $
                                      62,698
                                      
                                      
                                      $
                                      (3,705
                                      )
                                      
                                      
                                      
                                      
                                      
                                      $
                                      66,403
                                      
                                      
                                      $
                                      2,481





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 decreased $2.8 million, or 18.20%, in 2008 compared to
2007 and increased $2.5 million, or 20.00%, in 2007 compared to 2006.The
decrease in investments was primarily a result of increased loan origination
activity during 2008 for which funding was required.





The
Bank's current investment portfolio primarily consists of mortgage-backed
pass-through agency securities and other government-sponsored agency debt
securities.  The Bank does not invest in high-risk securities or
complex structured notes.





During
2008, several significant financial entities failed and were taken over by the
Federal Government including Fannie Mae and Freddie Mac, the most significant
mortgage market makers in the country.  In addition, many other
financial institutions and insurance companies have experienced severe financial
weaknesses as a result of the economic conditions and/or subprime lending
involvement.  Financial institutions holding equity positions in these
entities experienced permanent and/or other than temporary impairment in value
that resulted in write-offs.  The Bank holds fixed income debt and
mortgage-backed securities of Fannie Mae and Freddie Mac for which there was no
negative impact on value.  The most significant risk associated with
the Bank’s investments is “optionality” whereby callable debt securities are
called or the speeds at which mortgage-backed securities pay quicken creating
additional liquidity in a declining rate environment.  The result is a
reduction in yield on the portfolio.





25








As
reflected in Table 4 below, the average maturity of the portfolio is 1.36 years
in 2008 compared to 2.60 years in 2007. At December 31, 2008, 51% of the
investment portfolio consisted of callable agency securities for which the
duration shortened as a result of a high level of projected call activity in the
current low interest rate environment.  The remainder of the portfolio
consists of government sponsored agency (GSA) mortgage-backed pass-through
securities.  These securities do not have the same risk
characteristics of pooled subprime mortgages for which many financial
institutions have experienced valuation declines and losses.  The
payments of principal and interest on these pools of GSA loans are guaranteed by
these entities that bear the risk of default.  The Bank’s risk is
prepayment risk when defaults accelerate the repayment
activity.  These loans have longer-term con­tractual maturities
but are sometimes paid off/down before maturity or have repricing
characteristics that occur before final maturity.  The Bank has
attempted to minimize the repayment risk (risk of very fast or very slow
repayment) associated with these types of securities by investing primarily in a
number of seasoned mortgage pools for which there is a repayment
history.  This history better enables the Bank to project the
repayment speeds. In addition, the Bank has minimized the interest rate risk
associated with these mortgage-backed securities by investing in a variety of
pools, many of which have variable rates with indices that track closely with
the current interest rate environment. Because customers are less likely to
refinance in the current uncertain economic environment, the prepayment speed
decreased on this component of the portfolio.  The constant one year
prepayment rate (CPR) at December 31, 2008 was relatively unchanged at 13.20%
compared to 13.00% at December 31, 2007.   Although declining
rates generally encourage increased mortgage refinancing activity, the current
recessionary environment has curtailed new home purchases and refinancing by
consumers.





Management’s
goal is to maintain a portfolio with a relatively short duration to allow for
adequate cash flow to fund loan origination activity and to manage interest rate
risk.  The Bank will continue to take steps to control the level of
optionality in the portfolio by identifying replacement securities that
diversify risk and provide some level of monthly cash flow.








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
                          
                          $
                          -
                          
                          
                          
                          -
                          %
                          
                          $
                          2,044
                          
                          
                          
                          4.41
                          %
                          
                          $
                          3,949
                          
                          
                          
                          4.66
                          %
                          
                          $
                          500
                          
                          
                          
                          4.71
                          %
                          
                          $
                          6,449Mutual
      funds and other
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          128Mortgage-backed
      securities
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          5,981Total
      securities
                          
                          $
                          -
                          
                          
                          
                          
                          
                          
                          $
                          2,044
                          
                          
                          
                          
                          
                          
                          $
                          3,949
                          
                          
                          
                          
                          
                          
                          
                          500
                          
                          
                          
                          
                          
                          
                          $
                          12,558Average
      maturity
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.36 years





The above
table sets forth the maturities of investment securities at December 31, 2008
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 increased $4,525,000, or 10.36%, in 2008 compared to 2007 and decreased
$2,189,000, or 4.77%, in 2007 compared to 2006. In 2008, growth was a result of
net commercial loan fundings of $3.4 million and student loan originations of
$1.2 million.  The recent turmoil in the capital markets has resulted
in the Bank’s inability to sell its student loans.  Because of this,
the Bank has temporarily suspended its student loan origination
activity.  Only those student loans for which commitments had been
made at September 19, 2008 will be funded.  At December 31, 2008,
these commitments totaled $744 thousand and represent funding requirements
through June 2009.





26


As
reflected in Table 5 below, the Bank’s loan portfolio remains heavily
concentrated in commercial loans that comprise $36.5 million, or 75%, of total
loans at December 31, 2008.  Commercial real estate loans represented
$32.2 million of these loans of which $15.4 million are secured by owner
occupied commercial real estate that may serve to minimize the risk of loss. The
Bank continues to have a strong niche in lending to religious organizations for
which total loans now approximate $13.5 million, or 37%, of the commercial
portfolio.   In light of the economic uncertainty and the
potential “trickle down” effect that may impact the level of tithes and
offerings that provide cash flow for repayment, management has heightened its
monitoring of this concentration to proactively identify and manage credit
risk.





As
reflected in Table 6 below, approximately 48.62% of the Bank’s loan portfolio
has scheduled maturities or reprice in five years or more.  This
position is largely a result of the relatively high level of loans in the
commercial real estate portfolio that typically have five to seven year balloon
structures.  While scheduled maturities and repricing exceed five
years, the actual duration of the portfolio may be much shorter because of
changes in market conditions and refinancing activity.




Table
5—Loans Outstanding, Net of Unearned Income





December 31, 2008(Dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Commercial
      and industrial
                
                $
                4,286
                
                
                $
                4,463
                
                
                $
                5,323
                
                
                $
                4,544
                
                
                $
                5,845Commercial
      real estate
                
                
                32,199
                
                
                
                28,640
                
                
                
                27,016
                
                
                
                28,441
                
                
                
                22,442Residential
      mortgages
                
                
                6,110
                
                
                
                6,549
                
                
                
                5,551
                
                
                
                7,546
                
                
                
                10,665Consumer
      loans
                
                
                6,068
                
                
                
                5,532
                
                
                
                4,628
                
                
                
                5,891
                
                
                
                6,729Total
      loans
                
                $
                48,663
                
                
                $
                45,184
                
                
                $
                42,518
                
                
                $
                46,422
                
                
                $
                45,681





Table
      6—Loan Maturities and Repricing(Dollars
      in thousands)
                
                Within
                  one year
                
                
                After
      one but within five
    years
                
                
                After
                  five years
                
                
                TotalCommercial
      and industrial
                
                
                2,452
                
                
                $
                768
                
                
                $
                1,066
                
                
                $
                4,286Commercial
      real estate
                
                
                5,261
                
                
                
                11,886
                
                
                
                15,052
                
                
                
                32,199Residential
      mortgages
                
                
                830
                
                
                
                142
                
                
                
                5,138
                
                
                
                6,110Consumer
      loans
                
                
                3,330
                
                
                
                333
                
                
                
                2,405
                
                
                
                6,068Total
      loans
                
                $
                11,873
                
                
                $
                13,129
                
                
                $
                23,661
                
                
                $
                48,663Loans
      maturing after one year with:Fixed
      interest rates
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                7,938Variable
      interest rates
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                28,855








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.





27


Table
7—Nonperforming Loans





(Dollars
      in thousands)
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Nonaccrual
      loans
              
              $
              1,701
              
              
              $
              745
              
              
              $
              626
              
              
              $
              683
              
              
              $
              1,366Interest
      income included in net income for the year
              
              
              9
              
              
              
              35
              
              
              
              39
              
              
              
              37
              
              
              
              22Interest
      income that would have been recorded under original terms
              
              
              121
              
              
              
              65
              
              
              
              51
              
              
              
              56
              
              
              
              143Loans
      past due 90 days and still accruing
              
              
              578
              
              
              
              1,067
              
              
              
              170
              
              
              
              -
              
              
              
              65Restructured
      loans
              
              
              400
              
              
              
              1,206
              
              
              
              1,311
              
              
              
              554
              
              
              
              1,411





At
December 31, 2008, nonaccrual loans totaled $1.7 million compared to $745,000 at
December 31, 2007.  The non-accrual loans primarily include commercial
loans with SBA guarantees or strong loan-to-value ratios that help to mitigate
potential losses.  The increase relates to several commercial loans
for which borrowers have experienced reductions in cash
flow.  Management is actively working with these borrowers to develop
suitable repayment plans.





Impaired
loans totaled $2,531,000 at December 31, 2008 compared to $1,744,000 at December
31, 2007.  The Bank identifies a loan as impaired when it is probable
that interest and principal will not be collected according to the contractual
terms of the loan agreement.  The valuation allowance associated with
these loans was $97,000 and $254,000, at December 31, 2008 and 2007,
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.  During 2008,
the Bank charged off all but $20,000 related to loans to one customer, totaling
$459,000, for which it had a specific valuation allowance of $229,000 at
December 31, 2007.  The level of impaired loans did not decline with
this charge-off as additional commercial loans became impaired during 2008
because of delinquencies and/or deficiencies in cash
flow.   Management is working aggressively to resolve the
potential credit risk associated with its impaired loans by detailing specific
payment requirements in forbearance agreements.  Requirements might
include the sale of underlying collateral or obtaining take-out
financing.





Interest
income recognized on impaired loans during the year ended December 31, 2008 and
2007 was $65,000 and $112,000, 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, 2008,
restructured loans were $400,000 compared to $1,206,000at December 31,
2007.





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, 2008, approximately 37%
of the commercial loan portfolio of the Bank was concentrated in loans made to
religious organizations. From inception, the Bank has received support in the
form of investments and deposits and has developed strong relationships with the
Philadelphia region’s religious community.  Loans made to these
organizations are primarily for expansion and repair of church
facilities.  At December 31, 2008, several of these loans are showing
signs of weakness and are included in the Bank’s classified loans and analysis
of allowance for loan losses.  The Bank is actively managing these
credits to avoid any further deterioration in asset quality.


Allowance
for Loan Losses
 
 The allowance for loan losses reflects
management’s continuing evaluation of the loan portfolio.  Table 8
below presents the allocation of loan losses by major category for the past five
years.  The specific allocations in any particular category may prove
to be excessive or inadequate and con­sequently may be reallocated in the
future to reflect then current conditions. The allowance for loan losses as a
percentage of total loans was 1.21% at December 31, 2008 and 1.28% at December
31, 2007. Systematic provisions are made to the allowance for loan losses in
accordance with a detailed periodic analysis.  This analysis includes
specific reserves allocated to classified and impaired loans based on underlying
recovery values as well as a general reserve for the portfolio based on many
factors including charge-off history, migration analysis, economic conditions,
concentrations of credit risk and other relevant data.  Although the
level of impaired loans totaled $2,531,000, or 431% of the allowance for loan
losses, significant reserves/provisions were not required because of the
strength of the liquidation value of underlying collateral. (Refer to Nonperforming Loans
discussion above.)


28





In
2008, the U.S. economy slumped into a deep recession.  The fallout in
the subprime mortgage market created credit quality challenges and significant
write downs by financial institutions across the nation. The commercial real
estate boom also ended. A significant portion of the Bank’s portfolio of
commercial real estate consists of owner occupied properties which may serve to
minimize credit risk. Subprime foreclosures have also continued to increase.
Falling home values and over-leveraged consumers are contributing to increased
delinquencies and charge-offs of consumer credits. The Bank did not originate a
high volume of home equity loans/lines of credit or residential mortgage loans
during the last five years of home price escalation. Home equity loans
originated during this period were underwritten within the Bank’s LTV policy
limits. Because of these factors, the Bank is somewhat insulated from negative
industry trends related to residential loans.  However, the “trickle
down” effect is always a concern in a recessionary economy with reduced
employment and reduced spending.




Table
8—Allocation of Allowance for Loan Losses





2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006
                                                                
                                                                
                                                                2005
                                                                
                                                                
                                                                2004Amount
                                                                
                                                                
                                                                Percent
                                                                    of
      loans
                                                                    in
      each
                                                                    categorytotal
      loans
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Percent
                                                                    of
      loans
                                                                    in
      each
                                                                    category
      tototal
      loans
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Percent
                                                                    of
      loans
                                                                    in
      each
                                                                    category
      tototal
      loans
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Percent
                                                                    of
      loans
                                                                    in
      each
                                                                    category
      tototal
      loans
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Percent
                                                                    of
      loans
                                                                    in
      each
                                                                    category
      tototal
      loans(Dollars
      in thousands)Commercial
      and industrial
                                                                
                                                                $
                                                                282
                                                                
                                                                
                                                                
                                                                8.81
                                                                %
                                                                
                                                                $
                                                                517
                                                                
                                                                
                                                                
                                                                24.36
                                                                %
                                                                
                                                                $
                                                                362
                                                                
                                                                
                                                                
                                                                24.33
                                                                %
                                                                
                                                                $
                                                                267
                                                                
                                                                
                                                                
                                                                15.46
                                                                %
                                                                
                                                                $
                                                                424
                                                                
                                                                
                                                                
                                                                32.31
                                                                %Commercial
      real estate
                                                                
                                                                
                                                                210
                                                                
                                                                
                                                                
                                                                66.17
                                                                
                                                                
                                                                
                                                                28
                                                                
                                                                
                                                                
                                                                48.90
                                                                
                                                                
                                                                
                                                                140
                                                                
                                                                
                                                                
                                                                51.73
                                                                
                                                                
                                                                
                                                                66
                                                                
                                                                
                                                                
                                                                55.59
                                                                
                                                                
                                                                
                                                                49
                                                                
                                                                
                                                                
                                                                27.75Residential
      mortgages
                                                                
                                                                
                                                                33
                                                                
                                                                
                                                                
                                                                12.56
                                                                
                                                                
                                                                
                                                                8
                                                                
                                                                
                                                                
                                                                14.49
                                                                
                                                                
                                                                
                                                                22
                                                                
                                                                
                                                                
                                                                13.06
                                                                
                                                                
                                                                
                                                                17
                                                                
                                                                
                                                                
                                                                16.25
                                                                
                                                                
                                                                
                                                                14
                                                                
                                                                
                                                                
                                                                17.29Consumer
      loans
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                12.47
                                                                
                                                                
                                                                
                                                                37
                                                                
                                                                
                                                                
                                                                12.25
                                                                
                                                                
                                                                
                                                                37
                                                                
                                                                
                                                                
                                                                10.88
                                                                
                                                                
                                                                
                                                                79
                                                                
                                                                
                                                                
                                                                12.69
                                                                
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                22.65Unallocated
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                4
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                6$
                                                                587
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                $
                                                                590
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                $
                                                                561
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                $
                                                                472
                                                                
                                                                
                                                                
                                                                100.00
                                                                %
                                                                
                                                                $
                                                                603
                                                                
                                                                
                                                                
                                                                100.00
                                                                %


Management believes that the allowance
for loan losses is adequate at December 31, 2008.  While available
information is used to recognize losses on loans, future additions may be
necessary based on changes in economic conditions.  In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses.  Such
agencies may require the Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of the
examination.




Table
9—Analysis of Allowance for Loan Losses





Year ended December 31,(Dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance
      at January 1
                
                $
                590
                
                
                $
                561
                
                
                $
                472
                
                
                $
                603
                
                
                $
                339Charge-offs:Commercial
      and industrial
                
                
                (464
                )
                
                
                (91
                )
                
                
                (70
                )
                
                
                (762
                )
                
                
                -Commercial
      real estate
                
                
                (4
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Residential
      mortgages
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      loans
                
                
                (51
                )
                
                
                (139
                )
                
                
                (202
                )
                
                
                (219
                )
                
                
                (240
                )(519
                )
                
                
                (230
                )
                
                
                (272
                )
                
                
                (981
                )
                
                
                (240
                )Recoveries—commercial
      loans
                
                
                107
                
                
                
                92
                
                
                
                57
                
                
                
                165
                
                
                
                265Recoveries—consumer
      loans
                
                
                41
                
                
                
                46
                
                
                
                168
                
                
                
                127
                
                
                
                194148
                
                
                
                138
                
                
                
                225
                
                
                
                292
                
                
                
                459Net
      recoveries (charge-offs)
                
                
                (371
                )
                
                
                (92
                )
                
                
                (47
                )
                
                
                (689
                )
                
                
                219Provisions
      charged to operations
                
                
                368
                
                
                
                120
                
                
                
                137
                
                
                
                558
                
                
                
                45Balance
      at December 31
                
                $
                587
                
                
                $
                589
                
                
                $
                561
                
                
                $
                472
                
                
                $
                603Ratio
      of net (recoveries) charge-offs to average loans
    outstanding
                
                
                0.77
                %
                
                
                0.21
                %
                
                
                0.10
                %
                
                
                1.50
                %
                
                
                (0.48
                )%





Deposits





Average
deposits declined $3,705,000, or 5.58%, in 2008 compared to 2007 and increased
$2,481,000, or 3.88%, in 2007 compared to 2006. In 2008, savings account
balances for which the Bank once offered premium interest rates declined by
$2,350,000, or 11.58%, compared to 2007.  With increased competition
in the region as well as declining interest rates, the Bank is no longer able to
utilize rates to attract deposits.   Management is seeking to
capitalize on the FDIC’s increase in insurance limit from $100,000 to $250,000
that became effective on October 14, 2008.  The Bank has a number of
customers that deposited up to the insurance limit of $100,000 from which it
will solicit increased deposit levels.  Management will seek to
distinguish the Bank as a community development bank through which corporations
in the region can work to impact community.  Placing deposits in the
Bank provides the necessary funds for small business loans that improve the
financial capacity of these businesses and result in job
creation.  Therefore, management will focus its marketing efforts on
large corporations headquartered or doing business in the region to drive
deposit growth.  In addition, management will better enforce the
deposit requirements of its commercial loan customers to positively impact
community.





Certificates
of deposit decreased $847,000, or 3.91%, in 2008 compared to 2007 because one
certificates of deposit with a quasi-governmental organization that did not
renew at maturity.  While the Bank has $12.3 million in certificates
of deposit with balances of $100,000 or more, approximately $8 million, or 66%,
of these deposits are with governmental or quasi-governmental entities that have
a long history with the Bank and are considered stable. Based on discussions
with these entities, no further reduction in certificates held is
anticipated.





Table
10—Average Deposits by Class


2008
                                
                                
                                2007
                                
                                
                                2006(Dollars
      in thousands)
                                
                                Amount
                                
                                
                                Rate
                                
                                
                                Amount
                                
                                
                                Rate
                                
                                
                                Amount
                                
                                
                                RateNoninterest-bearing
      demand deposits
                                
                                $
                                13,117
                                
                                
                                
                                -
                                %
                                
                                
                                13,885
                                
                                
                                
                                -
                                %
                                
                                $
                                13,993
                                
                                
                                
                                -
                                %Interest-bearing
      demand deposits
                                
                                
                                10,836
                                
                                
                                
                                1.12
                                
                                
                                
                                10,576
                                
                                
                                
                                1.61
                                
                                
                                
                                9,906
                                
                                
                                
                                0.89Savings
      deposits
                                
                                
                                17,952
                                
                                
                                
                                0.57
                                
                                
                                
                                20,302
                                
                                
                                
                                1.42
                                
                                
                                
                                17,759
                                
                                
                                
                                0.59Time
      deposits
                                
                                
                                20,793
                                
                                
                                
                                2.72
                                
                                
                                
                                21,640
                                
                                
                                
                                3.49
                                
                                
                                
                                22,264
                                
                                
                                
                                2.79
                                %


29


Other
Borrowed Funds





The Bank did not borrow funds during
2008.  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. The Bank’s contingent funding
source is the Discount Window at the Federal Reserve Bank for which it currently
has $1.75 million in securities pledged that result in borrowing capacity of
$1.5 million.




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:


2008
              
              
              2007Commitments
      to extend credit
              
              $
              10,968,000
              
              
              $
              14,004,300Outstanding
      letters of credit
              
              
              -
              
              
              
              -





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract and unused credit card
lines.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.  Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a
fee.  The decrease in commitments at December 31, 2008 is primarily
related to the completion and term out of several construction loans that were
in process at December 31, 2007. Management believes the Bank has adequate
liquidity to support the funding of unused commitments.




Liquidity
and Interest Rate Sensitivity Management





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





The Bank must maintain minimum levels
of liquid assets.  This requirement is evaluated in relation to the
com­position and stability of deposits; the degree and trend of reliance on
short-term, volatile sources of funds, including any undue reliance on
particular segments of the money market or brokered deposits; any difficulty in
obtaining funds; and the liquidity provided by securities and other
assets.  In addition, consideration is given to the nature, volume and
anticipated use of commitments; the adequacy of liquidity and funding policies
and practices, including the provision for alternate sources of funds; and the
nature and trend of off-balance-sheet activities.  As of December 31,
2008, management believes the Bank’s liquidity is satisfactory.





The
Bank's principal sources of asset liquidity include investment securities
consisting principally of U.S. Government and agency issues, particularly those
of shorter maturities, and mortgage-backed securities with monthly repayments of
principal and interest.  Other types of assets such as federal funds
sold, as well as maturing loans, are also sources of
liquidity.  Approximately $10.6 million in loans are scheduled to
mature within one year.





30


By
policy, the Bank’s minimum level of liquidity is 6.00% of total
assets.  At December 31, 2008, the Bank had total short-term
liquidity, including cash and federal funds sold, of $5.5 million, or 7.87%, of
total assets compared to $13.9 million, or 18.48%, at December 31,
2007.  The decline in liquidity is primarily the result of net loan
fundings that totaled $3.5 million coupled with a $5.1 million decline in
deposits for the year ended December 31, 2008.  The portion of the
Bank’s investment portfolio classified as available-for-sale could also provide
liquidity. However, the majority of these securities are pledged as collateral
for deposits of governmental/quasi-governmental agencies as well as the Discount
Window at the Federal Reserve Bank.  Therefore, they are restricted
from use to fund loans or to meet other liquidity requirements.  To
ensure the ongoing adequacy of liquidity, the following strategies will be
utilized in order of priority:





·
            Seek
      additional non-public deposits from new and existing private sector
      customers


·
            Sell
      participations of existing commercial credits to other financial
      institutions in the region





The
Bank’s contingent funding sources  include the Discount Window at the
Federal Reserve Bank for which it currently has $1.75 million in securities
pledged that result in borrowing capacity of $1.5 million. This arrangement
replaced a fully secured $2 million Federal Funds Purchased line of credit the
Bank had with its correspondent bank.  Liquidity will continue to be
closely monitored and managed to minimize risk and ensure that adequate funds
are available to meet daily customer requirements and loan demand.





The Bank’s overall liquidity has been
enhanced by a high level of core deposits which management has determined are
less sensitive to interest rate movements.  The Bank has avoided
reliance on large-denomination time deposits as well as brokered
deposits.  Table 11 provides a breakdown of the maturity of time
deposits of $100,000 or more.  These deposits include $8 million in
deposits of governmental and quasi-governmental organizations that have
short-term maturities.  All are expected to continue to renew at
maturity as they have for more than 10 years.








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


(Dollars
      in thousands)3
      months or less
            $9,273Over
      3 through 6 months
            400Over
      6 months through 1 year
            2,540Over
      1 through five years
            143Over
      five years
            -Total
            $12,356





The following table sets forth
contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2008:





Table
12—Contractual Obligations and Other Commitments





Less
      than
              
              
              One
      to
              
              
              Four
      to
              
              
              After(Dollars
      in thousands)
              
              Total
              
              
              one year
              
              
              three years
              
              
              five years
              
              
              five yearsCertificates
      of Deposit
              
              $
              21,102
              
              
              $
              19,831
              
              
              $
              858
              
              
              $
              328
              
              
              $
              86Operating
      Lease Obligations
              
              
              3,461
              
              
              
              428
              
              
              
              1,097
              
              
              
              380
              
              
              
              1,642Total
              
              $
              24,563
              
              
              $
              20,259
              
              
              $
              1,955
              
              
              $
              708
              
              
              $
              1,323





In April 2008, the Bank began a 10-year
lease for a new branch with increased visibility in the Progress Plaza shopping
center.  The lease requires annual rental payments of $66,482 for
years 1-5 and $75,431 for Years 5-10.  This transaction is reflected
in the Bank’s long-term operating lease obligations noted above.





31


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, 2008, 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, 2008, an asset-sensitive position is maintained on a cumulative
basis through one year of 4.16%.  Generally, because of the positive
gap position of the Bank, in shorter time frames, the Bank can anticipate that
increases in market rates will have a positive impact on the net interest
income, while decreases will have the opposite effect.  Although
increasing, this level is well within the Bank’s policy guidelines of +/-15% on
a cumulative one-year basis.    In the current declining
interest rate environment, this positive gap position creates margin
compression.  Management will seek to minimize the impact by shifting
excess funds to commercial loan originations that are fixed for at least five
years and reducing the interest rates it pays on its premium savings and
interest-bearing deposit products.





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





32




Table
13—Interest Sensitivity Analysis





Interest rate sensitivity gaps as of December 31,
      2008OverOver
                                  
                                  
                                  1
      year
                                  
                                  
                                  Over3
      months
                                  
                                  
                                  3
      through
                                  
                                  
                                  through
                                  
                                  
                                  3
      through
                                  
                                  
                                  Over(Dollars
      in thousands)
                                  
                                  or less
                                  
                                  
                                  12 months
                                  
                                  
                                  3 years
                                  
                                  
                                  5 years
                                  
                                  
                                  5 years
                                  
                                  
                                  CumulativeInterest-sensitive
      assets:Interest-bearing
      deposits with banks
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  296
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  296Investment
      securities
                                  
                                  
                                  4,210
                                  
                                  
                                  
                                  1,683
                                  
                                  
                                  
                                  1,061
                                  
                                  
                                  
                                  1,653
                                  
                                  
                                  
                                  3,827
                                  
                                  
                                  
                                  12,434Federal
      funds sold
                                  
                                  
                                  2,726
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,726Loans
                                  
                                  
                                  16,561
                                  
                                  
                                  
                                  10,483
                                  
                                  
                                  
                                  6,433
                                  
                                  
                                  
                                  3,489
                                  
                                  
                                  
                                  11,698
                                  
                                  
                                  
                                  48,664Total
      interest-sensitive assets
                                  
                                  
                                  23,497
                                  
                                  
                                  
                                  12,462
                                  
                                  
                                  
                                  7,494
                                  
                                  
                                  
                                  5,142
                                  
                                  
                                  
                                  15,525
                                  
                                  
                                  $
                                  64,120Cumulative
      totals
                                  
                                  
                                  23,497
                                  
                                  
                                  
                                  35,959
                                  
                                  
                                  
                                  43,453
                                  
                                  
                                  
                                  48,595
                                  
                                  
                                  
                                  64,120Interest-sensitive
      liabilities:Interest
      checking accounts
                                  
                                  
                                  1,922
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,922
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,844Savings
      accounts
                                  
                                  
                                  11,542
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11,542
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  23,084Certificates  $100,000
      or more
                                  
                                  
                                  9,273
                                  
                                  
                                  
                                  2,940
                                  
                                  
                                  
                                  143
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,356Certificates
      of less than $100,000
                                  
                                  
                                  2,995
                                  
                                  
                                  
                                  4,622
                                  
                                  
                                  
                                  715
                                  
                                  
                                  
                                  414
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,746Total
      interest-sensitive liabilities
                                  
                                  $
                                  25,732
                                  
                                  
                                  $
                                  7,562
                                  
                                  
                                  $
                                  14,322
                                  
                                  
                                  $
                                  414
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  48,030Cumulative
      totals
                                  
                                  $
                                  25,732
                                  
                                  
                                  $
                                  33,294
                                  
                                  
                                  $
                                  47,616
                                  
                                  
                                  $
                                  48,030
                                  
                                  
                                  $
                                  48,030Interest
      sensitivity gap
                                  
                                  $
                                  (2,235
                                  )
                                  
                                  $
                                  4,900
                                  
                                  
                                  $
                                  (6,828
                                  )
                                  
                                  $
                                  4,728
                                  
                                  
                                  $
                                  15,525Cumulative
      gap
                                  
                                  $
                                  (2,235
                                  )
                                  
                                  $
                                  2,665
                                  
                                  
                                  $
                                  (4,163
                                  )
                                  
                                  $
                                  565
                                  
                                  
                                  $
                                  16,090Cumulative
      gap/total earning assets
                                  
                                  
                                  (3.49
                                  )%
                                  
                                  
                                  4.16
                                  %
                                  
                                  
                                  (6.49
                                  %)
                                  
                                  
                                  0.81
                                  %
                                  
                                  
                                  25.09
                                  %Interest-sensitive
      assets to interest-sensitiveliabilities
                                  
                                  
                                  0.91
                                  
                                  
                                  
                                  1.64
                                  
                                  
                                  
                                  0.52
                                  
                                  
                                  
                                  12.42
                                  
                                  
                                  
                                  -


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 interest income or “earnings” at risk at December
31, 2008 are as follows:





Net
      interest
              
              
              Percent
      ofChanges in rate
              
              income
              
              
              risk(Dollars
      in thousands)+200
      basis points
              
              $
              3,235
              
              
              
              (0.06
              )%+100
      basis points
              
              
              3,238
              
              
              
              0.03Flat
      rate
              
              
              3,237
              
              
              
              --100 basis
      points
              
              
              3,219
              
              
              
              (0.56
              )-200 basis
      points
              
              
              3,189
              
              
              
              (1.48
              )





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, 2008 are as
follows:





33


MV
      of equityChanges in rate
              
              MV equity
              
              
              Risk change(Dollars
      in thousands)+200
      basis points
              
              $
              5,542
              
              
              
              (26.70
              )%+100
      basis points
              
              
              6,564
              
              
              
              (13.20
              )Flat
      rate
              
              
              7,562
              
              
              
              --100 basis
      points
              
              
              8,373
              
              
              
              10.70-200 basis
      points
              
              
              9,107
              
              
              
              20.40








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 creates 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 or re-price immediately. At December 31, 2008, the
change in the market value of equity in a +200 basis point interest rate change
is 26.7%, in excess of the Bank’s policy limit of 25%.  Management
will seek to mitigate this risk by originating more variable rate loans and/or
purchasing floating rate mortgage-backed securities.





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.  In today’s uncertain economic times, the results of the Bank’s
simulation models is even more uncertain.





The
Bank’s Board of Directors and management consider all of the relevant factors
and conditions in the asset/liability planning process.  Based on the
results of the simulation models, with the exception of the market value
measure, interest-rate exposure is not considered significant and is within the
policy limits of the Bank on all other measures at December 31,
2008.  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.





Capital
Resources





Total
shareholders’ equity declined $636,000 in 2008 compared to 2007 and increased
$72,000 in 2007 compared to 2006.  The decrease in capital in 2008 is
attributable to a net loss of $653,000 offset by other comprehensive income
related to an increase in the unrealized gain on the securities classified as
available-for-sale.




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




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





34


As
indicated in Table 14, UBS’ 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)
                
                2008
                
                
                2007
                
                
                2006Total
      Capital
                
                $
                8,050
                
                
                $
                8,685
                
                
                $
                8,624Less:
      Intangible Assets/Net unrealized   gains (losses) on
      available forsale
                
                
                (872
                )
                
                
                (1,026
                )
                
                
                (1,185
                )Tier
      I capital
                
                
                7,178
                
                
                
                7,659
                
                
                
                7,433Tier
      II capital
                
                
                587
                
                
                
                571
                
                
                
                556Total
      qualifying capital
                
                $
                7,765
                
                
                $
                8,230
                
                
                $
                7,995Risk-adjusted
      total assets (including off-balance-sheet exposures)
                
                $
                46,862
                
                
                $
                45,667
                
                
                $
                44,464Tier
      I risk-based capital ratio
                
                
                15.32
                %
                
                
                16.77
                %
                
                
                16.73
                %Total
      (Tier I and II) risk-based capital ratio
                
                
                16.57
                
                
                
                18.02
                
                
                
                17.98Tier
      I leverage ratio
                
                
                10.27
                
                
                
                10.34
                
                
                
                10.33





Recent
Accounting Pronouncements




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




Effective
January 1, 2008, UBS adopted SFAS 157 Fair Value Measurement,which
provides a framework for measuring fair value under generally accepted
accounting principles.   SFAS 157 applies to all financial
instruments that are being measured and reported on a fair value basis with the
exception of nonfinancial assets and nonfinancial liabilities that are
recognized and disclosed at fair value on a non-recurring basis for which fair
value disclosures have been delayed under FASB Staff Position (FSP) No. SFAS
157-2 “Effective date of FASB Statement No. 157” to fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. The Company
does not expect that the adoption of this statement will have a material impact
on its financial statements.




UBS also
adopted SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,on January
1, 2008.  SFAS 159 allows an entity the irrevocable option to elect
fair value for the initial and subsequent measurement of certain financial
assets on a contract-by-contract basis.  SFAS 159 requires that the
difference between the carrying value before election of the fair value option
and the fair value of these instruments be recorded as an adjustment to
beginning retained earnings in the period of adoption.  We have not
elected the fair value option for any of our existing financial assets or
liabilities and consequently did not have any adoption related adjustments. The
Company does not expect that the adoption of this statement will have a material
impact on its financial statements.




SFAS No.
160, Non-controlling Interests
in Consolidated Financial Statement, requires all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions.  This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited.   This Statement shall be
applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented.





35








ITEM7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
quantitative and qualitative disclosures about market risks are included in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in the following sections:  Liquidity and Interest Rate
Sensitivity Management, Net Interest Income, Provision for Loan Losses,
Allowance for Loan Losses, Liquidity and Interest Rate Sensitivity Management,
Non-Interest Income, Non-Interest Expense, Non-Performing Loans, and Off Balance
Sheet Arrangements.








ITEM8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





See Consolidated Financial Statements
on pages 48 to 73 hereof.





ITEM9 — 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, 2008.





ITEM9A—CONTROLS AND PROCEDURES





(a)
Evaluation of Disclosure Controls and Procedures.




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




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




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and with the
participation of principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the framework,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2008.




Management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2008 has not been audited by McGladrey & Pullen, LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.  The effectiveness of our internal controls over
financial reporting was not subject to attestation by the Bank’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Bank to provide only management’s report in this document.




36


(c)
Changes in Internal Control Over Financial Reporting.




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







ITEM9B—OTHER INFORMATION





None.





PART III





ITEM10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





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





(a)         Directors of the Registrant
and Bank





Principal
      occupation and
              Year
      first
              TermName
              Age
              other directorships
              became director
              will expireBernard
      E. Anderson
              70
              Economist
              2002
              2010Philadelphia,
      PADavid
      R. Bright
              69
              Retired,
      Executive Vice PresidentMeridian
      Bancorp
              2002
              2010Philadelphia,
      PAJoseph
      T. Drennan
              63
              Chief
      Financial Officer
              2004
              2010Universal
      Capital Management, Inc.Wilmington,
      DEL.
      Armstead Edwards
              66
              Chairman
      of the Board,
              1993
              2008United
      Bancshares, Inc.Owner
      and President,Edwards
      Entertainment., Inc.Philadelphia,
      Pennsylvania





Marionette
      Y. Wilson(Frazier)
                                  64
                                  Retired
      as co-Founder,
                                  1996
                                  2008John
      Frazier, Inc.Philadelphia,
      PennsylvaniaMaurice
      R. Mitts
                                  47
                                  Founder/Partner,
                                  2008
                                  2010Mitts
      Milavec, LLP, Attorney at LawPhiladelphia,
      PennsylvaniaWilliam
      B. Moore
                                  66
                                  Vice
      Chairman of the Board,United
      Bancshares, Inc.Pastor,
      Tenth Memorial
                                  1993
                                  2011Baptist
      ChurchPhiladelphia,
      Pennsylvania






37


Ahsan
      M. Nasratullah1
            50
            President,
      JNA Capital
            2004
            2009Philadelphia,
      PennsylvaniaEvelyn
      F. Smalls
            63
            President
      and CEO of Registrant
            2000
            2011and
      United Bank of PhiladelphiaErnest
      L. Wright
            80
            Founder,
      President and
            1993
            2008CEO
      of Ernest L. WrightConstruction
      CompanyPhiladelphia,
      Pennsylvania




(1) Ahsan
Nasratullah resigned from the board of directors in January 2008 for personal
reasons.





(b)         Executive Officers of
Registrant and Bank





Name
              Age
              OfficeEvelyn
      F. Smalls
              63
              President
      and Chief Executive OfficerBrenda
      M. Hudson-Nelson
              47
              Executive
      Vice President/Chief Financial
Officer





CORPORATE
GOVERNANCE





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





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





UBS’ Board of Directors meets when
necessary and during 2008 held eleven (11) meetings, including UBS’ organization
meeting. In 2008, the Bank’s Board of Directors was scheduled to meet at least
monthly, except in August and during 2008 held eleven (11)
meetings.   The independent directors of the UBS’ and the Bank’s
Board of Directors will hold executive sessions on a regular basis, but, in any
event, not less than twice a year.




Policy
for Attendance at Annual Meetings




UBS
has a policy requiring all of its directors to attend UBS’ annual
meeting.  At the annual meeting held on December 5, 2008, eight (8) of
UBS’ ten (10) directors attended the meeting.





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





The Audit/Compliance Committee of UBS’
Board of Directors is comprised of Joseph T. Drennan (Chairman), L. Armstead
Edwards, Marionette Y. Wilson (Frazier) and William B. Moore, meets when
necessary at the call of the Chairman. The Committee meets with the internal
auditor to review audit programs and the results of audits of specific areas, as
well as other regulatory compliance issues.  The Committee selects the
independent registered public accountants. In addition, the Committee meets with
UBS’ independent registered public accountants to review the results of the
annual audit and other related matters. Each member of the Committee is
“independent” as defined in the applicable listing standards of the National
Association of Securities Dealers (“NASDAQ”). The Committee held twelve (12)
meetings during 2008.





38


Each
member of the Audit/Compliance Committee is financially literate as defined by
NASDAQ.  The Boards of Directors of the Company and the Bank have
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 monthly. The Audit/Compliance Committee meets with the internal auditor
to review audit programs and the results of audits of specific areas, as well as
other regulatory compliance issues. In addition, the Audit/Compliance Committee
meets with the Bank’s independent registered public accountants to review the
results of the annual audit and other related matters, as well as other
regulatory compliance issues. Each member of the Audit/Compliance Committee is
“independent” as defined in the applicable listing standards of NASDAQ. The
Committee held twelve (12) meetings during 2008.





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, 2008,
the Audit Committee (i) reviewed and discussed the consolidated audited
financial statements with UBS’ management, (ii) discussed with McGladrey and
Pullen, LLP, UBS’ independent registered public accounting firm, the matters
required to be discussed by Statement on Auditing Standards No. 61 (as modified
or supplemented), (iii) discussed the independence of   McGladrey
and Pullen, LLP, and (iv) has received the written disclosures and the letter
from McGladrey and Pullen, LLP required by PCAOB Rule 3526 (as modified or
supplemented). Based on the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in UBS’ Annual Report on Form 10-K for the year
ending December 31, 2008.





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 EdwardsWilliam
      B. MooreMarionette
      Y. Wilson (Frazier)





39


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 2008.





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 held two (2) meetings during 2008 resulting in
the nomination of Maurice R. Mitts as a Class B director and  the
re-election of Class A directors standing for re-election.





Meetings
of UBS’ Board and its Committees




The total number of meetings of UBS’
Board of Directors that were held in 2008 was eleven (11). All of the incumbent
directors, who were directors during 2008 (i) attended at least seventy-five
percent (75%) of the total number of meetings of the Board of Directors, except
Joseph T. Drennan, who attended fifty percent (50%); 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 Joseph T. Drennan, who attended fifty percent (50%) 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 2008. 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,
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 2008, the Asset and
Liability Management Committee held four (4) meetings.





40


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 2008, 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 2008 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 Joseph T. Drennan, who attended
fifty percent (50%); 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 Joseph T. Drennan,
who attended fifty percent (50%) 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, 2008.








41







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, 2009:





Name,
      Principal Occupation and
              Business Experience For Past 5
      Years
            Age
      as of
              March 2, 2009
            Office with the UBS and/or
    Bank
            Shares
      of
              UBS
      Stock
              Beneficially
              OwnedEvelyn
      F. Smalls(1)(2)
            63
            President
      and Chief Executive Officer and
              Director
      of UBS and Bank
            500Brenda
      M. Hudson-Nelson (3)
            47
            Executive
      Vice President and Chief Financial Officer
              of
      UBS and Bank
            50





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.





CODE
OF CONDUCT AND ETHICS





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





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





42


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, 2008 except for a late Form 3
filing of Maurice R. Mitts.





ITEM11 — 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 but 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
and Brenda M. Hudson-Nelson Executive Vice President and Chief Financial
Officer.  Each member of the Compensation Committee is independent as
defined by NASDAQ. During 2008, 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.


·
            Succession
      Planning to ensure adequate replacement for key
  executives





43


Compensation
Philosophy




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





The
Committee’s Process





Because
of the inability of management to attain the goals outlined in the 2007
Strategic Plan, there were no salary increases given to executive officers in
2008.  Therefore, there were no deliberations by the committee in
reference to salary increases.





Components
of Compensation for 2008




For the
fiscal year ended December 31, 2008, the components of executive compensation
were:




•
            Salary;


•
            Life
      Insurance in the amount of two times salary;
and


•
            Automobile
      Allowance.




Salary




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




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




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





Life
Insurance and Auto Allowance





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





44







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, 2008.


Name
      and Principal
                            Position
                          
                          Year
                          
                          
                          Salary ($)
                          
                          
                          Bonus
                            ($)(1)
                          
                          
                          Stock
                            Awards
                            ($)(1)
                          
                          
                          Option
                            Awards
                            ($)(1)
                          
                          
                          Non-Equity
                            Incentive
      Plan
                            Compensation(1)
                          
                          
                          Change
      in
                            Pension
                            Value
      and
                            Nonqualified
                            Deferred
                            Compensation
                            Earnings
                            ($)(1)
                          
                          
                          All
      Other
                            Compensation
                            ($)(2)
                          
                          
                          Total
                            ($)Evelyn
      F. Smalls
                            President
      and Chief Executive Officer
                          
                          
                          2008
                            2007
                          
                          
                          $
                          160,000
                            160,000
                          
                          
                          $
                          0
                            0
                          
                          
                          $
                          0
                            0
                          
                          
                          $
                          0
                            0
                          
                          
                          $
                          0
                            0
                          
                          
                          $
                          0
                            0
                          
                          
                          $
                          6,209
                            6,209
                          
                          
                          $
                          166,209
                            166,209Brenda
      Hudson-Nelson,
                            Executive
      Vice President and Chief Financial Officer
                          
                          
                          2008
                            2007
                          
                          
                          
                          115,000
                            115,000
                          
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          6,095
                            6,095
                          
                          
                          
                          121,095
                            121,095Terrence
      Barclift (3)Senior Vice President
      and Senior Lending Officer
                          
                          
                          2008
                            2007
                          
                          
                          
                          22,923
                            110,000
                          
                          
                          
                          0
                            0
                          
                          
                          
                          0
                            0
                          
                          
                          
                          0
                            0
                          
                          
                          
                          0
                            1,348
                          
                          
                          
                          0
                            0
                          
                          
                          
                          1,000
                            21,000
                          
                          
                          
                          23,923
                            132,348





(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)
            For
      personal reasons, Terrence Barclift resigned his position as Senior Vice
      President/Senior Lending Officer effective February 25,
    2008.








Executive
Employment Agreements





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





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





45


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




Payments
Upon Termination





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





Equity
Compensation Plan Information





The
Company adopted a Stock Option Plan in 1998.  Under this Plan, options
to acquire shares of common stock were granted to the former chief executive
officer.  The Stock Option Plan provides for the granting of options
at the fair market value of the Company’s common stock at the time the options
are granted.  Each option granted under the Stock Option Plan may be
exercised within a period of ten years from the date of
grant.  However, no option may be exercised within one year from the
date of grant.  No options were granted in 2008 and no options were
outstanding as of December 31, 2008.





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.





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, 2008.


Respectfully
      submitted:L.
      Armstead EdwardsWilliam
      B. MooreMarionette
      Y. WilsonJoseph
      T. DrennanDavid
      R. Bright








46


ITEM12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT





The
following table sets forth certain information known to UBS, as of March 2, 2009
(1), with respect to the only persons to UBS’ knowledge, who may be beneficial
owners of more than 5% of UBS’ Common Stock.


Name
      and Address
              of Beneficial Owner
            Amount
      and Nature of
              Beneficial
      Ownership
              of
      Corporation
              Common Stock
            Percentage
      of
              Outstanding
              Corporation
              Common
      Stock
              OwnedPhiladelphia
      Municipal
            71,667
            8.21%Retirement
      System2000
      Two Penn CenterPhiladelphia,
      Pennsylvania 19102Wachovia
      Corporation, (formerly, First Union Corporation)2
            50,000
            5.73%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
            5.11%401
      Cypress StreetPhiladelphia,
      PA  19106




(1)  
As of March 2, 2009, 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.


(3)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.




The
following table lists the beneficial ownership of shares of the UBS’ Common
Stock as of March 2, 2009 for each of the UBS’ directors and executive
officers.   The table also shows the total number of shares of
Common Stock ownership by the directors and executive officers of UBS as a
group.





Name
            Common
              Stock1,2,3
            Percent of
              Outstanding StockCurrent
      DirectorsL.
      Armstead Edwards
            10,833
            1.23%Marionette
      Y. Wilson (Frazier)
            17,900
            2.04%Ernest
      L. Wright
            7,084
            *Bernard
      E. Anderson
            850
            *David
      R. Bright
            850
            *Joseph
      T. Drennan
            783
            *Maurice
      R. Mitts
            -
            *William
      B. Moore
            1,834
            *Evelyn
      F. Smalls
            500
            *





Certain
      Executive OfficersEvelyn
      F. Smalls
            500**
            *Brenda
      M. Hudson-Nelson
            50
            *All
      Current Directors and Executive Officers as a Group
            40,634
            4.64%




47


__________________


Footnotes
Concerning Beneficial Ownership of Stock


*
            Less
      than one percent.**
            Ms.
      Smalls is also a Director; see listing above.(1)
            Stock
      ownership information is given as of March 2, 2009, 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, 2009. Unless otherwise
      indicated, each director and each such named executive officer holds sole
      voting and investment power over the shares listed.(2)
            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.(3)
            None
      of the common stock of directors and executive officers is pledged to
      secure a debt.





ITEM13 — 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 2008 all loans and commitments to lend were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons.  In our opinion, the
transactions and loan commitments did not involve more than normal risk of
collectively or present other unfavorable features.




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




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




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




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




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




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




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




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




-              Other
factors the committee deems appropriate.





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





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





48




ITEM14—PRINCIPAL ACCOUNTANT FEES AND SERVICES





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


2008
              
              
              2007Audit
      Fees
              
              $
              110,374
              
              
              $
              100,440Audit-related
      fees
              
              
              -
              
              
              
              -Tax
      fees
              
              
              10,882
              
              
              
              11,515All
      other fees
              
              
              -
              
              
              
              -Total
      fees
              
              $
              121,256
              
              
              $
              111,955





Services
Provided by McGladrey and Pullen, LLP




1)
            Audit
      Fees—These are fees for professional services performed by McGladrey and
      Pullen, LLP in 2008 and 2007 for the audit, including an audit of
      consolidated  financial statements reporting, and review of
      financial statements included in our Form 10-Q and Form 10-K
      filings.2)
            Tax
      Fees—These are fees for professional services performed by RSM McGladrey,
      Inc. (an independent company associated with McGladrey and Pullen, LLP
      through an alternative practice structure) with respect to tax compliance
      and tax advice. This includes preparation of our tax returns, tax research
      and tax advice.





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




Pre-approval
of Services





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








49




PART IV





ITEM15 — EXHIBITS AND FINANCIAL STATEMENTS
SCHEDULES





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


Page(a)
                1.
                Financial Reports of United Bancshares,
      Inc.Report
      of Independent Registered Public Accounting Firm.
                53Consolidated
      Balance Sheets at December 31, 2008 and 2007.
                54Consolidated
      Statements of Operations for the three years ended December 31,
      2008.
                56Consolidated
      Statements of Changes in Shareholders’ Equity for the three years
      endedDecember
      31, 2008.
                57Consolidated
      Statements of Cash Flows for the three years ended December 31,
      2008.
                58Notes
      to Consolidated Financial Statements
                592.
                Financial
      Statement SchedulesFinancial
      Statement Schedules are omitted because the required information is either
      not applicable, not required or is shown in the respective financial
      statements or in the notes thereto.3.
                The
      following Exhibits are filed herewith or incorporated by reference as a
      part of this Annual Report:





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.
      15th
      Street, Suite 1200, Philadelphia, PA (Incorporated by reference to
      Registrant’s 2004 Form 10-K)b)
            Lease
      for branch office located at 1620 Wadsworth Avenue(Incorporated by
      reference to Registrant’s 2002 Form 10-K)c)
            Lease
      for branch office located at 1015 North Broad Street(Incorporated by
      reference to Registrant’s 2002 Form 10-K)d)
            Evelyn
      F. Smalls’ Employment Agreement, dated November 1, 2004, (Incorporated by
      reference to Registrant’s 2005 Form 10-K)e)
            Brenda
      Hudson-Nelson’s Employment Agreement, dated November 1, 2004, ,
      (Incorporated by reference to Registrant’s 2005 Form
  10-K)f)
            Long
      Term Incentive Compensation Plan (Incorporated by reference to
      Registrant’s 1992 Form 10)





50


g)
            Lease
      for Retail office located at The Graham Building, 30 S. 15th
      Street, Philadelphia, PA, , (Incorporated by reference to Registrant’s
      2005 Form 10-K)h)
            Sublease
      for Retail office located at The Graham Building, 30 S. 15th
      Street, Philadelphia, PA(Incorporated by reference to Registrant’s 2005
      Form 10-K)i)
            Lease
      for branch office located at 1520 North Broad Street (Incorporated by
      reference to Registrant’s 2005 Form 10-K)j)
            Terrence
      Barclift’s Employment Agreement, dated October 2, 2006 (Incorporated by
      reference to the Registrant’s 2006 Form
10-K).





(11)
                Statement
      of Computation of Earnings Per Share.  Included at Note 16 of
      the Financial Statements hereof.(12)
                Statement
      of Computation of Ratios.  Included at Note 17 of the Financial
      Statements hereof.(14)
                Code
      of Conduct and Ethics (Incorporated by reference to Registrant’s 2004
      10-K)(21)
                Subsidiaries of
  RegistrantName
                State of IncorporationUnited
      Bank of Philadelphia
                Pennsylvania(31)
                Certification
      of the Annual Report(31.1) Certification of the Chief Executive Officer
      Pursuant to Section 302 of the Sabanes-Oxley Act of
    2002.(31.2) Certification of the Chief Financial Officer
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.(32)
                Certification
      Pursuant to issue of Section 1350(A)
                Exhibit
      32.1Certification Pursuant to 18U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the
      Chief Executive Officer attached hereto as Exhibit
    99.1.(B)
                Exhibit
      32.2Certification Pursuant to 18U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the
      Chief Financial Officer attached hereto as Exhibit
    99.2.(99)
                Supplemental
      Information(A)
                The
      Annual Report to Shareholders and Proxy material will be furnished after
      the filing of Form 10-K.  Copies of these materials will be
      submitted to the Commission when they are sent to the
      shareholders.





51


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/_________________________________________
              March  31,
      2009Evelyn
      F. Smalls, President & CEO, Director/s/_________________________________________
              March  31,
      2009Brenda
      M. Hudson-Nelson, EVP, CFO/s/___________________________________
              March  31,
      2009L.
      Armstead Edwards, Chairman, Director/s/_________________________________________
              March  31,
      2009Marionette
      Y. Wilson(Frazier),  Secretary, Director/s/_________________________________________
              March  31,
      2009William
      B. Moore, Secretary,  Vice Chairman, Director/s/________________________________________
              March  31,
      2009Bernard
      E. Anderson, Director/s/________________________________________
              March  31,
      2009David
      R. Bright, Director/s/________________________________________
              March  31,
      2009Maurice
      r. Mitts, Director/s/________________________________________
              March  31,
      2009Joseph
      T. Drennan, Treasurer, Director/s/_________________________________________
              March  31,
      2009Ernest
      L. Wright, Director





52







McGladrey
      & Pullen, LLPOne
      Valley Square, Ste. 250512
      Township Line RoadBlue
      Bell, PA  19422-2700O
      215-641-8600  F
      215-641-8680www.mcgladrey.com




Report of Independent
Registered Public Accounting Firm
 
 
 To the
Board of Directors
 United
Bancshares, Inc.
 
 We have
audited the consolidated balance sheets of United Bancshares, Inc. and
Subsidiary (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders’ equity and cash
flows for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of United Bancshares, Inc. and
Subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with U.S. generally accepted accounting
principles.
 
 We were
not engaged to examine management’s assertion about the effectiveness of the
Bank’s internal control over financial reporting as of December 31, 2008
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
 
 
 
 Blue
Bell, Pennsylvania
 March 31,
2009





53


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATEDBALANCE SHEETS


December
31,





Assets
                                                                
                                                                2008
                                                                
                                                                
                                                                2007Cash
      and due from banks
                                                                
                                                                $
                                                                2,449,181
                                                                
                                                                
                                                                $
                                                                3,875,911Interest-bearing
      deposits with banks
                                                                
                                                                
                                                                296,290
                                                                
                                                                
                                                                
                                                                289,095Federal
      funds sold
                                                                
                                                                
                                                                2,726,000
                                                                
                                                                
                                                                
                                                                9,755,000Cash
      and cash equivalents
                                                                
                                                                
                                                                5,471,471
                                                                
                                                                
                                                                
                                                                13,920,006Investment
      securities:Available-for-sale,
      at fair market value
                                                                
                                                                
                                                                2,665,151
                                                                
                                                                
                                                                
                                                                3,455,363Held-to-maturity,
      at amortized cost (fair market value of $10,016,314and
      $10,493,820 in 2008 and 2007, respectively)
                                                                
                                                                
                                                                9,896,965
                                                                
                                                                
                                                                
                                                                10,466,053Loans,
      net of unearned discount of $54,461 and $67,807 in 2008and
      2007, respectively
                                                                
                                                                
                                                                48,663,437
                                                                
                                                                
                                                                
                                                                45,183,839Less
      allowance for loan losses
                                                                
                                                                
                                                                (586,673
                                                                )
                                                                
                                                                
                                                                (589,526
                                                                )Net
      loans
                                                                
                                                                
                                                                48,076,764
                                                                
                                                                
                                                                
                                                                44,594,313Bank
      premises and equipment, net
                                                                
                                                                
                                                                1,622,314
                                                                
                                                                
                                                                
                                                                966,494Accrued
      interest receivable
                                                                
                                                                
                                                                421,132
                                                                
                                                                
                                                                
                                                                399,243Intangible
      assets
                                                                
                                                                
                                                                848,046
                                                                
                                                                
                                                                
                                                                1,026,124Prepaid
      expenses and other assets
                                                                
                                                                
                                                                433,369
                                                                
                                                                
                                                                
                                                                408,855Total
      assets
                                                                
                                                                $
                                                                69,435,212
                                                                
                                                                
                                                                $
                                                                75,231,507Liabilities
      and Shareholders’ EquityLiabilities:Demand
      deposits, noninterest-bearing
                                                                
                                                                $
                                                                11,844,242
                                                                
                                                                
                                                                $
                                                                12,762,066Demand
      deposits, interest-bearing
                                                                
                                                                
                                                                11,290,173
                                                                
                                                                
                                                                
                                                                11,712,926Savings
      deposits
                                                                
                                                                
                                                                16,667,815
                                                                
                                                                
                                                                
                                                                19,912,673Time
      deposits, under $100,000
                                                                
                                                                
                                                                8,745,854
                                                                
                                                                
                                                                
                                                                8,315,998Time
      deposits, $100,000 and over
                                                                
                                                                
                                                                12,356,186
                                                                
                                                                
                                                                
                                                                13,380,822Total
      deposits
                                                                
                                                                
                                                                60,904,270
                                                                
                                                                
                                                                
                                                                66,084,485Accrued
      interest payable
                                                                
                                                                
                                                                126,793
                                                                
                                                                
                                                                
                                                                134,844Accrued
      expenses and other liabilities
                                                                
                                                                
                                                                354,401
                                                                
                                                                
                                                                
                                                                326,768Total
      liabilities
                                                                
                                                                
                                                                61,385,464
                                                                
                                                                
                                                                
                                                                66,546,097
  54


Commitments
      and Contingencies (Notes 5, 9, and 14)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
                  
                  
                  (6,735,664
                  )
                  
                  
                  (6,082,165
                  )Accumulated
      other comprehensive income
                  
                  
                  23,506
                  
                  
                  
                  5,669Total
      shareholders’ equity
                  
                  
                  8,049,748
                  
                  
                  
                  8,685,410Total
      liabilities and shareholders’ equity
                  
                  $
                  69,435,212
                  
                  
                  $
                  75,231,507


The
accompanying notes are an integral part of these statements.




55


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATEDSTATEMENTS OF OPERATIONS





Years
ended December 31,





2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Interest
      income:Interest
      and fees on loans
                                      
                                      $
                                      3,335,151
                                      
                                      
                                      $
                                      3,515,693
                                      
                                      
                                      $
                                      3,625,617Interest
      on investment securities
                                      
                                      
                                      607,996
                                      
                                      
                                      
                                      756,020
                                      
                                      
                                      
                                      577,224Interest
      on federal funds sold
                                      
                                      
                                      129,966
                                      
                                      
                                      
                                      524,720
                                      
                                      
                                      
                                      357,080Interest
      on time deposits with other banks
                                      
                                      
                                      7,444
                                      
                                      
                                      
                                      16,024
                                      
                                      
                                      
                                      7,843Total
      interest income
                                      
                                      
                                      4,080,557
                                      
                                      
                                      
                                      4,812,457
                                      
                                      
                                      
                                      4,567,764Interest
      expense:Interest
      on time deposits
                                      
                                      
                                      565,396
                                      
                                      
                                      
                                      754,189
                                      
                                      
                                      
                                      696,901Interest
      on demand deposits
                                      
                                      
                                      121,617
                                      
                                      
                                      
                                      170,566
                                      
                                      
                                      
                                      111,128Interest
      on savings deposits
                                      
                                      
                                      102,768
                                      
                                      
                                      
                                      287,546
                                      
                                      
                                      
                                      137,958Total
      interest expense
                                      
                                      
                                      789,781
                                      
                                      
                                      
                                      1,212,301
                                      
                                      
                                      
                                      945,987Net
      interest income
                                      
                                      
                                      3,290,776
                                      
                                      
                                      
                                      3,600,156
                                      
                                      
                                      
                                      3,621,777Provision
      for loan losses
                                      
                                      
                                      368,000
                                      
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      137,000Net
      interest income after provision for loan losses
                                      
                                      
                                      2,922,776
                                      
                                      
                                      
                                      3,480,156
                                      
                                      
                                      
                                      3,484,777Noninterest
      income:Gain
      on sale of loans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10,656Customer
      service fees
                                      
                                      
                                      554,731
                                      
                                      
                                      
                                      590,841
                                      
                                      
                                      
                                      603,259ATM
      fee income
                                      
                                      
                                      454,628
                                      
                                      
                                      
                                      454,338
                                      
                                      
                                      
                                      517,302Loan
      syndication fee income
                                      
                                      
                                      130,000
                                      
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      150,000Gain
      on sale of bank premises and equipment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      24,000
                                      
                                      
                                      
                                      -Other
      income
                                      
                                      
                                      69,567
                                      
                                      
                                      
                                      131,203
                                      
                                      
                                      
                                      133,285Total
      noninterest income
                                      
                                      
                                      1,208,926
                                      
                                      
                                      
                                      1,320,382
                                      
                                      
                                      
                                      1,414,502Noninterest
      expense:Salaries,
      wages and employee benefits
                                      
                                      
                                      1,557,247
                                      
                                      
                                      
                                      1,626,580
                                      
                                      
                                      
                                      1,746,539Occupancy
      and equipment
                                      
                                      
                                      1,120,800
                                      
                                      
                                      
                                      1,018,213
                                      
                                      
                                      
                                      993,397Office
      operations and supplies
                                      
                                      
                                      318,345
                                      
                                      
                                      
                                      319,394
                                      
                                      
                                      
                                      309,268Marketing
      and public relations
                                      
                                      
                                      104,045
                                      
                                      
                                      
                                      120,837
                                      
                                      
                                      
                                      115,756Professional
      services
                                      
                                      
                                      243,708
                                      
                                      
                                      
                                      256,186
                                      
                                      
                                      
                                      290,687Data
      processing
                                      
                                      
                                      513,424
                                      
                                      
                                      
                                      456,463
                                      
                                      
                                      
                                      421,699Deposit
      insurance assessments
                                      
                                      
                                      153,193
                                      
                                      
                                      
                                      154,597
                                      
                                      
                                      
                                      110,687Other
      operating
                                      
                                      
                                      774,439
                                      
                                      
                                      
                                      800,981
                                      
                                      
                                      
                                      792,556Total
      noninterest expense
                                      
                                      
                                      4,785,201
                                      
                                      
                                      
                                      4,753,251
                                      
                                      
                                      
                                      4,780,589(Loss)
      income before income taxes
                                      
                                      $
                                      (
      653,499
                                      )
                                      
                                      $
                                      47,287
                                      
                                      
                                      $
                                      118,690Provision
      for income taxes
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      (loss) income
                                      
                                      $
                                      (653,499
                                      )
                                      
                                      $
                                      47,287
                                      
                                      
                                      $
                                      118,690Net
      (loss) income per common share—basic
                                      
                                      $
                                      (0.61
                                      )
                                      
                                      $
                                      0.04
                                      
                                      
                                      $
                                      0.11Net
      (loss) income per common share—diluted
                                      
                                      $
                                      (0.61
                                      )
                                      
                                      $
                                      0.04
                                      
                                      
                                      $
                                      0.11Weighted
      average number of common shares
                                      
                                      
                                      1,068,588
                                      
                                      
                                      
                                      1,068,588
                                      
                                      
                                      
                                      1,068,588


The
accompanying notes are an integral part of these statements.




56


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY





Years
ended December 31, 2008, 2007, 2006








Series A preferred stock
                            
                            
                            Common stock
                            
                            
                            Additional
      paid-in
                            
                            
                            Accumulated
                            
                            
                            Accumulated
      other comprehensive
                            
                            
                            Total
      shareholders’
                            
                            
                            ComprehensiveShares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            deficit
                            
                            
                            income (loss)
                            
                            
                            equity
                            
                            
                            income (loss)Balance
      at December 31, 2005
                            
                            
                            136,842
                            
                            
                            $
                            1,368
                            
                            
                            
                            1,068,588
                            
                            
                            $
                            10,686
                            
                            
                            $
                            14,749,852
                            
                            
                            $
                            ( 6,248,142
                            )
                            
                            $
                            (32,570
                            )
                            
                            $
                            8,481,194Unrealized
      gains on investment securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            13,960
                            
                            
                            
                            13,960
                            
                            
                            $
                            13,960Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            118,690
                            
                            
                            
                            118,690
                            
                            
                            
                            118,690Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            132,650Balance
      at December 31, 2006
                            
                            
                            136,842
                            
                            
                            $
                            1,368
                            
                            
                            
                            1,068,588
                            
                            
                            $
                            10,686
                            
                            
                            $
                            14,749,852
                            
                            
                            $
                            (6,129,452
                            )
                            
                            $
                            ( 18,610
                            )
                            
                            $
                            8,613,844Unrealized
      gains on investment securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            24,279
                            
                            
                            
                            24,279
                            
                            
                            $
                            24,279Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            47,287
                            
                            
                            
                            47,287
                            
                            
                            
                            47,287Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            71,566Balance
      at December 31, 2007
                            
                            
                            136,842
                            
                            
                            $
                            1,368
                            
                            
                            
                            1,068,588
                            
                            
                            $
                            10,686
                            
                            
                            $
                            14,749,852
                            
                            
                            $
                            (6,082,165
                            )
                            
                            $
                            5,669
                            
                            
                            $
                            8,685,410Unrealized
      gains on investment securities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            17,837
                            
                            
                            
                            17,837
                            
                            
                            $
                            17,837Net
      loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (653,499
                            )
                            
                            
                            (653,499
                            )
                            
                            
                            (653,499
                            )Total
      comprehensive loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (635,662
                            )Balance
      at December 31, 2008
                            
                            
                            136,842
                            
                            
                            $
                            1,368
                            
                            
                            
                            1,068,588
                            
                            
                            $
                            10,686
                            
                            
                            $
                            14,749,852
                            
                            
                            $
                            ( 6,735,664
                            )
                            
                            $
                            23,506
                            
                            
                            $
                            8,049,748








The
accompanying notes are an integral part of these statements.




57


UNITED
BANCSHARES, INC. AND SUBSIDIARY





CONSOLIDATEDSTATEMENTS OF CASH FLOWS





Years
ended December 31,








2008
                  
                  
                  2007
                  
                  
                  2006Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (653,499
                  )
                  
                  $
                  47,287
                  
                  
                  $
                  118,690Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Provision
      for loan losses
                  
                  
                  368,000
                  
                  
                  
                  120,000
                  
                  
                  
                  137,000Gain
      on sale of loans
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10,656
                  )Gain
      on sale of fixed assets
                  
                  
                  -
                  
                  
                  
                  (24,000
                  )
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  309,080
                  
                  
                  
                  284,554
                  
                  
                  
                  269,111Amortization
      of core deposit intangible
                  
                  
                  178,078
                  
                  
                  
                  178,078
                  
                  
                  
                  178,078Decrease
      (Increase) in accrued interest receivable andother
      assets
                  
                  
                  (61,403
                  )
                  
                  
                  103,437
                  
                  
                  
                  (173,145
                  )Increase
      in accrued interest payable andother
      liabilities
                  
                  
                  14,639
                  
                  
                  
                  73,922
                  
                  
                  
                  6,742Net
      cash provided by operating activities
                  
                  
                  154,896
                  
                  
                  
                  783,278
                  
                  
                  
                  525,821Cash
      flows from investing activities:Purchase
      of available-for-sale investments
                  
                  
                  (250,000
                  )
                  
                  
                  (1,010,098
                  )
                  
                  
                  (503,125
                  )Purchase
      of held-to-maturity investments
                  
                  
                  (7,198,840
                  )
                  
                  
                  (3,775,751
                  )
                  
                  
                  (5,116,828
                  )Proceeds
      from maturity and principal reductions ofavailable-for-sale
      investments
                  
                  
                  1,067,521
                  
                  
                  
                  904,992
                  
                  
                  
                  833,197Proceeds
      from maturity and principal reductions ofheld-to-maturity
      investments
                  
                  
                  7,769,031
                  
                  
                  
                  6,114,630
                  
                  
                  
                  2,380,686Proceeds
      from sale of student loans
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  568,166Net
      proceeds from sale of fixed assets
                  
                  
                  -
                  
                  
                  
                  204,000
                  
                  
                  
                  -Net
      (increase) decrease in loans
                  
                  
                  (3,850,451
                  )
                  
                  
                  (1,039,510
                  )
                  
                  
                  3,277,616Purchase
      of loans
                  
                  
                  -
                  
                  
                  
                  (1,718,060
                  )
                  
                  
                  -Purchase
      of premises and equipment
                  
                  
                  (960,477
                  )
                  
                  
                  (323,478
                  )
                  
                  
                  (196,945
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (3,423,216
                  )
                  
                  
                  (643,276
                  )
                  
                  
                  1,253,123Cash
      flows from financing activities:Net(decrease)
      increase in deposits
                  
                  
                  ( 5,180,214
                  )
                  
                  
                  1,160,846
                  
                  
                  
                  1,600,123Net
      cash (used in) provided by financing activities
                  
                  
                  (5,180,214
                  )
                  
                  
                  1,160,846
                  
                  
                  
                  1,600,123Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (8,448,535
                  )
                  
                  
                  1,300,847
                  
                  
                  
                  3,379,366Cash
      and cash equivalents at beginning of year
                  
                  
                  13,920,006
                  
                  
                  
                  12,619,159
                  
                  
                  
                  9,239,793Cash
      and cash equivalents at end of year
                  
                  $
                  5,471,471
                  
                  
                  $
                  13,920,006
                  
                  
                  $
                  12,619,159Supplemental
      disclosure of cash flow information:Cash
      paid during the year for interest
                  
                  $
                  797,832
                  
                  
                  $
                  1,214,361
                  
                  
                  $
                  963,979








The
accompanying notes are an integral part of these statements.





58




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTESTO CONSOLIDATED FINANCIAL
  STATEMENTS





December
      31, 2008, 2007, 2006








1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





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





Statement
      of Cash Flows





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





Securities
      Held-to-Maturity





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





Securities
      Available-for-Sale





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





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





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





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





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








(Continued)











59








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006








1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - Continued





Loans





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





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





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





Loans
Held-for-Sale





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





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





Allowance
for Loan Losses





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





(Continued)








60







UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006





1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - Continued





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





Bank
      Premises and Equipment





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





Income
      Taxes





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





Earnings
      (Loss) Per Share





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




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.







(Continued)





61







UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006





1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued




Financial Instruments





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





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





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





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





Loans:
      The fair value of loans was estimated using a discounted cash flow
      analysis, which considered estimated pre­payments and
      amortizations.  Prepayments and discount rates were based on
      current marketplace estimates and pricing.  Residential mortgage
      loans were discounted at the current effective yield, including fees, of
      conventional loans,
      adjusted for their maturities with a spread to the Treasury yield
      curve.  The carrying amount of accrued interest receivable
      approximates fair market
value.








Deposit
      liabilities: The fair values disclosed for demand deposits (e.g., interest
      and noninterest checking, passbook savings, and certain types of money
      market accounts) are equal to the amounts payable on demand at the
      reporting date (e.g., their carrying amounts).  The carrying
      amounts for variable-rate, fixed-term money market accounts and
      certificates of deposit approximate the fair values at the reporting
      date.  Fair values for fixed-rate certificates of deposit are
      estimated using a discounted cash flow calculation.  The
      Treasury Yield Curve was utilized for discounting cash flows as it
      approximates the average marketplace certificate of deposit rates across
      the relevant maturity spectrum. Commitments to extend credit: The carrying
      amounts for commitments to extend credit approximate fair value as such
      commitments are not substantially different from the fees currently
      charged to enter into similar agreements, taking into account the
      remaining terms of the agreements and the present creditworthiness of the
      counterparts.  The carrying amount of accrued interest payable
      approximates fair market value.Fair Value
      MeasurementEffective
      January 1, 2008, the Company adopted SFAS 157 Fair Value Measurement,which provides a framework for measuring fair value under generally
      accepted accounting principles.   SFAS 157 applies to all
      financial instruments that are being measured and reported on a fair value
      basis with the exception of nonfinancial assets and nonfinancial
      liabilities that are recognized and disclosed at fair value on a
      non-recurring basis for which fair value disclosures have been delayed
      under FASB Staff Position (FSP) No. SFAS 157-2 “Effective date of FASB
      Statement No. 157” to fiscal years beginning after November 15, 2008 and
      interim periods within those fiscal
years.







(Continued)





62


UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006





1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES - Continued





The
      Company also adopted SFAS 159, The Fair Value Option for
      Financial Assets and Financial Liabilities,on January 1,
      2008.  SFAS 159 allows an entity the irrevocable option to elect
      fair value for the initial and subsequent measurement financial of certain
      assets on a contract-by-contract basis.  SFAS 159 requires that
      the difference between the carrying value before election of the fair
      value option and the fair value of these instruments be recorded as an
      adjustment to beginning retained earnings in the period of
      adoption.  We have not elected the fair value option for any of
      our existing financial assets or liabilities and consequently did not have
      any adoption related adjustments.Intangible
      AssetsOn
      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.


2008
              
              
              2007Core
      Deposit Premium (cost)
              
              $
              2,449,488
              
              
              $
              2,449,488Less
      accumulated amortization
              
              
              (1,601,442
              )
              
              
              (1,423,364
              )$
              848,046
              
              
              $
              1,026,202




Amortization
      of the intangible totaled $178,078 for each of the years ended December
      31, 2008, 2007, 2006.  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. No impairment has been
  recognized.Foreclosed
      Real Estate





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





Management’s
      Use of Estimates





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





Segments





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





(Continued)





63


UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007 and 2006





1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued





Reclassifications





Certain
      reclassifications have been made to the prior year’s financial statements
      to conform to the 2008
presentation.





Comprehensive
      Income





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





December 31, 2008Before
      tax
                
                
                Tax
                
                
                Net
      of taxamount
                
                
                (expense)
                
                
                amountUnrealized
      gains on securitiesUnrealized
      holding gains arising during period
                
                $
                29,765
                
                
                
                (11,928
                )
                
                $
                17,837Less:
      reclassification adjustment for gainsrealized
      in net income
                
                
                -
                
                
                
                -
                
                
                
                -Other
      comprehensive income, net
                
                $
                29,765
                
                
                $
                (11,928
                )
                
                $
                17,837December 31, 2007Before
      tax
                
                
                Tax
                
                
                Net
      of taxamount
                
                
                benefit (expense)
                
                
                amountUnrealized
      gains on securitiesUnrealized
      holding gains arising during period
                
                $
                36,237
                
                
                $
                (11,958
                )
                
                $
                24,279Less:
      reclassification adjustment for gainsrealized
      in net income
                
                
                -
                
                
                
                -
                
                
                
                -Other
      comprehensive income, net
                
                $
                36,237
                
                
                $
                (11,958
                )
                
                $
                24,279December 31, 2006Before
      tax
                
                
                Tax
                
                
                Net
      of taxamount
                
                
                benefit (expense)
                
                
                amountUnrealized  losses
      on securitiesUnrealized
      holding losses arising during period
                
                $
                20,836
                
                
                $
                (6,876
                )
                
                $
                13,960Less:
      reclassification adjustment for gainsrealized
      in net income
                
                
                -
                
                
                
                -
                
                
                
                -Other
      comprehensive income(loss), net
                
                $
                20,836
                
                
                $
                (6,876
                )
                
                $
                13,960





Recent
Accounting Pronouncements




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





(Continued)





64








UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006




SFAS No.
160, Non-controlling Interests
in Consolidated Financial Statement, requires all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as equity
in the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions.  This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited.   This Statement shall be
applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented.





2.  CASH
AND DUE FROM BANK BALANCES





The Bank
maintains various deposit accounts with other banks to meet normal fund
transaction requirements and to compensate other banks for certain correspondent
services.  The withdrawal or usage restrictions of these balances did
not have a significant impact on the operations of the Bank as of December 31,
2008.  Reserve balances were $125,000 and $627,000, respectively, as
of December 31, 2008 and 2007.





3.  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, 2008 and 2007 are as
follows:





2008Gross
              
              
              GrossAmortized
              
              
              unrealized
              
              
              unrealized
              
              
              Marketcost
              
              
              gains
              
              
              losses
              
              
              valueAvailable-for-sale:U.S.
      Government agency securities
              
              $
              250,000
              
              
              $
              3,515
              
              
              $
              -
              
              
              $
              253,515Mortgage-backed
      securities
              
              
              2,252,145
              
              
              
              34,072
              
              
              
              (2,504
              )
              
              
              2,283,713Total
      debt securities
              
              
              2,502,145
              
              
              
              37,587
              
              
              
              (2,504
              )
              
              
              2,537,228Investments
      in mutual funds
              
              
              127,923
              
              
              
              -
              
              
              
              -
              
              
              
              127,923$
              2,630,068
              
              
              $
              37,587
              
              
              $
              (2,504
              )
              
              $
              2,665,151Held-to-maturity:U.S.Government
      agency securities
              
              $
              6,199,087
              
              
              $
              37,961
              
              
              $
              (7,033
              )
              
              $
              6,230,015Mortgage-backed
      securities
              
              
              3,697,879
              
              
              
              94,015
              
              
              
              (5,595
              )
              
              
              3,786,299$
              9,896,965
              
              
              $
              131,976
              
              
              $
              (12,628
              )
              
              $
              10,016,3142007Gross
              
              
              GrossAmortized
              
              
              unrealized
              
              
              unrealized
              
              
              Marketcost
              
              
              gains
              
              
              losses
              
              
              valueAvailable-for-sale:U.S.Government
      agency securities
              
              $
              500,000
              
              
              $
              5,625
              
              
              $
              -
              
              
              $
              505,625Mortgage-backed
      securities
              
              
              2,822,982
              
              
              
              15,621
              
              
              
              (12,785
              )
              
              
              2,825,818Total
      debt securities
              
              
              3,322,982
              
              
              
              21,246
              
              
              
              (12,785
              )
              
              
              3,331,443Investments
      in mutual funds
              
              
              123,920
              
              
              
              
              
              
              
              
              
              
              
              123,920$
              3,446,902
              
              
              $
              21,246
              
              
              $
              (12,785
              )
              
              $
              3,455,363Held-to-maturity:U.S.Government
      agency securities
              
              $
              5,999,273
              
              
              $
              16,745
              
              
              $
              (6,865
              )
              
              $
              6,009,153Mortgage-backed
      securities
              
              
              4,466,780
              
              
              
              43,699
              
              
              
              (25,812
              )
              
              
              4,484,667$
              10,466,053
              
              
              $
              60,144
              
              
              $
              (32,677
              )
              
              $
              10,493,820








65





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





3.  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, 2008 (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
              
              
              1
              
              
              $
              493
              
              
              $
              (7
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              493
              
              
              $
              (
      7
              )Mortgage
      backedsecurities
              
              
              13
              
              
              
              802
              
              
              
              (8
              )
              
              
              -
              
              
              
              -
              
              
              
              802
              
              
              
              (8
              )Total
      temporarilyimpaired
      investmentsecurities
              
              
              14
              
              
              $
              1,295
              
              
              $
              (15
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              1,295
              
              
              $
              (15
              )








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





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





(Continued)





66




UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





3. INVESTMENTS-Continued





Management
does not believe any individual unrealized loss as of December 31, 2008 and 2007
represents other-than temporary impairment.  The unrealized losses on
these securities are caused by the changes in general market interest
rates





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





Maturities
of investment securities classified as available-for-sale and held-to-maturity
at December 31, 2008 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
              
              
              250,000
              
              
              
              253,515Mortgage-backed
      securities
              
              
              2,252,145
              
              
              
              2,283,713Total
      debt securities
              
              
              2,502,145
              
              
              
              2,537,228Investments
      in mutual funds
              
              
              127,923
              
              
              
              127,923$
              2,630,068
              
              
              $
              2,665,151Held-to-maturity:Due
      in one month through three years
              
              $
              -
              
              
              $
              -Due
      after three years through five years
              
              
              2,000,000
              
              
              
              2,014,498Due
      after five years through fifteen years
              
              
              3,699,399
              
              
              
              3,722,863Due
      after fifteen years
              
              
              499,688
              
              
              
              492,655Mortgage-backed
      securities
              
              
              3,697,879
              
              
              
              3,786,299$
              9,896,965
              
              
              $
              10,016,314





No
      securities were sold during 2008, 2007, and
  2006.





As
      of December 31, 2008 and 2007, investment securities with a book value of
      $12,434,194 and $11,607,363, respectively,   were pledged
      as collateral to secure public deposits and for other purposes required or
      permitted by law.








67








UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





4.  LOANS
AND ALLOWANCE FOR LOAN LOSSES





The
composition of the net loans is as follows:





2008
              
              
              2007Commercial
      loans
              
              $
              36,484,378
              
              
              $
              33,102,633Residential
      mortgages
              
              
              6,110,821
              
              
              
              6,549,378Consumer
      loans
              
              
              6,068,238
              
              
              
              5,531,828Total
      loans
              
              
              48,663,437
              
              
              
              45,183,839Less
      allowance for loan losses
              
              
              (586,673
              )
              
              
              (589,526
              )Net
      loans
              
              $
              48,076,764
              
              
              $
              44,594,313




At
December 31, 2008 and 2007, unamortized net deferred fees totaled $114,910 and
$109,651, respectively.





As of
December 31, 2008 and 2007, the Bank had loans to certain officers and directors
and their affiliated interests  in
aggregate dollar amounts of $826,868 and $877,946, respectively. During 2008,
there were $39,000 in new loans to related parties and repayments amounted to
$90,078. During 2007, there were no new loans to related parties and repayments
amounted to 145,129. During 2006, there were $212,176 in new loans to related
parties and repayments amounted to $95,299.





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





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


2008
              
              
              2007
              
              
              2006Total
      non-accrual loans
              
              $
              1,701
              
              
              $
              745
              
              
              $
              626Total
      impaired loans
              
              
              2,531
              
              
              
              1,745
              
              
              
              896Average
      impaired loans
              
              
              2,192
              
              
              
              929
              
              
              
              538Specific
      allowance allocated to impaired loans
              
              
              96
              
              
              
              254
              
              
              
              105Non-accrual/impaired
      loans with SBA Guarantees
              
              
              611
              
              
              
              374
              
              
              
              152Interest
      recognized on impaired loans
              
              
              65
              
              
              
              112
              
              
              
              76Loans
      past due 90 days and still accruing
              
              
              578
              
              
              
              1,067
              
              
              
              170Changes
      in the allowance for possible loan losses are as follows:2008
              
              
              2007
              
              
              2006Balance,
      beginning of year
              
              $
              589,529
              
              
              $
              561,409
              
              
              $
              472,198Provision
              
              
              368,000
              
              
              
              120,000
              
              
              
              137,000Charge-offs
              
              
              (519,363
              )
              
              
              (229,557
              )
              
              
              (272,459
              )Recoveries
              
              
              148,510
              
              
              
              137,674
              
              
              
              224,670Balance,
      end of year
              
              $
              586,673
              
              
              $
              589,526
              
              
              $
              561,409





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, 2008, approximately 37% of the Bank’s
commercial loan portfolio was concentrated in loans made to religious
organizations.





68








UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





5.  BANK
PREMISES AND EQUIPMENT





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


Estimateduseful life
              
              2008
              
              
              2007Buildings
      and leasehold improvements
              10-15
      years
              
              $
              1,655,273
              
              
              $
              1,039,387Furniture
      and equipment
              3-
      7 years
              
              
              1,197,105
              
              
              
              1,349,6142,852,378
              
              
              
              2,389,001Less
      accumulated depreciation
              
              
              
              (1,230,064
              )
              
              
              (1,422,507
              )$
              1,622,314
              
              
              $
              966,494





Depreciation
expense on fixed assets totaled $304,657, $276,508, and $258,389 for the years
ended December 31, 2008, 2007, 2006, respectively.





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, 2008, 2007,
      and 2006 was 394,396, $384,179 and $387,144., respectively. Future minimum
      lease payments under operating leases are as
  follows:


Year ending December 31,
                
                Operating
      leases2009
                
                $
                427,8772010
                
                
                366,7542011
                
                
                357,2782012
                
                
                373,1832013
                
                
                380,399Thereafter
                
                
                1,555,290Total
      minimum lease payments
                
                $
                3,460,781





In April
2008, the Bank began a 10-year lease for a new more visible retail space at
Progress Plaza.  The lease requires annual rental payments of $66,482
for Years 1-5 and $75,431 for Years 5-10.  This transaction is
reflected in the Bank’s long-term rental obligations noted above.





6.  DEPOSITS





At
      December 31, 2008, the scheduled maturities of time deposits (certificates
      of deposit) are as follows (in
thousands):





2007
              
              $
              19,8312008
              
              
              6002009
              
              
              4112010
              
              
              1752011
              
              
              19Thereafter
              
              
              66$
              21,102





69




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





7.   BORROWINGS





At
      December 31, 2008,  the Bank has the ability to borrow on a
      fully secured basis at the Discount Window of the Federal Reserve Bank for
      which it currently has $1.75 million in securities pledged that result in
      borrowing capacity of $1.5 million.  As of December 31, 2008 and
      2007, the Bank had no borrowings
outstanding.





8. INCOME
TAXES





At
      December 31, 2008, the Bank has net operating loss carry forwards of
      approximately $4,919000 for income tax purposes that expire in 2012
      through 2026.





Deferred
      income taxes reflect the net tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial reporting
      purposes and the amount used for income tax purposes.  For
      financial reporting purposes, a valuation allowance of $2,300,917 and
      $2,185,715 as of December 31, 2008 and 2007, respectively, has been
      recognized to offset the deferred tax assets related to the cumulative
      temporary differences and the tax loss carry
      forwards.  Significant components of the Bank’s deferred tax
      assets are as follows:


December
      31,2008
              
              
              2007Deferred tax assets(liabilities):Provision
      for loan losses
              
              $
              92,057
              
              
              $
              82,166Unrealized
      losses on investment securities
              
              
              11,928
              
              
              
              12,507Depreciation
              
              
              402,618
              
              
              
              413,569Net
      operating loss carryforwards
              
              
              1,672,613
              
              
              
              1,570,340Other
              
              
              121,700
              
              
              
              107,132Valuation allowance for deferred tax assets
              
              
              (2,300,917
              )
              
              
              (2,185,715
              )Net
      deferred tax assets
              
              $
              -
              
              
              $
              -




2008
              
              
              2007Effective rate reconciliation:Tax
      at statutory rate (34%)
              
              $
              (222,190
              )
              
              $
              16,078Nondeductible
      expenses
              
              
              5,608
              
              
              
              6,111Increase
      in valuation allowance
              
              
              115,202
              
              
              
              (13,933
              )Other
              
              
              101,380
              
              
              
              (8,256
              )Total
      tax expense
              
              $
              -
              
              
              $
              -




On
      January 1, 2007, we adopted FIN 48, which provides guidance for the
      recognition and measurement of certain tax positions in an enterprise's
      financial statements. Recognition involves a determination of whether it
      is more likely than not that a tax position will be sustained upon
      examination with the presumption that the tax position will be examined by
      the appropriate taxing authority having full knowledge of all relevant
      information. The adoption of FIN 48 did not have a material impact on our
      consolidated financial position, results of operations, or cash
      flows.





Our
      policy is to record interest and penalties associated with unrecognized
      tax benefits as additional income taxes in the statement of operations. As
      of December 31, 2008, we had no unrecognized tax benefits, and
      accordingly, we have not recognized any interest or penalties during 2008
      related to unrecognized tax benefits. We did not accrue for interest or
      penalties as of December 31, 2008. We do not have an accrual for uncertain
      tax positions as of December 31,
2008.





70




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





9.  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:





2008
              
              
              2007Commitments to extend credit
              
              $
              10,968,300
              
              
              $
              14,004,300Outstanding
      letters of credit
              
              
              -
              
              
              
              -





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract and unused credit card
lines.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.  Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a
fee.





10.  FAIR
VALUES OF FINANCIAL INSTRUMENTS




SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  In determining fair
value, the Company uses various methods including market, income and cost
approaches.  Based on these approaches, the Company often utilizes
certain assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and or the risks inherent in the
inputs to the valuation technique.  These inputs can be readily
observable, market corroborated, or generally unobservable
inputs.  The Company utilizes techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs.  Based
on the observable inputs used in valuation techniques the Company is required to
provide the following information according to the fair value
hierarchy.  The fair value hierarchy ranks the quality and reliability
of the information used to determine fair values.  Financial assets
and liabilities carried at fair value will be classified and disclosed as
follows:




Level
1


·
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.




(Continued)





71





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006








Generally, this includes
debt and equity securities and derivative contracts that are traded in an active
exchange market (i.e. New York Stock Exchange), as well as certain US Treasury
and US Government and agency mortgage-backed securities that are highly liquid
and are actively traded in over-the-counter markets.





Level
2 Inputs


·
            Quoted
      prices for similar assets or liabilities in active
  markets.


·
            Quoted
      prices for identical or similar assets or liabilities in markets that are
      not active.


·
            Inputs
      other than quoted prices that are observable, either directly or
      indirectly, for the term of the asset or liability (e.g., interest rates,
      yield curves, credit risks, prepayment speeds or volatilities) or “market
      corroborated inputs.”


·
            Generally,
      this includes US Government and agency mortgage-backed securities,
      corporate debt securities, derivative contracts and loans held for
      sale.





Level
3 Inputs


·
            Prices
      or valuation techniques that require inputs that are both unobservable
      (i.e. supported by little or no market activity) and that are significant
      to the fair value of the assets or
liabilities.


·
            These
      assets and liabilities include financial instruments whose value is
      determined using pricing models, discounted cash flow methodologies, or
      similar techniques, as well as instruments for which the determination of
      fair value requires significant management judgment or
      estimation.





These
levels are not necessarily an indication of the risks or liquidity associated
with these investments.  The following is a description of the
valuation methodologies used for instruments measured at fair
value:





Fair
Value on a Recurring Basis


The table
below presents the balances of assets and liabilities on the consolidated
balance sheets at their fair value as of December 31, 2008 by level within the
SFAS No. 157 fair value measurement hierarchy.





(in
      000’s)
            
            Fair
      Value Measurements at Reporting Date Using:Assets/Liabilities
      Measured at Fair Value at December 31, 2008
            Quoted
      Prices in Active markets for Identical Assets (Level 1)
            Significant
      other observable Inputs (Level 2)
            Significant
      Unobservable Inputs (Level 3)Assets:
              Investment
      securities available-for-sale
            $2,665
            
            $2,665
            -





The fair
value of available for sale securities is the market value based on quoted
market prices, when available, or market prices provided by recognized broker
dealers.  If listed prices or quotes are not available, fair value is
based upon externally developed models that use unobservable inputs due to the
limited market activity of the instrument.




(Continued)





72




UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, 2006




SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued








Fair
Value on a Nonrecurring Basis


Certain
assets and liabilities are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example,
when there is evidence of impairment).  The following table presents
the assets and liabilities carried on the consolidated balance sheets by level
within the SFAS No. 157 hierarchy as of December 31, 2008, for which a
nonrecurring change in fair value has been recorded during the year ended
December 31, 2008.





Carrying Value at December 31,
2008:


(in
      000’s)
                Total
                Quoted
      Prices in Active markets for Identical Assets
                  (Level
      1)
                Significant
      other observable Inputs
                  (Level
      2)
                Significant
      Unobservable Inputs
                  (Level
      3)Assets:
                  Impaired
      Loans
                $
      2,531
                -
                -
                $
      2,531





The fair
value of impaired loans is derived in accordance with SFAS 114, Accounting by
Creditors for Impairment of a Loan.  Fair value is determined at the
fair value of the collateral if the loan is collateral dependent.





The
valuation allowance for impaired loans is included in the allowance for loan and
lease losses in the consolidated balance sheets.  The valuation
allowance for impaired loans at December 31, 2008 was $96,708.




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.


2008
                          
                          
                          2007Carrying
                          
                          
                          Fair
                          
                          
                          Carrying
                          
                          
                          Fairamount
                          
                          
                          value
                          
                          
                          amount
                          
                          
                          value(Dollars
      in thousands)Assets:Cash
      and cash equivalents
                          
                          $
                          5,471
                          
                          
                          $
                          5,471
                          
                          
                          $
                          13,920
                          
                          
                          $
                          13,920Investment
      securities
                          
                          
                          12,555
                          
                          
                          
                          12,681
                          
                          
                          
                          13,921
                          
                          
                          
                          13,949Loans,
      net of allowance for loan losses
                          
                          
                          48,077
                          
                          
                          
                          48,416
                          
                          
                          
                          44,594
                          
                          
                          
                          45,400Interest
      receivable
                          
                          
                          433
                          
                          
                          
                          433
                          
                          
                          
                          399
                          
                          
                          
                          399Liabilities:Demand
      deposits
                          
                          
                          23,134
                          
                          
                          
                          23,134
                          
                          
                          
                          24,728
                          
                          
                          
                          24,728Savings
      deposits
                          
                          
                          16,668
                          
                          
                          
                          16,668
                          
                          
                          
                          19,913
                          
                          
                          
                          19,913Time
      deposits
                          
                          
                          21,102
                          
                          
                          
                          21,102
                          
                          
                          
                          21,697
                          
                          
                          
                          21,697Interest
      Payable
                          
                          
                          127
                          
                          
                          
                          127
                          
                          
                          
                          135
                          
                          
                          
                          135





73





UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





11.  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.  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.  A summary of the
status of the Bank’s stock options as of December 31, 2008 and 2007 and the
changes during the years ended on those dates is as presented
below:





2008
            2007#
      Shares of  Underlying Options
            Exercise
      Price
            #
      Shares of Underlying Options
            Exercise
      PriceOutstanding
      at the beginning of the period
            29,694
            
            29,694
            $  8.54Granted
            -
            
            -
            -Forfeited
            -
            
            -
            -Expired
            (29,694)
            
            -
            -Outstanding
      at the end of the period
            -
            
            29,694
            $  8.54Exercisable
      at the end of the period
            -
            
            29,694
            $ 
      8.54




There was
no compensation cost charged against income for the Plan for the years ended
December 31, 2008, 2007and 2006 as no options were granted under the Plan during
these periods.  All options were fully vested butexpired at December 31,
2008.




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.




74




UNITED
      BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





12.  CONSOLIDATED
FINANCIAL INFORMATION—PARENT COMPANY ONLY





Condensed
      Balance Sheets


December 31,(Dollars
      in thousands)
              
              2008
              
              
              2007Assets:Due
      from banks (subsidiary)
              
              $
              189
              
              
              $
              253Investment
      in United Bank of Philadelphia
              
              
              7,861
              
              
              
              8,435Total
      assets
              
              $
              8,050
              
              
              $
              8,688Liabilities:Other
      accrued liabilities
              
              
              -
              
              
              
              3Total
      Liabilities
              
              
              -
              
              
              
              3Shareholders’
      equity:Series
      A preferred stock
              
              
              1
              
              
              
              1Common
      stock
              
              
              11
              
              
              
              11Additional
      paid-in capital
              
              
              14,750
              
              
              
              14,750Accumulated
      deficit
              
              
              (6,736
              )
              
              
              (6,083
              )Net
      unrealized holding gains on securities available-for-sale
              
              
              24
              
              
              
              6Total
      shareholders’ equity
              
              
              8,050
              
              
              
              8,685Total
      liabilities and shareholders’ equity
              
              $
              8,050
              
              
              $
              8,688








Condensed
      Statements of Operations




Years ended December 31,(Dollars
      in thousands)
                                                
                                                2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006Other
      Expenses
                                                
                                                $
                                                (61
                                                )
                                                
                                                $
                                                (26
                                                )
                                                
                                                $
                                                -Equity
      in net (loss) income of subsidiary
                                                
                                                $
                                                (592
                                                )
                                                
                                                $
                                                75
                                                
                                                
                                                $
                                                119Net
      (loss) income
                                                
                                                $
                                                (653
                                                )
                                                
                                                $
                                                47
                                                
                                                
                                                $
                                                119Condensed
      Statements of Cash FlowsYears ended December 31,(Dollars
      in thousands)
                                                
                                                2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006Cash
      flows from operating activities:Net
      income (loss)
                                                
                                                $
                                                (653
                                                )
                                                
                                                $
                                                47
                                                
                                                
                                                $
                                                119Adjustments:Increase
      (decrease) in liabilities
                                                
                                                
                                                (3
                                                )
                                                
                                                
                                                (8
                                                )Equity
      in net income (loss) of subsidiary
                                                
                                                
                                                592
                                                
                                                
                                                
                                                (75
                                                )
                                                
                                                
                                                (119
                                                )Net
      cash provided by operating activities
                                                
                                                
                                                (64
                                                )
                                                
                                                
                                                (36
                                                )
                                                
                                                
                                                -Cash
      and cash equivalents at beginning of year
                                                
                                                
                                                253
                                                
                                                
                                                
                                                289
                                                
                                                
                                                
                                                289Cash
      and cash equivalents at end of year
                                                
                                                $
                                                189
                                                
                                                
                                                $
                                                253
                                                
                                                
                                                $
                                                289








75


UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006


13.  REGULATORY
MATTERS





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





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





The
      most recent notification from the Bank’s regulatory agencies categorized
      the Bank as “well 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.   The Bank’s growth and other operating factors may
      have an adverse effect on its capital
ratios.





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


Actual
              
              
              For
      capital adequacy
    purposes
              
              
              To
      be well capitalized under prompt corrective action provisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs of December 31, 2008:Total capital to risk-weighted
      assets:Consolidated
              
              $
              7,765
              
              
              
              16.57
              %
              
              $
              3,768
              
              
              
              8.00
              %
              
              
              N/ABank
              
              
              7,576
              
              
              
              16.17
              
              
              
              3,749
              
              
              
              8.00
              %
              
              $
              4,686
              
              
              
              10.00
              %Tier I capital to risk-weighted
      assets:Consolidated
              
              
              7,178
              
              
              
              15.32
              
              
              
              1,884
              
              
              
              4.00
              %
              
              
              N/ABank
              
              
              6,989
              
              
              
              14.91
              
              
              
              1,874
              
              
              
              4.00
              %
              
              $
              2,812
              
              
              
              6.00
              %Tier I capital to average assets:Consolidated
              
              
              7,178
              
              
              
              10.27
              
              
              
              2,804
              
              
              
              4.00
              %
              
              
              N/ABank
              
              
              6,989
              
              
              
              10.00
              
              
              
              2,795
              
              
              
              4.00
              %
              
              $
              3,493
              
              
              
              5.00
              %





76


UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006


As
      of December 31, 2007:Total
      capital to risk-weighted
      assets:Consolidated
              
              $
              8,230
              
              
              
              18.02
              %
              
              $
              3,676
              
              
              
              8.00
              %
              
              
              N/ABank
              
              
              7,974
              
              
              
              17.46
              
              
              
              3,653
              
              
              
              8.00
              %
              
              $
              4,567
              
              
              
              10.00
              %Tier
      I capital to risk-weighted
      assets:Consolidated
              
              
              7,659
              
              
              
              16.77
              
              
              
              1,838
              
              
              
              4.00
              %
              
              
              N/ABank
              
              
              7,403
              
              
              
              16.15
              
              
              
              1,827
              
              
              
              4.00
              %
              
              $
              2,740
              
              
              
              6.00
              %Tier
      I capital to average assets:Consolidated
              
              
              7,659
              
              
              
              10.34
              
              
              
              2,975
              
              
              
              4.00
              %
              
              
              N/ABank
              
              
              7,403
              
              
              
              9.99
              
              
              
              2,964
              
              
              
              4.00
              %
              
              $
              3,705
              
              
              
              5.00
              %





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.





14.  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.





15.  EARNINGS
PER SHARE COMPUTATION





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





Year ended December 31,
2008Income
              
              
              Shares
              
              
              Per
      share(numerator)
              
              
              (denominator)
              
              
              amountNet
      loss
              
              $
              (653,499
              )Basic  EPSLoss
      available to common stockholders
              
              $
              (653,499
              )
              
              
              1,068,588
              
              
              $
              (0.61
              )Fully
      Diluted EPSLoss
      available to common stockholders
              
              $
              (653,499
              )
              
              
              1,068,588
              
              
              $
              (0.61
              )Year ended December 31,
2007Income
              
              
              Shares
              
              
              Per
      share(numerator)
              
              
              (denominator)
              
              
              amountNet
      income
              
              $
              47,287Basic  EPSIncome
      available to common stockholders
              
              $
              47,287
              
              
              
              1,068,588
              
              
              $
              0.04Fully
      Diluted EPSIncome
      available to common stockholders
              
              $
              47,287
              
              
              
              1,068,588
              
              
              $
              0.04








77




UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006





15.  EARNINGS
PER SHARE COMPUTATION-Continued


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
              
              
              $
              0.11




Options
      to purchase 29,694 shares of common stock are not included in the
      computation of diluted EPS for the years ended December 31, 2008, 2007,
      and 2006 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.





16.  SUMMARY
OF QUARTERLY RESULTS (UNAUDITED)





The
      following summarizes the consolidated results of operations during 2008
      and 2007, on a quarterly basis, for United Bancshares, Inc. and
      Subsidiary:





(Dollars
      in thousands)


2008Fourth
              
              
              Third
              
              
              Second
              
              
              Firstquarter
              
              
              quarter
              
              
              quarter
              
              
              quarterInterest
      income
              
              $
              965
              
              
              $
              1,042
              
              
              $
              1,033
              
              
              $
              1,040Interest
      expense
              
              
              174
              
              
              
              180
              
              
              
              192
              
              
              
              244Net
      interest income
              
              
              791
              
              
              
              862
              
              
              
              841
              
              
              
              796Provision
      for loan losses
              
              
              75
              
              
              
              278
              
              
              
              15
              
              
              
              -Net
      interest after provision for loan losses
              
              
              716
              
              
              
              584
              
              
              
              826
              
              
              
              796Noninterest
      income
              
              
              313
              
              
              
              276
              
              
              
              312
              
              
              
              308Noninterest
      expense
              
              
              1,224
              
              
              
              1,208
              
              
              
              1,181
              
              
              
              1,172Net
      loss
              
              $
              (195
              )
              
              $
              (348
              )
              
              $
              (44
              )
              
              $
              ( 68
              )Basic
      loss per common share
              
              $
              (0.18
              )
              
              $
              (0.32
              )
              
              $
              (0.04
              )
              
              $
              (0.06
              )





78




UNITED
BANCSHARES, INC. AND SUBSIDIARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED





December
      31, 2008, 2007, and 2006








16.  SUMMARY
OF QUARTERLY RESULTS (UNAUDITED)--continued





The
      following summarizes the consolidated results of operations during 2008
      and 2007, on a quarterly basis, for United Bancshares, Inc. and
      Subsidiary:





(Dollars
      in thousands)








2007Fourth
              
              
              Third
              
              
              Second
              
              
              Firstquarter
              
              
              quarter
              
              
              quarter
              
              
              quarterInterest
      income
              
              $
              1,183
              
              
              $
              1,236
              
              
              $
              1,221
              
              
              $
              1,171Interest
      expense
              
              
              294
              
              
              
              327
              
              
              
              311
              
              
              
              280Net
      interest income
              
              
              889
              
              
              
              909
              
              
              
              910
              
              
              
              891Provision
      for loan losses
              
              
              50
              
              
              
              10
              
              
              
              50
              
              
              
              10Net
      interest after provision for loan losses
              
              
              839
              
              
              
              899
              
              
              
              860
              
              
              
              881Noninterest
      income
              
              
              342
              
              
              
              302
              
              
              
              395
              
              
              
              281Noninterest
      expense
              
              
              1,208
              
              
              
              1,196
              
              
              
              1,212
              
              
              
              1,136Net  income(loss)
              
              $
              (27
              )
              
              $
              5
              
              
              $
              43
              
              
              $
              26Basic
      earnings(loss) per common share
              
              $
              (0.03
              )
              
              $
              0.01
              
              
              $
              0.04
              
              
              $
              0.02Diluted
      earnings per common share
              
              $
              0.03
              )
              
              $
              0.01
              
              
              $
              0.04
              
              
              $
              0.02


79