UNITED BANCSHARES INC /PA - FORM 10-K

Attached files

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EX-32.2 - EXHIBIT 32.2B - UNITED BANCSHARES INC /PA	ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PA	ex31-1.htm
EX-32.1 - EXHIBIT 32.1A - UNITED BANCSHARES INC /PA	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PA	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

[ ]

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 registered
NONE	NONE

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

Common Stock, $ .01 Par Value

(Title of Class)

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

Yes [ ] No [X]

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

Yes [ ] No [X]

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

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

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

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

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

Yes [ ] No [X]

The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was [_not applicable ] on June 30, 2010. 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 $.01 par value 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 8, 2011 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 Incorporated
	None

The exhibit index is on pages 50 through 51. There are 89 pages in this report.

FORM 10-K

United Bancshares, Inc.

Index

Item No.		Page

PART I

1.	Business	4

1A.	Risk Factors	12

1B.	Unresolved Staff Comments	15

2.	Properties	15

3.	Legal Proceedings	16

4.	Reserved	16
PART II

5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16

6.	Selected Financial Data	17

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

7A.	Quantitative and Qualitative Disclosures about Market Risk	35

8.	Financial Statements and Supplementary Data	35

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35

9A.	Controls and Procedures	35

9B.	Other Information	36
PART III

10.	Directors, Executive Officers, and Corporate Governance	37

11.	Executive Compensation	43

12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47

13.	Certain Relationships and Related Transactions, and Director Independence	48

14.	Principal Accountant Fees and Services	49
PART IV

15.	Exhibits and Financial Statement Schedules	50

UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 8, 2011.

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 fair 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) UBS’ need for capital; (j) 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; (k) 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; (l) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; (m) the ability of key third party providers to perform their obligations to UBS and; (n) and UBS’ success in managing the risks involved in the foregoing.

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

ITEM 1 — BUSINESS

United Bancshares, Inc.

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

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

As of March 8, 2011, UBS and the Bank had a total of 31 employees.

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, 2010, the Bank had total deposits aggregating approximately $67.2 million and had total net loans outstanding of approximately $44.7 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 2010 and 2009, the Bank received grants totaling $394,400 and $165,500, respectively, from the U.S. Treasury CDFI Bank Enterprise Award Fund for its small business lending activity. Management intends to actively pursue additional CDFI and other government funding in 2011 to support its lending activity and capital adequacy.

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

A broad range of credit products is offered to the businesses and consumers in the Bank’s service area, including commercial loans, student loans, home improvement loans, auto loans, personal loans, home equity loans and secured credit card loans. At March 8, 2011, the Bank’s maximum legal lending limit was approximately $988,000 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 and other local agency credit enhancement programs including the Small Business Administration (“SBA”) and Department of Transportation (DOT), and Philadelphia Industrial Development Corporation (“PIDC”) when deemed appropriate. These programs offer guarantees of 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 “uniqueness” in the marketplace and its mission to service groups of people who have traditionally been under served and by its devotion to personalized customer service. A new branding message will be introduced in 2011, “So Much More Than Banking”, that highlights the Bank’s community development focus.

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

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.

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 “accumulated 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”), 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 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. 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, 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.

Dodd Frank Act

On July 21, 2010, the Dodd Frank Act was signed into law. The Dodd Frank Act will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd Frank Act will require many new rules to be issued by various federal regulatory agencies over the next several years. There will be a significant amount of uncertainty regarding the overall impact of this new law on the financial services industry until final rulemaking is complete. The ultimate impact of this law could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd Frank Act also includes provisions that, among other things, will:

Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws.

Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity.

Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on certain loan terms will be restricted.

Require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure.

Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will result in a decrease in the level of assessments for institutions with assets less than $10 billion.

Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.

Implement corporate governance revisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just financial institutions.

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.

Amend the Electronic Funds Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

As noted above, the Dodd Frank Act requires that the federal regulatory agencies draft many new regulations which will implement the foregoing provisions as well as other provisions contained in the Dodd Frank Act, the ultimate impact of which will not be known for some time.

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. The Dodd-Frank Act permanently exempts non-accelerated filers from the auditor attestation requirement of the Act.

UBS, in compliance with the Sarbanes-Oxley Act of 2002, has made the determination that the Audit Committee of UBS 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 UBS. 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.

The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the FDIC. 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.

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 Deposit Insurance Assessments

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 insures the Bank’s deposits up to applicable limits per insured depositor. For this protection, each insured bank pays a quarterly statutory insurance assessment and is subject to certain rules and regulations of the FDIC. The amount of FDIC assessments paid by individual insured depository institutions, such as the Bank, is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this system, in establishing the insurance premium assessment for each bank, the FDIC will take into consideration the probability that the deposit insurance fund will incur a loss with respect to an institution, and will charge an institution with perceived higher inherent risks a higher insurance premium. The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the revenue needs of the deposit insurance fund, and any other factors the FDIC deems relevant. Increases in the assessment rate and additional special assessments 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 accordance with the Economic Stabilization Act (discussed below), the deposit insurance per account owner was increased from $100,000 to $250,000 through December 31, 2013. The newly enacted Dodd Frank Act made this change in deposit insurance permanent and, as a result, each account owner’s deposits will be insured up to $250,000 by the FDIC. In addition, the Dodd Frank Act provides for unlimited deposit insurance coverage on non-interest bearing transaction accounts, including Interest On Lawyer Trust Accounts but excluding interest-bearing NOW accounts, without an additional fee at insured institutions through December 31, 2012.

Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses. An institution’s risk is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned. Pursuant to the Dodd Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e. Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

Prior to the passage of the Dodd Frank Act, assessments for FDIC deposit insurance ranged from 7 to 77 basis points per $100 of assessable deposits. On May 22, 2009, the FDIC imposed a special assessment of five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, which was payable to the FDIC on September 30, 2009. In 2009, the Bank paid $30,386 related to the special assessment. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Also during 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $502,011. The Bank amortized and expensed $32,923 for the quarter ending December 31, 2009 and $135,784 for the year ending December 31, 2010. The prepaid assessment remaining at December 31, 2010 is $333,303-- $162,587 for 2011 and $170,716 for 2012.

In connection with the Dodd Frank Act’s requirement that insurance assessments be based on assets, the FDIC has recently issued the final rule that provides that assessments be based on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level. The FDIC has stated that the new assessment schedule, which will be effective as of April 1, 2011, should result in the collection of assessment revenue that is approximately revenue neutral compared to the current method of calculating assessments. Pursuant to this new rule, the assessment base will be larger than the current assessment base, but the new rates are lower than current rates, ranging from approximately 2.5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio equals or exceeds 1.15%, the applicable assessment rates may range from 1.5 basis points to 40 basis points.

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.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, rule, regulation, order, or condition imposed by the FDIC. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC. There are no pending proceedings to terminate the FDIC deposit insurance of the Bank, and the management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance.

Small Business Jobs and Credit Act

On Sept. 27, 2010, the Small Business Jobs and Credit Act was enacted. It is the most significant piece of small business legislation in over a decade that provides critical resources to help small businesses continue to drive economic recovery and create jobs. The new law extended SBA enhanced loan provisions while offering billions more in lending support, tax cuts, and other opportunities for entrepreneurs and small business owners. The Small Business Jobs and Credit Act authorized the creation of a $30 billion Small Business Lending Fund (“SBLF”). Banks that are on the FDIC problem list or not current on TARP Capital Purchase Program dividend payments are not eligible. It provides the Treasury with the ability to purchase preferred stock and other debt instruments from eligible financial institutions with less than $10 billion in total assets. Eligible institutions include insured depositories, bank and savings and loan holding companies, and certain community development loan funds. Eligible institutions with less than $1 billion in total assets can apply to receive investments of up to five percent of their risk-weighted assets. Eligible institutions between $1 billion and $10 billion in total assets can receive investments of up to three percent of risk-weighted assets. Participating institutions will pay a five percent dividend rate on the preferred stock, but this rate can be reduced to as low as one percent if a bank demonstrates a 10 percent increase in small business lending relative to a baseline set using the four quarters prior to enactment. The dividend rate is increased to seven percent after two years, if the bank does not increase its small business lending. To encourage timely repayment, the rate increases to nine percent after four and a half years. Treasury’s authority to make capital investments under the program is terminated one year after the date of enactment. The Bank plans to submit an application to participate in the SBLF to support its lending activities and supplement capital by March 31, 2011, the deadline for application.

The Community Reinvestment Act

The Bank is required, by the Community Reinvestment Act (“CRA”) and its implementing regulations, to meet the credit needs of the community, including the low and moderate-income neighborhoods, which it serves. The Bank’s CRA 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 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 examination the Bank was given an “outstanding” CRA 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. The BSA also requires the Bank to file suspicious activity reports for transactions that involve more than $5,000 and which the Bank knows, suspects or has reason to suspect, involves illegal fund is designed to evade the requirements of the BSA or has no lawful purpose.

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 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 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 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. Failure to comply with the Patriot Act could have serious legal and reputational consequences for a financial institution.

Future Litigation

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. From time to time the United States Congress, as well as the Pennsylvania Legislature enacts various laws which could place restrictions or impose requirements on financial institutions. It is impossible to predict whether any potential litigation will be enacted into law or, even if enacted, the effect which they may have on the business and earnings of USB and the Bank. There is no assurance that the recently enacted legislation discussed in regulatory matters above will stabilize the financial industry as intended.

ITEM 1A--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.

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

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, increases in unemployment rates, and declines in real estate values, 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.

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 the 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 status, 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.

Our operations are subject to interest rate risk and variations in interest rates may negatively affect financial performance

In addition to other factors, our earnings and cash flows are dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Changes in the general level of interest rates may have an adverse effect on our business, financial condition, and results of operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence the amount of interest income that we receive on loans and investment securities and the amount of interest that we pay on deposits and borrowed funds. Changes in monetary policy and interest rates also can adversely affect:

our ability to originate loans and obtain deposits;

the fair value of our financial assets and liabilities; and

the average duration of our investment securities portfolio.

If the interest rates paid on deposits and other borrowed funds increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowed funds.

The Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely impact our business

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which provides for a broad range of financial reform and will result in a number of new regulations which could significantly impact regulatory compliance costs and the operations of community banks and bank holding companies. The Dodd-Frank Act, among other things, broadens the base for FDIC insurance assessments which may increase our FDIC insurance premiums; repeals the prohibition on a bank’s payment of interest on demand deposit accounts of commercial clients beginning one year after the date of enactment; and contains provisions affecting corporate governance and executive compensation for publicly traded companies. The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection with broad authority to develop and implement rules regarding most consumer financial products. Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional costs, including increased compliance costs. These changes may also require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply. These changes may adversely affect our business, financial condition and results of operations.

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. These regulations establish permissible activities for the Bank to engage in, require maintenance of adequate capital levels, and regulate 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 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.

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 earnings.

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 earnings of the Bank.

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

A decline in the aggregate balance of 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, 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 earnings of the Company.

The soundness of other financial services institutions may adversely affect USB and the Bank.

Routine funding transactions may be adversely affected by the actions and soundness of other financial institutions. Financial service institutions are interrelated as a result of trading, clearing, lending, borrowing or other relationships. As a result, a rumor, default or failures within the financial services industry could lead to market wide liquidity problems which, in turn, could materially impact the financial condition of USB and the Bank.

Our information systems may experience an interruption or breach in security that could impact our operational capabilities.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrences of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

USB’s Controls and Procedures may Fail or be Circumvented.

USB diligently reviews and updates its internal controls and financial reporting, disclosure controls and procedures and corporate governance policies and procedures. Any failure or undetected circumvention of these controls could have material adverse impact on USB and the Bank’s financial condition and results of operations.

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

New developments in the banking industry

Variations in quarterly or annual operating results

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

Litigation involving UBS or the Bank

Changes in accounting policies or procedures

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

ITEM 1B—UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

Corporate Headquarters

United Bank of Philadelphia’s corporate office is located in The Graham Building, 30 S. 15th Street, Suite 1200, Center City Philadelphia. In February 2005, the Bank began a 10-year lease for its new Center City headquarters location. The Graham building is located in the heart of the Philadelphia business district, directly across from City Hall. The Bank occupies approximately 10,000 square feet on the 12th Floor that provides adequate and suitable space for 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 that expired in 2009. The Bank simultaneously subleased this space to another company with the exception of the lobby in which its automated teller machine (ATM) is located. In 2009, at expiration of the sublease, the Bank amended its corporate office lease to include this retail space for which the term is co-terminous. The Bank’s sublease with the African American Chamber of Commerce expired in September 2010. Negotiations are underway with a prospective tenant, a national beverage company, to sublease the space beginning in March 2011. Under this agreement, the Bank would have a designated space for business development as well as its ATM. The Bank’s average aggregate gross monthly rental is $8,000 of which the prospective tenant would pay an average monthly rent of $5,500.

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 2008, 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 were completed in 2010. 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 $5,996.

ITEM 3 — LEGAL PROCEEDINGS

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

ITEM 4 - RESERVED

PART II

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

RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

UBS’ 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 2010 and 2009.

As of March 8, 2011 there were 3,143 shareholders of record of UBS’ voting Common Stock and two shareholders of record of UBS’ Class B Non-voting Common Stock.

Dividend Restrictions

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

Under the Federal Reserve Act, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank’s net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve 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

There were no equity compensation instruments outstanding at December 31, 2010.

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

ITEM 6 — SELECTED FINANCIAL DATA

Selected Financial Data

	Year ended
(Dollars in thousands, except per share data)	2010			2009			2008			2007			2006

Net interest income	$	3,094		$	3,124		$	3,291		$	3,600		$	3,622
Provision for loan losses		747			235			368			120			137
Noninterest income		1,465			1,313			1,209			1,320			1,415
Noninterest expense		5,040			4,747			4,785			4,753			4,780
Net income (loss)		(1,228	)		(545	)		(653	)		47			119
Net income (loss) per share – basic		(1.15	)		(0.51	)		(0.61	)		0.04			0.11
Net income (loss) per share – fully diluted		(1.15	)		(0.51	)		(0.61	)		0.04			0.11

Balance sheet totals:
Total assets	$	73,966		$	68,318		$	69,435		$	75,232		$	73,935
Net loans		44,686			46,860			48,077			44,594			41,957
Investment securities		16,477			11,834			12,562			13,921			15,891
Deposits		67,211			60,307			60,904			66,084			64,924
Shareholders’ equity		6,297			7,531			8,050			8,685			8,614
Ratios:
Tangible Equity to average assets		7.95	%		9.89	%		10.32	%		10.17	%		9.93	%
Equity to assets ratio		8.51	%		11.02	%		11.59	%		11.54	%		11.65	%
Return on assets		(1.68	)%		(0.79	)%		(0.87	)%		0.06	%		0.16	%
Return on equity		(17.49	)%		(7.66	)%		(8.21	)%		0.62	%		1.63	%

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Because UBS is a bank holding company for the Bank, the financial statements in this report are prepared on a consolidated basis to include the accounts of 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 Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers’ ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management’s judgment, require the Bank to recognize additions or reductions to the allowance.

Various regulatory agencies periodically review the adequacy of the Bank’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Bank to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination. It is reasonably possible that the above factors may change significantly and, therefore, affect management’s determination of the allowance for loan losses in the near term.

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

Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Executive Brief

United Bank of Philadelphia is the only African American-owned and controlled community development financial institution headquartered in Philadelphia. Management continues to seek to maximize the Bank’s “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.

Although the economy is slowly recovering, the lagging effect of the recession has resulted in asset quality challenges including higher levels of delinquent/nonaccrual loans. During the year ended December 31, 2010, the Company significantly increased its provision for losses to address potential credit exposure. Management also intensified its collection efforts which resulted in increased legal, collection and foreclosure-related expenses. The following actions are critical to enhancing the Company’s future financial performance:

Proactive management of asset quality to minimize credit losses. In 2010, improving credit quality was one of the Bank’s top priorities and will continue to be going forward. Regular asset quality meetings continue to be held to review and proactively manage classified and emerging problem credits. Significant progress was made in the Bank’s collection, underwriting, and customer relationship management practices. Evidence of these improvements can be seen in the reduction of the level of impaired loans from approximately $3.8 million to approximately $2.5 million and a decline in delinquency ratios from 13.73% at December 31, 2009 to 8.67% at December 31, 2010. In addition, the Bank’s non-performing loans decreased to approximately $2.8 million at December 31, 2010 from $3.8 million at December 31, 2009. Non-performing loans during 2010 were positively affected by paydowns, charge-offs and transfers to other real estate owned. Management expects to make additional progress during 2011 in reducing the level of non-performing loans and non-performing assets and anticipates that credit quality costs, including the provision for loan losses and other real estate owned related costs, will continue to affect reported earnings as the Bank diligently works to reduce the outstanding investment in these assets.

Continued core deposit growth. During the year ended December 31, 2010, total deposits increased by approximately $6.9 million, or 11.45 %, compared to 2009. Utilizing its competitive advantage as a community development bank and increased FDIC insurance limits, management identified and continues to call upon corporations and institutions in the region to request core depository relationships to support the Bank’s small business lending strategies. Management will continue to utilize this strategy as well as other retail deposit marketing strategies to achieve deposit growth that is critical to attaining economies of scale and leveraging capital to maximize the Company’s earnings potential.

Controlling and managing the net interest margin. The Bank’s net interest margin for 2010 decreased twenty-eight (28) basis points to 4.57% from 4.85% for 2009. Margin compression was fueled by the continued historically low interest rate environment that resulted in lower yields on loans and investment securities. High levels of non-accrual loans also contributed to the compression. While management actively manages the rates paid on deposit products to “average” market rates to mitigate the effect of the reduction in yield on earning assets, its focus will be on growing the Bank’s core assets and reducing the level of nonaccrual loans to increase net interest income.

Controlling and managing noninterest expense. During the year ended December 31, 2010, noninterest expense continued to escalate as a result of legal, collection-related expenses, costs associated with the acquisition and maintenance of foreclosure properties (other real estate) and increased FDIC insurance expense. Savings continue to be realized in the area of data processing with the implementation of branch capture in late 2009 and re-negotiated data processing contracts. Management will continue to seek additional savings and efficiencies utilizing technology where possible including the introduction of e-statements in the first quarter of 2011 to reduce postage and an electronic document storage solution to reduce the cost of storage.

Enhancing capital to support growth. Although reduced as a result of net losses and growth, the Bank’s tangible, core, and risk-based capital ratios exceeded “minimum” and “well capitalized” for regulatory capital requirements. Management recognizes the importance of establishing and maintaining capital levels to support the Bank’s growth and to remain in compliance with regulatory requirements. Since dividends are not being paid to existing shareholders, there are no opportunities to sell additional shares to existing or prospective shareholders. Therefore, management will seek to supplement capital utilizing programs available through the US Treasury Department for CDFIs as well as the new SBLF.

Results of Operations

In 2010, the Company recorded a net loss of approximately $1,228,000 ($1.15 per share) compared to a net loss of approximately $545,000 ($0.51 per share) in 2009 and net loss of approximately $653,000 ($0.61 per share) in 2008. 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

	2010								2009								2008
	Average					Yield/			Average					Yield/			Average			Average		Yield/
(Dollars in thousands)	balance			Interest		Rate			Balance			Interest		Rate			balance			balance		rate
Assets:
Interest-earning assets:
Loans	$	46,775		$	2,806		6.00	%	$	48,568		$	3,039		6.26	%	$	48,199		$	3,335		6.92	%

Investment securities held-to-maturity		13,711			508		3.71			9,888			439		4.44			9,366			447		4.77
Investment securities available-for-sale		1,348			62		4.60			2,211			107		4.84			3,040			161		5.30
Total investment securities		15,059			570		3.79			12,099			546		4.51			12,046			608		5.05

Interest bearing balances with other banks		305			1		0.33			299			7		2.34			292			8		2.40
Federal funds sold		5,557			12		0.22			3,396			8		0.24			5,398			130		2.41
Total interest-earning assets		67,696			3,389		5.01			64,362			3,600		5.59			66,295			4,081		6.15
Noninterest-earning assets:
Cash and due from banks		1,814								2,294								2,603
Premises and equipment, net		1,263								1,492								1,417
Other assets		2,975								1,863								1,925
Less allowance for loan losses		(740	)							(626	)							( 697	)
Total	$	73,008							$	69,385							$	71,543
Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Demand deposits	$	12,455			75		0.60	%	$	11,161			89		0.80	%	$	10,836			122		1.12	%
Savings deposits		14,441			15		0.10			15,988			34		0.21			17,952			103		0.52
Time deposits		24,450			205		0.84			20,803			353		1.70			20,793			565		2.72
Total interest-bearing liabilities		51,346			295		0.57			47,952			476		0.99			49,581			790		1.59
Noninterest-bearing liabilities:
Demand deposits		14,232								13,248								13,117
Other		408								268								388
Shareholders’ equity		7,022								7,917								8,457
Total	$	73,008							$	69,385							$	71,543
Net interest income				$	3,094							$	3,124							$	3,291
Spread							4.44	%							4.60	%							4.56	%
Net yield on interest-earning assets							4.57	%							4.85	%							4.96	%

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

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 approximately $3,094,000 in 2010, a decrease of approximately $30,000, or 0.96% compared to 2009. Net interest income totaled approximately $3,124,000 in 2009, a decrease of approximately $167,000, or 5.07% compared to 2008.

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

	2010 compared to 2009									2009 compared to 2008
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest earned on:
Loans	$	(107	)	$	(126	)	$	(233	)	$	23		$	(319	)	$	(296	)
Investment securities held-to-maturity		142			(73	)		69			23			(31	)		(8	)
Investment securities available-for-sale		(40	)		(5	)		(45	)		(40	)		(14	)		(54	)
Interest-bearing deposits with other banks		-			(6	)		(6	)		-			(1	)		(1	)
Federal funds sold		5			(1	)		4			(5	)		(117	)		(122	)
Total Interest-earning assets		-			(211	)		(211	)		1			(482	)		(481	)
Interest paid on:
Demand deposits		8			(22	)		(14	)		3			(36	)		(33	)
Savings deposits		(2	)		(17	)		(19	)		(4	)		(65	)		(69	)
Time deposits		31			(179	)		(148	)		-			(212	)		(212	)
Total interest-bearing liabilities		37			(218	)		(181	)		( 1	)		(313	)		(314	)
Net interest income	$	(37	)	$	7		$	(30	)	$	2		$	(169	)	$	(167	)

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

In 2010, there was a decrease in net interest income of approximately $37,000 due to changes in volume and an increase of approximately $7,000 due to changes in rate. In 2009, there was an increase in net interest income of approximately $2,000 due to changes in volume but a decrease of $169,000 due to changes in rate.

Although average earning assets increased to approximately $67.7 million in 2010 compared to approximately $64.4 million in 2009, the net interest margin of the Bank declined to 4.57% in 2010 from 4.85% in 2009 and 4.96% in 2008. The margin compression was fueled by the continued historically low interest rate environment with prime and federal funds sold rates of 3.25% and 0.25%, respectively. High levels of non-accrual loans also contributed to the compression. While management actively manages the rates paid on deposit products to “average” market rates to mitigate the effect of the reduction in yield on earning assets, its focus will be on growing the Bank’s core assets and reducing the level of nonaccrual loans to increase net interest income.

The average yield on the investment portfolio declined to 3.79% in 2010 compared to 4.51% in 2009 and 5.05% in 2008. The decline in yield was the result of the call of higher yielding agency securities as well as a $5 million increase in governmental deposits for which the Bank is required to pledge collateral; as a result, securities were purchased in 2010 in the low rate environment. In addition, some of the Bank’s floating rate mortgage-backed securities that have Treasury and LIBOR indices repriced in 2010. The average yield is projected to decline further in 2011 as a result of anticipated calls of higher yielding agency securities as well as increased prepayment rates on mortgage-backed securities because of continued high levels of foreclosure.

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 loan 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 2010 was $747,000 compared to $235,000 in 2009 and $368,000 in 2008. 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 probable loan losses in the portfolio. Increased provisions during 2010 were primarily driven by declining real estate collateral values on loans deemed impaired and/or transferred to other real estate owned in the foreclosure process. Based on its analysis, management believes the level of the allowance for loan losses is adequate as of December 31, 2010. Refer to the Allowance for Loan Loss section below for further discussion/analysis of the Bank’s credit quality.

Noninterest Income

Noninterest income increased approximately $152,000 in 2010, or 11.59% compared to 2009 and increased $104,000 in 2009, or 8.58% compared to 2008.

In September 2010, the Bank received a $394,400 Bank Enterprise Award (“BEA”) grant from the Community Development Financial Institutions Fund (“CDFI”) of the US Treasury for its small business lending activity. This grant was fully recognized as all conditions required by the grant have been fulfilled, and is included as grant income. In September 2009, the Bank received a similar $165,500 BEA grant from the CDFI Fund of the US Treasury for its small business lending activity. This grant was fully recognized and is included as grant income in 2009.

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 2010, customer service fees declined approximately $57,000, or 11.65% compared to 2009 and declined approximately $65,000, or 11.72%, compared to 2008. In 2010, the Bank escheated a number of dormant accounts for which it was collecting inactivity and/or low balance fees that resulted in a reduction in customer fees. In addition, overdraft fees declined as a result of fewer overdraft “repeat offenders”.

During 2010, surcharge income on the Bank’s ATM network declined approximately $71,000, or 16.22%, compared to 2009 and declined approximately $17,000 in 2009, or 3.74%, compared to 2008. The Bank’s ATM network continues to experience a reduction in volume because of ATM saturation in the marketplace by both financial and non-financial competitors. Also, consistent with trends in the industry, ATM usage has declined as consumers move to electronic payment methods utilizing debit and credit cards versus cash. Methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated.

Since 2002, the Bank has served as arranger/agent for loan syndications for several major corporations throughout the country. In this capacity, the Bank arranges back-up lines/letters of credit with other minority banks for which it receives agent/administrative fees. In 2010 and 2009, these fees totaled $140,000 and $130,000 in 2008. The Bank serves as agent/arranger for two (2) facilities. Fees on these facilities are received annually for the administration of the credit facilities. Growth in this business line was temporarily curtailed as a result of the turmoil in the financial markets over the last several years. Management may seek to expand these credit services in 2011 as the economy moves out of recession.

Noninterest Expense

Noninterest expense increased approximately $292,000, or 6.16% in 2010 compared to 2009 and decreased approximately $38,000, or .79%, in 2009 compared to 2008.

Salaries and benefits increased approximately $110,000, or 6.86%, in 2010 compared to 2009 and increased approximately $50,000, or 3.19%, in 2009 compared to 2008. The increase in 2010 is related to the hiring of additional staff in credit administration and lending as well as a cost of living increase for all staff. Management continues to review the organizational structure to maximize efficiencies and increase business development activity.

Occupancy and equipment expense decreased approximately $79,000, or 7.23%, in 2010 compared to 2009 and decreased approximately $24,000, or 2.14%, in 2009 compared to 2008. The reduction in 2010 is attributable to lower depreciation expense as a result of computer equipment and furniture becoming fully depreciated and a negotiated reduction in Use and Occupancy Tax the Bank pays to the City of Philadelphia.

Office operations and supplies expense decreased approximately $12,000, or 4.04%, in 2010 compared to 2009 and decreased approximately $15,000, or 4.60%, in 2009 compared to 2008. The decrease is primarily related to a reduction in courier expense as a result of the implementation of branch capture, Check 21 technology, in October 2009 to scan and electronically transmit the Bank’s checks and other items for processing versus physical delivery. Management continues to review all office operations expenses including supplies, storage, security, etc. to achieve cost reductions.

Marketing and public relations expense decreased approximately $13,000, or 23.67%, in 2010 compared to 2009 and decreased approximately $48,000, or 45.68%, in 2009 compared to 2008. During the quarter ended December 30, 2010, the Bank began a radio advertising campaign as well as the utilization of consultants to assist with the development of a new branding message, “So Much More Than Banking”. All other marketing was curtailed during 2010 in favor of more direct outreach through office receptions and direct calling by business development staff.

Professional services expense increased approximately $62,000, or 24.55%, in 2010 compared to 2009 and increased approximately $10,000, or 3.90%, in 2009 compared to 2008. The increase is primarily related to higher accounting fees, loan-related legal fees and consulting fees for strategic planning and SBA loan collection services.

Data processing expenses are a result of 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-five (25) machines for which it pays processing fees. This network is larger than most banks in its peer group.

Data processing expenses decreased approximately $55,000, or 10.32%, in 2010 compared to 2009 and increased approximately $15,000, or 2.90%, in 2009 compared to 2008. In September 2009, negotiations for contract extensions were completed that resulted in a reduction in core processing fees. In addition, in October 2009, the Bank converted to an electronic transmission of its items processing by utilizing “Check 21” and branch capture processing that resulted in a reduction in its items processing fees.

Loan and collection expenses increased approximately $269,000, or 355.70%, in 2010 compared to 2009 and decreased approximately $6,000, or 7.56%, in 2009 compared to 2008. The increase in 2010 is directly related to increased foreclosure activity in the Bank’s commercial loan portfolio that resulted in Sheriff’s sale costs and other expenses associated with the acquisition of other real estate properties.

Federal deposit insurance premiums increased approximately $47,000, or 48.28% in 2010 compared to 2009 and decreased approximately $56,000, or 36.52%, in 2009 compared to 2008. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings. In 2006, 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, the Bank had an assessment credit to offset a portion of its premium. The assessment credit continued to be used to reduce deposit premiums that would otherwise have been due through 2009 when they were completely exhausted. In 2010, the Dodd-Frank financial reform legislation was enacted that will, among other things, modify the method of calculating deposit insurance premiums and may result in a reduction in the Bank’s assessment beginning April 1, 2011. (Refer to “The Dodd-Frank Act” and “Federal Deposit Insurance Assessments” above).

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

FINANCIAL CONDITION

Sources and Uses of Funds

The Bank’s financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 below indicates how the Bank has managed these elements. Average funding uses increased approximately $3,334,000, or 5.18%, in 2010 compared to 2009 and decreased approximately $1,933,000, or 2.92%, in 2009 compared to 2008.

Table 3—Sources and Use of Funds Trends

	2010								2009
			Increase								Increase
	Average		(decrease)						Average		(decrease)
(Dollars in thousands)	balance		amount			Percent			balance		amount			Percent
Funding uses:
Loans	$	46,775	$	(1,793	)		(3.69	)%	$	48,568	$	369			0.77	%
Investment securities
Held-to-maturity		13,711		3,823			38.66			9,888		522			5.57
Available-for-sale		1,348		(863	)		(39.03	)		2,211		(829	)		(27.27	)
Interest-bearing balances with other banks		305		6			2.01			299		7			2.40
Federal funds sold		5,557		2,161			63.63			3,396		(2,002	)		(37.09	)
Total uses	$	67,696	$	3,334					$	64,362	$	(1,933	)
Funding sources:
Demand deposits:
Noninterest-bearing	$	14,232	$	984			7.43		$	13,248	$	131			1.00	%
Interest-bearing		12,455		1,294			11.59			11,161		325			3.00
Savings deposits		14,441		(1,547	)		(9.68	)		15,988		(1,964	)		(10.94	)
Time deposits		24,450		3,647			17.53			20,803		10			0.05
Total sources	$	65,578	$	4,378					$	61,200	$	(1,498	)

Investment Securities and Other Short-Term Investments

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

Average investment securities increased approximately $2,960,000, or 24.46%, in 2010 compared to 2009 and decreased approximately $307,000, or 2.45%, in 2009 compared to 2008. The increase in 2010 was primarily related to an increase in average balances of governmental deposits that required collateralization. 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. 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.

As reflected in Table 4 below, the average maturity of the portfolio is 2.04 years in 2010. At December 31, 2010, 68% of the investment portfolio consisted of callable agency securities for which the duration extended as a result of the purchase of securities with longer maturities to serve as collateral for governmental deposits as well as enhance the yield on the portfolio. However, a high level of call activity is projected in the current low interest rate environment that may result in a shortened duration. The remainder of the portfolio consists of government sponsored agency (GSA) mortgage-backed pass-through securities. 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. Home foreclosures in the current recessionary economy and lower interest rates continue to result in increased prepayment speeds and a shortened duration. Management’s goal is to maintain a portfolio with a 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			Total
Other government securities	$	-		-	%	$	-		-	%	$	9,369		3.45	%	$	1,033		2.89	%	$	10,402
Mutual funds and other							-					-					-					129
Mortgage-backed securities		-					-					-					-					5,880
Total securities	$	-				$	-				$	9,369				$	1,033				$	16,411
Average maturity																					2.04 years

The above table sets forth the maturities of investment securities at December 31, 2010 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security).

Loans

Average loans decreased approximately $1,793,000, or 3.69%, in 2010 compared to 2009 and increased approximately $369,000, or 0.77%, in 2009 compared to 2008. While commercial loan fundings during 2010 totaled approximately $4,000,000, they were offset by payoffs/paydowns, and charge-offs totaling approximately $1,400,000 in the commercial and consumer portfolios and the transfer of approximately $1,800,000 of commercial real estate to bank ownership following foreclosure and Sheriff’s sale actions. Although the economy is slowly growing out of recession, the Bank continues to maintain stringent underwriting standards especially related to non-owner occupied real estate lending. The focus is on traditional small business lending for which credit enhancements through the Small Business Administration or other loan guaranty programs may be available to mitigate credit risk.

As reflected in Table 5 below, the Bank’s loan portfolio is concentrated in commercial loans that comprise approximately $36.5 million, or 80%, of total loans at December 31, 2010. Approximately $18.7 million of these loans 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, including construction loans, for which total loans at December 31, 2010 were $13.6 million, or 37.5%, of the commercial portfolio. Management continues to closely monitor this concentration to proactively identify and manage credit risk in light of the current high level of unemployment that may impact the level of tithes and offerings that provide cash flow for repayment.

As reflected in Table 6 below, approximately $16.7 million, or 36.67%, of the Bank’s loan portfolio has scheduled maturities or repricing in five years or more. This position is largely a result of the relatively high level of loans in the commercial real estate portfolio that typically have five to seven year balloon structures. While scheduled maturities and repricing exceed five years, the actual duration of the portfolio may be much shorter because of changes in market conditions and refinancing activity.

Table 5—Loans Outstanding, Net of Unearned Income

	December 31,
(Dollars in thousands)	2010		2009		2008		2007		2006
Commercial and industrial	$	5,729	$	4,353	$	4,286	$	4,463	$	5,323
Commercial real estate		30,738		32,294		32,199		28,640		27,016
Residential mortgages		4,432		5,313		6,110		6,549		5,551
Consumer loans		4,713		5,626		6,068		5,532		4,628
Total loans	$	45,612	$	47,587	$	48,663	$	45,184	$	42,518

Table 6—Loan Maturities and Repricing


(Dollars in thousands)	Within one year		After one but within five years		After five years		Total
Commercial and industrial	$	3,901	$	1,520	$	308	$	5,729
Commercial real estate		3,579		16,538		10,621		30,738
Residential mortgages		331		97		4,004		4,432
Consumer loans		2,734		185		1,794		4.713
Total loans	$	10,545	$	18,340	$	16,727	$	45,612
Loans maturing after one year with:
Fixed interest rates							$	30,448
Variable interest rates								4,619

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. The loan is also placed on nonaccrual status at that time. 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 generally reversed out of income.

Table 7—Nonperforming Loans

(Dollars in thousands)	2010		2009		2008		2007		2006

Nonaccrual loans	$	2,781	$	3,783	$	1,701	$	745	$	626
Impaired loans		2,516		3,553	$	2,531		1,745		896
Interest income on nonaccrual loans included in net income for the year		110		219		9		35		39
Interest income that would have been recorded under original terms		186		195		121		65		51
Interest income recognized on impaired loans		63		34		64		112		76
Loans past due 90 days and still accruing		205		776		578		1,067		170
Troubled Debt Restructured loans		-		-		-		-		-

At December 31, 2010, nonaccrual loans totaled approximately $2,781,000 compared to approximately $3,783,000 at December 31, 2009. The decline is primarily related to foreclosure activity totaling approximately $1,800,000. In 2010, the Bank aggressively pursued collection on severely delinquent loans through the foreclosure process after exhausting all other avenues for repayment. The remaining nonaccrual loans primarily include commercial loans with SBA guarantees or real estate collateral that may help to mitigate potential losses. Management continues to actively work with these borrowers to develop suitable repayment plans.

The level of classified loans (including impaired loans) decreased from approximately $3,913,000 in 2009 to approximately $3,251,000 in 2010. These loans possess potential weaknesses/deficiencies deserving management’s closer attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects at some future date. No significant loss of principal or interest is envisioned on these loans as a result of the underlying collateral value and/or government guarantees. The borrowers may be experiencing adverse operating trends, which potentially could impair debt, services capacity but secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. This category may include credits with inadequate loan agreements or control over collateral. These borrowers may have limited ability to obtain credit elsewhere. Management is working proactively with these borrowers to prevent any further deterioration in credit quality.

Impaired loans totaled approximately $2,516,000 at December 31, 2010 compared to approximately $3,553,000 at December 31, 2009. 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 increase is primarily concentrated in several significant commercial real estate loans. The valuation allowance associated with impaired loans was approximately $238,000 and $187,000, at December 31, 2010 and 2009, respectively and included in the overall allowance for loan and lease losses. 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 Management is working aggressively to resolve the potential credit risk associated with its impaired loans by detailing specific payment requirements including the sale of underlying collateral or obtaining take-out financing. (Refer to Note 3 in the financial statements for additional information on asset quality.)

Interest income recognized on impaired loans during the year ended December 31, 2010 and 2009 was $63,000 and $34,000, 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.

Management may 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, 2010 and 2009, there were no restructured loans.

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.

The commercial loan portfolio of the Bank is 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, 2010, loans to religious organizations represented approximately $441,000 of total impaired loans compared to approximately $132,000 at December 31, 2009. The increase is related to one church relationship with credit exposure totaling approximately $318,000. Management continues to work closely with the leadership of these organizations in an attempt to develop suitable repayment plans. In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.

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 2.03% at December 31, 2010 and 1.53% at December 31, 2009. Systematic provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis. This analysis includes specific reserves allocated to classified and impaired loans based on underlying recovery values as well as a general reserve for the portfolio based on many factors including charge-off history, migration analysis, economic conditions, concentrations of credit risk and other relevant data. The increase in the allowance in 2010 is related to an increase in specific reserves for impaired loans secured by real estate for which underlying values have declined. In addition, there was a higher level of charge-offs in the commercial and consumer loan portfolios in 2010 that resulted in an increase in inherent general reserve requirements. (Refer to Note 3 in the financial statements for additional information on the allowance for loan losses.)

Table 8—Allocation of Allowance for Loan Losses

			2010					2009					2008					2007					2006
			Percent of loans in each category to					Percent of loans in each category to					Percent of loans in each category to					Percent of loans in each category to					Percent of loans in each category to
	Amount		Total loans			Amount		total loans			Amount		total loans			Amount		total loans			Amount		total loans
(Dollars in thousands)

Commercial and industrial	$	301		12.56	%	$	324		8.54	%	$	282		8.81	%	$	517		9.88	%	$	362		12.52	%
Commercial real estate		553		67.39			298		68.47			210		66.17			28		63.38			140		63.54
Residential mortgages		36		10.33			38		11.17			33		12.56			8		14.49			22		13.06
Consumer loans		36		9.72			65		11.82			62		12.47			37		12.25			37		10.88
Unallocated		-		-			2		-			-		-			-							-
	$	926		100.00	%	$	727		100.00	%	$	587		100.00	%	$	590		100.00	%	$	561		100.00	%

Management believes that the allowance for loan losses is adequate at December 31, 2010. 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)	2010			2009			2008			2007			2006
Balance at January 1	$	727		$	587		$	590		$	561		$	472

Charge-offs:
Commercial and industrial		(189	)		(22	)		(464	)		(91	)		(70	)
Commercial real estate		(227	)		(62	)		(4	)		-			-
Residential mortgages		(8	)		-			-			-			-
Consumer loans		(177	)		(57	)		(51	)		(139	)		(202	)
		(601	)		(141	)		(519	)		(230	)		(272	)
Recoveries:
Commercial loans		7			2			107			92			57
Commercial real estate		1			-			-			-			-
Consumer loans		45			44			41			46			168
		53			46			148			138			225
Net recoveries (charge-offs)		(548	)		(95	)		(371	)		(91	)		(47	)
Provisions charged to operations		747			235			368			120			137

Balance at December 31	$	926		$	727		$	587		$	590		$	561
Ratio of net (recoveries) charge-offs to average loans outstanding		1.17	%		0.20	%		0.77	%		0.21	%		0.10	%

Deposits

Average deposits increased approximately $4,378,000, or 7.15%, in 2010 compared to 2009 and declined approximately $1,498,000, or 2.39%, in 2009 compared to 2008. Management continues to seek to distinguish the Bank as a community development bank through which corporations in the region can work collaboratively to positively impact the 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 continues to focus its marketing efforts on large corporations headquartered or doing business in the region to drive deposit growth. In 2010, utilizing this strategy as well as increased FDIC limits, management was successful with its strategy of calling on corporations and institutions in the region to develop core depository relationships in support of its small business lending initiatives that resulted in a $1,294,000 increase in average money market deposits. This strategy will continue to be utilized to grow core deposits. In addition, a concerted effort was made to attract and retain core deposits from existing, new, and potential commercial loan customers to stabilize and grow deposit levels.

Savings account balances declined on average by approximately $1,547,000, or 9.68%, in 2010 compared to 2009 and declined approximately $1,964,000, or 10.94%, in 2009 compared to 2008. With increased competition in the region as well as declining interest rates, the Bank is no longer able to utilize rates to attract deposits. Also, during the current recession, deposit attrition has occurred as a result of increased liquidity needs of customers. New retail deposit strategies have been developed to encourage financial preparedness and increased savings.

Certificates of deposit increased on average by approximately $3,647,000, or 17.53%, in 2010 compared to 2009. In April 2010, the Bank received an additional $5 million deposit from the City of Philadelphia for which a certificate of deposit was established. The Bank has approximately $17,976,000 in certificates of deposit with balances of $100,000 or more. Approximately $13 million, or 72%, of these deposits are governmental or quasi-governmental relationships that have a long history with the Bank and are considered stable and core.

Table 10—Average Deposits by Class

	2010					2009					2008
(Dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate

Noninterest-bearing demand deposits	$	14,232		-	%	$	13,248		-	%	$	13,117		-	%
Interest-bearing demand deposits		12,455		0.60			11,161		0.80			10,836		1.12
Savings deposits		14,441		0.10			15,988		0.21			17,952		0.57
Time deposits		24,450		0.84			20,803		1.70			20,793		2.72

Other Borrowed Funds

The Bank did not borrow funds during 2010. 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 in thousands are as follows:

	2010		2009

Commitments to extend credit	$	7,531	$	8,558
Outstanding standby letters of credit		695		-

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. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The decrease in commitments at December 31, 2010 is primarily related to the completion and term out of several construction loans that were in process at December 31, 2009. In addition, as a result of the credit climate, several national credit facilities in which the Bank participated with other minority institutions did not renew. 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, 2010, 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.

By policy, the Bank’s minimum level of liquidity is 6.00% of total assets. At December 31, 2010, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $8.7 million, or 11.75%, compared to approximately $6.3 million, or 9.21%, of total assets at December 31, 2009. The increase primarily relates to growth in deposits. 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

While management continues to seek additional non-public core deposits to support ongoing loan demand, liquidity levels have been adequate. As a result, it was not necessary to sell loan participations to other institutions.

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	$	7,921
Over 3 through 6 months		6,618
Over 6 months through 1 year		2,723
Over 1 through five years		714
Over five years		-
Total	$	17,976

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2010:

Table 12—Contractual Obligations and Other Commitments

(Dollars in thousands)	Total		Less than one year		One to three years		Four to five years		After five years
Certificates of Deposit	$	26,023	$	24,250	$	1,235	$	487	$	51
Operating Lease Obligations		2,777		452		951		976		398
Total	$	28,800	$	24,702	$	2,186	$	1,463	$	449

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 that expired in 2009. The Bank simultaneously subleased this space to another company with the exception of the lobby in which its automated teller machine (ATM) is located. In 2009, at expiration of the sublease, the Bank amended its corporate office lease to include this retail space for which the term is co-terminous. The Bank’s sublease with the African American Chamber of Commerce expired in September 2010. The Bank’s average aggregate gross monthly rental is $8,000 of which the prospective tenant would pay an average monthly rent of $5,500.

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, 2010, 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, 2010, an asset-sensitive position is maintained on a cumulative basis through one year of 2.89%. 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 low interest rate environment, this positive gap position creates margin compression. Management has minimized 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.

Table 13—Interest Sensitivity Analysis

	Interest rate sensitivity gaps as of December 31, 2010

(Dollars in thousands)	3 months or less			Over 3 through 12 months			Over 1 year Through 3 years			Over 3 through 5 years			Over 5 years			Cumulative
Interest-sensitive assets:
Interest-bearing deposits with banks	$	-		$	305		$	-		$	-		$	-		$	305
Investment securities		2,885			4,339			1,053			2,421			5,650			16,348
Federal funds sold		6,247			-			-			-			-			6,247
Loans		14,168			12,036			6,905			3,500			6,222			42,831
Total interest-sensitive assets		23,300			16,680			7,958			5,921			11,872		$	65,731
Cumulative totals		23,300			39,980			47,938			53,859			65,731
Interest-sensitive liabilities:
Interest checking accounts		1,923			-			1,922			-			-			3,845
Savings and money market accounts		11,907			-			11,907			-			-			23,814
Certificates $100,000 or more		7,920			9,342			464			250			-			17,976
Certificates of less than $100,000		2,901			4,087			771			288			-			8,047
Total interest-sensitive liabilities	$	24,651		$	13,429		$	15,064		$	538		$	-		$	53,682
Cumulative totals	$	24,651		$	38,080		$	53,144		$	53,682		$	53,682
Interest sensitivity gap	$	(1,351	)	$	3,251		$	(7,106	)	$	5,383		$	11,872
Cumulative gap		(1,351	)		1,900			(5,206	)		177			12,049
Cumulative gap/total earning assets		(2.05	)%		2.89	%		(7.92	%)		0.26	%		18.33	%
Cumulative Interest-sensitive assets to interest-sensitive Liabilities		0.95			1.05			0.90			1.10			1.22

Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management’s estimates. Nonaccrual loans are not included in the interest-sensitive asset totals.

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 over a two year period. The calculated estimates of net interest income or “earnings” at risk at December 31, 2010 are as follows:

Year 1
	Net interest	Percent of
Changes in rate	Income	Risk
(Dollars in thousands)
+400 basis points +300 basis points +200 basis points	$3,187 3,177 3,178	1.28% 0.96 1.01
+100 basis points	3,174	0.87
Flat rate	3,147	-
-100 basis points	3,069	(2.46)
-200 basis points -300 basis points -400 basis points	2,850 2,617 2,404	(9.45) (16.82) (23.61)

Year 2
	Net interest	Percent of
Changes in rate	Income	Risk
(Dollars in thousands)
+400 basis points +300 basis points +200 basis points	$6,513 6,458 6,436	3.48% 2.61 2.27
+100 basis points	6,398	1.66
Flat rate	6,294	-
-100 basis points	6,057	(3.76)
-200 basis points -300 basis points -400 basis points	5,482 4,872 4,315	(12.90) (22.59) (31.43)

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, 2010 are as follows:

MV of equity
Changes in rate	MV equity	Risk change
(Dollars in thousands)
+200 basis points +300 basis points +200 basis points	$2,551 3,362 4,289	(57.80)% (44.30) (29.00)
+100 basis points	5,223	(13.50)
Flat rate	6,040	-
-100 basis points	6,718	11.20
-200 basis points -300 basis points -400 basis points	7,429 8,179 8,975	23.00 35.40 48.60

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, 2010, the change in the market value of equity in a +200 basis point interest rate change is -29.00%, in excess of the Bank’s policy limit of 25% and -57.80% in a +400 basis point interest rate change, above the policy limit of 50%. 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 result 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, 2010. 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:

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

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

Restructure the Bank’s investment portfolio.

Capital Resources

Total shareholders’ equity declined approximately $1,234,000, or 16.38%, in 2010 compared to 2009 and declined $518,000, or 6.44%, in 2009 compared to 2008. The decrease in capital in 2010 is attributable to a net loss of approximately $1,228,000 and other comprehensive loss related to a decrease in the unrealized gain on the securities classified as available-for-sale.

The Company will seek to maintain the requisite minimum regulatory capital levels by internal capital generation (retained earnings) and by monitoring its asset growth. Management submitted applications for funding through US Treasury programs available to Community Development Financial Institutions (“CDFIs”) to support growth and provide a “cushion” for unforeseen economic events that may negatively impact the Bank’s capital position. In September 2010, the Bank received a $394,400 Bank Enterprise Award (“BEA”) grant from the Community Development Financial Institutions Fund (“CDFI”) of the US Treasury Department for its small business lending activity. Management will continue to apply for these funds to supplement capital.

In addition, the Small Business Lending Fund (Refer to Small Business Jobs and Credit Act above) is another source that the Bank will seek to support its capital position. The Small Business Jobs and Credit Act established a $30 billion Small Business Lending Fund for interested community banks with $10 billion or less in assets. Community banks with less than $1 billion in assets will be eligible for investments of up to 5 percent of risk-weighted assets. The funds carry a base dividend rate of 5 percent. Participants that increase their small-business lending will be able to lower their dividend rate to as low as l percent during the first two-year period. The level of investment is up to 5% of risk-weighted assets, however, the Bank submitted an application that will request $1 million on March 2011.

Federal and state banking laws impose on financial institutions such as USB and the Bank certain minimum requirements for capital adequacies. The Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk rated assets of 8%. At least half of the total capital must be composed of “Tier I Capital” which is defined as common equity, retained earnings and qualified perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier II Capital” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance. Also, federal banking regulatory agencies have established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum of Tier I Capital to adjusted average quarterly assets equal to 3% to 5%, subject to bank regulatory evaluation of an organization’s overall safety and soundness. Under the federal banking regulations, a financial institution would be deemed to “adequately capitalized” or better if it exceeds the minimum federal regulatory capital requirements. A financial institution would be deemed “undercapitalized” if it fails to meet the minimum capital requirements and significantly undercapitalized if it has a total risk based capital ratio that is less than 6%, Tier I risk basedcapital ratio is less than 3%, or a leverage ratio that is less than 3% and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to less than 2%. USB and the Bank are “well-capitalized” for regulatory capital purposes. See Table 14 below for more information regarding USB’s regulatory capital ratios.

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)	2010			2009			2008
Total Capital	$	6,297		$	7,531		$	8,050
Less: Intangible Assets/Net unrealized gains (losses) on available for
sale		(536	)		(720	)		(872	)
Tier I capital		5,761			6,811			7,178
Tier II capital		577			596			587
Total qualifying capital	$	6,338		$	7,407		$	7,765
Risk-adjusted total assets (including off-balance-sheet exposures)	$	45,580		$	47,569		$	46,862
Tier I risk-based capital ratio		12.64	%		14.32	%		15.32	%
Total (Tier I and II) risk-based capital ratio		13.91			15.57			16.57
Tier I leverage ratio		7.63			10.08			10.27

ITEM 7A — 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.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements on pages 54 to 89 hereof.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 2010.

ITEM 9A—CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, has 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, 2010.

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

ITEM 9B—OTHER INFORMATION

A shareholders’ annual meeting of UBS was held on December 17, 2010. Proxies for the annual meeting were solicited pursuant to Regulation 14A of the Exchange Act and there were no solicitation in opposition to the management’s nominees as listed in the proxy statement and all such nominees were elected.

The matters voted upon at the shareholders’ annual meeting of UBS were the reelection of three (3) Class C directors to serve four year terms and the ratification of the appointment of McGladrey and Pullen LLP as UBS’ independent registered public accounting firm for the year 2010.

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:

51.00% Shares Voted

445,687 of 873,725 Shares

Question	YES	NO	WITHHOLD/ABSTAIN
Election of Directors: Bernard Anderson David R. Bright Joseph T. Drennan (CLASS C)	99.33% 426,224	0.00% 0.00	0.67% 2,878.00
Ratify McGladrey and Pullen, LLP	99.47% 443,337	0.06% 300	0.45% 2,050.00

PART III

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

(a) Directors of the Registrant and Bank

		Principal occupation and	Year first	Term
Name	Age	other directorships	became director	Will expire
Bernard E. Anderson	73	Economist	2002	2014
		Philadelphia, PA

David R. Bright	71	Retired, Executive Vice President
		Meridian Bancorp	2002	2014
		Philadelphia, PA

Joseph T. Drennan	66	Former Chief Financial Officer	2004	2014
		Universal Capital Management, Inc.
		Wilmington, DE

L. Armstead Edwards	68	Chairman of the Board,	1993	2012
		United Bancshares, Inc.
		Owner and President,
		Edwards Entertainment., Inc.
		Philadelphia, Pennsylvania

Marionette Y. Wilson(Frazier)	65	Retired as co-Founder,	1996	2012
		John Frazier, Inc.
		Philadelphia, Pennsylvania

Maurice R. Mitts	50	Founder/Partner,	2008	2013
		Mitts Milavec, LLP, Attorney at Law
		Philadelphia, Pennsylvania
William B. Moore	68	Vice Chairman of the Board,
		United Bancshares, Inc.
		Pastor, Tenth Memorial	1993	2011
		Baptist Church
		Philadelphia, Pennsylvania

Evelyn F. Smalls	65	President and CEO of Registrant	2000	2011
		and United Bank of Philadelphia

Ernest L. Wright	82	Founder, President and	1993	2012
		CEO of Ernest L. Wright
		Construction Company
		Philadelphia, Pennsylvania

(b) Executive Officers of Registrant and Bank

Name	Age	Office

Evelyn F. Smalls	65	President and Chief Executive Officer
Brenda M. Hudson-Nelson	49	Executive Vice President/Chief Financial Officer

BOARD OF DIRECTORS QUALIFICATIONS

United Bank of Philadelphia has a very engaged and committed Board of Directors. The board takes its governance responsibilities very seriously and challenges management to meet its targeted goals and objectives. Currently, the board has eight (8) outside directors and one (1) insider. This leadership group has diverse experiences in business, banking, and community development that are important to fulfill their oversight responsibilities.

L. Armstead Edwards serves as Chairman and is one of two remaining founding members currently active on the board. Mr. Edwards spent a number of years as an educator and small business owner. He understands the plight of small business owners and combined with his experience in organizational dynamics, he brings a unique perspective to the role. He chairs the Executive Committee and serves on the Asset Liability, Loan and Audit/Compliance Committees. Mr. Edwards has encouraged deliberations to take place at the committee level so the board meeting can focus more on strategic initiatives and engage management on execution and performance measures.

Rev. William B. Moore is a founding member of the board and serves as Vice Chairman and is a member of the Executive and Audit/Compliance Committees. The Chairman and Vice Chairman alternate in leading the board meetings. Rev. Moore has a rich history in the faith community and has been the Senior Pastor of Tenth Memorial Baptist Church for over 30 years. He serves as a strong catalyst in rallying the faith community to support the Bank which is evidenced with the high percentage of loans to churches in the loan portfolio. Rev. Moore also leads an informal Advisory Group of Pastors who offer advice to the Bank’s management regarding the financial needs of the urban community to continue to bridge the economic divide in the region. As a former executive with a quasi-governmental agency, he has a broad based consistency and is very effective in building multi-sector coalitions to ensure economic inclusion.

Joseph T. Drennan, a director since 2002, serves as Treasurer of the Board and is Chairman of the Audit/Compliance Committee and member of the Executive and Asset Liability committees. In addition, he has expertise in generally accepted accounting principles, financial statements, and internal control over financial reporting, as well as an understanding of audit committee functions. Mr. Drennan has over 30 years banking experience as an executive in commercial, consumer and strategic planning. He is the former partner and Chief Financial Officer of Universal Capital Management, Inc. providing equity to start-up and emerging companies.

Marionette Y. Wilson a director since 1993 serves as Secretary of the Board and member of the Executive and Asset Liability Committees. Prior to her retirement, Ms. Wilson was co-founder of a construction management company and her expertise in this area is very helpful as the Bank works to provide financing to emerging contractors in the region. In addition, she is a leader in the faith community and has been instrumental in directing relationships to the Bank.

Evelyn F. Smalls serves as an inside director since 2000 when she was appointed President and Chief Executive Officer of the Bank. She serves on the Executive, Asset Liability and Loan Committees. Ms. Smalls brings versatile skills with over 25 years experience in banking and community and economic development know-how. Her leadership is propelled by her passion to move more inner city communities into the economic mainstream.

David R. Bright a retired Bank President has a rich history in commercial lending and credit administration. Mr. Bright, a director since 2001, serves as Chairman of the Loan Committee and a member of the Executive Committee. In addition, he brought to the Bank a keen knowledge of community reinvestment initiatives that can propel economic inclusion and impact. Mr. Bright’s community interests include his participation on a number of boards including Greater Philadelphia Urban Affairs Coalition, West Oak Lane Charter School, and Allegheny West CDC.

Dr. Bernard E. Anderson a director since 2002 and chairs the Asset Liability Committee. Dr. Anderson as an economist brings a dynamic perspective to the Bank as a retired Whitney E. Young, Jr., Professor of Management, The Wharton School, University of Pennsylvania As an Advisor to the Urban League of Philadelphia as well as the National Urban League, Dr. Anderson firmly believes that economic disparities among minority groups can be remediated through public and private policies aided at expanding economic opportunity for all with the Philadelphia region specifically and across the country in general.

Ernest L. Wright a director since 1992 serves as member of the Loan and Asset Liability Committees. His passion is sales and his expertise is in the construction field. He is the proprietor of Wright Construction Management. Mr. Wright was very helpful when the Bank upgraded its branch facilities by conceptualizing affordable designs and sharing his project management skills. He has been instrumental in referring new clients to the Bank particularly from the faith and small business sectors.

Maurice Mitts, the newest director, joined the board in 2008 and serves on the Loan Committee. Mr. Mitts’ relationship with the Bank started as a customer as he launched his law practice as co-founding partner of Mitts & Milavec, LLC, a multi-disciplined law firm that provides business and litigation counsel to public and private enterprises, government entities and non-profit clients. His legal expertise and that of his colleagues has filled an important void on the board.

CORPORATE GOVERNANCE

The Bylaws provide that a Board of Directors of not less than five (5) and not more than twenty-five (25) directors shall manage our business. The Board, as provided in the bylaws, is divided into four classes of directors: Class A, Class B, Class C and Class D, with each class being as nearly equal in number as possible. The Board of Directors has fixed the number of directors at nine (9), with three (3) members in Class A, one (1) member in Class B, three (3) members in Class C, and two (2) members in Class D.

Under UBS’ bylaws, persons elected by the Board of Directors to fill a vacancy on the Board serve as directors for the balance of the term of the director who that person succeeds.

Code of Conduct

UBS and the Bank have 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 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 the Sarbanes – Oxley Act and the listing standards of NASDAQ and UBS provides a copy of the Code to each director, officer and employee.

Under our Code of Ethics, the Board is responsible for resolving any conflict of interest involving the directors, executive officers and senior financial officers. The executive officers are responsible for resolving any conflict of interest involving any other officer or 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.

Board Leadership Structure

The positions of the Board Chairman and President and Chief Executive Officer are held by two individuals. The Board believes this structure is appropriate for USB and the Bank because of the need for the Chairman to have independence in leading the Board of Directors to oversee and direct management and the President and CEO’s direct involvement in leading management of USB and the Bank.

Directors’ Qualifications

In considering any individual nominated to be a director on UBS’ and the Bank’s Board of Directors’, the Board of Directors considers a variety of factors, including whether the candidate is recommended by the Bank’s executive management and the Board’s Nominating Committee, the individual’s professional or personal qualifications, including business experience, education and community and charitable activities and the individual’s familiarity with the communities in which UBS or the Bank is located or is seeking to locate.

Risk Oversight

The Board of Directors establishes and revises policies to identify and manage various risks inherent in the business of the Company, and both directly and through its committees, periodically receives and reviews reports from management to ensure compliance with and evaluate the effectiveness of risk controls. The President and Chief Executive Officer meets regularly with other senior officers to discuss strategy and risks facing UBS. Senior management attends monthly Board meetings and is available to address any questions or concerns raised by the Board on risk-management-related and any other matters. Each month the Board receives presentations from senior management on strategic matters and discusses significant challenges, risks and opportunities for UBS.

The Board has an active role, as a whole and also at the committee level, in overseeing management of the UBS’ risks. The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to areas of financial reporting, internal controls and compliance with accounting regulatory requirements. Employees who oversee day-to-day risk management duties, including the Vice President/Chief Risk Officer and Compliance Officer, report their findings to the Audit Committee. The Loan Committee of the Bank assists the Board with fulfilling its oversight responsibilities with respect to management of risks related to the Bank’s loan portfolio and its credit quality. The Asset Liability Management Committee of the Bank assists the Board with fulfilling its oversight responsibilities with respect to management of interest risk and the Bank’s investment portfolio.

Nomination for Directors

Section 3.4 of Article 3 UBS’ Bylaws provides that no shareholder shall be permitted to nominate a candidate for election as a director, unless such shareholder shall provide to the Secretary of UBS information about such candidate as is equivalent to the information concerning candidates nominated by the Board of Directors that was contained in the UBS Proxy Statement for the immediately preceding Annual Meeting of shareholders in connection with election of directors. Such information consists of the name, age, any position or office held with UBS or the Bank, a description of any arrangement between the candidate and any other person(s), naming such persons pursuant to which he or she was nominated as a director, his/her principal occupation for the five (5) years prior to the meeting, the number of shares of UBS stock beneficially owned by the candidate and a description of any material transactions or series of transactions to which UBS or the Bank is a party and in which the candidate or any of his affiliates has a direct or indirect material interest, which description should specify the amount of the transaction and where practicable the amount of the candidates interest in the transaction.

Such information shall be provided in writing not less than one hundred twenty (120) days before the first anniversary preceding the annual meeting of UBS’ shareholders. The Chairman of the Board of Directors is required to determine whether the director nominations have been made in accordance with the provisions of the UBS’ Bylaws, and if any nomination is defective, the nomination and any votes cast for the nominee(s) shall be disregarded.

The Nominating Committee’s process for identifying and evaluating nominees for director, including nominees recommended by security holders and for incumbent directors whose terms of office are set to expire, include review of the directors’ overall service during their terms, including meetings attended, level of participation, quality of performance, and contributions towards advancing UBS’s interests and enhancing shareholder value. With respect to new directors, the procedure includes a review of the candidates’ biographical information and qualifications and a possible check of candidates’ references. All potential candidates are interviewed by all members of the Committee and other members of the board. Using this information, the committee evaluates the nominee and determines whether it should recommend to the board that the board nominate or elect to fill a vacancy with the prospective candidate.

The Committee believes the following qualifications must be met by a nominee: a good character, have a reputation, personally and professionally, consistent with UBS’s image and reputation; be an active or former leaders of organizations; possess knowledge in the field of financial services; have an understanding of the Bank’s marketplace; be independent; be able to represent all of the shareholders; be willing to commit the necessary time to devote to board activities, and be willing to assume fiduciary responsibility.

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 17, 2010, all nine (9) directors attended the meeting.

GENERAL INFORMATION ABOUT UBS’ AND BANK’S BOARDS OF DIRECTORS

Director Independence

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.

Meetings and Executive Sessions of Independent Directors

In 2010, the Bank’s Board of Directors is met at least monthly, except in August, and during 2010 held eleven (11) meetings. The independent directors of UBS and the Bank Boards of Directors hold executive sessions on a regular basis, but, in any event, not less than twice a year. During 2010, two (2) executive sessions were held. Each director attended at least 75% of the Board meetings held during 2010 and the committee meetings held by each committee on which the director served , except Maurice R. Mitts (73%), William B. Moore (73%), and Marionette Y. Wilson (64%).

Information About the Committees of the Boards of Directors of the Corporation and the Bank

The Committees of UBS’ Board of Directors are the Executive Committee, Audit/Compliance Committee, and the Nominating Committee. The Corporation and the Bank have the same committees with the same members for each committee, except that the Bank also has an Asset Liability Management Committee and a Loan Committee.

Executive 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 exercise the authority and powers of the Board of Directors of the Corporation and the Bank at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee also meets to discuss and approve certain human resource matters including compensation, and to ratify and approve certain of the Bank’s loans. The Executive Committee held eleven (11) meetings during 2010.

The 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 Executive Committee, 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 Evelyn F. Smalls the President of UBS and Brenda M. Hudson-Nelson Executive Vice President and Chief Financial Officer. The Committee has the responsibility to review and provide recommendations to the full Board regarding compensation and benefit policies, plans and programs. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2010, the Executive Committee held one (1) meeting as the Compensation Committee to discuss the performance and compensation of the executive officers. There is no charter for the Executive Committee acting as a compensation committee.

Audit/Compliance Committee 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 accounting firm. In addition, the Committee meets with UBS’ independent registered public accounting firm to review the results of the annual audit and other related matters as well as other regulatory compliance issues. Each member of the Committee is “independent” as defined in the applicable listing standards of the NASDAQ. The Committee held four (4) meetings during 2010. The Audit Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS.

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.

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 NASDAQ. The Nominating Committee does not currently have a formal policy with respect to diversity. However, in considering nominees for director, the Nominating Committee also considers the Board’s desire to be a diverse body with diversity reflecting gender, ethic background and professional experience. The Board and the Nominating Committee believe it is essential that the Board members represent diverse viewpoints. The Nominating Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS. The Committee held one(1) meeting during 2010 resulting in the nomination of for re-election of three (3) Class C directors.

Asset Liability Management Committee. The Asset Liability Management Committee of the Bank, 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 2010, the Asset and Liability Management Committee held four (4) meetings.

Loan Committee. The Loan Committee of the Bank, 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 2010, the Loan Committee held ten (10) meetings.

Board of Directors Compensation

The normal non-officer director fee to be 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, 2010.

Audit Committee Report

In connection with the preparation and filing of UBS’ Annual Report on Form 10-K for the year ended December 31, 2010, 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 Public Company Accounting Oversight Board (United States)Rule 3526. 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, 2010.

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), William B. Moore

L. Armstead Edwards, Marionette Y. Wilson (Frazier)

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 8, 2011:

Name, Principal Occupation and Business Experience For Past 5 Years	Age as of March 8, 2011	Office with the UBS and/or Bank	UBS Stock Beneficially Owned
Evelyn F. Smalls(1)(2)	65	President and Chief Executive Officer and Director of UBS and Bank	500
Brenda M. Hudson-Nelson (3)	49	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.

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, 2010.

ITEM 11 — EXECUTIVE COMPENSATION

The Executive Committee, comprised of L. Armstead Edwards (Chairman of the Board), William B. Moore(Vice Chairman of the Board), Marionette Y. Wilson, Joseph T. Drennan, and David R. Bright 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 2010, the Executive Committee held one (1) meeting as the Compensation Committee.

COMPENSATION DISCUSSION AND ANALYSIS

Compensation Objectives

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.

To assist with succession Planning to ensure adequate replacement for key executives

Compensation Philosophy

The compensation philosophy is to compensate our executive officer 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 continued focus on achieving core profitability, only 5.00% cost of living increases covering multiple years were provided to executive officers in 2010. This increase was consistent with that provided for all Bank personnel as it had been a number of years since salary adjustments were made. Executive contract renewal deliberations continue to be deferred.

Components of Compensation for 2010

For the fiscal year ended December 31, 2010, 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 officer performance from Ms. Smalls and her recommendations for base salaries for the other officer. 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 officer.

Life Insurance and Auto Allowance

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

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, 2010.


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/CEO		2010 2009 2008	$	168,000 160,000 160,000	$	0 0 0	$	0 0 0	$	0 0 0	$	0 0 0	$	0 0 0	$	6,209 6,209 6,209	$	174,209 166,209 166,209


Brenda Hudson- Nelson EVP/CFO		2010 2009 2008		121,000 115,000 115,000		0 0 0		0 0 0		0 0 0		0 0 0		0 0 0		6,095 6,095 6,905		127,095 121,095 121,095

(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 incentive payouts columns are not included in the Compensation Table since these benefits are not made available by UBS or the Bank.

(2)

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

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.

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.

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 in this Proxy Statement and Annual Report on Form 10-K for the year ended December 31, 2010.

	Respectfully submitted:

	L. Armstead Edwards
	William B. Moore
	Marionette Y. Wilson
	Joseph T. Drennan
	David R. Bright

Transactions with Related Parties

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 2010. 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.

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to UBS, as of March 8, 2011 (1), with respect to the only persons to UBS’ knowledge, who may be beneficial owners of more than 5% of UBS’ Common Stock.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership of Corporation Common Stock		Percentage of Outstanding Corporation Common Stock Owned
Philadelphia Municipal		71,667		8.17	%
Retirement System
2000 Two Penn Center
Philadelphia, Pennsylvania 19102
Wells Fargo, (formerly, Wachovia Corporation)2		50,000		5.70	%
301 S College Street, Floor 27
Charlotte, NC 28288

Greater Philadelphia Urban Affairs Coalition		47,500		5.42	%
1207 Chestnut Street, Floor 7
Philadelphia, PA 19107

The Estate of James F. Bodine		44,583		5.08	%
401 Cypress Street
Philadelphia, PA 19106

(1)	As of March 8, 2011, there were 876,921 shares of UBS’ voting Common Stock outstanding.

(2)	Wells Fargo (formerly 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 8, 2011 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 Stock
Current Directors
L. Armstead Edwards		10,833		1.24	%
Marionette Y. Wilson (Frazier)		17,900		2.05	%
Ernest L. Wright		7,084		*
Bernard E. Anderson		850		*
David R. Bright		850		*
Joseph T. Drennan		783		*
Maurice R. Mitts		833		*
William B. Moore		1,834		*
Evelyn F. Smalls		500		*

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

Footnotes Concerning Beneficial Ownership of Stock

*	Less than one percent.
**	Ms. Smalls is also a Director; see listing above.

(1)	Stock ownership information is given as of March 8, 2011, and includes shares that the individual has the right to acquire (other than by exercise of stock options) within sixty (60) days of March 8, 2011. 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.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of our directors, executive officers, and members of their immediate families and the companies with which they are associated were our customers of and had banking transactions with us in the ordinary course of our business during the year 2010 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.

- 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;

- 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.

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

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

	2010		2009

Audit Fees	$	111,804	$	111,530
Audit-related fees		-		-
Tax fees		11,000		11,000
All other fees		-		-
Total fees	$	122,804	$	122,530

Services Provided by McGladrey and Pullen, LLP

1)	Audit Fees—These are fees for professional services performed by McGladrey and Pullen, LLP in 2010 and 2009 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 the independent public accounting firm are approved by the Audit Committee.

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT 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.	53

		Consolidated Balance Sheets at December 31, 2010 and 2009.	54
		Consolidated Statements of Operations for the three years ended December 31, 2010.	55

		Consolidated Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2010.	56

		Consolidated Statements of Cash Flows for the three years ended December 31, 2010.	57

		Notes to Consolidated Financial Statements	58


	2.	Financial Statement Schedules

		Financial 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)

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)	First Amendment to lease for corporate headquarters office located at The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, PA(incorporated by reference to Registrant’s 2009 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 Registrant

	Name	State of Incorporation
	United Bank of Philadelphia	Pennsylvania

(31)	Certification of the Annual Report
	(31.1) Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	(31.2) Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32)	Certification Pursuant to issue of Section 1350
	(A)	Exhibit 32.1
		Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer attached hereto as Exhibit 99.1.
	(B)	Exhibit 32.2
		Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer attached hereto as Exhibit 99.2.

(99)	Supplemental Information
	(A)	The Annual Report to Shareholders and Proxy material will be furnished after the filing of Form 10-K. Copies of these materials will be submitted to the Commission when they are sent to the shareholders.

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, 2011

Evelyn F. Smalls, President & CEO, Director


/s/_________________________________________	March 31, 2011
Brenda M. Hudson-Nelson, EVP, CFO


/s/___________________________________	March 31, 2011
L. Armstead Edwards, Chairman, Director


/s/_________________________________________	March 31, 2011

Marionette Y. Wilson(Frazier), Secretary, Director


/s/_________________________________________	March 31, 2011

William B. Moore, Secretary, Vice Chairman, Director


/s/________________________________________	March 31, 2011

Bernard E. Anderson, Director


/s/________________________________________	March 31, 2011

David R. Bright, Director

/s/________________________________________	March 31, 2011

Maurice R. Mitts, Director

/s/________________________________________	March 31, 2011

Joseph T. Drennan, Treasurer, Director


/s/_________________________________________	March 31, 2011
Ernest L. Wright, Director

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

United Bancshares, Inc. and Subsidiary

We have audited the consolidated balance sheets of United Bancshares, Inc. and Subsidiary (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

Blue Bell, Pennsylvania

March 31, 2011

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31,

Assets:	2010			2009
Cash and due from banks	$	2,144,390		$	2,495,359
Interest-bearing deposits with banks		304,721			303,485
Federal funds sold		6,247,000			3,491,000
Cash and cash equivalents		8,696,111			6,289,844

Investment securities:
Available-for-sale, at fair value		1,338,898			1,862,993
Held-to-maturity, at amortized cost (fair value of $15,242,856
and $10,019,986 in 2010 and 2009, respectively)		15,138,389			9,970,807

Loans, net of unearned discount of $44,418 and $58,024 in 2010
and 2009, respectively		45,612,217			47,587,112
Less allowance for loan losses		(925,905	)		(727,397	)
Net loans		44,686,312			46,859,715
Bank premises and equipment, net		1,143,347			1,358,296
Accrued interest receivable		363,348			421,292
Other real estate owned		1,416,543			-
Intangible assets		491,889			669,967
Prepaid expenses and other assets		690,878			884,879
Total assets		73,965,715		$	68,317,793
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits, noninterest-bearing	$	13,528,781		$	14,030,712
Demand deposits, interest-bearing		13,802,602			10,188,990
Savings deposits		13,856,033			15,302,458
Time deposits, under $100,000		8,047,679			8,417,102
Time deposits, $100,000 and over		17,975,595			12,367,359
Total deposits		67,210,690			60,306,621
Accrued interest payable		56,907			63,954
Accrued expenses and other liabilities		400,702			415,942
Total liabilities		67,668,299			60,786,517

Commitments and Contingencies (Notes 5, 9, and 13)

Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value,
500,000 shares authorized; 136,842 issued and outstanding		1,368			1,368
Common stock, $0.01 par value; 2,000,000 shares authorized;
876,921 issued and outstanding		8,769			8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
191,667 issued and outstanding		1,917			1,917
Additional paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(8,508,591	)		(7,280,793	)
Accumulated other comprehensive income		44,101			50,163
Total shareholders’ equity		6,297,416			7,531,276
Total liabilities and shareholders’ equity	$	73,965,715		$	68,317,793

The accompanying notes are an integral part of these statements.

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,

	2010			2009			2008
Interest income:
Interest and fees on loans	$	2,806,458		$	3,039,349		$	3,335,151
Interest on investment securities		569,778			545,119			607,996
Interest on federal funds sold		11,685			8,927			129,966
Interest on time deposits with other banks		1,260			7,215			7,444
Total interest income		3,389,181			3,600,610			4,080,557

Interest expense:
Interest on time deposits		205,291			352,919			565,396
Interest on demand deposits		75,400			89,367			121,617
Interest on savings deposits		14.407			33,888			102,768
Total interest expense		295.098			476,174			789,781
Net interest income		3,094,083			3,124,436			3,290,776
Provision for loan losses		747,000			235,000			368,000

Net interest income after provision for loan losses		2,347,083			2,889,436			2,922,776

Noninterest income:
Customer service fees		432,676			489,719			554,731
ATM fee income		366,971			437,997			454,628
Loan syndication fee income		140,000			140,000			130,000
Grant income		394,400			165,500			-
Other income		130,776			79,457			69,567
Total noninterest income		1,464,823			1,312,673			1,208,926

Noninterest expense:
Salaries, wages and employee benefits		1,717,137			1,606,978			1,557,247
Occupancy and equipment		1,017,477			1,096,789			1,120,800
Office operations and supplies		291,458			303,717			318,345
Marketing and public relations		43,140			56,516			104,045
Professional services		315,390			253,216			243,708
Data processing		473,788			528,298			513,424
Loan and collection cost		344,695			75,640			81,922
Deposit insurance assessments		144,183			97,240			153,193
Other operating		692,436			728,844			692,517
Total noninterest expense		5,039,704			4,747,238			4,785,201
Net loss before income taxes		(1,227,798	)		(545,129	)		( 653,499	)
Provision for income taxes		-			-			-
Net loss	$	(1,227,798	)	$	(545,129	)	$	(653,499	)

Net loss per common share—basic and diluted	$	(1.15	)	$	(0.51	)	$	(0.61	)
Weighted average number of common shares		1,068,588			1,068,588			1,068,588

The accompanying notes are an integral part of these statements.

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2010, 2009, and 2008

														Accumulated
									Additional					other			Total
	Series A preferred stock				Common stock				paid-in		Accumulated			comprehensive			shareholders’			Comprehensive
	Shares		Amount		Shares		Amount		capital		deficit			income (loss)			equity			income (loss)


Balance at December 31, 2007		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852		(6,082,165	)	$	5,669		$	8,685,410

Unrealized gains on investment securities, net of tax		-		-		-		-		-		-			17,837			17,837		$	17,837
Net loss		-		-		-		-		-		(653,499	)		-			(653,499	)		(653,499	)

																				$	(635,662	)
Total comprehensive loss

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

Unrealized gains on investment securities, net of tax		-		-		-		-		-		-			26,657			26,657		$	26,657
Net loss		-		-		-		-		-		(545,129	)		-			(545,129	)		(545,129	)
																		-
Total comprehensive loss
																				$	(518,472	)
Balance at December 31, 2009		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	(7,280,793	)	$	50,163		$	7,531,276

Unrealized gains on investment securities, net of tax		-		-		-		-		-		-			(6,062	)		(6,062	)	$	(6,062	)
Net loss		-		-		-		-		-		(1,227,798	)		-			(1,227,798	)		(1,227,798	)

Total comprehensive loss
																				$	(1,233,860	)
Balance at December 31, 2010		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	(8,508,591	)	$	44,101		$	6,297,416

The accompanying notes are an integral part of these statements.

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,

	2010			2009			2008

Cash flows from operating activities:
Net loss	$	(1,227,798	)	$	(545,129	)	$	(653,499	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses		747,000			235,000			368,000
Amortization of premiums on investments		43,328			33,460			4,423
Amortization of core deposit intangible		178,078			178,078			178,078
Depreciation on fixed assets		274,151			343,741			304,657
Decrease (increase) in accrued interest receivable and
other assets		251,945			(451,670	)		(61,403	)
(Decrease) increase in accrued interest payable and
other liabilities		(22,287	)		(1,298	)		14,639
Net cash provided by (used in) operating activities		244,417			(207,818	)		154,896

Cash flows from investing activities:
Purchase of available-for-sale investment securities		-			-			(250,000	)
Purchase of held-to-maturity investment securities		(16,415,439	)		(9,156,047	)		(7,198,840	)
Proceeds from maturity and principal reductions of
available-for-sale investment securities		515,363			824,312			1,067,521
Proceeds from maturity and principal reductions of
held-to-maturity investment securities		11,207,199			9,057,989			7,769,031
Proceeds from sale of other real estate owned		355,859			-			-
Net (increase) decrease in loans		(345,999	)		982,049			(3,850,451	)
Purchase of bank premises and equipment		(59,202	)		(84,463	)		(960,477	)
Net cash (used in) provided by investing activities		(4,742,219	)		1,623,840			(3,423,216	)

Cash flows from financing activities:
Net increase (decrease) in deposits		6,904,069			(597,649	)		( 5,180,214	)
Net cash provided by (used in) financing activities		6,904,069			(597,649	)		(5,180,214	)
Net increase(decrease)in cash and cash equivalents		2,406,267			818,373			(8,448,535	)
Cash and cash equivalents at beginning of year		6,289,844			5,471,471			13,920,006
Cash and cash equivalents at end of year	$	8,696,111		$	6,289,844		$	5,471,471
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	302,145		$	539,013		$	797,832
Noncash transfer of loans to other real estate owned	$	1,772,402			-			-

The accompanying notes are an integral part of these statements.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

United Bancshares, Inc. (the Company) is the holding company for United Bank of Philadelphia (the “Bank”). The Company was incorporated under the laws of the Commonwealth of Pennsylvania on April 8, 1993 and provides financial services through the Bank.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, 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, interest bearing deposits with banks that mature within 90 days 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

Bonds, notes, and debentures for which the Company 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.

Investment securities that would be held for indefinite periods of time but not necessarily to maturity, including securities that would be used as part of the Bank’s asset/liability management strategy and possibly sold in response to changes in interest rates, prepayments and similar factors are classified as “Available for Sale.” These securities are carried at fair value, with any temporary unrealized gains or losses reported as a separate component of other comprehensive income (loss), net of the related income tax effect. Gains and losses on the sale of such securities are accounted for on the specific identification basis in the statements of operations on the trade date.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Declines in the fair value of individual debt securities below their cost that are deemed to be other than temporary result in write-downs of the individual securities to their fair value. Debt securities that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses to the extent impairment is related to credit losses. The amount of the impairment for debt securities related to other factors is recognized in other comprehensive income (loss). In evaluating whether impairment is temporary or other-than-temporary, management first considers whether the Bank intends to sell the security or it is more-likely-than-not that the Bank will be required to sell the security prior to recovery. In these circumstances, the loss is determined to be other-than-temporary and the difference between the security’s fair value and its amortized cost is reflected as a loss in the statement of operations.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

If management does not intend to sell the security and likely will not be required to sell the security prior to forecasted recovery, management evaluates whether it expects to recover the entire amortized cost of the debt security or if there is a credit loss. In evaluating whether there is a credit loss, management considers various qualitative factors which include (1) the length of time and the extent to which the fair value has been less than cost, (2) the reasons for the decline in the fair value, and (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events. If, based on an analysis of these factors, management concludes that there is a credit loss, then management calculates the expected cash flows and records a loss in earnings equal to the difference between the amortized cost of the debt security and the expected cash flows. The portion of the decline in fair value that is due to factors other than credit loss is recognized in other comprehensive income. No investment securities held by the Bank as of December 31, 2010 and 2009 were subjected to a write-down due to credit related other-than-temporary impairment. Interest income from securities adjusted for the amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the contractual lives of the related securities. Realized gains and losses, determined using the amortized cost value of the specific securities sold, are included in noninterest income in the statement of operations.

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 loan is well collateralized and in the process of collection. 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, unpaid accrued interest previously credited to income is reversed and the loan is classified as impaired.

Unearned discount is amortized over the weighted average maturity of the related 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

Loans held-for-sale are carried at the lower of aggregate cost or market value. The Bank had no loans held for sale at December 31, 2010 and 2009.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when all the components meet the definition of a participating interest and when control over the assets has been surrendered. A participating interest generally represents (1) a proportionate (pro rata) ownership interest in an entire financial assets, (2) a relationship where from the date of transfer all cash flows received from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership, (3) the priority of cash flows has certain characteristics, including no reduction in priority, subordination of interest, or recourse to the transferor other than standard representation or warranties, and (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance account, and subsequent recoveries, if any, are credited to the allowance. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers’ ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management’s judgment, require the Bank to recognize additions or reductions to the allowance.

Various regulatory agencies periodically review the adequacy of the Bank’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Bank to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination. It is reasonably possible that the above factors may change significantly and, therefore, affects management’s determination of the allowance for loan losses in the near term.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience, other qualitative factors, and adjustments made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. The Bank does not allocate reserves for unfunded commitments to fund lines of credit.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank will identify and assess loans that may be impaired through any of the following processes:

During regularly scheduled meetings of the Asset Quality Committee

During regular reviews of the delinquency report

During the course of routine account servicing, annual review, or credit file update

Upon receipt of verifiable evidence of a material reduction in the value of collateral to a level that creates a less than desirable LTV ratio

Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller, homogeneous loans, including consumer installment and home equity loans, 1-4 family residential mortgages, and student loans are evaluated collectively for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

It is the Bank’s policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the statement of operations.

The Bank does not have an accrual for uncertain tax positions as of December 31, 2010 or 2009, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law.

Earnings (Loss) Per Share (“EPS”)

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.

Intangible Assets

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

	2010			2009

Core Deposit Premium (cost)	$	2,449,488		$	2,449,488
Less accumulated amortization		(1,957,599	)		(1,779,521	)
	$	491,889		$	669,967

Amortization of the intangible totaled approximately $178,100 for each of the years ended December 31, 2010, 2009, and 2008. The amortization of the intangible is projected to be approximately $178,100 for each of the next two years and approximately $136,000 in 2013. 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.

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value, net of estimated cost to sell, 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 Bank had approximately $1,417,000 in foreclosed real estate as of December 31, 2010. The Bank had no foreclosed real estate as of December 31, 2009.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

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 fair value of investment securities, the determination of the allowance for loan losses, valuation allowance for deferred tax assets and consideration of impairment of other intangible assets.

Segments

Reclassifications

Certain reclassifications have been made to the prior years’ financial statements to conform to the 2010 presentation, with no impact on earnings or shareholders’ equity.

Comprehensive Income

Comprehensive income includes net loss 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, 2010
	Before tax			Tax			Net of tax
	amount			benefit(expense)			amount

Unrealized loss on securities
Unrealized holding loss arising during period	$	( 9,048	)	$	2,986		$	( 6,062	)
Less: reclassification adjustment for gains (losses)
realized in net loss		-			-			-
Other comprehensive loss, net	$	(9,048	)	$	2,986		$	(6,062	)

	December 31, 2009
	Before tax			Tax			Net of tax
	amount			benefit(expense)			amount
Unrealized gains on securities
Unrealized holding gains arising during period	$	39,787		$	(13,130	)	$	26,657
Less: reclassification adjustment for gains (losses)
realized in net loss		-			-			-
Other comprehensive income, net	$	39,787		$	(13,130	)	$	26,657

(Continued)

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

	December 31, 2008
	Before tax		Tax			Net of tax
	amount		benefit(expense)			amount
Unrealized gains on securities
Unrealized holding gains arising during period	$	29,765	$	(11,928	)	$	17,837
Less: reclassification adjustment for gains (losses)
realized in net loss		-		-			-
Other comprehensive income, net	$	29,765	$	(11,928	)	$	17,837

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements that fall in either Level 2 or level 3. The Company’s disclosures about fair value measurements are presented in Note 14: Fair Value Measurements. These new disclosure requirements were effective for fiscal years beginning after December 31, 2009, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Company’s financial statement disclosure upon adoption of this ASU.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosures based on how it develops its allowance for loan losses and how it manages credit exposures. The existing disclosures to be presented on a disaggregated basis include a rollforward of the allowance for loan losses, the related recorded investment in such loans, the non-accrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted this guidance effective December 31, 2010. Since the adoption of this guidance was disclosure related, it did not have a material effect on the Company’s consolidated financial position or results of operations. However, it did result in additional disclosures as depicted in Note 4.

In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. That guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. As changes in current accounting guidance are unknown, the Company cannot reasonably predict what effect, if any, this will have on the Company’s financial position or results of operations.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

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, 2010. Reserve balances were $125,000, as of December 31, 2010 and 2009.

INVESTMENTS

The amortized cost, gross unrealized holding gains and losses, and estimated fair value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 2010 and 2009 are as follows:

	2010
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	Cost		gains		losses			value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,144,091	$	65,822	$	-		$	1,209,913
Investments in mutual funds		128,985		-		-			128,985
	$	1,273,076	$	65,822	$	-		$	1,338,898

Held-to-maturity:
U.S.Government agency securities	$	10,401,918	$	90,281	$	(145,356	)	$	10,346,843
Government Sponsored Enterprises residential mortgage-backed securities		4,736,472		165,675		(6,134	)		4,896,013
	$	15,138,389	$	255,957	$	(151,490	)	$	15,242,856
	2009
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	Cost		gains		losses			Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,659,353	$	74,870	$	-		$	1,734,223
Total debt securities		128,770		-		-			128,770
Investments in mutual funds	$	1,788,123	$	74,870	$	-		$	1,862,993

Held-to-maturity:
U.S. Government agency securities	$	6,574,668	$	8,898	$	(101,293	)	$	6,482,273
Government Sponsored Enterprises residential mortgage-backed securities		3,396,139		153,433		(11,859	)		3,537,713
	$	9,970,807	$	162,331	$	(113,152	)	$	10,019,986

In 2010, $10,047,000 in U.S. Government agencies securities were called. In 2009, $8,475,000 in U.S. Government agencies securities were called. There were no gross gains or losses realized from these transactions during 2010, 2009 or 2008. No securities were sold during 2010, 2009, or 2008.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

3. INVESTMENTS-Continued

The table below indicates the length of time individual held-to-maturity securities have been in a continuous unrealized loss position at December 31, 2010 (in thousands):

	Number		Less than 12 months					12 months or longer				Total
Description of	of		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Securities	securities		value		Losses			value		losses		value		losses

U.S. Government
agency securities		14	$	5,398	$	(145	)	$	-	$	-	$	5,398	$	(145	)

Mortgage backed
securities		4		536		(6	)		-		-		536		(6	)
Total temporarily
impaired investment
securities		18	$	5,934	$	(151	)	$	-	$	-	$	5,934	$	(151	)

The table below indicates the length of time individual securities held-to-maturity have been in a continuous unrealized loss position at December 31, 2009 (in thousands):

	Number		Less than 12 months					12 months or longer				Total
Description of	of		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Securities	securities		value		Losses			value		losses		value		losses

U.S. Government
agency securities		18	$	5,718	$	(101	)	$	-	$	-	$	5,718	$	(101	)

Mortgage backed
securities		2		510		(12	)		-		-		510		(12	)
Total temporarily
impaired investment
securities		20	$	6,228	$	(113	)	$	-	$	-	$	6,228	$	(113	)

U.S. Government and Agency Obligations. Unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2010 and 2009.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Residential Federal Agency Mortgage-Backed Securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities may be caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2010 and 2009.

The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2010 were as follows. Expected maturities may differ from contractual maturities because the U.S. agencies may be called or underlying mortgages supporting mortgage backed securities may be prepaid without any penalties. Consequently, mortgage-backed securities are not presented by maturity category.

	Amortized		Fair
	cost		Value
Available-for-sale:
Due in one year	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		-		-
Government-sponsored enterprises residential mortgage-backed securities		1,144,091		1,209,913

Total debt securities		1,144,091		1,209,913
Investments in mutual funds		128,985		128,985
	$	1,273,076	$	1,338,829

Held-to-maturity:
Due in one year	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		9,368,780		9,340,933
Due after ten years		1,033,138		1,005,910
Government-sponsored enterprises residential mortgage-backed securities		4,736,472		4,896,013

	$	15,138,389	$	15,242,856

As of December 31, 2010 and 2009, investment securities with a carrying value of $16,173,972 and $11,705,030 respectively, were pledged as collateral to secure public deposits and contingent borrowing at the Discount Window.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the net loans is as follows:

	2010		2009

Commercial and industrial:
Commercial	$	3,133,405	$	2,837,533
SBA Loans		228,722		319,715
Asset-based		2,367,443		1,196,218
Total Commercial and industrial		5,729,569		4,353,466

Commercial real estate:
Commercial mortgages		15,774,175		15,628,692
SBA Loans		1,311,032		1,351,673
Construction		-		1,249,506
Religious organizations		13,652,429		14,064,605
Total Commercial real estate		30,737,636		32,294,476

Consumer real estate:
Home equity loans		1,812,894		2,069,667
Home equity lines of credit		714,392		1,014,135
1-4 family residential mortgages		4,432,051		5,313,371
Total consumer real estate		6,959,337		8,397,173

Total real estate		37,696,973		40,691,649

Consumer and other:
Consumer installment		81,379		160,475
Student loans		1,912,375		2,181,083
Other		191,920		200,439
Total consumer and other		2,185,674		2,541,997

Total Loans	$	45,612,216	$	47,587,112

At December 31, 2010 and 2009, unamortized net deferred fees totaled $114,172 and $114,910, respectively, and are included in the related loan accounts.

Loan Origination/Risk Management. The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans. Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate prudently to service the projected debt. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Bank’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable. The Bank may also seek credit enhancements for commercial and industrial loans from the Small Business Administration, Department of Transportation or other available programs. Generally, the Bank utilizes an advance formula for loans secured by eligible accounts receivable and other available programs to mitigate risk.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed as cash flow loans first and secondarily as loans secured by real estate. Commercial real estate loans typically have higher principal amounts and the repayment of these loans is dependent on the successful operation of property securing the loan or business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The Bank tracks the level of owner occupied versus non-owner occupied loans. Typically, owner-occupied real estate loans represent less risk for the Bank.

The Bank’s commercial real estate loans are largely concentrated in loans to religious organizations. These loans are generally made to these organizations are primarily for expansion and repair of church facilities (construction loans). The source of repayment is viewed as cash flow from tithes and offerings and secondarily as loans secured by real estate.

The Bank’s construction lending has primarily involved lending for construction of commercial properties although the Bank does lend funds for construction of single-family residences. Construction loans are underwritten utilizing feasibility studies, independent appraisals, analysis of lease rates, and the financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates can be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. These loans are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, regulations of real property, general economic conditions and the availability of long-term financing.

Consumer loans are underwritten after an analysis of the borrower’s past and present financial information including credit score, personal financial statements, tax returns and other information deemed necessary to calculate debt service ratios that determine the ability of a borrower to repay the loan. Minimum debt service ratios have been established by policy. Underwriting standards for home equity loans are also heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80% and documentation requirements.

The Bank performs an annual loan review by an independent third party firm that reviews and validates the credit risk program. The results of these reviews are presented to the board and management. The loan review process reinforces the risk identification and assessment decisions made by lenders and credit administration personnel, as well as the Bank’s policies and procedures.

Concentrations of Credit. The Bank’s loan portfolio is concentrated in commercial real estate and commercial and industrial loans Approximately $18.7 million of these loans 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 at December 31, 2010 were $13.6 million, or 37.5%, of the commercial portfolio.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Related Party Loans. In the ordinary course of business, the Bank granted loans to certain directors, executive officers and there affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans is presented in the following table.

	2010			2009
Balance outstanding at December 31,	$	1,535,973		$	826,868
Principal additions		1,012,362			838,657
Principal reductions	$	(616,613	)	$	(129,552	)
Balance outstanding at December 31,	$	1,931,722		$	1,535,973

Non-accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received 30 days as of the date such payments were due. The Bank generally places a loan on non-accrual status when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may place the loan on nonaccrual status before the lapse of 90 days. Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on nonaccrual status, previously accrued and unpaid interest is reversed out of income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

An age analysis of past due loans, segregated by class of loans, as of December 31, 2010 follows:

			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	441,507	$	-	$	504,660		946,166	$	2,187,239	$	3,133,405
SBA loans		12,234		-		18,223		30,457		198,265		228,722
Asset-based		-		-		-		-		2,367,443		2,367,443
Total Commercial and industrial		453,741		-		522,883		976,623		4,752,947		5,729,570

Commercial real estate:
Commercial mortgages		125,348		-		1,494,690		1,620,038		14,154,137		15,774,175
SBA loans						58,123		58,123		1,252,909		1,311,032
Religious organizations		125,908		-		314,702		440,610		13,211,819		13,652,429
Total Commercial real estate		251,256		-		1,867,515		2,118,771		28,618,865		30,737,636

Consumer real estate:
Home equity loans		154,686		142,138		130,181		427,005		1,385,890		1,812,894
Home equity lines of credit		-		-		-		-		714,392		714,392
1-4 family residential mortgages		-		-		260,597		260,597		4,171,454		4,432,051
Total consumer real estate		154,686		142,138		390,778		687,602		6,271,736		6,959,337

Total real estate		405,941		142,138		2,258,293		2,806,373		34,890,600		37,696,973

Consumer and other:
Consumer installment		7,564		-		-		7,564		73,815		81,379
Student loans		87,464		43,731		-		131,195		1,781,180		1,912,375
Other		12,793		19,238		-		32,031		159,889		191,920
Total consumer and other		107,821		62,969		-		170,790		2,014,884		2,185,674

Total loans	$	967,503	$	205,107	$	2,781,176	$	3,953,786	$	41,658,431	$	45,612,217

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

An age analysis of past due loans, segregated by class of loans, as of December 31, 2009 follows:

			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans			Total Loans
Commercial and industrial:
Commercial	$	75,968	$	-	$	17,487		93,455		$	2,744,078	$	2,837,533
SBA loans		-		-		21,989		21,989			297,726		319,715
Asset-based		-		-		120,738		120,738			1,075,480		1,196,218
Total commercial and industrial		75,968		-		160,214		236,182			4,117,284		4,353,466

Commercial real estate:
Commercial mortgages		1,192,888		27,978		2,381,318		3,602,185			12,026,507		15,628,692
SBA loans		-		-		389,627		389,627			962,046		1,351,673
Construction		-		-		507,181		507,181			742,325		1,249,506
Religious organizations		305,553		492,190		-		797,743			13,266,862		14,064,605
Total commercial real estate		1,498,442		520,168		3,278,126		5,296,736			26,997,740		32,294,476

Consumer real estate:
Home equity loans		188,917		144,348		166,801		500,066			1,569,601		2,069,667
Home equity lines of credit		9,847		-		23,594		33,441			980,694		1,014,135
1-4 family residential mortgages		44,733		-		152,055		196,788			5,116,583		5,313,371
Total consumer real estate		243,497		144,348		342,450		730,295			7,666,878		8,397,173

Total real estate		1,741,939		664,516		3,620,576		6,027,031			34,664,618		40,691,649

Consumer and other:
Consumer installment		10,089		12,179		1,929		24,197			136,278		160,475
Student loans		137,268		99,008		-		236,276			1,944,807		2,181,083
Other		10,924		-		-		10,924			189,515		200,439
Total consumer and other		158,281		111,187		1,929		271,397			2,270,600		2,541,997

Total loans	$	1,976,187	$	775,703	$	3,782,719	$	6,534,610		$	41,052,502	$	47,587,112

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Impaired Loans. 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 interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis.

In accordance with guidance provided by ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; and the Observable Market Price of a Loan Method. To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.

Year-end impaired loans are set forth in the following table.


	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average		Interest Recognized
2010	Principal		With No		With		Recorded		Related		Recorded		on impaired
	Balance		Allowance		Allowance		Investment		Allowance		Investment		loans

Commercial and industrial:
Commercial	$	504,660	$	421,932	$	82,728	$	504,660	$	82,728	$	72,989	$	21,304
SBA loans		20,939		18,223		-		18,223		-		19,747		-
Asset-based		-		-		-		-		-		20,123		-
Total Commercial and industrial		525,599		440,155		82,728		522,883		82,728		112,859		21,304

Commercial real estate:
Commercial mortgages		1,412,374		577,301		835,073		1,412,374		155,719		1,700,001		25,001
SBA Loans		150,196		140,439		-		140,439		-		289,225		-
Construction		-		-		-		-		-		338,121		-
Religious Organizations		440,610		440,610		-		440,610		-		311,591		16,986
Total Commercial real estate		2,003,180		1,158,350		835,073		1,993,423		155,719		2,638,938		41,987

Total Loans	$	2,528,779	$	1,598,506	$	917,801	$	2,516,307	$	238,447	$	2,751,797	$	63,291

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008


	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average		Interest Recognized
2009	Principal		With No		With		Recorded		Related		Recorded		on impaired
	Balance		Allowance		Allowance		Investment		Allowance		Investment		loans

Commercial and industrial:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
SBA loans		21,989		21,989		-		21,989		-		20,081		-
Asset-based		120,738		-		120,738		120,738		120,738		77,736		-
Total commercial and industrial		142,727		21,989		120,738		263,465		120,738		97,817		-

Commercial real estate:
Commercial mortgages		2,381,318		2,365,435		15,883		2,381,318		2,083		1,708,533		6,022
SBA loans		389,627		320,996		68,630		389,626		12,767		422,753		-
Construction		507,181		-		507,181		507,181		51,539		42,265		16,779
Religious organizations		132,190		132,190		-		132,190		-		123,058		11,215
Total commercial real estate		3,410,316		2,818,621		591,694		3,410,315		66,389		2,296,609		34,016


Total Loans	$	3,553,043	$	2,840,610	$	712,432	$	3,553,043	$	187,127	$	2,394,426	$	34,016

Credit Quality Indicators. For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating. The Bank uses a 1 through 7 loan grading system that follows regulatory accepted definitions as follows:

Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments. Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.

Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention. Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.

Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. No loss of principal or interest is envisioned. Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit. Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However a restructuring of the debt should result in repayment. The asset is currently protected, but is potentially weak. This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Risk ratings of “6” are assigned to ‘Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.

Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The borrower's recent performance indicates an inability to repay the debt. Recovery from secondary sources is uncertain. The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.

Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets. They are recommended for charge-off if attempts to recover will be long term in nature. This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible. Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis. A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan.

The table below details the bank’s loans by class according to their credit quality indictors discussed above.


	2010
	Good/Excellent		Satisfactory		Pass		Special Mention		Subtandard		Total



Commercial and industrial:
Commercial	$	379,003	$	2,078,992	$	72,641	$	98,109	$	504,660	$	3,133,405
SBA loans		-		90,000		70,643		-		68,079		228,722
Asset-based		-		2,082,626		183,875		100,942		-		2,367,443
		379,003		4,251,618		327,159		199,051		572,739		5,729,570
Commercial real estate:
Commercial mortgages		-		13,901,585		264,496		-		1,608,094		15,774,175
SBA Loans				1,240,674						70,358		1,311,032
Construction		-		-		-		-		-		-
Religious organizations		-		9,919,609		2,932,210		360,000		440,610		13,652,429
		-		25,061,868		3,196,706		360,000		2,119,062		30,737,636

Total commercial loans	$	379,003	$	29,313,486	$	3,523,865	$	559,051	$	2,691,801	$	36,467,206


	2010
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing					Nonperforming			Total

Consumer Real Estate:
Home equity	$	1,682,713			$	130,181			$	1,812,894
Home equity line of credit		714,392				-				714,392
1-4 family residential mortgages		4,171,454				260,597				4,432,051
		6,568,559				390,778				6,959,337

Consumer Other:
Consumer Installment		81,379				-				81,379
Student loans		1,912,375				-				1,912,375
Other		191,920				-				191,920
		2,185,674				-				2,185,674

Total consumer loans	$	8,754,233			$	390,778			$	9,145,011

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008


	2009
	Good/Excellent		Satisfactory		Pass		Special Mention		Substandard		Total



Commercial and industrial:
Commercial	$	-	$	2,511,827	$	148,289	$	56,679	$	120,738	$	2,837,533
SBA loans		-		83,635		-		-		236,080		319,715
Asset-based		-		799,323		-		-		396,895		1,196,218
		-		3,394,785		148,289		56,679		753,713		4,353,467
Commercial real estate:
Commercial mortgages		507,657		12,145,044		206,836		130,907		2,638,248	$	15,628,692
SBA loans				1,150,675						200,998		1,351,674
Construction		-		1,249,506		-		-		-		1,249,506
Religious organizations		-		12,005,136		1,927,280		-		132,190		14,064,605
		507,657		26,550,361		2,134,115		130,907		2,971,436		32,294,477

Total commercial loans	$	507,657	$	29,945,146	$	2,282,404	$	187,586	$	3,725,150	$	36,647,944


	2009
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing					Nonperforming			Total
Consumer real estate:
Home equity	$	1,902,866			$	166,801			$	2,069,667
Home equity line of credit		990,541				23,594				1,014,135
Residential mortgages		5,161,316				152,055				5,313,371
		8,054,723				342,450				8,397,173

Consumer other:
Consumer installment		160,475								160,475
Student loans		2,181,083								2,181,083
Other		198,510				1,929				200,439
		2,540,068				1,929				2,541,997

Total consumer loans	$	10,594,791			$	344,379			$	10,939,170

Allowance for loan losses. Management reviews the level of the allowance for loans losses on a quarterly basis. The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans which have been defined to include all nonperforming loans and troubled debt restructurings. The general reserve is set based upon a representative average historical net charge-off rate adjusted for certain environmental factors such as delinquency and impairment trends, charge-off and recovery trends, volume and loan term demand trends, risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.

All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, moderate, high. The factors are evaluated separately for each type of loan (i.e. commercial and industrial, commercial real estate, etc.) Each type of loan is risk weighted for each environmental factor based on individual characteristics.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

According to the Bank’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectible. All credits that are 90 days or more past due must be analyzed for the Bank’s ability to collect the outstanding principal and/or interest. Once a loss is known to exist, the charge-off approval process must be followed for all loan types. An analysis of the activity in the allowance for loan losses for the years 2010 and 2009 is as follows:

(in 000's)
2010
	Commercial and industrial			Commercial real estate			Residential mortgages			Consumer loansReal Estate			Consumer Loans Other			Unallocated			Total
Beginning balance	$	324		$	298		$	38		$	59		$	6		$	2		$	727
Provision for possible loan losses		159			481			6			80			23			(2	)		747

Charge-offs		(189	)		(227	)		(8	)		(154	)		(23	)		-			(601	)
Recoveries		7			1			-			45						-			53
Net charge-offs		(182	)		(226	)		(8	)		(109	)		(23	)		-			(548	)

Ending balance	$	301		$	553		$	36		$	36		$	6		$	-		$	926

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	82		$	156		$	-		$	-		$	-		$	-		$	238
Loans collectively evaluated for impairment		219			397			36			36			-						688
	$	301		$	553		$	36		$	36		$	-		$	-		$	926

Loans, ending balance:
Loans indivdually evaluated for impairment	$	523		$	1,993		$	-		$	-		$	-		$	-		$	2,516
Loans collectively evaluated for impairment		5,206			28,745			4,432			2,527			2,186						43,095
Total	$	5,729		$	30,738		$	4,432		$	2,527		$	2,186		$	-		$	45,611






2009

Beginning balance	$	282		$	210		$	62		$	33					$	-		$	587
Provision for possible loan losses		62			150			(24	)		45						2			235

Charge-offs		(22	)		(62	)		-			(57	)					-			(141	)
Recoveries		2			-			-			44						-			46
Net charge-offs		(20	)		(62	)		-			(13	)		-			-			(95	)

Ending balance	$	324		$	298		$	38		$	65		$	-		$	2		$	727

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	121			66			-			-			-			-		$	187
Loans collectively evaluated for impairment		203			232			38			65			-			2			540
	$	324		$	298		$	38		$	65		$	-		$	2		$	727

Loans, ending balance:
Loans indivdually evaluated for impairment	$	142		$	3,410		$	-		$	-		$	-		$	-		$	3,552
Loans collectively evaluated for impairment		4,211			28,884			5,313			3,084			2,542						44,035
Total	$	4,353		$	32,294		$	5,313		$	3,084		$	2,542		$	-		$	47,587

2008
Beginning balance																			$	590
Provision for possible loan losses																				368

Charge-offs																				(519	)
Recoveries																				148
Net charge-offs																				(371	)

Ending balance																			$	587

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

5. BANK PREMISES AND EQUIPMENT

The major classes of bank premises and equipment and the total accumulated depreciation are as follows at December 31:

	Estimated
	useful life	2010			2009

Buildings and leasehold improvements	10-15 years	$	1,256,349		$	1,679,142
Furniture and equipment	3- 7 years		725,630			1,257,699
			1,981,979			2,936,841
Less accumulated depreciation			(838,632	)		(1,578,545	)
		$	1,143,347		$	1,358,296

Depreciation expense on fixed assets totaled $274,151, $343,741, and $304,657, for the years ended December 31, 2010, 2009, 2008, 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, 2010, 2009, and 2008 was $416,640, $416,201, and $394,396, respectively. Future minimum lease payments under operating leases are as follows:


Year ending December 31,	Operating leases

2011	$	451,776
2012		470,354
2013		480,243
2014		490,194
2015		486,778
Thereafter		397,593

Total minimum lease payments	$	2,776,938

6. DEPOSITS

At December 31, 2010, the scheduled maturities of time deposits (certificates of deposit) are as follows (in thousands):

2011	$	24,250
2012		831
2013		404
2014		147
2015		340
Thereafter		51

	$	26,023

7. BORROWINGS

At December 31, 2010, 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, 2010 and 2009, the Bank had no borrowings outstanding.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

INCOME TAXES

At December 31, 2010, the Bank has net operating loss carry forwards of approximately $6,020,000 for income tax purposes that expire in 2013 through 2027.

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 $2,749,768 and $2,400,568 as of December 31, 2010 and 2009, 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,
	2010			2009

Deferred tax assets(liabilities):
Provision for loan losses	$	214,918		$	147,544
Unrealized gain on investment securities		(21,721	)		(24,707	)
Depreciation		380,715			391,666
Net operating loss carryforwards		2,048,999			1,763,240
Other, net		126,858			122,825
Valuation allowance for deferred tax assets		(2,749,768	)		(2,400,568	)
Net deferred tax assets	$	-		$	-

	2010			2009

Effective rate reconciliation:
Tax at statutory rate (34%)	$	(417,451	)	$	(185,344	)
Nondeductible expenses		6,163			5,191
Increase in valuation allowance		344,592			167,439
Other		66,696			12,714
Total tax expense	$	-		$	-

Management has evaluated the Bank’s tax positions and concluded that the Bank has taken no uncertain tax positions that require adjustment to the financial statements. With few exceptions, the Bank is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for the years before 2007.

9. FINANCIAL INSTRUMENT COMMITMENTS

(Continued)

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

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

	2010		2009

Commitments to extend credit	$	7,531,275	$	8,558,100
Outstanding letters of credit		695,033		-

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

10. FAIR VALUE

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Level 1



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

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.”

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.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Value on a Recurring Basis

Securities Available for Sale: Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities include U.S. agency securities and mortgage backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Assets on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.

(in 000’s)				Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value at December 31, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale: Government Sponsored Enterprises residential mortgage-backed securities Mutual Funds Total	$1,210 129 $1,339	$- 129 $129	$1,210 - $1,210	- -

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

(in 000’s)				Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value at December 31, 2009	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale: Government Sponsored Enterprises residential mortgage-backed securities Mutual Funds Total	$1,734 $129 $1,863	$- 129 $129	$1,734 - $1,734	- -

As of December 31, 2010 and 2009, the fair value of the Bank’s AFS securities portfolio was approximately $1,339,000 and $1,863,000, respectively. Over 90% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,210,000 and $1,734,000 at December 31, 2010 and 2009, respectively. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. All AFS securities were classified as level 2 assets at December 31, 2010 and 2009. The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information. There were no transfers between Level 1 and Level 2 assets during the period ended December 31, 2010 or 2009.

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).

Impaired Loans (net of specific reserves): The carrying value of impaired loans is derived in accordance with FASB ASC Topic 310, “Receivables”. Fair value is determined based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation. The valuation allowance for impaired loans is included in the allowance for loan losses in the balance sheets. The valuation allowance for impaired loans at December 31, 2010 and December 31, 2008 was $238,000 and $187,000 respectively.

The following table presents the assets and liabilities carried on the consolidated balance sheets by level within the fair value hierarchy as of December 31, 2010, for which a nonrecurring change in fair value has been recorded during the year ended December 31, 2010.

Carrying Value at December 31, 2010:

(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)	Total fair value gain (loss) during the year ended December 31, 2010
Impaired Loans Other real estate owned (“OREO”)	$679 1,417	- -	- -	$679 1,417	$(238) -

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Carrying Value at December 31, 2009:

(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)	Total fair value gain (loss) during year ended December 31, 2009
Impaired Loans	$525	-	-	$525	$(91)

Fair Value of Financial Instruments

FASB ASC Topic 825 “Disclosure About Fair Value of Financial Instruments”, requires the disclosure of the fair value of financial instruments. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or non recurring basis are discussed above.

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 available for sale are as described above. Investment securities held to maturity 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 (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments, amortizations, and non performance risk. Prepayments and discount rates were based on current marketplace estimates and rates. 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. The carrying amount of accrued interest payable approximates fair market value.

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. Such amounts were not significant.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

The fair value of financial instruments at year-end are presented below:

(in 000’s)

	2010				2009
	Carrying		Fair		Carrying		Fair
Assets:	Amount		Value		Amount		Value
Cash and cash equivalents	$	8,696	$	8,696	$	6,290	$	6,290
Investment securities		16,477		16,582		11,834		11,883
Loans, net of allowance for loan losses		44,686		44,698		46,860		46,707
Interest receivable		363		363		421		421
Liabilities:
Demand deposits		27,331		27,331		24,219		24,219
Savings deposits		13,856		13,856		15,302		15,302
Time deposits		26,023		26,023		20,785		20,785
Interest Payable		57		57		64		64

11. CONSOLIDATED FINANCIAL INFORMATION—PARENT COMPANY ONLY

Condensed Balance Sheets

	December 31,
(Dollars in thousands)	2010			2009
Assets:
Cash and cash equivalents	$	70		$	117
Investment in United Bank of Philadelphia		6,227			7,415
Total assets	$	6,297		$	7,532

Shareholders’ equity:
Series A preferred stock		1			1
Common stock		11			11
Additional paid-in capital		14,750			14,750
Accumulated deficit		(8,509	)		(7,280	)
Net unrealized holding gains on securities available-for-sale		44			50

Total shareholders’ equity	$	6,297			7,532

Total liabilities and shareholders’ equity	$	6,297		$	7,532

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

Condensed Statements of Operations

Years ended December 31,
(Dollars in thousands)	2010			2009			2008
Other Expenses	$	(47	)	$	(72	)	$	(61	)
Equity in net (loss) income of subsidiary	$	(1,181	)	$	(473	)	$	(592	)
Net loss	$	(1,228	)	$	(545	)	$	(653	)
Condensed Statements of Cash Flows
Years ended December 31,
(Dollars in thousands)		2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	(1,228	)	$	(545	)	$	(653	)
Adjustments:
Increase (decrease) in liabilities		-			-			(3	)
Equity in net (loss) income of subsidiary		1,181			473			592
Net cash used in operating activities		(47	)		(72	)		(64	)
Cash and cash equivalents at beginning of year		117			189			253
Cash and cash equivalents at end of year	$	70		$	117		$	189

12. REGULATORY MATTERS

The Bank engages in the commercial banking business, with a particular focus on serving African Americans, 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, 2010, the FDIC became the Bank’s primary regulator after it voluntarily surrendered its 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. Prompt corrective action provisions are not applicable to bank holding companies. 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.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

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

	Actual					For capital adequacy purposes					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010:
Total capital to risk-
weighted assets:
Consolidated	$	6,338		13.91	%	$	3,652		8.00	%		N/A
Bank		6,268		13.75	%		3,646		8.00	%	$	4,558		10.00	%
Tier I capital to risk-
weighted assets:
Consolidated		5,761		12.64	%		1,826		4.00	%		N/A
Bank		5,691		12.49	%		1,823		4.00	%	$	2,735		6.00	%
Tier I capital to average assets:
Consolidated		5,761		7.63	%		3,024		4.00	%		N/A
Bank		5,691		7.53	%		3,022		4.00	%	$	3,777		5.00	%

	Actual					For capital adequacy purposes					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009:
Total capital to risk-
weighted assets:
Consolidated	$	7,407		15.57	%	$	3,815		8.00	%		N/A
Bank		7,290		15.33	%		3,806		8.00	%	$	4,759		10.00	%
Tier I capital to risk-
weighted assets:
Consolidated		6,811		14.32	%		1,907		4.00	%		N/A
Bank		6,694		14.07	%		1,903		4.00	%	$	2,854		6.00	%
Tier I capital to average assets:
Consolidated		6,811		10.08	%		2,708		4.00	%		N/A
Bank		6,694		9.91	%		2,703		4.00	%	$	3,379		5.00	%

13. 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.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

14. EARNINGS PER SHARE COMPUTATION

Net loss per common share is calculated as follows:

	Year ended December 31, 2010
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Net loss	$	(1,227,798	)
Basic EPS
Loss attributable to common stockholders	$	(1,227,798	)		1,068,588	$	(1.15	)
Fully Diluted EPS
Loss attributable to common stockholders	$	(1,227,798	)		1,068,588	$	(1.15	)

	Year ended December 31, 2009
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Net loss	$	(545,129	)
Basic EPS
Loss attributable to common stockholders	$	(545,129	)		1,068,588	$	(0.51	)
Fully Diluted EPS
Loss attributable to common stockholders	$	(545,129	)		1,068,588	$	(0.51	)

	Year ended December 31, 2008
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Net loss	$	(653,499	)
Basic EPS
Loss attributable to common stockholders	$	(653,499	)		1,068,588	$	(0.61	)
Fully Diluted EPS
Loss attributable to common stockholders	$	(653,499	)		1,068,588	$	(0.61	)

There were no common stock equivalents for the years December 31, 2010, 2009, and 2008.

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.

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2010, 2009, and 2008

15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following summarizes the consolidated results of operations during 2010 and 2009, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:

(Dollars in thousands)

	2010
	Fourth			Third		Second			First
	Quarter			Quarter		Quarter			Quarter

Interest income	$	851		$	878	$	848		$	812
Interest expense		68			74		77			76
Net interest income		783			804		771			736
Provision for loan losses		270			70		377			30
Net interest after provision for loan losses		513			734		394			706
Noninterest income		282			615		301			267
Noninterest expense		1317			1,303		1,256			1,164
Net (loss)earnings	$	(522	)	$	46	$	(561	)	$	(191	)
Basic (loss)earnings per common share	$	( 0.47	)	$	0.04	$	(0.54	)	$	(0.18	)
Diluted (loss)earnings per common share	$	( 0.47	)	$	0.04	$	(0.54	)	$	(0.18	)

(Dollars in thousands)

	2009
	Fourth			Third			Second			First
	Quarter			Quarter			Quarter			Quarter


Interest income	$	845		$	907		$	927		$	921
Interest expense		91			111			125			149
Net interest income		754			796			802			772
Provision for loan losses		30			145			30			30
Net interest after provision for loan losses		724			651			772			742
Noninterest income		306			417			313			276
Noninterest expense		1,227			1,200			1,166			1,155
Net loss		(196	)		(132	)		(80	)		(137	)
Basic loss per common share	$	(0.18	)	$	(0.12	)	$	(0.08	)	$	(0.13	)
Diluted loss per common share	$	(0.18	)	$	(0.12	)	$	(0.08	)	$	(0.13	)

Commission File No. 0-25976

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2010

UNITED BANCSHARES, INC.

EXHIBITS

UNITED BANCSHARES INC /PA - FORM 10-K - March 31, 2011

Attached files

UNITED BANCSHARES INC /PA Reports