10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x  

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

  OR

¨  

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

SECURITIES EXCHANGE ACT OF 1934

for the transition period from to

Commission file number: 0-25976

UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2802415
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
The Graham Building, 30 South 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 3^rd Street Philadelphia, PA 19106

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

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

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

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

Common Stock, $ .01 Par Value

(Title of Class)

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

Yes [  ] No [X]

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

 Yes [  ] No [X]

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

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

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

Large Accelerated filer ¨Accelerated filer ¨Non-accelerated filer x

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

Yes ¨    No x

The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was [_______________] on June 30, 2006. Not applicable the Registrant shares are not publicly traded

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

DocumentParts Into Which Incorporated

None

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

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FORM 10-K

United Bancshares, Inc.

Index

Item No.		Page
PART I
1.	Business	4
1A.	Risk Factors	12
1B.	Unresolved Staff Comments	14
2.	Properties	14
3.	Legal Proceedings	14
4.	Submission of Matters to a Vote of Security Holders	15
PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters	15
6.	Selected Financial Data	17
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
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 and Executive Officers, Promoters, Control persons and Corporate
	Governance; Compliance with Section 16(a) of the Exchange Act	36
11.	Executive Compensation	41
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	44
13.	Certain Relationships and Related Transactions, and Director Independence	45
14.	Principal Accountant Fees and Services	46
PART IV
15.	Exhibits and Financial Statements Schedules	47

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

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PART I

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT

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

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

ITEM 1 — BUSINESS

United Bancshares, Inc.

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

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

As of March 2, 2007, UBS and the Bank had a total of 31 employees.

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United Bank of Philadelphia

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

The Bank conducts all its banking activities through its three offices located as follows: West Philadelphia Branch 38th and Lancaster Avenue, Philadelphia, Pennsylvania, (iii) Mount Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (iv) Progress Plaza Branch 1015 North Broad Street, Philadelphia, Pennsylvania. In addition, the Bank leases and concurrently subleases to a mortgage brokerage company, the retail space on the bottom floor of its Center City Graham Building corporate office. The Bank has an automated teller machine in the lobby of this space that allows the Bank to have a branding presence in Center City Philadelphia without incurring additional occupancy expense. Through its locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2006, the Bank had total deposits aggregating approximately $64.9 million and had total net loans outstanding of approximately $42.5 million. Although the Bank’s primary service area for Community Reinvestment Act purposes is Philadelphia County, it also services, generally, the Delaware Valley, which consists of portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties in New Jersey.

The city of Philadelphia is comprised of 381 census tracts and, based on 2000 census data, 249 or 65% of these are designated as low to moderate-income tracts while 105 or 27.5% are characterized both as low to moderate-income and minority tracts. The Bank’s primary service area consists of a population of 1,517,550, which includes a minority population of 752,309.

       United Bank of Philadelphia, while state chartered as a commercial bank, is uniquely structured to be a player in providing retail services to its urban communities, while maintaining and establishing a solid portfolio of commercial relationships that include small businesses, churches and corporations. The Bank will leverage its CDFI (community development financial institution) designation as established by the United States Department of Treasury to attract deposits from entities seeking Community Reinvestment Act (the “CRA Act”) credit as well as grants and/or equity from the US Treasury CDFI Fund and other agencies of the U.S. Government.

The Bank will seek to strengthen communities in the Philadelphia region with innovative products and services including new Check 21 technology—remote deposit capture as well as enhanced e-banking functionality. The Bank engages in commercial banking business with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts.

A broad range of credit products is offered to the businesses and consumers in the Bank’s service area, including commercial loans, student loans, home improvement loans, auto loans, personal loans, home equity loans and secured credit card loans. At March 2, 2007, the Bank’s maximum legal lending limit was approximately $1,157,000 per borrower. However, the Bank’s internal Loan Policy limits the Bank’s lending to $500,000 per borrower in order to diversify the credit risk in the loan portfolio. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions.

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

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

Segments

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

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

Reports filed electronically by United Bancshares, Inc.’s with the Securities and Exchange Commission including proxy statements, reports on Form 10-K, reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendment of those reports, and other information about UBS and the Bank are accessible at no cost on the Bank’s web site at www.unitedbankofphiladelphia.com under the “shareholders corner” section. These files are also accessible on the Commission’s web site@www.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 tap into wealth and profitable business in minority communities. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers including cash management, investment and trust services. To date, the Bank has attracted, and believes it will continue to attract its customers from the deposit base of such existing banks and financial institutions largely due to the Bank’s mission to service groups of people who have traditionally been under served and by its devotion to personalized customer service. The Bank’s strategy has been, and will continue to be, to emphasize personalized services with special sensitivity to the needs of Blacks, Hispanics and women and to offer competitive rates to borrowers and depositors.

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

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

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

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Supervision and Regulation

Regulation of United Bancshares, Inc.

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

The Bank Holding Company Act

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

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

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

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

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

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

The Financial Services Act

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

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

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

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

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

Regulation of the Bank

The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board because the Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank’s deposits and thus the Bank is subject to certain FDIC regulations. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Below are summarized those laws and regulations which a have material impact on the operations and expenses of the Bank and thus UBS.

Branch Banking

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

Federal Reserve Membership Regulations

Since the Bank is a member bank of the Federal Reserve System, the Federal Reserve Board possesses the power to prohibit institutions regulated by it, such as the Bank, from engaging in any activity that would be an unsafe and unsound banking practice or violate the law. Moreover, the Board has: (i) empowered the Federal Deposit Insurance Corporation (the “FDIC”) to issue cease-and-desist or civil money penalty orders against the Bank or its executive officers, directors and/or principal shareholders based on violations of law or unsafe and unsound banking practices; (ii) authorized the FDIC to remove executive officers who have participated in such violations or unsound practices; (iii) restricted lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricted management personnel of the Bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the Bank Control Act provides that no person may acquire control of the Bank unless the Federal Reserve Board has been given 60-days prior written notice and within that time has not disapproved of the acquisition or extended the period for disapproval.

The Federal Deposit Insurance Corporation Act

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

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

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

        In November 2006, the FDIC adopted final regulations to implement the Reform Act. The final regulations include the annual assessment rates that will take effect at the beginning of 2007. The new assessment rates for nearly all banks will vary between five and seven cents for every $100 of domestic deposits. However, although the Bank is adequately capitalized, because of its current regulatory rating and designation as a “troubled financial institution”, its rate is projected to be twenty-eight cents for every $100 of deposits. Applied to United Bank of Philadelphia’s assessment base of approximately $64.9 million, this translates to an annual deposit premium estimated to be $181 thousand. As part of the Reform Act, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC’s insurance reserves. As a result, according to the FDIC, the Bank will have an assessment credit to initially offset a portion of its premium in 2007. The preliminary assessment credit for United Bank of Philadelphia was calculated at $122 thousand. The assessment credit will be used to reduce future deposit premiums that would otherwise be due. Further, the Bank’s usage of the credit is limited to the average assessment of all institutions of between five and seven cents for every $100. Accordingly, the maximum premium the Bank is projected to pay is twenty-three cents per $100, or $142,780--an increase of 29%, or $32,093, from its 2006 deposit insurance assessment.

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

The Community Reinvestment Act

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

The Bank Secrecy Act

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

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Privacy of Consumer Financial Information

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

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

Consumer Protection Rules - Sale of Insurance Products

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

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

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

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

The Patriot Act

        The Patriot Act of 2001 which was enacted in the wake of the September 11, 2001 attacks, include provisions designed to combat international money laundering and advance the U.S. government’s war against terrorism. The Patriot Act, and the regulations, which implement it, contains many obligations, which must be satisfied by financial institutions, including the Bank, which involve additional expenses for the Bank. In March of 2006 the Patriot Act, which was about to expire, was extended. The provisions in the Patriot Act concerning anti-terrorism were extended and provisions were added to the Patriot Act to curb certain of the criminal investigation powers that were in the original Patriot Act.

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

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

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

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

Compliance with Section 404 of the Sarbanes-Oxley Act

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

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

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

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

Future Legislation and Governmental Policies

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

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Regulatory Action

In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (“Agreement”) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank to maintain a minimum leverage capital ratio of 7.00%. As of December 31, 2002, the Bank had met the required ratios by continuing to implement strategies that included improving profitability, consolidating branches, and soliciting new and additional sources of capital. At December 31, 2006, the Bank’s Tier 1 leverage ratio was 9.93%--293 basis points above the 7.00% minimum requirement. Management continues to address all matters outlined in the Agreement and believes that the Bank is substantially in compliance with the Agreement’s terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions.

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

ITEM 1A--RISK FACTORS

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

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

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

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

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

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

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

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Government regulation can result in limitations on operations

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

The financial services industry is very competitive     

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

Inadequate liquidity

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

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

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

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

Ø   New developments in the banking industry

Ø   Variations in quarterly or annual operating results

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

Ø   Litigation involving UBS or the Bank

Ø   Changes in accounting policies or procedures

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

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ITEM 1B—UNRESOLVED STAFF COMMENTS

None.

ITEM 2— PROPERTIES

Corporate Headquarters

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

In August 2005, the Bank assumed the remaining term from another financial institution of a lease for retail space on the ground level of the Graham Building. The Bank simultaneously subleased this space to a regional mortgage brokerage company with the exception of the lobby in which its automated teller machine (ATM) is located. The lease expires in September 2009. The Bank’s average aggregate gross monthly rental is $4,858 of which the tenant pays an average monthly rent of $3,358. In addition, the Bank pays $1,500 per month for the ATM lobby plus one third of common area maintenance.

Mt. Airy Branch

The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is located in a densely populated residential neighborhood and in close proximity to small businesses/retail stores. Management believes this branch has not reached its capacity and looks forward to increased business opportunities in this area. A business-to-business calling program will be utilized to increase the Bank’s visibility in the neighborhood in which the branch is located. To further enhance its appeal, the internal appearance of this branch was updated in 2006 to include new paint, flooring, and furnishings. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased at a monthly rental of $3,958.

West Philadelphia Branch

The Bank owns and operates the branch location at 3750 Lancaster Avenue. This branch is located in close proximity to two major universities and hospitals. It is comprised of approximately 3,000 square feet. Internal and external facelifts are planned for this branch in 2007. The main floor houses teller and customer service areas, a drive-up teller facility and automated teller machine. The basement provides storage for the facility.

Progress Plaza Branch

The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, Pennsylvania. The Progress Plaza branch is a very active branch with the largest number of customers seeking service on a daily basis. This area of North Philadelphia is an important area for the Bank and its mission. The facility is comprised of a teller and customer service area, lobby and vault. The aggregate monthly rental for this facility is $3,875 per month. This lease expired in October 2003. Extensive improvements to the shopping plaza in which this branch is located are planned for 2007. The Bank will be relocated within the shopping plaza in a space to be constructed by the Fall of 2007. It is currently leasing this facility on a month-to-month basis. Terms of the new lease for the new space have been negotiated to include a term of ten years with average aggregate gross monthly rent of $5,552.

ITEM 3 — LEGAL PROCEEDINGS

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

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

A            A shareholders’ annual meeting of UBS was held on November 21, 2006. Proxies for the annual meeting were solicited pursuant to Regulation 14A of the Exchange Act and there were no solicitation in opposition to the management’s nominees as listed in the proxy statement and all such nominees were elected.

       The matters voted upon at the shareholders’ annual meeting of UBS were the reelection of three (3) Class C directors to serve four year terms and the ratification of the appointment of McGladrey and Pullen LLP as UBS’ independent registered public accountants for the year 2005.

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

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

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

PART II

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

RELATED STOCKHOLDER MATTERS

Common Stock

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

There were no capital stock transactions during 2006 and 2005.

As of March 2, 2007 there were 3,143 shareholders of record of UBS’ voting Common Stock and two shareholders of record of UBS’ Class B Non-voting Common Stock.

Dividend Restrictions

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

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

        Securities Authorized for Issuance Under Equity Compensation Plans

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

Equity Compensation Plan Table

	(a)	(b)	(c)
Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants, and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	29,694	$8.54	70,306
Equity compensation plans not approved by security holders	-	-	-
Total	29,694	$8.54	70,306

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

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ITEM 6 — SELECTED FINANCIAL DATA

Selected Financial Data

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

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Critical Accounting Policies

Allowance for Credit Losses

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

Income Taxes

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

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Executive Summary

       United Bank of Philadelphia is the only minority-owned and controlled community development financial institution headquartered in Philadelphia. With the stabilization of the Bank’s capital position, management can now maximize this competitive advantage by leveraging its strategic partnerships and relationships to increase market penetration and to help ensure that the communities it serves have full access to financial products and services. Understanding of the regulatory climate in which the Bank operates, the primary focus of management is to continue to increase core profitability and build franchise/shareholder value by:

·   Growing and diversifying the deposit mix

·   Growing and diversifying the loan mix

·   Enhancing the branch network and alternative delivery options

        During 2006, the Bank’s total assets increased by $1.7 million, or 2.38% and modest profitability of $119,000 was achieved. Even though the Bank’s net interest margin remained strong, the 2006 financial results were significantly impacted by competition from money center banks entering the region placing branches in close proximity to the Bank’s branches. The neighborhoods in which the Bank’s branches are located had seen a departure of these types of financial institutions in the late 80’s and early 90’s when the Bank was formed. There are now strategic initiatives by these institutions to capture of the “new markets” business consisting of blacks, Hispanics and women. These markets have always been included in the Bank’s mission. With significantly more capital, these Bank’s are often able to offer higher interest rates, longer hours, and state of the art branches with new technology. As a result, growth in deposits and loans remain management’s challenge. Strategies that will be used to achieve growth include the following:

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

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

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

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

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

Results of Operations

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

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

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

For purposes of computing the average balance, loans are not reduced for nonperforming loans.

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Net Interest Income

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

Net interest income totaled $3,622,000 in 2006, an increase of $51,000, or 1.43%, compared to 2005. Net interest income was $3,571,000 in 2005, an increase of $291,000, or 8.87%, compared to 2004.

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

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

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

In 2006, there was a decrease in net interest income of $61,000 due to changes in volume and an increase of $112,000 due to changes in rate. In 2005, there was an increase in net interest income of $54,000 due to changes in volume and an increase of $237,000 due to changes in rate.

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

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

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

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

Provision for Loan Losses

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

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

       Management continues to monitor its credit quality very closely by working with borrowers in an effort to identify and control credit risk. Systematic provisions are made to the allowance for loan losses to cover potential credit losses in the portfolio. Management believes the level of the allowance for loan losses is adequate as of December 31, 2006.

Noninterest Income

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

       The customer service fee component of noninterest income reflects the volume of transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charges, overdrafts, account analysis, and other customer service fees. During 2006, customer service fees declined by $79,000, 11.54%, compared to 2005 and decreased $171,000, or 20.03%, in 2005 compared to 2004. From 2004 to 2006, there has been $2.3 million decline in the Bank’s average noninterest bearing demand deposits. This decline resulted in less overdraft fees, activity service charges and low balance fees.

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

        Since 2002, the Bank has served as arranger/agent for loan syndications for several major corporations throughout the country. In this capacity, the Bank syndicates back-up lines/letters of credit with other minority banks for which it receives agent/administrative fees. In 2006, these fees totaled $150,000 compared to $202,000 in 2005 and $178,000 in 2004. The decline in 2006 was the result of the non-renewal of one credit facility in June 2006 for which the Bank’s fees were $50,000. The Bank continues to serve as agent/arranger for three (3) facilities. Fees on these facilities will be received annually for the administration of the credit facilities. Management plans to continue to develop this core line of business to generate fee income to support the Bank’s profitability goals.

        In connection with its 2004 re-capitalization plan, the Bank sold bank-owned real estate including a remote bank-owned parking lot and its corporate headquarters building located at 300 N. Third Street. The sale of these assets resulted in a non-recurring gain of approximately $1,874,000 million in 2004.

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        In 2006, the Bank was awarded a $50,000 grant by the Commonwealth of Pennsylvania to support a loan program for small businesses and non-profit organizations. This grant is included in other income.

Noninterest Expense

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

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

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

       Leasehold improvement expenses were incurred during the last quarter of 2006 to renovate the interior of the Bank’s Wadsworth Avenue branch including paint, flooring and new furnishings. Additional improvements are planned for 2007 to the exterior of this branch building. Similar interior and exterior improvements are planned for the Bank’s West Philadelphia branch in 2007. These renovations and relocations will result in increased leasehold/furniture depreciation expense. In addition, the Bank’s Progress Plaza branch is scheduled to be re-located in the Fall of 2007 to newly built space within the shopping plaza where it is currently located. A new 10-year lease has been negotiated that will result in an annual increase of $20,000 in the Bank’s rent expense.

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

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

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

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

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

Federal deposit insurance premiums were $111,000 in 2006, $113,000 in 2005, and $72,000 in 2004. FDIC insurance premiums are applied to all financial institutions based on a risk based premium assessment system. Under this system, bank strength is based on three factors: 1) asset quality, 2) capital strength, and 3) management. Premium assessments are then assigned based on the institution’s overall rating, with the stronger institutions paying lower rates.  By typical regulatory guidelines the Bank is considered “well” capitalized, however, because it is operating with a Written Agreement (Refer to “Regulatory Action” above), it is only considered to be “adequately” capitalized. The FDIC adopted new rules in 2006 to re-capitalize the deposit insurance fund that will result in increased deposit insurance premiums in 2007. (Refer to “The Federal Deposit Insurance Act” above)

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

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FINANCIAL CONDITION

Sources and Uses of Funds

The Bank’s financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 below indicates how the Bank has managed these elements. Average funding uses decreased $499,000, or 0.75% in 2006 compared to 2005 and increased approximately $493,000, or 0.75% in 2005 compared to 2004.

Table 3—Sources and Use of Funds Trends

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

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

Investment Securities and Other Short-Term Investments

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

Average investment securities, increased $144,000, or 1.15%, in 2006 and decreased $273,000, or 2.14%, in 2005 compared to 2004. The increase in investments was primarily a result of additional liquidity created by payoffs/paydowns in the Bank’s loan portfolio. Funds were re-deployed into short-term investments pending increased loan origination activity.

       The Bank's current investment portfolio primarily consists of mortgage-backed pass-through agency securities and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. As reflected in Table 4 below, the average maturity of the portfolio is 2.90 years in 2006 compared to 3.25 years in 2005. In the current interest rate environment, the duration of the investment portfolio is shortened because of the short-term nature of the Bank’s callable agency securities that currently have an average life of 2.2 years. These securities are typically used as collateral for short-term jumbo governmental certificates of deposit.

       At December 31, 2006, approximately 41% of the portfolio consists of mortgage-backed pass-through securities that have longer-term con-tractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. The Bank has attempted to minimize the repayment risk (risk of very fast or very slow repayment) associated with these types of securities by investing primarily in a number of seasoned mortgage pools for which there is a repayment history. This history better enables the Bank to project the repayment speeds of these pools. In addition, the Bank has minimized the interest rate risk associated with these mortgage-backed securities by investing in a variety of pools, many of which have variable rates with indices that track closely with the current interest rate environment. Because customers are less likely to refinance in the current rising interest rate environment, the prepayment speed decreased on this component of the portfolio. The constant one year prepayment rate (CPR) at December 31, 2006 was 14.42% compared to 20.60% at December 31, 2005. This translates into only 14.42% of the mortgage-backed pools repaying on an annual basis. This results in less monthly cash flow than was received in 2005.

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       The Bank will continue to take steps to control the level of optionality in the portfolio by identifying replacement loans or securities that diversify risk and provide some level of monthly cashflow to be reinvested in the projected current rising rate environment.

Table 4—Analysis of Investment Securities

	Within one year					After one but within five years					After five but within ten years					After ten years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield		Total
Other government securities	$	3,248		4.73	%	$	5,749		4.70	%	$	250		4.67	%	$	-		%	$	9,247
Mutual funds and other		-					-					-					-				379
Mortgage-backed securities		-					-					-					-				6,527
Total securities	$	3,248				$	5,749				$	250					-			$	16,153
Average maturity																					2.90 years

The above table sets forth the maturities of investment securities at December 31, 2006 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security).

Loans

       Average loans decreased $1,998,000, or 4.17%, in 2006 and increased $1,824,000, or 3.96%, in 2005 compared to 2004. During 2006, the Bank funded $7 million in new commercial loans. However, growth in the loan portfolio was offset by payoffs of some large loan participations the Bank had with other financial institutions. In addition, the Bank’s mortgage loan portfolio declined by $2 million as a result of customers with interest-only or adjustable rate loans refinancing into fixed rate mortgages to avoid the negative impact of future interest rate increases.

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

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

       As a result of the payoffs and sale of loans noted above, the Bank’s loan-to-deposit ratio declined to 64.62% at December 31, 2006 compared to 72.8% at December 31, 2005. The target loan-to-deposit ratio is 75%. This level would allow the Bank to optimize interest income on earning assets while maintaining adequate liquidity.

       As reflected in Table 5 below, the Bank’s loan portfolio is heavily concentrated in commercial real estate loans that comprise approximately $22 million, or 51.73%, of total loans. Of the $7 million in 2006 of new commercial loan originations, many were commercial real estate transactions, including $1.3 million in loans made to religious organizations. Continued payoffs resulted in a reduction of the residential mortgage loan component of the portfolio from $7.5 million at December 31, 2005 to $5.5 million at December 31, 2006. The Bank does not originate residential mortgage loans for its portfolio.

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       As reflected in Table 6 below, approximately 47.30% of the Bank’s loan portfolio have scheduled maturities or reprice in five years or more. This position is largely a result of the relatively high level of loans in the commercial real estate portfolio that typically have five to seven year balloon structures. While scheduled maturities and repricing exceed five years, the actual duration of the portfolio may be much shorter because of changes in market conditions and refinancing activity.

Table 5—Loans Outstanding, Net of Unearned Income

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

Table 6—Loan Maturities and Repricing

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

Nonperforming Loans

Table 7 reflects the Bank’s nonperforming and restructured loans for the last five years. The Bank generally determines a loan to be “nonperforming” when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be nonperforming before the lapse of 90 days. The Bank’s policy is to charge off unsecured loans after 90 days past due. Interest on nonperforming loans ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on nonaccrual, previously accrued and unpaid interest is reversed out of income unless adequate collateral from which to collect the principal of, and interest on, the loan appears to be available.

Table 7—Nonperforming Loans

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

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

The balance of impaired loans was $896,000 and $386,000 at of December 31, 2006 and 2005, respectively. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The allowance for loan loss associated with these loans was $101,000 and $113,000 at December 31, 2006 and 2005, respectively. The allowance was determined based on careful review and analysis including collateral liquidation values and/or guarantees and is deemed adequate to cover shortfalls in loan repayment.

      Interest income recognized on impaired loans during the year ended December 31, 2006 and 2005 was $76,000 and $37,000, respectively. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans.

From time to time, management will modify or restructure the terms of certain loans to provide relief to borrowers. Restructured loans are those loans whose terms have been modified because of deterioration in the financial condition of a borrower to provide for a reduction of either interest or principal, regardless of whether such loans are secured or unsecured and regardless of whether such credits are guaranteed by the government or by others. At December 31, 2006, restructured loans totaled $1,311,000, an increase of $757,000, or 137%, compared to 2005. The loans restructured in 2006 relate to consolidations and/or extensions in terms to enable the borrowers to better meet debt service requirements.

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

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

At December 31, 2006, approximately 33% of the commercial loan portfolio of the Bank was concentrated in loans made to religious organizations. This represents an increase from a 25% concentration at December 31, 2005. During 2006, the Bank funded and/or originated $2.1 million in loans to religious organizations. From inception, the Bank has received support in the form of investments and deposits and has developed strong relationships with the Philadelphia region’s religious community. Loans made to these organizations are primarily for expansion and repair of church facilities. At December 31, 2006, several of these loans are now showing signs of weakness and are included in the Bank’s classified loans. The Bank is actively managing these credits to avoid any further deterioration in asset quality.

Allowance for Loan Losses

The allowance for loan losses reflects management’s continuing evaluation of the loan portfolio. Table 8 below presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and con-sequently may be reallocated in the future to reflect then current conditions.

        The allowance for loan losses as a percentage of total loans was 1.31% at December 31, 2006 compared to 1.02% at December 31, 2005. Systematic provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis. This analysis includes specific reserves allocated to classified and impaired loans based on underlying recovery values as well as a general reserve for the portfolio based on many factors including charge-off history, migration analysis, economic conditions, concentrations of credit risk and other relevant data.

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

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Table 8—Allocation of Allowance for Loan Losses

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

Management believes that the allowance for loan losses is adequate at December 31, 2006. While management uses available information to recognize losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination.

Table 9—Analysis of Allowance for Loan Losses

	Year ended December 31,
(Dollars in thousands)	2006			2005			2004			2003			2002
Balance at January 1	$	472		$	603		$	339		$	675		$	708
Charge-offs:
Commercial and industrial		(70	)		(762	)		-			(799	)		-
Commercial real estate		-			-			-			-			(100	)
Residential mortgages		-			-			-			-			-
Consumer loans		(202	)		(219	)		( 240	)		(174	)		(261	)
		(272	)		(981	)		(240	)		(973	)		(361	)
Recoveries—commercial loans		57			165			265			-			27
Recoveries—consumer loans		168			127			194			72			126
		225			292			459			72			153
Net recoveries(charge-offs)		(47	)		(689	)		219			(901	)		(208	)
Provisions charged to operations		137			558			45			565			175
Balance at December 31	$	561		$	472		$	603		$	339		$	675
Ratio of net (recoveries) charge-offs to average loans
outstanding		0.10	%		1.50	%		(0.48	)%		1.99	%		0.49	%

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Deposits

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

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

Table 10—Average Deposits by Class

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

Other Borrowed Funds

The Bank did not borrow funds during 2006. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. The Bank’s liquidity has been enhanced by loan paydowns/payoffs and called investment securities—thereby, reducing the need to borrow.

Off Balance Sheet Arrangements

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

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

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

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

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Liquidity and Interest Rate Sensitivity Management

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

The Bank must maintain minimum levels of liquid assets. This requirement is evaluated in relation to the com-position and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. As of December 31, 2006, management believes the Bank’s liquidity is satisfactory.

   The Bank’s principal sources of asset liquidity include investment securities consisting primarily of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. There are no securities maturing in one year or less. However, other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. At December 31, 2006, approximately $11.4 million in loans are scheduled to mature within one year.

        In addition, the Bank has several back-up sources of liquidity consisting of a borrowing arrangement with one of its correspondent banks that includes a Federal Funds line of credit totaling $2 million. Borrowings under this agreement have interest rates that fluctuate based on market conditions. In addition, the Bank has the ability to borrow on a fully secured basis at the Discount Window of the Federal Reserve Bank. As of December 31, 2006 and 2005, the Bank had no borrowings outstanding.

The Bank’s overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large-denomination time deposits as well as brokered deposits. Table 11 provides a breakdown of the maturity of time deposits of $100,000 or more.

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

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

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

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Table 12—Contractual Obligations and Other Commitments

			Less than		One to		Four to		After
(Dollars in thousands)	Total		one year		three years		five years		five years
Certificates of Deposit	$	22,199	$	21,896	$	830	$	366	$	107
Rental Obligations		2,028		317		579		203		929
Total	$	24,227	$	22,213	$	1,409	$	569	$	1,036

In April 2006, the Bank entered into a 10-year lease for a new branch in the Progress Plaza shopping center that is scheduled to be constructed by the Fall of 2007. The lease requires annual rental payments of $60,000 for Year 1, $62,500 for years 2-5, and $71,250 for Years 5-10. This transaction is not reflected in the Bank’s long-term rental obligations noted above as the lease will commence upon completion and occupancy of the new branch. The Bank currently leases the branch it occupies at Progress Plaza on a month-to-month basis.

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest-sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap or excess interest-earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. Table 13 sets forth the earliest repricing distribution of the Bank’s interest-earning assets and interest-bearing liabilities at December 31, 2006, the Bank’s interest rate sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over interest rate-sensitive liabilities, divided by total assets) and the Bank’s cumulative interest rate sensitivity gap ratio. For purposes of the table, except for savings deposits, an asset or liability is considered rate-sensitive within a specified period when it matures or could be repriced within such period in accordance with its contractual terms. At December 31, 2006, an asset-sensitive position is maintained on a cumulative basis through one year of 5.91%. Generally, because of the positive gap position of the Bank in shorter time frames, the Bank can anticipate that increases in market rates will have a positive impact on the net interest income, while decreases will have the opposite effect. This level is well within the Bank’s policy guidelines of +/-15% on a cumulative one-year basis. Interest rate risk is minimized by the Bank’s high level of core deposits that have been placed in shorter repricing intervals.

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

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Table 13—Interest Sensitivity Analysis

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

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

While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. The calculated estimates of net income or “earnings” at risk at December 31, 2006 are as follows:

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

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A simulation model is also used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the economic value of the Bank. This model produces an interest rate exposure report that measures the long-term rate risks in the balance sheet by valuing the Bank’s assets and liabilities at market. It simulates what amount would be left over if the Bank liquidated its assets and liabilities. This is otherwise known as “economic value” of the capital of the Bank. The calculated estimates of economic value at risk at December 31, 2006 are as follows:

(Dollars in thousands)

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

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

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

       The Bank’s Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest rate exposure is within the policy limits of the Bank at December 31, 2006. However, if significant interest rate risk arises, the Board of Directors and management may take, but are not limited to, one or all of the following steps to reposition the balance sheet as appropriate:

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

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

3.   Restructure the Bank’s investment portfolio.

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

Capital Resources

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

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

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

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

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

Table 14—Capital Ratios

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

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

Recent Accounting Pronouncements

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

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

34

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

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

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

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       The financial information required by this Item 7A is incorporated by reference to page 33 of this Report, the Liquidity and Interest Rate Sensitivity Management provisions and pages 33 to 37 of this Report, including Table 13 the Interest Sensitivity Analysis Table of this Report.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements on pages 49 to 74 hereof.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

        There were no changes in or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 2006.

ITEM 9A—CONTROLS AND PROCEDURES

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

35

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

ITEM 9B—OTHER INFORMATION

None.

PART III

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

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

(a)Directors of the Registrant and Bank

		Principal occupation and	Year first	Term
Name	Age	other directorships	became director	will expire
Bernard E. Anderson	68	Professor of Management/Economist	2002	2010
		At the Wharton School,
		Philadelphia, PA
David R. Bright	67	Retired, Executive Vice President	2002	2010
		Meridian Bancorp
		Philadelphia, PA
Joseph T. Drennan	61	Universal Capital Management, Inc.	2004	2010
		Wilmington, DE
L. Armstead Edwards	64	Chairman of the Board,	1993	2008
		United Bancshares, Inc.
		Owner and President,
		Edwards Entertainment., Inc.
		Philadelphia, Pennsylvania
Marionette Y. Wilson(Frazier)	62	Retired as co-Founder,	1996	2008
		John Frazier, Inc.
		Philadelphia, Pennsylvania
William B. Moore	64	Vice Chairman of the Board,	1993	2007
		United Bancshares, Inc.
		Pastor, Tenth Memorial
		Baptist Church
		Philadelphia, Pennsylvania

36

		Principal occupation and	Year first	Term
Name	Age	other directorships	became director	will expire
Ashan M. Nasratullah	49	President,	2004	2009
		JNA Capital, Inc.
		Philadelphia, PA
Evelyn F. Smalls	61	President and CEO of Registrant	2000	2007
		and United Bank of Philadelphia
Ernest L. Wright	78	Founder, President and	1993	2008
		CEO of Ernest L. Wright
		Construction Company
		Philadelphia, Pennsylvania

(b)Executive Officers of Registrant and Bank

Name	Age	Office
Evelyn F. Smalls	61	President and Chief Executive Officer
Brenda M. Hudson-Nelson	45	Executive Vice President/Chief Financial Officer
Terrence D. Barclift	32	Senior Vice President/Senior Lending Officer

(c)Family Relationships.

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

(d)Other

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

CORPORATE GOVERNANCE

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

The Board of Directors of the Company and the Bank has determined that all of its members are independent and meet the independence requirements of National Association of Securities Dealers (“ NASDAQ”) except Evelyn F. Smalls. Because Ms. Smalls is the President and Chief Executive Officer of the Company and the Bank she is not independent as defined by NASDAQ.

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

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

Policy for Attendance at Annual Meetings

            UBS has a policy requiring all of its directors to attend UBS’ annual meeting. At the annual meeting held on November 21, 2006, eight (8) of UBS’ ten (10) directors attended the meeting.

37

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

The Audit/Compliance Committee of UBS’ Board of Directors¹ is comprised of Joseph T. Drennan² (Chairman), L. Armstead Edwards, Marionette Y. Wilson (Frazier) and William B. Moore, meets when necessary at the call of the

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

Chairman. The Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. The Committee selects the independent registered public accountants. In addition, the Committee meets with UBS’ independent registered public accountants to review the results of the annual audit and other related matters. Each member of the Committee is “independent” as defined in the applicable listing standards of the National Association of Securities Dealers (“NASDAQ”). The Committee held seven (7) meetings during 2006.

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

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

Information About the Bank’s Audit/Compliance Committee

The Audit/Compliance Committee comprised of Joseph T. Drennan (Chairman), L. Armstead Edwards, William B. Moore, and Marionette Y. Wilson met at least quarterly through September 2006 and monthly thereafter in accordance with its Written Agreement with regulators. The Audit/Compliance Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Audit/Compliance Committee meets with the Bank’s independent registered public accountants to review the results of the annual audit and other related matters, as well as other regulatory compliance issues. Each member of the Audit/Compliance Committee is “independent” as defined in the applicable listing standards of NASDAQ. The Committee held seven (7) meetings during 2006.

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

Audit Committee Report

In connection with the preparation and filing of UBS’ Annual Report on Form 10-K for the year ended December 31, 2006, the Audit Committee (i) reviewed and discussed the audited financial statements with UBS’ management, (ii) discussed with McGladrey and Pullen, LLP, UBS’ independent registered public accounting firm, the matters required to be discussed by Statement on Auditing Standards No. 61 (as modified or supplemented), (iii) discussed the independence of McGladrey and Pullen, LLP, and (iv) has received the written disclosures and the letter from McGladrey and Pullen, LLP required by Independence Standards Board Standard No. 1 (as modified or supplemented). Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in UBS’ Annual Report on Form 10-K for the year ending December 31, 2006.

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

Respectfully submitted:

Joseph T. Drennan (Chairman)

L. Armstead Edwards

William B. Moore

Marionette Y. Wilson (Frazier)

38

INFORMATION ABOUT THE COMMITTEES OF THE BOARDS

Information About the Committees of UBS’ Board of Directors

The Committees of UBS’ Board of Directors are the Executive Committee, Audit/Compliance Committee, and the Nominating Committee. The Executive Committee, comprised of L. Armstead Edwards (Chairman), David R. Bright, Joseph T. Drennan, William B. Moore, Evelyn F. Smalls, and Marionette Y. Wilson (Frazier) meets, when necessary, at the call of the Chairman, and to exercise the authority and powers of UBS’ Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2006.

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

Information About UBS’ Nominating Committee

The Nominating Committee, comprised of L. Armstead Edwards (Chairman), Ernest L. Wright, and Joseph T. Drennan meets at the call of the Chairman. The Committee is responsible for considering and recommending future director nominees to the Board of Directors of UBS and the Bank and the Committee is independent and meets the requirements for independence of the NASDAQ Stock market. The Nominating Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS. A copy of the charter is not available on UBS’ website. The Committee did not hold any meetings during 2006. Directors standing for re-election were nominated by the Executive Committee of the Board, without the participation of Evelyn Smalls, who is not independent. 

Meetings of UBS’ Board and its Committees

The total number of meetings of UBS’ Board of Directors that were held in 2006 was eleven (11). All of the incumbent directors, who were directors during 2006 (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors, except William B. Moore, who attended seventy-three percent (73%) and Marionette Y. Frazier, who attended sixty-four percent (64%); and (ii) all directors attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served, except William B. Moore, who attended seventy-three percent (73%) of the Executive Committee meetings and forty percent (40%) of the Audit Committee meetings.

Information About Committees of the Bank’s Board of Directors

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

The Executive Committee, comprised of L. Armstead Edwards (Chairman), William B. Moore, Joseph T. Drennan, David R. Bright, Evelyn F. Smalls and Marionette Y. Wilson meets, when necessary, at the call of the Chairman, to discuss and approve certain human resource matters including compensation, to ratify and approve certain of the Bank’s loans and to exercise the authority and powers of the Bank’s Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2006. The Bank’s Board of Directors does not have a Compensation Committee; the Executive Committee performs that function without Evelyn Smalls who serves as an executive officer of the Bank.

The Asset Liability Management Committee, comprised of Bernard E. Anderson (Chairman), L. Armstead Edwards, Angela M. Huggins³, Joseph T. Drennan, Evelyn F. Smalls and Ernest L. Wright meets, when necessary, at the call of the Chairman, to review and manage the Bank’s exposure to interest rate risk, market risk and liquidity risk. During 2006, the Asset and Liability Management Committee held four (4) meetings.

39

The Loan Committee, comprised of David R. Bright (Chairman), L. Armstead Edwards, Evelyn F. Smalls, and Ernest Wright meets when necessary to review and approve loans that are $200,000 and over and to discuss other loan-related matters. During 2006, the Loan Committee held twelve (12) meetings.

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

Meetings of Bank’s Board and its Committees

The total number of meetings of the Bank’s Board of Directors that were held in 2006 was eleven (11). All incumbent directors (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors; except William B. Moore, who attended seventy-three percent (73%) and Marionette Y. Frazier, who attended sixty-four percent (64%); and, (ii) all directors attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served, except William B. Moore, who attended seventy-three percent (73%) of the Executive Committee meetings and forty percent (40%) of the Audit Committee meetings.

BOARD OF DIRECTORS COMPENSATION

Directors Fees

The normal non-officer director fee paid by the Bank is Three Hundred Fifty Dollars ($350) for attending each Board meeting and One Hundred Seventy-five Dollars ($175) per quarter for attending the Board of Directors’ Committee meetings. Directors’ fees are not paid to officer directors for attending Bank Board of Directors or Committee meetings. UBS does not pay any fees to any directors for attending UBS’ Board of Directors or Committee meetings. Effective April 1, 2002, the Board of Directors elected to waive all fees for an indefinite period of time. Therefore, no table summarizing the compensation paid to non-employee directors is required for the fiscal year ended December 31, 2006.

UBS’S AND BANK’S EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the current executive officers of UBS and Bank as of March 2, 2007:

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

Footnote Information Concerning Executive Officers

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

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

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

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

40

CODE OF CONDUCT AND ETHICS

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

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires that UBS’ directors and executive officers file reports of their holdings of UBS’ Common Stock with the SEC. Based on UBS’ records and other information available to UBS believes that the SEC’s Section 16(a) reporting requirements applicable to UBS’ directors and executive officers were complied with for UBS’ fiscal year ended December 31, 2006. There were no reportable transactions during this period.

ITEM 11 — EXECUTIVE COMPENSATION

The Executive Committee, comprised of L. Armstead Edwards (Chairman of the Board), William B. Moore(Vice Chairman of the Board), Marionette Y. Wilson, Joseph T. Drennan, and David R. Bright without Evelyn Smalls, who is not independent, serves as the compensation committee and meets to discuss compensation matters. It annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives and determines and approves the compensation and benefits to be paid or provided to the Evelyn F. Smalls the President of UBS, Brenda M. Hudson-Nelson Executive Vice President and Chief Financial Officer, and Terrence Barclift, Senior Vice President and Senior Lending Officer. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2006, the Executive Committee held two (2) meetings as the Compensation Committee.

Compensation Discussion and Analysis

The primary objectives of our compensation policy are:

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

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

Compensation Philosophy

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

41

The Committee’s Process

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

Components of Compensation for 2006

For the fiscal year ended December 31, 2006, the components of executive compensation were:

•Salary;

•Life Insurance two times salary; and

•Automobile Allowance.

Salary

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

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

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

COMPENSATION COMMITTEE REPORT

             The Executive Committee serving as the Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the committee recommended that the Compensation Discussion and Analysis be included our Annual Report on Form 10-K for the year ended December 31, 2006.

Respectfully submitted:

L. Armstead Edwards

William B. Moore

Marionette Y. Wilson

Joseph T. Drennan

David R. Bright

42

Summary Compensation Table

The table below summarizes the total compensation paid or earned by each of the Named Executive Officers for the year ended December 31, 2006. 

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

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

(2)   UBS’ executives receive a $500 per month automobile allowance. UBS’ executive are provided with life insurance policies equivalent to two times their annual salary for which the cost is $209/annually for Evelyn Smalls and $98/annually for Brenda Hudson-Nelson

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

Executive Employment Agreements

The Bank entered into an Employment Agreement with Evelyn F. Smalls in November 2004 to continue to serve as the Bank’s President and Chief Executive Officer. The term of the Employment Agreement is three (3) years, unless extended or terminated. The Employment Agreement provides for an annual base salary of $160,000 that may be increased, but not decreased as well as life insurance equivalent to two times her base salary, and a $500 per month automobile allowance.

The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson in November 2004 to continue to serve as the Bank’s Executive Vice President and Chief Financial Officer. The term of the Employment Agreement is three (3) years, unless extended or terminated. The Employment Agreement provides for an annual base salary of $115,000 that may be increased, but not decreased as well as life insurance equivalent to two times her base salary, and a $500 per month automobile allowance.

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

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Payments Upon Termination

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

Equity Compensation Plan Information

            The Company adopted a Stock Option Plan in 1998. Under this Plan, options to acquire shares of common stock were granted to the former chief executive officer. The Stock Option Plan provides for the granting of options at the fair market value of the Company’s common stock at the time the options are granted. Each option granted under the Stock Option Plan may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from the date of grant. No options were granted in 2006.

Other Compensation Tables

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

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to UBS, as of March 2, 2007 (1), with respect to the only persons to UBS’ knowledge, who may be beneficial owners of more than 5% of UBS’ Common Stock.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership of Corporation Common Stock	Percentage of Outstanding Corporation Common Stock Owned
Philadelphia Municipal	71,667	8.17%
Retirement System
2000 Two Penn Center
Philadelphia, Pennsylvania 19102
Wachovia Corporation, (formerly, First Union 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 2, 2007, there were 876,921 shares of UBS’ voting Common Stock outstanding.

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

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             The following table lists the beneficial ownership of shares of the UBS’ Common Stock as of March 2, 2007 for each of the UBS’ director, nominees and executive officers. The table also shows the total number of shares of Common Stock ownership by the director, nominees and executive officers of UBS as a group.

Name	Common Stock9,10,11, 12	Percent of Outstanding Stock
Current Directors
L. Armstead Edwards	10,833	1.23%
Marionette Y. Wilson (Frazier)	17,900	2.04%
Ernest L. Wright	7,084	*
Bernard E. Anderson	850	*
David R. Bright	850	*
Joseph T. Drennan	783	*
Ahsan M. Nasratullah	833	*
William B. Moore	1,834	*
Evelyn F. Smalls	600	*

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

__________________

Footnotes Concerning Beneficial Ownership of Stock

* Less than one percent.

** Ms. Smalls is also a Director; see listing above.

*** Calculated by adding the Common Stock owned plus exercisable options and dividing by the actual number of shares outstanding on March 2, 2007, plus the shares subject to the exercisable option.

(9) Stock ownership information is given as of March 2, 2007, and includes shares that the individual has the right to acquire (other than by exercise of stock options) within sixty (60) days of March 2. 2007. Unless otherwise indicated, each director and each such named executive officer holds sole voting and investment power over the shares listed.

(10) The number of shares “beneficially owned” in each case includes, when applicable, shares owned beneficially, directly or indirectly, by the spouse or minor children of the director, and shares owned by any other relatives of the director residing with the director. None of the directors holds title to any shares of UBS of record that such director does not own beneficially.

(11) UBS does not know of any person having or sharing voting power and/or investment power with respect to more than 5% of the UBS’ Common Stock other than Wachovia Corporation (formerly First Union Corporation), Philadelphia Municipal Retirement System, Greater Philadelphia Urban Affairs Coalition, and the Estate of James F. Bodine.

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

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of our directors, executive officers, and members of their immediate families and the companies with which they are associated were our customers of and had banking transactions with us in the ordinary course of our business during the year 2006 All loans and commitments to lend were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In our opinion, the transactions and loan commitments did not involve more than normal risk of collectively or present other unfavorable features.

45

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

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

Services Provided by McGladrey and Pullen, LLP

1) Audit Fees—These are fees for professional services performed by McGladrey and Pullen, LLP in 2006 and 2005 for the audit, including an audit of consolidated financial statements reporting, and review of consolidated financial statements included in our Form 10-Q and Form 10-K filings.

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

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

Pre-approval of Services

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

46

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

The following documents are filed as part of this report of United Bancshares, Inc.:	Page
1.            Financial Reports of United Bancshares, Inc.
Report of Independent Registered Public Accounting Firm.	50
Consolidated Balance Sheets at December 31, 2006 and 2005.	51
Consolidated Statements of Operations for the three years ended December 31, 2006.	52
Consolidated Statements of Changes in Shareholders’ Equity for the three years ended
December 31, 2006.	53
Consolidated Statements of Cash Flows for the three years ended December 31, 2006.	54
Notes to Consolidated Financial Statements	55
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 NumberItem

(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. 15^th 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)

47

e)   Brenda Hudson-Nelson’s Employment Agreement, dated November 1, 2004, , (Incorporated by reference to Registrant’s 2005 Form 10-K)

f)   Long Term Incentive Compensation Plan (Incorporated by reference to Registrant’s 1992 Form 10)

g)   Lease for Retail office located at The Graham Building, 30 S. 15^th 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. 15^th Street, Philadelphia, PA(Incorporated by reference to Registrant’s 2005 Form 10-K)

i)   Lease for branch office located at 1520 North Broad Street is attached hereto as Exhibit (10)j.

j)   Terrence Barclift’s Employment Agreement, dated October 2, 2006, is attached hereto as Exhibit (10)k.

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

(12) Statement of Computation of Ratios. Included at Note 17 of the Financial Statements hereof.

(14)   Code of Conduct and Ethics (Incorporated by reference to Registrant’s 2004 10-K)

(21) Subsidiaries of Registrant

NameState of Incorporation

United Bank of PhiladelphiaPennsylvania

(31)Certification of the Annual Report

(31.1) Certification of the Chief Executive Officer Pursuant to Section 302 of the Sabanes-Oxley Act of 2002.

(31.2) Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32) Certification Pursuant to issue of Section 1350

(A)  Exhibit 32.1

        Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 of the Chief Executive Officer attached hereto as Exhibit 99.1.

(B)   Exhibit 32.2

Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 of the Chief Financial Officer attached hereto as Exhibit 99.2.

(99)  Supplemental Information

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

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

49

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

United Bancshares, Inc.

Philadelphia, Pennsylvania

We have audited the consolidated balance sheets of United Bancshares, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bancshares, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the financial statements, in 2006 United Bancshares, Inc. adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”

/s/ McGladrey & Pullen, LLP

Blue Bell, Pennsylvania

April 4, 2007

McGladrey & Pullen, LLP is a member firm of RSM International -

an affiliation of separate and independent legal entities.

50

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31,

Assets	2006			2005
Cash and due from banks	$	3,179,239		$	3,657,763
Interest-bearing deposits with banks		281,920			290,030
Federal funds sold		9,158,000			5,292,000
Cash and cash equivalents		12,619,159			9,239,793
Investment securities:
Available-for-sale, at fair market value		3,349,606			3,627,425
Held-to-maturity, at amortized cost (fair market value of $12,683,809
and $9,906,420 in 2006 and 2005, respectively)		12,804,351			10,078,441
Loans, net of unearned discount of $5,204 and $21,781 in 2006
and 2005, respectively		42,518,151			46,422,378
Less allowance for loan losses		(561,409	)		(472,198	)
Net loans		41,956,742			45,950,180
Bank premises and equipment, net		1,099,524			1,038,081
Accrued interest receivable		422,216			336,466
Other real estate owned		-			164,500
Intangible assets		1,204,202			1,382,279
Prepaid expenses and other assets		479,959			392,564
Total assets	$	73,935,759		$	72,209,729
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits, noninterest-bearing	$	14,082,940		$	14,469,063
Demand deposits, interest-bearing		10,585,080			9,788,131
Savings deposits		18,056,849			16,396,073
Time deposits, under $100,000		8,885,199			9,665,743
Time deposits, $100,000 and over		13,313,571			13,004,506
Total deposits		64,923,639			63,323,516
Accrued interest payable		132,785			150,777
Accrued expenses and other liabilities		254,906			243,657
Total liabilities		65,311,330			63,717,950
Commitments and Contingencies (Notes 6, 10, 14 and 15)
Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value,
500,000 shares authorized; 136,842 issued; 6,308 shares held in treasury		1,368			1,368
Common stock, $0.01 par value; 1,750,000 shares authorized;
876,921 issued		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
Treasury Stock, 33,500 shares of common stock, at cost		-			-
Additional paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(6,118,867	)		(6,237,557	)
Accumulated other comprehensive loss		(18,610	)		(32,570	)
Total shareholders’ equity		8,624,429			8,491,779
Total liabilities and shareholders’ equity	$	73,935,759		$	72,209,729

The accompanying notes are an integral part of these statements.

51

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,

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

52

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2006, 2005 and 2004

	Series A Preferred Stock				Common Stock				Additional paid-in		Accumulated			Accumulated other comprehensive  income			Total shareholders’			Comprehensive
	Shares		Amount		Shares		Amount		capital		deficit			(loss)			equity			income (loss)
Balance at December 31, 2003		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	(7,614,662	)		87,649		$	7,234,893
Unrealized losses on investment
securities															(70,087	)		(70,087	)	$	(70,087	)
Net income												1,646,522						1,646,522			1,646,522
Total comprehensive income																				$	1,576,435
Balance at December 31, 2004		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	( 5,968,140	)	$	17,562		$	8,811,328
Unrealized losses on investment
securities															(50,132	)		(50,132	)	$	(50,132	)
Net loss												(269,417	)					(269,417	)		(269,417	)
Total comprehensive loss																				$	(319,549	)
Balance at December 31, 2005		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	( 6,237,557	)	$	(32,570	)	$	8,491,779
Unrealized gains on investment                 securities															13,960			13,960		$	13,960
Net income												118,690						118,690			118,690
Total comprehensive income																				$	132,650
Balance at December 31, 2006		136,842	$	1,368		1,068,588	$	10,686	$	14,749,852	$	(6,118,867	)	$	(18,610	)	$	8,624,429

The accompanying notes are an integral part of these statements.

53

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,

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

The accompanying notes are an integral part of these statements.

54

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005, and 2004

       1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Statement of Cash Flows

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

Securities Held-to-Maturity

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

Securities Available-for-Sale

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

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

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

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

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

(Continued)

55

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

        1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Loans

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

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

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

Loans Held-for-Sale

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

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

Allowance for Loan Losses

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

(Continued)

56

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

        1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

Bank Premises and Equipment

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

Income Taxes

The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Earnings (Loss) Per Share

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

Stock-based Compensation

As of January 1, 2006, the Bank transitioned to fair value based accounting for stock-based compensation using a modified version of prospective application in accordance with Statement of Financial Accounting Standards No. 123R, (“FAS 123R”), Share-Based Payment. There was no compensation cost charged against income for the Plan for the years ended December 31, 2006, 2005and 2004 as no options were granted under the Plan during these periods. All options were fully vested at December 31, 2006.

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

The Stock Option Plan provides for the granting of options at the fair market value of the Company’s common stock at the time the options are granted. Each option granted under the Stock Option Plan may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from the date of grant. In 1998, options to purchase 29,694 shares of the Company’s common stock at a price of $8.54 per share were awarded, to the former chief executive officer. Those options remain outstanding at December 31, 2006.

(Continued)

57

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

        1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Off-Balance-Sheet Financial Instruments

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

Financial Instruments

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

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

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

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

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

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

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

(Continued)

58

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

        1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Intangible Assets

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

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

Amortization of the intangible totaled $178,078 for each of the years ended December 31, 2006, 2005, 2004. The amortization of the intangible is projected to be $178,078 for each of the next five years.

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

Foreclosed Real Estate

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

Management’s Use of Estimates

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

Segments

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

(Continued)

59

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

        1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

Reclassifications

Certain reclassifications have been made to the prior year’s financial statements to conform to the 2006 presentation.

Comprehensive Income

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

	December 31, 2006
	Before tax amount		Tax (expense)			Net of tax amount
Unrealized gains on securities       Unrealized holding gains arising during period	$	20,836	$	(6,876	)	$	13,960
Less: reclassification adjustment for gains
realized in net income		-		-			-
Other comprehensive income, net	$	20,836	$	(6,876	)	$	13,960

(Continued)

60

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

	December 31, 2005
	Before tax amount			Tax benefit (expense)		Net of tax amount
Unrealized losses on securities
Unrealized holding losses arising during period	$	(75,958	)	$	25,826	$	(50,132	)
Less: reclassification adjustment for gains
realized in net income		-			-		-
Other comprehensive income(loss), net	$	(75,958	)	$	25,826	$	(50,132	)

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

Recent Accounting Pronouncements

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

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

(Continued)

61

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

2. REGULATORY AGREEMENT

In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (Agreement) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had met the required ratios by implementing strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. At December 31, 2006 and 2005, the Bank’s tier one leverage ratio was 9.93% and 9.47%, respectively.

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

62

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

3. CASH AND DUE FROM BANK BALANCES

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, 2006.

4. INVESTMENTS

The amortized cost, gross unrealized holding gains and losses, and estimated market value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 2006 and 2005 are as follows:

	2006
			Gross		Gross
	Amortized		unrealized		unrealized			Market
	cost		gains		losses			value
Available-for-sale:
Mortgage-backed securities	$	2,997,170	$	14,335	$	(42,111	)	$	2,969,394
Investments in mutual funds		117,662							117,662
Other investments		262,550							262,550
	$	3,377,382	$	14,335	$	( 42,111	)	$	3,349,606
Held-to-maturity:
U.S.Government agency securities	$	9,247,342	$	2,425	$	(95,430	)	$	9,154,337
Mortgage-backed securities		3,557,009		19,725		(47,262	)		3,529,472
	$	12,804,351	$	22,150	$	(142,692	)	$	12,683,809
	2005
				Gross		Gross
		Amortized		unrealized		unrealized			Market
		cost		gains		losses			value
Available-for-sale:
U.S.Government agency securities	$	250,000	$		$	(3,515	)	$	246,485
Mortgage-backed securities		3,085,436		18,348		(63,445	)		3,040,339
Total debt securities		3,335,436		18,348		(66,960	)		3,286,824
Investments in mutual funds		112,151							112,151
Other investments		228,450							228,450
	$	3,676,037	$	18,348	$	(66,960	)	$	3,627,425
Held-to-maturity:
U.S.Government agency securities	$	6,997,720	$	235	$	(133,292	)	$	6,864,663
Mortgage-backed securities		3,080,721		23,875		(62,839	)		3,041,757
	$	10,078,44	$	24,110	$	(196,131	)	$	9,906,420

63

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

4. INVESTMENTS--Continued

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

	Number		Less than 12 months					12 months or longer					Total
Description of	of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	securities		value		losses			value		losses			value		losses
U.S. Government
agency securities		16	$	3,246	$	(2	)	$	4,405	$	(93	)	$	7,651	$	( 95	)
Mortgage backed
securities		19		395		(1	)		3,149		(88	)		3,544		(89	)
Total temporarily
impaired investment
securities		35	$	3,641	$	(3	)	$	7,554	$	(181	)	$	11,195	$	( 184	)

The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2005 (in thousands):

	Number		Less than 12 months					12 months or longer					Total
Description of	of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	securities		value		losses			value		losses			value		losses
U.S. Government
agency securities		17	$	1,723	$	(25	)	$	2,569	$	(172	)	$	4,555	$	(197	)
Mortgage backed
securities		20		970		(12	)		7,441		(54	)		8,411		(66	)
Total temporarily
impaired investment
securities		37	$	2,693	$	(37	)	$	10,010	$	(226	)	$	12,966	$	(263	)

Management does not believe any individual unrealized loss as of December 31, 2006 and 2005 represents other-than-temporary impairment. The unrealized losses on these securities are caused by the changes in general market interest rates. All securities with unrealized losses are reviewed by management at least quarterly to determine whether the unrealized losses are other-than-temporary. The Company believes it will collect all amounts contractually due on these securities as they are backed by the full faith and credit of the U.S. Government or are guaranteed by an agency of the U.S. Government. The Company has the ability and the intent to hold these securities until market price recovery or maturity.

64

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

4.           INVESTMENTS- Continued

Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2006 were as follows. Expected maturities may differ from contractual maturities.

	Amortized		Market
	cost		value
Available-for-sale:
Due after one month through three years	$	-	$	-
Due after three year through five years		-		-
Due after five years through fifteen years		-		-
Mortgage-backed securities		2,997,170		2,969,394
Total debt securities		2,997,170		2,969,394
Investments in mutual funds		117,662		117,662
Other investments		262,550		262,550
	$	3,377,382	$	3,349,606
Held-to-maturity:
Due in one month through three years	$	5,747,342	$	5,703,084
Due after three years through five years		3,250,000		3,201,253
Due after five years through fifteen years		250,000		250,000
Mortgage-backed securities		3,557,009		3,529,472
	$	12,804,351	$	12,683,809

No securities were sold during 2006 and 2005. The Bank recorded a gross gain of $31,115 on the sale of investments during the year ended December 31, 2004.

As of December 31, 2006 and 2005, investment securities with a book value of $10,769,296 and $11,780,583, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the net loans is as follows:

	2006			2005
Commercial loans	$	32,339,517		$	32,985,265
Residential mortgages		5,551,098			7,545,858
Consumer loans		4,627,536			5,891,256
Total loans		42,518,151			46,422,378
Less allowance for loan losses		(561,409	)		(472,198	)
Net loans	$	41,956,742		$	45,950,180

At December 31, 2006 and 2005, unamortized net deferred fees totaled $128,552 and $127,714, respectively.

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

65

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

5. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued

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

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

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

The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. At December 31, 2006, approximately 33% of the Bank’s commercial loan portfolio was concentrated in loans made to religious organizations.

6. BANK PREMISES AND EQUIPMENT

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

	Estimated
	useful life		2006			2005
Buildings and leasehold improvements		10-15 years	$	1,005,923		$	853,066
Furniture and equipment		3- 7 years		1,236,978			1,068,223
				2,242,901			1,921,289
Less accumulated depreciation				(1,143,377	)		(833,208	)
			$	1,099,524		$	1,038,081

66

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

6.  BANK PREMISES AND EQUIPMENT-Continued

The Bank leases other facilities and other equipment under non-cancelable operating lease agreements. The amount of expense for operating leases for the years ended December 31, 2006, 2005, and 2004 was $387,144, $340,638, and $277,850. Future minimum lease payments under operating leases are as follows:

	Operating leases
Year ending December 31,
2007	$	316,808
2008		312,599
2009		266,389
2010		202,530
2011		202,784
Thereafter		727,132
Total minimum lease payments	$	2,028,242

In April 2006, the Bank entered into a 10-year lease for a new Progress Plaza branch that is scheduled to be constructed by the Fall of 2007. The lease requires annual rental payments of $60,000 for Year 1, $62,500 for Years 2-5, and $71,250 for Years 5-10. This transaction is not reflected in the Bank’s long-term rental obligations noted above as the lease will commence upon completion and occupancy of the new branch. The Bank currently leases the branch it occupies at Progress Plaza on a month-to-month basis.

7.  DEPOSITS

At December 31, 2006, the scheduled maturities of time deposits (certificates of deposit) are as follows (dollars in thousands):

2007	$	20,896
2008		718
2009		112
2010		104
2011		262
Thereafter		107
8.   BORROWINGS	$	22,199

At December 31, 2006, the Bank has a borrowing arrangement with one of its correspondent banks that includes a Federal Funds line of credit totaling $2 million. Borrowings under this agreement have interest rates that fluctuate based on market conditions. In addition, the Bank has the ability to borrow on a fully secured basis at the Discount Window of the Federal Reserve Bank. As of December 31, 2006 and 2005, the Bank had no borrowings outstanding.

9.INCOME TAXES

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

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. For financial reporting

 

67

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

9.   INCOME TAXES - Continued

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

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

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

10. FINANCIAL INSTRUMENT COMMITMENTS

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

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

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

 

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

68

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

11. FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

12.  EMPLOYEE COMPENSATION

In November 2004, the Bank renewed the employment agreements of its chief executive officer and its chief financial officer covering such items as salaries, bonuses and benefits for three years. In October 2006, the Bank entered into a two year employment agreement with its senior lending officer covering similar terms. These agreements provide for guaranteed minimum annual compensation over the term of the contracts. A summary of the status of the Bank’s stock options as of December 31, 2006 and 2005 and the changes during the years ended on those dates is as presented below:

	2006				2005
	# Shares of UnderlyingOptions		Exercise Price		# Shares of UnderlyingOptions		Exercise Price
Outstanding at the beginning of the period		29,694	$	8.54		29,694	$	8.54
Granted		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Outstanding at the end of the period		29,694	$	8.54		29,694	$	8.54
Exercisable at the end of the period		29,694	$	8.54		29,694	$	8.54

69

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

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

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

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

13. CONSOLIDATED FINANCIAL INFORMATION—PARENT COMPANY ONLY

Condensed Balance Sheets

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

Condensed Statements of Operations

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

70

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

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

Condensed Statements of Cash Flows

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

14.  REGULATORY MATTERS

 

The Bank engages in the commercial banking business, with a particular focus on serving Blacks, Hispanics and women, and is subject to substantial competition from financial institutions in the Bank’s service area. As a bank holding company and a banking subsidiary, the Company and the Bank, respectively, are subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and are required to maintain capital requirements established by those regulators. Prompt corrective actions may be taken by those regulators against banks that do not meet minimum capital requirements. Prompt corrective actions range from restriction or prohibition of certain activities to the appointment of a receiver or conservator of an institution’s net assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Tier I capital (as defined in the regulations) for capital adequacy purposes to risk-weighted assets (as defined).

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

71

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

14. REGULATORY MATTERS--Continued

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

											To be well
											capitalized under
						For capital					prompt corrective
	Actual					adequacy purposes					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006:
Total capital to risk-
weighted assets:
Consolidated	$	7,995		17.98	%	$	3,580		8.00	%		N/A
Bank		7,706		17.33			3,557		8.00	%	$	4,446		10.00	%
Tier I capital to risk-
weighted assets:
Consolidated		7,439		16.73			1,790		4.00	%		N/A
Bank		7,150		16.08			1,779		4.00	%	$	2,668		6.00	%
Tier I capital to average assets:
Consolidated		7,439		10.33			2,892		4.00	%		N/A
Bank		7,150		9.93			2,880		4.00	%	$	3,600		5.00	%
As of December 31, 2005:
Total capital to risk-
weighted assets:
Consolidated	$	7,581		17.03	%	$	3,583		8.00	%		N/A
Bank		7,292		16.39			3,560		8.00		$	4,450		10.00	%
Tier I capital to risk-
weighted assets:
Consolidated		7,109		15.97			1,792		4.00			N/A
Bank		6,820		15.32			1,780		4.00		$	2,670		6.00
Tier I capital to average assets:
Consolidated		7,109		9.87			2,891		4.00			N/A
Bank		6,820		9.47			2,880		4.00		$	3,600		5.00

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

15. COMMITMENTS AND CONTINGENCIES

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

72

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

16. EARNINGS PER SHARE COMPUTATION

	Year ended December 31, 2006
	Income			Shares		Per share
	(numerator)			(denominator)		amount
Net income	$	118,690
Basic EPS
Income available to common stockholders	$	118,690			1,068,588	$	0.11
Fully Diluted EPS
Income available to common stockholders…………	$	118,690			1,068,588	$	0.11
	Year ended December 31, 2005
		Income			Shares		Per share
		(numerator)			(denominator)		amount
Net loss	$	(269,417	)
Basic and fully diluted EPS
Loss available to common stockholders	$	(269,417	)		1,068,588	$	(0.25	)
	Year ended December 31, 2004
		Loss			Shares		Per share
		(numerator)			(denominator)		amount
Net income	$	1,646,522
Basic EPS
Income available to common stockholders	$	1,646,522			1,068,588	$	1.54
Fully Diluted EPS
Income available to common stockholders	$	1,646,522			1,068,588	$	1.54

Options to purchase 29,694 shares of common stock are not included in the computation of diluted EPS for the years ended December 31, 2006 and December 31, 2004, noting that such inclusion would be anti-dilutive.

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

73

UNITED BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005, and 2004

17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

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

(Dollars in thousands)
	2006
	Fourth			Third		Second		First
	quarter			quarter		quarter		quarter
Interest income	$	1,161		$	1,169	$	1,124	$	1,113
Interest expense		272			255		224		195
Net interest income		889			914		900		918
Provision for loan losses		22			40		35		40
Net interest after provision for loan losses		867			874		865		878
Noninterest income		398			314		357		345
Noninterest expense		1,232			1,179		1,216		1,153
Net income	$	33		$	9	$	6	$	70
Basic earnings per common share	$	0.03		$	0.01	$	0.01	$	0.06
Diluted earnings per common share	$	0.03		$	0.01	$	0.01	$	0.06
		2005
		Fourth			Third		Second		First
		quarter			quarter		quarter		quarter
Interest income	$	1,063		$	1,075	$	1,031	$	986
Interest expense		183			157		130		115
Net interest income		880			918		901		871
Provision for loan losses		398			50		70		40
Net interest after provisions for loan losses		482			868		831		831
Noninterest income		390			362		416		414
Noninterest expense		1,239			1,193		1,197		1,234
Net (loss) income	$	(367	)	$	37	$	50	$	11
Basic earnings (loss) per common share	$	(0.34	)	$	0.03	$	0.05	$	0.01
Diluted earnings (loss) per common share	$	(0.34	)	$	0.03	$	0.05	$	0.01

74

Commission File No. 0-25976

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2006

UNITED BANCSHARES, INC.

EXHIBITS

EX-10.J

PROGRESS PLAZA

FUNDAMENTAL LEASE PROVISIONS

Certain Fundamental Lease Provisions are presented in this Section and represent the agreement of the parties hereto, subject to further definition and elaboration in the Lease:

NAME AND ADDRESS OF CENTER: PROGRESS PLAZA, 1501 N. Broad Street, Phila., PA 19122

LANDLORD: PROGRSS TRUST, INC.

NOTICE ADDRESS OF LANDLORD:

Progress Trust, Inc.

1501 North Broad Street, Second Floor

Philadelphia, PA 19122

Attention: Benjamin Gilbert

With a copy to:

Mark Herrmann & Associates, Inc.

38 W. Lodges Lane

Bala Cynwyd, PA 19004

TENANT: United Bank of Philadelphia

TENANT'S TRADE NAME: United Bank

NOTICE ADDRESS OF TENANT:

United Bank of Philadelphia

Graham Building, 30 S. 15^th St.

Philadelphia, PA 19102

With a copy to:

Love and Long, L.L.P.

108 Washington Street

Newark, New Jersey 07102

RENT COMMENCEMENT DATE: The earlier of (i) sixty (60) days after Landlord notifies Tenant of the completion of “Landlord’s Work” as defined in this Lease, or (ii) the date Tenant opens for business to the public.

TERM OF LEASE: 10 years, plus the period from the Rent Commencement Date to the last day of the calendar month in which it occurs.

OPTION TERM: Two (2) separate five (5) year options- See Lease Section 3(d)

PREMISES GROSS LEASABLE AREA: 2,500 square feet +/-

PERMITTED USE: Full Service Bank and related activities

ANNUAL BASIC RENTAL:

Period	Annual Rent			Monthly Rent
Rent Commencement	$	60,000.00		$	5,000.00
Date to the end of the 12th
Full calendar month
Months 13-60	$	62,500.00		$	5,208.33
Months 61-120	$	71,250.00		$	5,937.50
Option Term:		See Lease Section 3 (d	)

INITIAL MONTHLY PAYMENT ON ACCOUNT OF OPERATING EXPENSES:

AND TAXES: $754.17 (based on $3.62 psf per annum)

ADVANCE RENTAL: N/A

SECURITY DEPOSIT: N/A

DATE OF LEASE: March _____, 2006

1. PREMISES	2
2. USE; QUIET ENJOYMENT	2
3. TERM; TERMINATION	4
4. RENT	5
5. ADVANCE RENTAL	5
7. IMPROVEMENTS	5
8. TENANT ASSESSMENTS. USE AND OCCUPANCY TAXES.	6
9. UTILITIES AND SERVICES	6
10. TAXES AND OPERATING COSTS	7
11.FIXTURES, EQUIPMENT AND APPURTENANCES	11
12.ALTERATIONS AND IMPROVEMENTS BY TENANT	11
13. SIGNS AND ADVERTISING	12
14. REPAIRS BY LANDLORD; INSPECTION	12
15. REPAIRS BY TENANT	13
16. INSURANCE	14
17. INDEMNITY BY TENANT; EXONERATION	14
18. INCREASE IN INSURANCE PREMIUMS; WAIVER OF SUBROGATION	15
19. FIRE OR OTHER CASUALTY	15
20. CONDEMNATION	17
21. MARKETING FUND AND PROMOTION OF CENTER	17
22. ASSIGNMENT, MORTGAGING AND SUBLETTING	17
23. PERFORMANCE BY TENANT	18
24. BANKRUPTCY	19
25. HAZARDOUS MATERIALS	19
26. DEFAULT; REMEDIES	19
27. REMEDIES CUMULATIVE	23
28. SUBORDINATION; ATTORNMENT	23
29. SUCCESSORS AND ASSIGNS	24
30. NOTICES	24
31. APPLICABLE LAW	24
32. CAPTIONS AND HEADINGS	24
33. JOINT AND SEVERAL LIABILITY	24
34. BROKERAGE COMMISSION	25
35. NO OPTION	25
36. NO MODIFICATION	25
37. SEVERABILITY	25
38. THIRD PARTY BENEFICIARY	25
39. TRANSFER BY LANDLORD	25
40. LIMITATION OF LIABILITY OF LANDLORD	26
41. PARKING	26
42. SUBSTITUTE SPACE	26
43. COVENANTS AND CONDITIONS	26
44. TIME OF ESSENCE	26
45. MODIFICATIONS FOR LENDER	26

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46. HOLDING OVER	27
47. RULES AND REGULATIONS	27
48. TITLE	27
49. PRIOR LEASE	27
50. WAIVER OF JURY TRIAL	27

    THIS Retail Lease is made as of the date, and between the Landlord and Tenant, set forth in the Fundamental Lease Provisions attached hereto.

1. PREMISES

In consideration of the rents and covenants herein set forth, Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the premises (“Premises”) located upon the land and within the buildings (collectively, the "Center") described in the Fundamental Lease Provisions. The Premises are further depicted in the drawing attached hereto as Exhibit “A”. The Premises are comprised of the number of square feet of rentable area set forth in the Fundamental Lease Provisions. The rentable area of the Premises and the Center has been calculated and determined on a basis determined by the Landlord. The Landlord's calculations for the Center and the Premises, and the Expense Percentage are final and are not subject to adjustment except as provided for in Section 10 below.

2. USE; QUIET ENJOYMENT

(a) The Premises shall be used by Tenant for the purposes, and under the Trade Name set forth in the Fundamental Lease Provisions. Tenant shall not use or permit the Premises to be used for any other purpose or under any other trade name without the prior written consent of Landlord; provided Tenant shall not use, permit or suffer anything to be done in the Premises or anything to be brought into or kept in the Premises, in either case, which occasions discomfort or annoyance to any other tenants or occupants of the Center, or which in Landlord's reasonable judgment may tend to impair the reputation or appearance of the Center or tend to interfere with the proper and economic operation of the Center by Landlord.

(b) Tenant shall, at its expense, procure any and all governmental licenses and permits, including without limitation, sign permits, required for the conduct of business in the Premises and shall, at all times, comply with the requirements of each such license and permit. Landlord does not represent or warrant that it will obtain for Tenant (or that Tenant will be able to obtain) any license or permit.

(c) Tenant agrees that it shall continuously operate, conduct its business within and otherwise use the Premises in accordance with the terms and conditions of this Lease. Tenant will keep the Premises open for business during such hours of operation as are established by Landlord for the Center.

(d) Tenant agrees that it:

(i) will not in connection with the Premises conduct or permit to be conducted any auction, fire, bankruptcy or going out of business sale, or similar type sale, or utilize any unethical method of business, provided that this provision shall not restrict the absolute freedom (as between Landlord and Tenant) of Tenant to determine its own selling prices, nor shall it preclude the conduct of periodic, seasonal promotional or clearance sales;

(ii) will not use or permit the use of any apparatus for sound and/or light reproduction or transmission, including loudspeakers in such manner that the sounds so transmitted shall be audible beyond the interior of the Premises; will not distribute at the Center or in any part thereof any handbills or other advertising or notices, and will not conduct or permit any activities that might constitute a nuisance or which are otherwise not generally considered appropriate in accordance with the standards of operation for the Center established by landlord.

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(iii) will keep all mechanical apparatus free of vibration and noise which may be transmitted beyond the confines of the Premises; will not cause or permit strong, unusual or offensive sound, sights, odors fumes, dust or vapors to emanate from the Premises.

(iv) will not load or permit the loading or unloading of merchandise, supplies or other property, nor ship nor receive outside the area and entrance designated therefore by Landlord from time to time, and will use its best efforts to have all such deliveries, loading, unloading and services to the Premises prior to 9:30 a.m. each day.

(v) will not paint or decorate any part of the exterior of the Premises, or change the architectural treatment, decor or other appearance of the exterior of the Premises without first obtaining Landlord's written approval of such work.

(vi) will not perform any work of any nature whatsoever to the roof, exterior walls or any of the structural portions of the Premises.

(vii) will comply with all applicable federal, state and local environmental and other laws, rules, regulations, guidelines, judgments, or orders and all recommendations of any public or private agency having authority over insurance rates with respect to the use or occupancy of the Premises by Tenant; will not use or permit the use of any portion of the Premises for any unlawful purpose.

(viii) will not, within the vestibule or within three feet of any entrance or exit or of any window in the Premises, or upon glass panes, affix or maintain any signs, trademarks, merchandise or other item, except as shall be approved by Landlord.

(ix) will keep the storefront sign and display windows lighted during all hours in which the Premises are required to be opened for business.

(x) will provide all security within its Premises as it deems appropriate;

(xi) will comply with all rules and regulations as may be established by landlord from time to time.

(xii) will not use the malls or sidewalks adjacent to the Premises for solicitations, vending or sales of merchandise.

(xiii) will maintain at all times a full staff of employees and a complete stock of merchandise and other goods consistent with the use of the Premises.

(xiv) will not, without obtaining Landlord's prior written approval, install any storage or propane tank, whether above or underground at the Premises or in the Center.

(e) So long as Tenant is not in default of any covenant or term of this Lease, Tenant shall have the right to peaceful and quiet enjoyment of the Premises during the term hereof subject however to the rights of holders of any mortgages affecting the Center which appear in the real estate records of the county in which the Center is located from time to time.

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3. TERM; TERMINATION

(a) The term of this Lease shall commence on the date set forth as the Rent Commencement Date in the Fundamental Lease Provisions, provided the Premises are "ready for occupancy" (as that term is defined in Section 7 hereof), but if the Premises are not ready for occupancy on such date then the term shall commence on the date which is seven (7) days after the mailing of notice by Landlord to Tenant that the Premises are "ready for occupancy". The term shall be for the period set forth in the Fundamental Lease Provisions, plus, if the Rent Commencement Date shall not be the first day of a month, the part of a month from the date of the Rent Commencement Date to the last day of the calendar month in which it occurs. Each of the parties hereto agrees upon demand of the other, to execute a declaration expressing the commencement date of the term as soon as the commencement date has been determined. If Tenant, or its contractors, are permitted to take possession prior to the Rent Commencement Date, Tenant shall comply with all terms and conditions of the Lease other than payment of Basic Annual Rent, Taxes or Operating Costs.

(b) This Lease shall terminate at the end of the original term hereof, or any extension or renewal thereof without the necessity of any notice from either Landlord or Tenant to terminate the same, and Tenant hereby waives notice to vacate the Premises and agrees that Landlord shall be entitled to the benefit of all provisions of law respecting the summary recovery of possession of premises from a tenant holding over to the same extent as if statutory notice had been given. For the period of four (4) months prior to the expiration of the term, or any renewal or extension thereof, and provided that Tenant has not provided Landlord with notice of Tenant’s intent to exercise its option to renew pursuant to the terms and conditions below, Landlord shall have the right to show the Premises and all parts hereof to prospective tenants during normal business hours.

(c) At the expiration or earlier termination of this Lease, Tenant shall, at Tenant's expense, remove all of Tenant's personal property and repair all injury done to the Premises or any part of the Premises by or in connection with the installation or removal of said property, and surrender the Premises, broom clean and in as good condition as they were at the beginning of the term, reasonable wear and tear excepted. All property of Tenant remaining on the Premises after the expiration or earlier termination of this Lease shall be conclusively deemed abandoned and at Landlord's option, may be retained by Landlord, or may be removed by Landlord, and Tenant shall reimburse Landlord for the cost of such removal. Landlord may have any such property stored at Tenant's risk and expense.

(d) Option to Renew. So long as Tenant is not in default of its obligations hereunder, Landlord hereby agrees that Tenant shall have two (2) separate options to renew the term of this Lease for a term of five (5) years each, provided that Tenant notifies Landlord of its exercise of such option(s) no later than seven (7) months prior to the expiration date of the then current term. Such renewal shall be on the same terms and conditions set forth in the Lease, except that Annual Basic Rental shall be set at the then current rent established by Landlord for the Premises. Tenant shall execute any renewal form required by Landlord in order to preserve Landlord's rights and remedies under the lease, as renewed.

Within thirty (30) days following receipt of Tenant's exercise of its option, Landlord shall advise Tenant of the Annual Basic Rental which will be charged for the renewal term. Tenant shall have a period of fifteen (15) days within which to notify Landlord, in writing, of its election to revoke its option, in which event the term of the Lease shall expire as though no option to renew had been exercised by Tenant. Should Tenant fail to so notify Landlord of its election to revoke the exercise of its option, the option shall be effective and the Annual Basic Rental shall be that set forth in Landlord's notice to Tenant.

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4. RENT

(a) Tenant covenants and agrees to pay to Landlord, as rental for the Premises, Annual Basic Rental in the sum set forth in the Fundamental Lease Provisions, payable in advance in equal monthly installments on the first day of each full calendar month during the term, the first such payment to include rent, prorated on a daily basis, for the period (if any) from the date of commencement of the term to the first day of the first full calendar month in the term.

(b) Any sum, amount, item or charge payable by Tenant hereunder shall be deemed additional rent, and except as otherwise specifically provided herein, shall be paid by Tenant to Landlord on the first day of the month following the date on which Landlord notifies Tenant of the amount payable or on the tenth day after the giving of such notice, whichever shall be later. Any such notice shall specify in reasonable detail the basis of such additional rent.

(c) All rentals payable by Tenant to Landlord under this Lease shall be paid to Landlord at the office of Landlord herein designated or to such other address and/or person or company as Landlord may designate from time to time by notice to Tenant. Tenant will promptly pay all rentals herein prescribed when and as the same shall become due and payable. If Landlord shall pay any monies or incur any expenses in correction of violations of covenants herein set forth, the amount so paid or incurred shall, at Landlord's option, and on notice to Tenant, be considered additional rentals, payable by Tenant with the first installment of rent thereafter becoming due and payable, and may be collected or enforced as by law provided in respect of rentals.

5. PERCENTAGE RENT

[This Section Intentionally Deleted]

6. ADVANCE RENTAL AND SECURITY DEPOSIT

[This Section Intentionally Deleted]

7. IMPROVEMENTS

(a) Prior to the Rent Commencement Date, the Landlord shall perform the work in the Premises (“Landlord’s Work”) specified in Exhibit “B” hereto. Landlord will provide Tenant with written notice of the completion of Landlord’s Work, and Tenant shall thereupon enter the Premises and complete all work required for it to open its business to the public as quickly as possible, but in any event not later than sixty (60) days after completion of Landlord’s Work. Landlord anticipates that it will complete Landlord’s Work on or before September 1, 2006. With Landlord’s consent, and so long as it will not interfere with the completion of Landlord’s Work, Tenant’s contractors shall be entitled to work alongside Landlord’s contractors in the Premises. Except for Landlord’s obligation to perform Landlord’s Work, Tenant, by accepting possession of the Premises shall have examined and accepted the Premises in their "as- is" condition, and no representations or warranties concerning the condition of the Premises have been made by Landlord

(b) Tenant shall have the right, at its sole expense, and in accordance with the procedures set forth in Section 12, to make non-structural changes, modifications and improvements to the interior of the Premises, with the written consent of the Landlord, which consent shall not be unreasonably withheld, in order to obtain the consent of Landlord, Tenant shall deliver to Landlord plans and specifications for any work which it wishes to perform in the Premises.

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(c) Any approval by Landlord or Landlord's architects and/or engineers of any of Tenant's drawings, plans and specifications which are prepared in connection with any construction of improvements or alterations in the Premises shall not in any way be construed or operate to bind Landlord or to constitute a representation or warranty of Landlord as to the adequacy or sufficiency of such drawings, plans and specifications or the improvements to which they relate, for any use, purpose, or condition but such approval shall merely be the consent of Landlord as may be required hereunder in connection with Tenant's construction of improvements in the Premises in accordance with such drawings, plans and specifications under the terms of this Lease.

8. TENANT ASSESSMENTS. USE AND OCCUPANCY TAXES.

(a) Tenant shall pay any and all taxes, assessments, impositions, excises, fees and other charges levied, assessed or imposed by governmental or quasi-governmental authority upon Tenant or its business operation, or based upon the use or occupancy of the Premises, or upon Tenant's leasehold interest, trade fixtures, furnishings, equipment, leasehold improvements, alterations, changes and additions, merchandise and personal property of any kind owned, installed or used by Tenant in or from the Premises. Tenant shall also pay when due, any sales or use tax, or other similar tax assessed or levied against this Lease or the rent payable hereunder. Should any tax or charge referred to in this subsection be collected by Landlord on behalf of such taxing authority, then such tax or charge shall be paid by Tenant to Landlord monthly as additional rent upon notice from Landlord. If any gross receipts tax shall be payable by Landlord, Tenant shall pay the portion thereof attributable to landlord's receipts from this Lease. Tenant shall pay any tax or charge covered by this subsection within thirty (30) days after receipt of each bill therefore.

(b)   Tenant shall also pay to Landlord, upon invoice, any Use and Occupancy tax (or similar tax) based upon Tenant's occupancy of the Premises.

(c)   Notwithstanding anything to the contrary contained herein, Tenant shall have the right to contest any Use and Occupancy tax (or similar tax) provided that Tenant complies with the applicable laws and regulations permitting such contestation.

9. UTILITIES AND SERVICES

(a) Tenant shall connect to, and become a direct customer of the local utility, for any utility services provided to the Premises. Tenant shall pay, on or before the due date, all charges imposed by such utility.

(b)(i) At Landlord's sole option, it may provide any utility service directly to Tenant, and charge Tenant for the costs of such service at a rate no greater than that which Tenant would pay if it were a direct customer of such utility. In such event, such sum shall be due and payable as additional rent hereunder.

(ii) Tenant's usage of any utility shall be measured either by separate meter, or, if no separate meter is available, by an alternative means determined by Landlord. The cost of any meter(s) as well as the cost of installation and repair and replacement of any meter(s) shall be borne by Tenant which shall reimburse Landlord for the cost thereof within thirty days after receipt of written demand therefor.

(c) Landlord reserves the right to stop the supply of water, sewage, electrical current, parking, and other services, without thereby incurring any liability to Tenant, when necessary by reason of accident or emergency, or for repairs, alterations, replacements or improvements in the judgment of Landlord desirable or necessary, or when prevented from supplying such services by strikes, lockouts, difficulty of obtaining materials, accidents or any other cause beyond Landlord's control, or by laws, orders or inability

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by exercise of reasonable diligence to obtain electricity, water, steam, coal, oil or other suitable fuel or power. No diminution or abatement of Rent or other compensation shall or will be claimed by Tenant as a result of, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of, any such interruption, curtailment or suspension. However, if such interruption, curtailment or suspension continues for either three consecutive days or any ten days within a thirty-day period, Tenant’s Rent shall abate.

10. TAXES AND OPERATING COSTS

(a) Tenant shall pay, as additional rent hereunder, an amount equal to its Expense Percentage of Taxes and Operating Costs incurred in connection with the ownership and operation of the Center.

The Tenant’s Expense Percentage is determined by dividing the gross rentable area of the Premises by the gross rentable area of the Center (exclusive of any basement space or the Office Space as defined below).

The “Office Space” is the area located on the second floor of the East Building of the Center. At such time as any of the Office Space is leased, it shall be included and shall remain in the gross rentable area of the Center, and Tenant’s Expense Percentage shall be reduced accordingly throughout the term of this Lease. .

(b) Taxes shall include all real estate and other ad valorem taxes and other assessments, impositions, excises and other governmental or quasi-governmental charges of every kind and nature (including but not limited to general and special assessments, sewer and fire district assessments, foreseen as well as unforeseen) with respect to the Center and all improvements thereon or any part thereof. Taxes shall also include Landlord's costs and expenses (including statutory interest if any) in obtaining or attempting to obtain any refund, reduction or deferral of Taxes.

(c) Operating Costs shall refer to all costs and expenses incurred by Landlord in connection with the operation, management, maintenance, repair, replacement and cleaning of the Center and any signs or other improvements serving or related to the Center including, without limitation, the following:

(i) The cost of fire, casualty, liability and other insurance carried by Landlord;

(ii) The cost of electricity, steam, fuel, gas, heating, ventilating and air-conditioning, water and sewer services, but excluding the cost of all such items (A) which is included in the charges paid by Tenant under this Lease or (B) which is separately charged to and paid for by other tenants or occupants of the Center;

(iii) The cost of all repairs, maintenance, services and replacement of plumbing, heating, air-conditioning, ventilating, and electrical equipment and systems; the cost of all repairs, maintenance and replacements of utility systems; the cost of repair, maintenance and replacements to the roofs or exteriors; the cost of repair, maintenance and replacement of lobbies, corridors, rest rooms, stairways and other common areas; the cost of landscaping, repair, maintenance and replacement of the paved areas, signs and sidewalks or other common areas; the cost of repair, maintenance and replacements required in order to comply with any federal, state or local law, rule or regulation;

(iv) The cost of trash removal, uniforms, paper goods, window cleaning, janitorial services and snow removal and the cost of all labor, materials, equipment and supplies;

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(v) All payroll, wages, and salaries of all staff persons and other persons engaged in maintenance, repair, replacement and/or operation, including, without limiting the generality of the foregoing, all state and federal taxes, workmen's compensation insurance, unemployment taxes, FICA and employee pension and benefit programs;

(vi) All management fees of persons and firms engaged in management, maintenance or operation;

(vii) All costs of providing security (if any, as determined by Landlord);

(viii) All other costs and expenses of any kind or nature which would be considered as costs or expenses of maintenance, operations, management, repair or replacement; and,

(ix) Landlord's supervisory charge in an amount equal to fifteen percent (15%) of the foregoing costs and expenses.

(d) Any capital expenditures included in Operating Costs shall be amortized over the anticipated life of such improvements as determined by Landlord=s accountants. Notwithstanding anything herein to the contrary, in calculating its Operating Costs, Landlord may utilize reasonable estimates of such costs, with estimates and payments thereon being subject to adjustments in future billings to Tenant based upon Landlord's actual costs.

(e)Despite anything in the definition of Operating Expenses to the contrary, Operating Expenses will not include:

(i)Any ground lease rental;

(ii) Costs of items considered capital repairs, replacements, improvements and equipment under generally accepted accounting principles (“Capital Items”) except as provided in subsection (d) above;

(iii)Rentals for items (except when needed in connection with normal repairs and maintenance of permanent systems) which if purchased, rather than rented, would constitute a Capital Item that is specifically excluded in (ii) Center;

(iv)Costs incurred by Landlord for the repair of damage to the Center, to the extent that Landlord is reimbursed by insurance proceeds, and costs of all capital repairs, regardless of whether such repairs are covered by insurance;

(v)Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant or other occupants’ improvements in the Center or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Center;

(vi)Depreciation, amortization and interest payments, except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party’s services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted or required, the item will be amortized over its reasonably anticipated useful life;

(vii)Marketing costs, including without limitation, leasing commissions, attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease or assignment negotiations, and transactions with present or prospective tenants or other occupants of the Center;

(viii)Expenses in connection with services or other benefits that are not offered to Tenant or for which Tenant is charged for directly but that are provided to another tenant or occupant of the Center at a lesser cost;

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(ix)Costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Center;

(x)Overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and services in or to the Center to the extent the same exceeds the costs of such goods and services rendered by unaffiliated third parties on a competitive basis;

(xi)Interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Center or the site (except as permitted in (ii));

(xii)Landlord’s general corporate overhead and general and administrative expenses;

(xiii)Advertising and promotional expenditures, and costs of signs in or on the Center identifying the owner of the Center or other tenants’ signs;

(xiv)Costs incurred in connection with upgrading the Center to comply with life, fire and safety codes, ordinances, statutes or other laws in effect prior to the Commencement Date including, without limitation, the ADA, including penalties or damages incurred due to non-compliance;

(xv)Tax penalties incurred as a result of Landlord’s negligence, inability or unwillingness to make payments or to file any tax or informational returns when due;

(xvi)Costs for which Landlord has been compensated by a management fee, and any management fees in excess of those management fees that are normally and customarily charged by landlords of comparable buildings;

(xvii)Costs arising from the negligence or fault of other tenants or Landlord or its agents, or any vendors, contractors, or providers of materials or services selected, hired or engaged by Landlord or its agents including, without limitation, the selection of Center materials;

(xviii) Despite any contrary provision of the Lease including without limitation, any provision relating to capital expenditures, any and all costs arising from the presence of hazardous materials or substances (as defined by applicable laws in effect on the date this Lease is executed) in or about the Premises or the Center including, without limitation, hazardous substances or the ground water or soil, not placed in the Premises or the Center by Tenant;

(xix) Costs arising from Landlord’s charitable or political contributions;

(xx)Costs arising from latent defects in the base, shell or core of the Center or improvements installed by Landlord or repair to them;

(xxi)Costs for sculpture, paintings or other objects of art;

(xxii)Costs (including all attorneys’ fees and costs of settlement judgments and payments) arising from claims, disputes or potential disputes in connection with potential or actual claims litigation or arbitrations pertaining to Landlord or the Center;

(xxiii)Costs associated with the operation of the business of the partnership or entity that constitutes Landlord as the same are distinguished from the costs of operation of the Center, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Center, costs of any disputes between Landlord and its employee (if any) not engaged in Center operation, disputes of Landlord with Center management, or outside fees paid in connection with disputes with other tenants;

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(xxiv)Cost of any “tap fees” or any sewer or water connection fees for the benefit of any particular tenant in the Center;

(xxv)Costs incurred in connection with any environmental clean-up, response action, or remediation on, in, under or about the Premises or the Center including, but not limited to, costs and expenses associated with the defense, administration, settlement, monitoring or management of them;

(xxvi)Any entertainment, dining or travel expenses for any purpose;

(xxvii)Any flowers, balloons, or other gifts provided to any entity including, but not limited to, Tenant, other tenants, employees, vendors, contractors, prospective tenants and agents;

(xxviii)Any “above-standard” cleaning including, but not limited to, construction cleanup or special cleanings associated with parties or events and specific tenant requirements in excess of service provided to Tenant, including related trash collection, removal, hauling and dumping;

(xxix)The cost of any magazine, newspaper, trade or other subscriptions;

(xxx)The cost of any training or incentive programs, other than for tenant life safety information services;

(xxxi)The cost of any “tenant relations” parties, events or promotion not consented to by an authorized representative of Tenant in writing;

(xxxii)“In-house” legal and accounting fees; and

(e)Operating Expenses will be reduced by all cash discounts, trade discounts, or quantity discounts received by Landlord or Landlord’s managing agent in the purchase of any goods, utilities, or services in connection with the operation of the Center

(f)If any facilities, services or utilities used in connection with the Center are provided from another building owned or operated by Landlord or vice versa, the costs incurred by Landlord in connection with them will be allocated to Operating Expenses by Landlord on an equitable basis.

(g)In determining Operating Costs for any year, if less than one hundred percent (100%) of the Center=s rentable area shall have been occupied by tenants at any time during such year, Operating Costs shall be deemed for such year to be an amount equal to the like expenses which Landlord reasonably determines would normally be incurred had such occupancy been one hundred percent (100%) throughout such year.

(h) Payments on account of Tenant's share of Taxes and Operating Costs shall be paid by Tenant in equal monthly (or other periodic) installments in advance in such amounts as are estimated and billed by Landlord based upon the total Taxes and Operating Costs estimated to be payable in each year. Landlord may revise its estimates and may adjust such monthly payment at the end of any calendar month. The first (1st) such installment shall be due and payable on the Rent Commencement Date (prorated for the remaining number of days in the calendar year) and subsequent installments shall thereafter be due and payable at the beginning of each ensuing calendar month during the term.

(i) Within one hundred twenty (120) days, or a reasonable time thereafter, following the end of each calendar year in the term hereof, Landlord shall deliver to Tenant a statement of all Taxes and Operating Costs paid or payable by Landlord for such year. If the total of Tenant's monthly remittances is less than or greater than the Tenant's share of Taxes and Operating Costs for the preceding calendar year, the amount of any excess shall be credited to Tenant's next payments due on account of Taxes and Operating Costs. The amount of any deficiency shall be paid by Tenant to Landlord within thirty (30) days of the mailing of the statement.

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(j) If the term of this Lease shall commence or terminate during any calendar year, Tenant shall be liable only for that portion of Taxes and Operating Costs for such year represented by a fraction, the numerator of which is the number of days of the term which fall within the said year and the denominator of which is Three Hundred Sixty Five (365).

11.FIXTURES, EQUIPMENT AND APPURTENANCES

All fixtures, equipment, improvements and appurtenances attached to or built into the Premises prior to or during the term of this Lease, whether by Landlord at its expense or at the expense of Tenant or by Tenant, shall be and remain part of the Premises and shall not be removed by Tenant at the end of the term unless otherwise expressly provided in this Lease. All electrical, telephone, communication, radio, plumbing, heating and sprinkling systems, fixtures and outlets, vaults, paneling, molding, shelving, ventilating, silencing, air-conditioning and cooling equipment, shall be deemed to be included in such fixtures, equipment and improvements and appurtenances, whether or not attached to or built into the Premises. Where not built into the Premises, and if furnished and installed by and at the sole expense of Tenant, all removable electrical fixtures, carpets, drinking or tap water facilities, furniture, or trade fixtures or business equipment shall not be deemed to be included in such fixtures, equipment, improvements and appurtenances and may be, and upon the request of Landlord shall be, removed by Tenant upon the condition that such removal shall not materially damage the Premises or the Center and that the cost of repairing any damage to the Premises or the Center arising from such removal shall be paid by Tenant; provided, however, that any of such items for which Landlord shall have granted any allowance or credit to Tenant, shall be deemed not to have been furnished and installed in the Premises by or at the sole expense of Tenant. If this Lease shall be terminated by reason of Tenant's breach or default, then notwithstanding anything to the contrary in this Lease contained, Landlord shall have a lien against all Tenant's property in the Premises at the time of such termination to secure Landlord's rights under Section 26 hereof. Notwithstanding anything to the contrary contained herein, if there is then no Event of Default, Tenant may remove from the Premises any trade fixtures, equipment, and movable furniture placed in the Premises by Tenant, whether or not the trade fixtures or equipment are fastened to the Premises. Tenant will not remove any trade fixtures or equipment without Landlord's prior written consent if the trade fixtures or equipment are used in the operation of the Center or if the removal of the fixtures or equipment will impair the structure of the Center. Whether or not there is then an Event of Default, Tenant will remove the alterations, additions, improvements, trade fixtures, equipment, and furniture as Landlord has requested in accordance with Section 12 below. Tenant will fully repair any damage occasioned by the removal of any trade fixtures, equipment, furniture, alterations, additions, and improvements. All trade fixtures, equipment, furniture, alterations, additions, improvements and other personal property not removed will conclusively be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant or to any other person and without obligation to account for them. Tenant will pay Landlord all expenses incurred in connection with Landlord's disposition of such property, including without limitation the cost of repairing any damage to the Center or the Premises caused by removal of such property, and will hold Landlord harmless from loss, liability, or expense arising from the claims of third parties such as lenders whose loans are secured by such property.

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12.ALTERATIONS AND IMPROVEMENTS BY TENANT

(a) Tenant shall make no alterations, decorations, installations, removals, additions or improvements in or to the Premises after the commencement of the term without Landlord's prior written consent which consent shall not be unreasonably withheld and then only by contractors or mechanics approved by Landlord. Any contractors selected by Tenant shall be required to work in harmony with Landlord’s contractors and sub-contractors. No installation or work shall be undertaken or begun by Tenant until Landlord has approved written plans and specifications therefor; and no amendments or additions to such plans and specifications shall be made without the prior written consent of Landlord. Any such work, alterations or decorations, installations, removals, additions and improvements shall be done at Tenant's sole expense and at such time and in such manner as Landlord may from time to time designate. If Tenant shall make any alterations, decorations, installations, or removals, additions or improvements, then Landlord may elect to require Tenant at the expiration of this Lease to restore the Premises to substantially the same condition as existed at the commencement of the term hereof.

(b) Any approval by Landlord or Landlord's architects and/or engineers of any of Tenant's drawings, plans and specifications which are prepared in connection with any improvements or alterations in the Premises shall not in any way be construed or operate to bind Landlord or to constitute a representation or warranty of Landlord as to the adequacy or sufficiency of such drawings, plans and specifications or the improvements to which they relate, for any use, purpose, or condition but such approval shall merely be the consent of Landlord as may be required hereunder in connection with Tenant's construction of improvements in the Premises in accordance with such drawings, plans and specifications under the terms of this Lease.

(c) Prior to any work being performed by Tenant pursuant to this Section 12, Tenant shall cause all contractors and subcontractors performing such work to file a waiver of mechanics' liens in the appropriate filing office for the county in which the Center is located.

(d) In the event any lien shall at any time be filed against the Premises or against any part of the Center by reason of work, labor, or services performed or alleged to have been performed, or materials furnished or alleged to have been furnished by for or to Tenant or to anyone holding the Premises through or under Tenant, Tenant shall forthwith cause the same to be discharged of record or bonded to the satisfaction of Landlord. If Tenant shall fail to cause such lien forthwith to be so discharged or bonded after being notified of the filing thereof, then, in addition to any other right or remedy of Landlord, Landlord may discharge the same by paying the amount claimed to be due, and the amount so paid by Landlord and all costs and expenses, including reasonable attorney's fees incurred by Landlord in procuring the discharge of such lien, shall be due and payable by Tenant to Landlord as additional rent on the first day of the next following month.

13. SIGNS AND ADVERTISING

Tenant will not place or suffer to be placed or maintained on the exterior of the Premises or the Center any sign, advertising matter or other thing of any kind, and will not place or maintain any decoration, lettering or advertising matter on any door or window of the Premises without first obtaining Landlord's written approval thereof which approval shall not be unreasonably withheld. Tenant further agrees to maintain such sign, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times. Tenant shall have the right to a sign on the Center pylon in space equal to that provided to other tenants other than Major Tenants (defined as tenants whose leased premises consists of 15,000 or more square feet).

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14. REPAIRS BY LANDLORD; INSPECTION

(a) Landlord shall (i) keep the structure and exterior of the buildings located in the Center, as well as the plumbing, electrical, heating, ventilating and air -conditioning systems and the service lines furnished by Landlord to the common areas of the Center in serviceable condition and repair; (ii) keep the common areas of the Center and all other means of ingress and egress for the Premises and all public portions of the Center in serviceable condition and repair and in a reasonably clean and safe condition: (iii) comply with the applicable governmental rules, regulations, laws and ordinances affecting the Center (other than the individual premises leased by tenants of the Center), and (iv) maintain, clean and plow the roads, sidewalks and parking areas located on the Center. Landlord reserves the right to interrupt, curtail, stop and suspend the furnishing of any parking services and the operation of the plumbing, electrical, heating, ventilating and air-conditioning systems when necessary by reason of accident or emergency or for repairs, alterations, replacements or improvements which may become necessary or when it cannot secure supplies or labor, or by reason of any other cause beyond its control, without liability therefor or any abatement of rent being due thereby. The obligations of Landlord contained in this Section 14 (a) shall be performed at the expense of Landlord (subject to reimbursement by tenants as provided elsewhere in this Lease), except to the extent that any such obligation arises from the negligence or wrongful act or failure to act of Tenant, its officers, agents, employees, contractors or sub-contractors, or from any act or failure to act of Tenant, which is contrary to the terms and provisions of this Lease, in either of which case, Tenant shall bear the expense of the performance of such obligation by Landlord.

(b) Landlord, its agents, employees and contractors shall have the right to enter the Premises at all reasonable times for the purpose of making inspections or to install, maintain, repair or replace electrical, mechanical, plumbing, heating, ventilating and air-conditioning equipment and installations serving the common areas of the Center. Except in case of emergency, Landlord agrees that, to the extent reasonably possible, such inspections, installations, maintenance, repairs or replacements shall be made at such times in such a manner as not to unreasonably disrupt Tenant's normal business operations.

15. REPAIRS BY TENANT

(a) Tenant shall be responsible for all repairs or replacements required to be made to the Premises, including without limitation, HVAC, other utility systems and sprinklers, except and solely to the extent such repairs or replacements are expressly made Landlord's responsibility pursuant to either Section 14 above, or Section 19 below. Without limiting the foregoing Tenant shall keep the Premises clean and neat and in good order, making all necessary replacements and/or repairs and will surrender the Premises in as good condition as when received, excepting depreciation caused by damage by fire, unavoidable accident or act of God. Tenant will keep the inside and outside of all glass in the doors and windows of the Premises clean and will replace any cracked or broken glass with glass of the same kind, size and quality, will maintain the Premises at its own expense in a sanitary condition and free of insects, rodents, vermin and other pests; will not burn or permit undue accumulation of garbage, trash or refuse and will remove the same from the Premises to compactors or other receptacles, and will keep such refuse in proper containers in the interior of the Premises until removed at Tenant=s sole cost and expense. Tenant shall not overload the electrical wiring within the Premises or serving the Premises and will install, at its own expense, but only after obtaining Landlord's written approval, any additional electrical wiring which may be required in connection with Tenant's apparatus.

(b) Tenant shall not place a load upon the floor of the Premises exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law. Machines, fixtures and mechanical equipment shall be placed and maintained by Tenant at Tenant's expense in settings sufficient to absorb and prevent vibration, noise and annoyance. Any moving of such equipment shall be at the sole risk and hazard of Tenant and Tenant will indemnify and save Landlord harmless against and from any liability, loss, injury, claim or suit resulting directly or indirectly from such moving.

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(c) Tenant will maintain, repair and if necessary replace any HVAC unit solely serving the Premises. Tenant shall also maintain at all times a preventive maintenance contract for such unit at Tenant's sole expense.

16. INSURANCE

Tenant will keep in force at its expense as long as this Lease remains in effect and during such other time as Tenant occupies the Premises or any part thereof comprehensive general liability insurance including broad form endorsement, with respect to the Premises with a $1,000,000.00 combined single limit; and "all risk" insurance on Tenant's personal property, including trade fixtures, floor coverings, furniture, stock in trade, and other property removable by Tenant. Tenant will further deposit the policy or policies of such insurance or certificates thereof with Landlord, which policies shall name Landlord. its managing agent, lender and/or its or their designee(s) as additional named insured, and shall also contain a provision stating that such policy or policies shall not be canceled except after ten (10) days' written notice to Landlord. All such insurance shall be in companies and in form acceptable to Landlord. If the nature of Tenant's business is such as to place all or any of its employees under the coverage of local workmen's compensation or similar statutes, Tenant shall also keep in force, at its expense, so long as this Lease remains in effect and during such other times as Tenant occupies the Premises or any part thereof, workmen's compensation or similar insurance affording statutory coverage and containing statutory limits. If Tenant shall not comply with its covenants made in this Section 16, Landlord may cause insurance as aforesaid to be issued, and in such event Tenant agrees to pay, as additional rent, the premium for such insurance upon Landlord's demand.

17. INDEMNITY BY LANDLORD AND TENANT; EXONERATION

(a) Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, actions, damages, liability and expense, including attorney's fees and other professional fees connection with loss of life, personal injury and/or damage to property arising from or out of the occupancy or use by Tenant of the Premises or any part thereof or any other part of the Center occasioned wholly or in part by any act or omission of Tenant, its officers, employees, agents or contractors.

(b) To the maximum extent permitted by law, Tenant agrees to use and occupy the Premises and such other portions of the Center as Tenant is permitted to use at Tenant's own risk; and Landlord shall have no responsibility for any injury to persons, or loss of or damage to property, sustained or occurring in or on the Premises, or occurring elsewhere (other than in the Premises) in or about the Center; and in particular, not limiting the generality of the foregoing, Landlord shall have no responsibility for injury to persons for loss of, or damage to, property sustained or occurring on or about the stairways, public corridors, sidewalks, parking areas, roads or other appurtenances and facilities used in connection with the Center or the Premises arising out of the use or occupancy of the Center or the Premises by Tenant, or by any person claiming by, through or under Tenant, on account or based upon the act, omission, fault, negligence or misconduct of any person or persons other than Landlord and those for whose conduct Landlord is legally responsible.

(c) Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, electrical disturbance, water, rain or snow or leaks from any part of the Center or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or caused by dampness or by any other cause of whatever nature, unless caused by or due to the negligence of Landlord, its officers, employees, agents or contractors, and then only after (i) notice to Landlord of the conditions claimed to constitute negligence and (ii) the expiration of a reasonable time after such notice has been received by Landlord without such conditions having been cured or corrected, and in no event shall Landlord or its agent be liable for any such damage caused by other tenants or persons in the Center or caused by operations in construc-tion of any private, public or quasi-public work; nor shall Landlord be liable for any latent defect in the Premises or in the Center.

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(d) It is the intention of the parties that the provisions of this Section 17 shall require Tenant to indemnify and hold Landlord harmless with regard to acts, including negligence of Tenant, which result in harm to any employee of Tenant. This provision shall be deemed to fulfil the requirements requiring or permitting contribution or indemnity as set forth in Section 481 (b) of the Pennsylvania Workman's Compensation Act, or any successor statute.

(e) Landlord will indemnify Tenant, its officers, directors, members, shareholders, partners, lenders, agents, and employees against, and hold them harmless from, any and all demands, claims, causes of action, fines, penalties, damages (including without limitation consequential damages), losses, liabilities, judgments, and expenses (including without limitation attorneys’ fees and court costs) arising in the Common Areas.

18. INCREASE IN INSURANCE PREMIUMS; WAIVER OF SUBROGATION

(a) Tenant will not do or suffer to be done or keep or suffer to be kept, anything in, upon or about the Premises which will contravene Landlord's policies insuring against loss or damage by fire or other hazards (including, without limitation, public liability) or which will prevent Landlord from procuring such policies in companies acceptable to Landlord. If anything done, omitted to be done or suffered by Tenant to be kept, in, upon or about the Premises shall cause the rate of fire or other insurance on the Premises or on other property of Landlord or of others in the Center to be increased beyond the minimum rate from time to time applicable to the Premises, or to any such property for the use or uses made thereof, Tenant shall pay, as additional rent, the amount of any such increase upon Landlord's demand.

(b) Landlord shall cause each insurance policy carried by it insuring the Center against loss by fire or any of the casualties covered by standard extended coverage to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Tenant in connection with any loss or damage covered by the policy. Tenant will cause each insurance policy carried by it insuring the Premises as well as the contents thereof, including trade fixtures and personal property, against loss by fire or any of the casualties covered by standard extended coverage to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Landlord in connection with any loss or damage covered by the policy. Neither party hereto shall be liable to the other for any loss or damage caused by fire or any of the casualties covered by standard extended coverage, which loss or damage is covered by the insurance policies maintained by the other party, provided that such policies are not invalidated by such waiver; and, provided, further, that if either party shall be unable to obtain the waiver of subrogation required by this Section without additional premiums therefor, then unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice of the statement setting forth such requirement and the amount of additional premium, such waiver shall be of no force and effect between such party and the claiming party. It is agreed that should either party fail to procure such waiver, if available without additional cost (or if available at additional cost and the other party has agreed to pay such additional premium), it will pay to the other in liquidated damages all monies to which any subrogor hereunder becomes entitled and the cost of reasonable legal defense of any claims for subrogating.

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19. FIRE OR OTHER CASUALTY

(a) If the Premises or any part thereof shall be damaged by fire or other casualty insured by Landlord and Tenant shall have given prompt written notice thereof to Landlord, Landlord shall (subject to the subsections 19 (b) or (c) hereof) proceed with reasonable diligence to repair or cause to be repaired such damage (but in no event shall Landlord be obligated to expend an amount in excess of the net proceeds of insurance made available) and if the Premises, or any part thereof, shall be rendered untenantable by reason of such damage, and such damage shall not be due to the fault of Tenant, its agents, contractors, employees, guests, invitees or licensees, the Annual Basic Rental, or an amount thereof apportioned according to the number of square feet of floor space of the Premises so rendered untenantable (if less than the entire Premises shall be so rendered untenantable), shall be abated for the period from the date of such damage to the date when the damage shall have been repaired as aforesaid; provided, however, that if Landlord shall make available to Tenant during the period of repair, other space in the Center reasonably suitable for the temporary carrying on of Tenant's business, there shall be no such abatement of Annual Basic Rental. If Landlord or any mortgagee of the Center shall be unable to collect the insurance proceeds (including rent insurance proceeds) applicable to such damage because of some action or inaction on the part of Tenant, or the agents, contractors, employees, guests, invitees or licensees of Tenant, the cost of repairing such damage shall be paid by Tenant and there shall be no abatement of rent.

(b) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage from fire or other casualty or the repair thereof. Tenant understands that Landlord will not carry insurance of any kind on Tenant's improvements, alterations, stock in trade, furniture or furnishings or on any fixtures or equipment removable by Tenant under the provisions of this Lease, and that Landlord shall not be obligated to repair any damage thereto or replace the same.

(c) Notwithstanding subparagraphs (a) and (b) of this Section 19, if:

(i) the Center shall be so damaged by such fire or other casualty that substantial alteration or reconstruction of the Center shall, in Landlord's opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), or

(ii) the Premises are totally or substantially damaged or rendered wholly or substantially untenantable, or

(iii) the Premises shall be damaged in whole or in part by such fire or other casualty during the last one year of the term or any extension thereof which has been exercised prior to the date of such casualty, or

(iv) the proceeds of insurance made available to Landlord are insufficient to pay for the costs of repairing the damage, and Landlord elects not to repair such damage,

then and in any such event, Landlord may, at its option, by giving written notice to Tenant within forty-five (45) days after the date of such damage, terminate this Lease and Tenant's estate hereunder, as of the date of such termination specified in such notice. The effect of such termination shall be the same as if the date specified in the notice were the date hereinbefore set for the end of the Term and the Annual Basic Rental and additional rental hereunder shall be apportioned as of such date.

(d) Notwithstanding anything contained herein to the contrary the Rent will be abated proportionately during any period in which, by reason of any damage or destruction not occasioned by the negligence or willful misconduct of Tenant or Tenant's employees or invitees, there is a substantial interference with the operation of the business of Tenant. The abatement will be proportional to the area of the Premises that Tenant may be required to discontinue for the conduct of its business. The abatement will continue for the period commencing with the destruction or damage and ending with the completion by the Landlord of the work, repair, or reconstruction that Landlord is obligated to do.

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20. CONDEMNATION

(a) If the whole or any part of the Premises shall be taken under the power of eminent domain, this Lease shall terminate as to the part so taken on the date Tenant is required to yield possession thereof to the condemning authority. Landlord shall make such repairs and alterations as may be necessary in order to restore the part not taken to useful condition and the Annual Basic Rental shall be reduced proportionately as to the portion of the Premises so taken. If the portion of the Premises so taken renders the balance of the Premises untenantable, taking into account the nature of Tenant's business, either party may terminate this Lease as of the date when Tenant is required to yield possession. If twenty-five percent (25%) or more of the total rentable floor area of the Center or the parking areas located in the Center are taken as aforesaid, then Landlord may terminate this Lease as of the date of the taking. All compensation awarded for any taking of the leasehold and/or the improvements thereon shall belong to and be the property of Landlord; provided, however, that nothing contained herein shall prevent Tenant from applying for reimbursement from the condemning authority (if permitted by law) for moving expenses, or removal of Tenant's furniture, business equipment and such fixtures as Tenant is permitted to remove hereunder, but if and only if such action shall not reduce the amount of compensation otherwise recoverable by Landlord from the condemning authority.

(b) Notwithstanding anything to the contrary contained herein, Tenant will have the right to claim and recover from the taking authority, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of

(i) any and all costs or loss (including loss of business) that Tenant incurs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements, and equipment to a new location,

(ii) the taking of personal property and fixtures owned by Tenant,

(iii) the unamortized portion of any real property improvements made to the Premises by Tenant at Tenant's sole cost and expense,

(iv) any loss of goodwill, and

(v) the value of Tenant's leasehold estate.

21. MARKETING FUND AND PROMOTION OF CENTER

Landlord has established or may establish an advertising and promotional service (herein the "Marketing Service") to furnish and maintain advertising and sales promotions which, in Landlord's judgment, will benefit the Center. Landlord has established, or may establish, a fund (the "Marketing Service Fund") to be used by Landlord to pay all costs and expenses of the Marketing Service (including administrative costs and insurance). In such event, Tenant shall pay each month, as additional rent, and as its contribution to the Marketing Service Fund, an amount established by Landlord, which shall not be in excess of ten percent (2%) of the Annual Basic Rental payable by Tenant for such month.

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22. ASSIGNMENT, MORTGAGING AND SUBLETTING

(a) Tenant covenants and agrees that neither this Lease nor the terms and estate hereby granted, nor any interest herein or therein, will be assigned, mortgaged, pledged, encumbered or otherwise transferred, and that neither the Premises, or any part thereof, will be encumbered in any manner by reason of any act or omission on the part of Tenant, or used or occupied, or permitted to be used or occupied by anyone other than Tenant, or for any purpose other than as stated in the Fundamental Lease Provisions hereof, or be sublet, or offered or advertised for subletting, without the prior written consent of Landlord in every case, which consent shall not be unreasonably withheld. Tenant shall be responsible for all costs incurred by Landlord in considering and documenting any requested assignment or sublease, as well as Landlord's legal fees not to exceed $1,000. Consent by Landlord to any assignment, mortgaging or subletting shall not constitute a waiver of the necessity for such consent for any subsequent assignment, mortgaging or subletting. This prohibition includes any assignment, encumbrancing or subletting which would otherwise occur by operation of law, merger, consolida-tion, reorganization, transfer or other change of Tenant's corporate or proprietary structure, stock or equity. However, notwithstanding anything to the contrary contained herein, Tenant may encumber, assign, sell or otherwise convey up to 50 percent of Tenant’s stock or equity without being required to obtain written consent from Landlord.

(b) No assignment, subletting or licensing shall affect or reduce the liability of Tenant for the performance of the terms and provisions hereof.

(c) Tenant agrees that if a sublease is secured on the Premises and the rental rate under such sublease is greater than the rental rate hereunder, or if this Lease shall be assigned, and Tenant shall receive consideration in exchange for such assignment, Landlord shall receive fifty percent (50%) of this increased rental or consideration. If a sublease or assignment is executed, then any options to extend this Lease shall be voided, unless Landlord, in its sole discretion, shall agree to the contrary.

(d) In addition to Landlord=s right to approve or disapprove a proposed sublease or assignment, as hereinbefore set forth, Landlord shall have the right, to be exercised by giving notice to Tenant within thirty (30) days after receipt of Tenant=s notice as aforesaid, to recapture the Premises, or portion thereof, described in the proposed sublease or assignment. If notice of recapture is given, it shall serve to cancel and terminate this Lease with respect to the proposed sublease space, or, in the case of a proposed assignment, it shall serve to cancel and terminate the entire Term of this Lease, in either case as of the proposed effective date of any assignment or sublet and as fully and completely as if that date had been definitely fixed as the expiration of the Term of this Lease; provided, however, that no termination of this Lease with respect to all or part of the Premises shall become effective without the prior written consent, where necessary, of the holder of each mortgage to which this Lease is then subject. If this Lease be cancelled pursuant to the terms hereof with respect to less than the entire Premises, the Rent shall be adjusted on the basis of the proportion of the gross rentable square footage retained by Tenant to the gross rentable square footage originally demised and the lease so amended shall continue thereafter in full force and effect. The failure of Landlord to exercise its right of recapture shall not be construed in any manner to be an approval of Tenant=s request to assign or sublet, such approval to be effective only if given in writing by Landlord to Tenant.

23. PERFORMANCE BY TENANT

(a) Tenant covenants and agrees to perform all obligations herein expressed on its part to be performed or observed by it. If Landlord should send notice specifying action desired by Landlord in connection with any such obligations, Tenant agrees to promptly comply with the terms of such notice. If Tenant shall not commence and proceed diligently to comply with such notice to the satisfaction of Landlord within five (5) days after delivery thereof, Landlord may, in addition to any rights or remedies provided hereunder or at law, enter upon the Premises without terminating this Lease and do the things specified in said notice. Landlord shall have no liability to Tenant for any loss or damages resulting in any way from such action by Landlord, and Tenant agrees to pay promptly upon demand any expense incurred by Landlord in taking such action.

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(b) Notwithstanding anything in this Lease to the contrary, Landlord shall have the right to immediately enter the Premises to correct any situation which, in the sole discretion of Landlord, is deemed to be of an emergency nature. Landlord shall have no liability to Tenant for any loss or damages resulting in any way from such action by Landlord, and Tenant agrees to pay promptly upon demand any expense incurred by Landlord in taking such action. Tenant will provide Landlord with a key to allow entry to the Premises for this purpose.

24. BANKRUPTCY

If any sale of Tenant's interest in the Premises created by this Lease shall be made under execution or similar legal process, or if a voluntary or involuntary petition or answer proposing the adjudication of Tenant as a bankrupt or the reorganization of Tenant pursuant to the Federal Bankruptcy Act or any similar Federal or State proceeding is filed against Tenant and such petition or answer is not discharged or denied within thirty (30) days of the date of the filing thereof; or if Tenant shall be adjudicated a bankrupt or insolvent and such adjudication is not vacated within ten (10) days; or if a receiver or trustee shall be appointed for its business or property and such appointment shall not be vacated within ten (10) days; or if a corporate reorganization of Tenant or any arrangement with its creditors shall be approved by a court under the Federal Bankruptcy Act or any state bankruptcy law; or if Tenant shall make an assignment for the benefit of creditors; or if in any other manner Tenant's interest under this Lease shall pass to another by operation of law, Tenant shall be deemed to have breached a material covenant and Landlord may re-enter the Premises and/or declare this Lease and the tenancy hereby created terminated. Notwithstanding such termination, Tenant shall remain liable for all rent and damages which may be due at the time of such termination and shall be liable for the damages set forth in Section 26.

25. HAZARDOUS MATERIALS

(a) Tenant shall not cause to brought upon the Premises any (i) hazardous substance, pollutant or contaminant (as defined in Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. S9601, as amended by the Superfund Amendments and Re-authorization Act of 1986 (Pub. L.No. 99-499, 100 Stat. 1613 (1986) (SARA) or 40 CFR Part 261, whichever is applicable), or (ii) hazardous waste, residual waste or solid waste, as those terms are defined in Section 103 of the Pennsylvania Solid Waste Management Act, 35 P.S. S6018.103 and/or 25 PA Code SS75.260 and 75.261 and/or Hazardous Sites Cleanup Act, 35 P.S. S6020.101 et seq.

(b) If Tenant shall violate the foregoing covenant, and Landlord is thereafter identified in any litigation, administrative proceedings or investigation as a responsible party for any liability under the above referenced laws, Tenant shall indemnify and agrees to hold Landlord harmless from and against all loss, liability, damage, expense and costs arising out of Tenant's breach of the representations and covenants of this Section 25. The foregoing indemnification shall survive the expiration or termination of this Lease.

26. DEFAULT; REMEDIES

(a) Defaults. Subject to the provisions contained in subsection 26 (c) below, if any of the following shall occur:

(i) Tenant does not pay in full when due any installment of Annual Basic Rent, additional rent or any other charge or payment whether or not herein included as rent,

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(ii) Tenant violates or fails to perform or otherwise breaks any covenant, agreement or condition herein contained or any other obligation of Tenant to Landlord,

(iii) Tenant does not occupy the Premises within sixty (60) days after the Rent Commencement Date,

(iv) Tenant removes or attempts to remove Tenant's property from the Premises other than in the ordinary course of business without having first paid to Landlord in full all rent and any other charges that may have become due;

(v) Tenant or any guarantor of Tenant hereunder becomes the subject of commencement of an involuntary case under the federal bankruptcy law as now or hereafter constituted, or there is filed a petition against Tenant or any guarantor of Tenant hereunder seeking reorganization, arrangement, adjustment or composition of or in respect of Tenant or any guarantor of Tenant hereunder under the federal bankruptcy law as now or hereafter constituted, or under any other applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or seeking the appointment of a receiver, liquidator or assignee, custodian, trustee, sequestrator (or similar official) of Tenant or any guarantor of Tenant hereunder or any substantial part of the property of either Tenant or any guarantor of Tenant hereunder, or seeking the winding-up or liquidation of its affairs and such involuntary case or petition is not dismissed within sixty (60) days after the filing thereof, or if Tenant or any guarantor of Tenant hereunder commences a voluntary case or institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to the institution of bankruptcy or insolvency proceedings against it, under the federal bankruptcy laws as now or hereafter constituted, or any other applicable federal or state bankruptcy, reorganization or insolvency or other similar law, or consents to the appointment of or taking possession by a receiver or liquidator or assignee, trustee, custodian, sequestrator (or other similar official) of Tenant or any guarantor of Tenant hereunder or of any substantial part of its property, or makes any assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due, or fails to generally pay its debts as they become due, or if Tenant or any guarantor of Tenant hereunder takes any action in contemplation of any of the foregoing, then:

(b) Landlord's Remedies. If any such event set forth above, and at the sole option of Landlord, in addition to all remedies Landlord may have at law or in equity,

(i) The whole balance of rent and any other charges, whether or not payable as rent, for the entire balance of the term and any renewal or extension thereof for which Tenant has become bound, or any part of such rent and charges, and also all or any costs and sheriff's, marshall's, constable's or other officials' commissions, whether chargeable to Landlord or Tenant, including watchman's wages, shall be taken to be due and payable and in arrears as if by the terms of this Lease said balance of rent and such other charges and expenses were on that date payable in advance.

(ii) The term of this Lease shall terminate and become absolutely void, without notice and without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term, agreement or covenant broken.

(iii) THE FOLLOWING SECTIONS SET FORTH WARRANTS OF AUTHORITY FOR ANY ATTORNEY TO CONFESS JUDGMENT AGAINST THE TENANT, AND TO HAVE TENANT'S PROPERTY SEIZED OR OTHERWISE SUBJECTED TO ATTACHMENT OR OTHER EXECUTION PROCESS IMMEDIATELY AFTER THE CONFESSED JUDGMENT IS ENTERED. IN GRANTING THESE WARRANTS OF ATTORNEY, TENANT REPRESENTS TO LANDLORD THAT TENANT HAS HAD AN OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL ABOUT THIS MATTER, AND ACTS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS THE TENANT HAS OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS OF AND LAWS OF THE UNITED STATES OF AMERICA AND THE COMMONWEALTH OF PENNSYLVANIA.

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(B) Upon the expiration of the then current term of this Lease or the earlier termination or surrender hereof as provided in this Lease, it shall be lawful for any attorney of any Court of record to appear as attorney for Tenant, as well as for all persons claiming by, through or under Tenant, and to enter in any competent Court an action in ejectment against Tenant and all persons claiming by, through or under Tenant and therein confess judgment for the recovery by Landlord of possession of the Premises, for which a copy of this Lease, verified by affidavit, shall be sufficient warrant, whereupon if Landlord so desires a writ of possession or other appropriate writ under the Rules of Civil Procedure then in effect may issue forthwith, without any prior writ or proceedings; provided, however, if this Lease is terminated and the possession of the Premises remain in or be restored to Tenant, Landlord shall have the right for the same default and upon any subsequent default or defaults, or upon the termination of this Lease under any of the terms of the Lease to bring one or more further action or actions as hereinbefore set forth to recover possession of the Premises as provided above.

(C) In any action of ejectment, Landlord shall first cause to be filed in such action, an affidavit made by him, or someone acting for him, setting forth the facts necessary to authorize the entry of judgment and, if a true copy of this Lease (and of the truth of the copy such affidavit shall be sufficient evidence) be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of Court, custom or practice to the contrary notwithstanding.

(iv) If proceedings shall be commenced by Landlord to recover possession under the Acts of Assembly and Rules of Civil Procedure, either at the end of the term, or upon the earlier termination of this Lease, or for non-payment of rent or any other reason, tenant, specifically waives the right to the three months; notice and to the fifteen or thirty days' notice required by the Landlord and Tenant Act of 1951, and agrees that five (5) days' notice shall be sufficient in either or any such case.

(v) After re-entry or retaking or recovering of the Premises, whether by way of termination of this Lease or not, Landlord may lease the Premises or any part or parts thereof to such person or persons and upon such terms as may in Landlord's discretion seem best for a term within or beyond the term of this Lease, and Tenant shall be liable for any loss of rent for the balance of the term and any renewal or extension for which Tenant has become bound plus the costs and expenses of reletting and of making repairs and alterations to the Premises. Further, Tenant, for itself and its successors and assigns, hereby irrevocably constitutes and appoints Landlord as Tenant's agent to collect the rents due and to become due from all subleases and apply the same to the rent due hereunder without in any way affecting Tenant's obligation to pay any unpaid balance of rent due or to become due hereunder.

(vi) Landlord may (but shall not be obligated to do so), in addition to any other rights it may have in law or equity, cure such default on behalf of Tenant, and Tenant shall reimburse Landlord upon demand for all costs incurred by Landlord in curing such default, including, without limitation, reasonable attorneys' fees and other legal expenses, together with interest thereon at the interest rate specified in subsection 26 (g) below, which costs and interest thereon shall be deemed additional rent hereunder.

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(c) Notice of Default. Except as to defaults under subsections 26 (a) (i), (a) (iii), (a) (iv) and (a) (v), Landlord shall not exercise any right or remedy provided for in this Lease or allowed by law because of any default of Tenant, unless Landlord shall have first given written notice of such default to Tenant, and Tenant shall have failed within ten (10) days after such notice from Landlord to correct such default, or if such default is not susceptible of being corrected within the aforesaid ten (10) days, then provided Tenant shall have commenced such cure within the aforesaid ten (10) day period and shall diligently prosecute completion of same, Tenant shall have such additional time (not to exceed twenty (20) additional days) as Tenant may reasonably require to complete such cure; provided, however, that Landlord shall not be required to give, and Tenant shall not be entitled to the benefit of, any such notice or grace period (i) more than two (2) times in any twelve (12) month period, or (ii) if in Landlord's reasonable judgment, Tenant's delay in curing such default would materially jeopardize the Premises, Center, or any tenants thereof.

(d) Remedies Cumulative. All remedies available to Landlord hereunder and at law and in equity shall be cumulative and concurrent. No termination of this Lease nor taking or recovering possession of the Premises shall deprive Landlord of any remedies or actions against Tenant for rent, for charges or for damages for the breach of any covenant, agreement or condition herein contained, nor shall the bringing of any such action for rent, charges or breach of covenant, agreement or condition, nor the resort to any other remedy or right for the recovery of rent, charges or damages for such breach be construed as a waiver or release of the right to insist upon the forfeiture and to obtain possession. No re-entering or taking possession of the Premises, or making of repairs, alterations or improvements thereto, or reletting thereof, shall be construed as an election on the part of Landlord to terminate this Lease unless written notice of such election be given by Landlord to Tenant. The failure of Landlord to insist upon strict and/or prompt performance of the terms, agreements, covenant and conditions of this Lease or any of them, and/or the acceptance of such performance thereafter shall not constitute or be construed as a waiver of Landlord's right to thereafter enforce the same strictly according to the terms thereof in the event of a continuing or subsequent default.

(e) Expenses of Enforcement. In the event Landlord shall engage counsel as a result of any action by Tenant, regardless of whether litigation is instituted, Landlord shall be entitled to receive from Tenant the amount of Landlord's reasonable out-of-pocket legal fees and out-of-pocket expenses of counsel.

(f) Nonwaiver. Any failure of Landlord to enforce any remedy allowed for the violation of any provision of this Lease shall not imply the wavier of any such provision, even if such violation is continued or repeated and no express wavier shall affect any provision other than the one(s) specified in such waiver and only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way (i) alter the length of the term or of Tenant's right of possession hereunder, or (ii) after the giving of any notice, reinstate, continue or extend the term or affect any notice given to Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any rent due, and the payment of said rent shall not waive or affect said notice, suit or judgment.

(g) Interest Rate. If any sums which Tenant is obligated to pay to Landlord are not paid when due, they shall bear interest at the rate of eighteen percent (18%) per annum (but in no event at a rate in excess of the highest rate allowed by law).

(h) Late Charge. Tenant shall pay a "late charge" of eight percent (8%) (but in no event to exceed the highest lawful rate) of any installment of Annual Basic Rent (or any other charge or payment considered additional rent under this Lease) when paid more than seven days after the due date thereof, to cover the administrative expense involved in handling delinquent payments.

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27. REMEDIES CUMULATIVE

Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord or Tenant of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the party in question of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise.

28. SUBORDINATION; ATTORNMENT

(a) Tenant's rights under this Lease are and shall always be subordinate to the operation and effect of any lease of land only or of land and buildings in a sale-leaseback transaction, any mortgage, deed of trust or other security instrument now or hereafter placed upon the Center or any part or parts thereof by Landlord. This clause shall be self-operative, and no further instrument of subordination shall be required. In confirmation thereof, Tenant shall execute such further assurances as may be requisite. In addition, Tenant agrees to attorn to any successor in interest to Landlord whether by purchase, fore-closure, sale in lieu of foreclosure, power of sale, termination of any lease of land only or land and buildings in a sale-leaseback transaction or otherwise, if so requested or required by such successor in interest, and Tenant agrees, upon demand, to execute such agreement or agreements in confirmation of such attornment.

(b) Landlord or its mortgagee, any ground lessor or other similar secured party, may, at their option, make this Lease superior to any such mortgage, ground lease or other security instrument by giving Tenant ten (10) days prior written notice. No other documentation shall be necessary to affect such change.

(c) If any person shall succeed to all or part of Landlord's interest in the Premises upon the exercise of any remedy provided for in any mortgage of the Premises now or hereafter recorded to which this Lease is prior as provided in subsection 28 (a) above, (i) Tenant shall attorn and recognize such person as Tenant's landlord as above provided and this Lease shall continue in full force and effect as a direct lease between such person and Tenant as fully and with the same force and effort as if this Lease had originally been entered into by such person and Tenant, except that such person shall not be liable for any act or omission of Landlord prior to such person's succession to title nor be subject to any offset, defense or counterclaim accruing prior to such person's succession to title, nor be bound by any payment of Annual Basic Rent or on account of the Tax Charge or Operating Costs made more than one month in advance (except for payments in the nature of security deposits), nor be bound by any modification of this Lease or any waiver, compromise, release or discharge of any obligation of Tenant hereunder unless such modification, waiver, compromise, release or discharge shall have been specifically consented to in writing by the mortgagee under said mortgage, and (ii) such person and each person succeeding to its interest in the Premises shall not be liable for any warranty or guaranty of Landlord under the Lease and shall be liable for the performance and observance of the other covenants and conditions to be performed and observed by Landlord under this Lease only with respect to the period during which such person shall own such interest.

(d)(i) Tenant agrees that at any time and from time to time at reasonable intervals, within ten (10) days after written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord and/or to such assignee, mortgagee or other similar secured party as may be designated by Landlord, a certificate stating that this Lease is unmodified and in full force and effect (or that the same is in full force and effect as modified, listing the instruments of modification), the dates to which rent and other charges have been paid, and whether or not to the best of Tenant's knowledge Landlord is in default hereunder (and if so, specifying the nature of the default), it being intended that any such statement delivered pursuant to this paragraph may be relied upon by a mortgagee, ground lessor or assignee of Landlord's interest in the Center.

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(ii) The failure of Tenant to execute and deliver such certificate shall constitute a default hereunder, in which event Landlord, in addition to all other remedies available to it for such default, is hereby authorized, as attorney and agent of Tenant, to execute such certificate and in such event Tenant hereby confirms and ratifies any such certificate executed by virtue of the power of attorney hereby granted.

29. SUCCESSORS AND ASSIGNS

This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord, its successors in trust, successors and assigns, and shall be binding upon Tenant, its successors and assigns and shall inure to the benefit of Tenant and only such assigns of Tenant to whom the assignment of Tenant has been consented to in writing by Landlord as herein provided.

30. NOTICES

(a) All notices from Tenant to Landlord shall be in writing directed to Landlord at the address of Landlord set forth in the Fundamental Lease Provisions. All notices from Landlord to Tenant shall be in writing directed to Tenant at the address set forth in the Fundamental Lease Provisions. Either party may designate in writing a substitute address for notices, and thereafter notices shall be directed to such substitute address. Notices shall be given by certified mail, return receipt requested or express delivery service.

(b) After receiving notice from any person, firm or other entity that it holds a mortgage which includes the Premises as part of the mortgaged premises, or that it is the ground lessor under a lease with Landlord, as ground lessee, which includes the Premises as part of the demised premises, no notice from Tenant to Landlord shall be effective unless and until a copy of the same is given to such holder or ground lessor, and the curing of any of Landlord's defaults by such holder or ground lessor shall be treated as performance by Landlord. For the purposes of this Lease, the term "mortgage" when used in the context of a landlord's mortgage includes a mortgage on a leasehold interest of Landlord (but not one on Tenant's interest).

31. APPLICABLE LAW

This Lease shall be construed under the laws of the state in which the Center is located.

32. CAPTIONS AND HEADINGS

Captions and headings are for convenience and reference only.

33. JOINT AND SEVERAL LIABILITY

If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership, or other business association to pay rent and perform all other obligations hereunder shall be deemed to be joint and several. In like manner, if the Tenant named in this Lease shall be a partnership or other business association, the members of which are, by virtue of statute or general law, subject to personal liability, the liability of each such member shall be joint and several.

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34. BROKERAGE COMMISSION

Each of the parties represents and warrants that there are no claims for brokerage commissions or finder's fees in connec-tion with the execution of this Lease, and agrees to indemnify the other against, and hold it harmless from, all liabilities arising from any such claim (including, without limitation, the cost of counsel fees in connection therewith).

35. NO OPTION

The submission of this Lease to Tenant for examination does not constitute a reservation of or option for the Premises, and this Lease becomes effective only upon execution and delivery thereof by Landlord.

36. NO MODIFICATION

This Lease and the Schedules or Exhibits attached hereto are intended by the parties as a final expression of their agreement and as a complete and exclusive statement of the terms thereof, all negotiations, consideration and representations between the parties having been incorporated herein. No course of prior dealings between the parties or their affiliates shall be relevant or admissible to supplement, explain or vary any of the terms of this Lease. Acceptance of, or acquies-cence in, a course of performance rendered under this or any prior agreement between the parties or their officers, employees, agents or affiliates shall not be relevant or admissible to determine the meaning of any of the terms of this Lease. No representations, understandings or agreements have been made or relied upon in the making of this Lease other than those specifically set forth herein. This Lease can only be modified by a writing signed by all of the parties hereto or their duly authorized agents.

37. SEVERABILITY

If any term or provision, or any portion thereof, of this Lease, or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.

38. THIRD PARTY BENEFICIARY

Nothing contained in this Lease shall be construed so as to confer upon any other party the rights of a third party beneficiary as to any provision contained herein.

39. TRANSFER BY LANDLORD

In the event of any sale, transfer or other disposition of Landlord's interest in the Center, Landlord shall automatically and without any further act or instrument be released and relieved of and from any and all obligations and liabilities of Landlord accruing from and after the date of such transfer and in such event Landlord's successor or transferee by accepting such sale, transfer and assignment shall hereby automatically assume and be liable for all obligations and liabilities of Landlord which accrue from and after such sale or transfer and Tenant agrees to look solely to such successor or transferee for the perform-ance of any such duties and obligations and in satisfaction of all such liabilities under this Lease.

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40. LIMITATION OF LIABILITY OF LANDLORD

Any agreement, obligation or liability of Landlord is made, entered into or incurred on the express condition that Tenant's only recourse under this Lease or otherwise in the event of a default by Landlord of any such agreement, obligation or liability of Landlord hereunder or otherwise, shall be limited to Landlord's interest in the Center.

41. PARKING

(a) Landlord agrees that Tenant and Tenant's employees, guests and invitees shall have the non-exclusive right, in common with others entitled thereto, to utilize the parking area located on the Center except that Tenant, its employees, invitees and guests shall not have the right to use parking spaces which are reserved for handicapped parking or which are otherwise set aside or reserved by Landlord.

(b) Tenant's use of all parking areas shall be subject to any rules and regulations relating thereto included from time to time in the Center's Rules and Regulations (including the establishment of a parking area for the employees of tenants). Landlord shall not be responsible for any vandalism or other damages from any cause occurring to automobiles or their contents while located in such parking spaces or moving in the parking area.

42. SUBSTITUTE SPACE

In the event that a tenant or occupant of the Center desires to expand its premises into the Premises or if a proposed tenant desires to lease space which includes the Premises, if Landlord so requests, Tenant shall vacate the Premises and relinquish its rights with respect to the same provided that Landlord shall provide to Tenant substitute space in the Center, such space to be reasonably comparable in size, layout, finish, visibility, accessibility and utility to the Premises, and further provided that said substitute space does not have a material adverse affect on Tenant in conducting Tenant’s business, and that Landlord shall, at its sole cost and expense, move Tenant and its removable property from the Premises to such new space in such manner as will minimize, to the greatest extent practicable, undue interference with the business or operations of Tenant. Any such substitute space shall, from and after such relocation, be treated as the Premises under this Lease and shall be occupied by Tenant under the same terms, provisions and conditions as are set forth in this Lease.

43. COVENANTS AND CONDITIONS

All of the covenants of Tenant hereunder shall be deemed and construed to be "conditions", if Landlord so elects, as well as "covenants" as though the words specifically expressing or importing covenants and conditions were used in each separate instance.

44. TIME OF ESSENCE

Time is of the essence of this Lease and each of its provisions.

45. MODIFICATIONS FOR LENDER

If in connection with obtaining financing or re-financing for the Center, the lender shall request reason-able modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder.

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46. HOLDING OVER

Any holdover by Tenant after the expiration of the term of this Lease shall be treated as a daily tenancy at sufferance at a rate equal to two (2) times the Annual Basic Rent plus other additional rent charges herein provided (pro-rated on a daily basis) and shall otherwise be on the terms and conditions set forth in this Lease as far as applicable.

47. RULES AND REGULATIONS

Landlord shall have the right from time to time to prescribe rules and regulations which, in its judgment, may be desirable for the use, entry, operation and management of the Premises and Center each of which rules and regulations and any amendments thereto shall become a part of this Lease without further action of the parties. Tenant shall comply with all such rules and regulations.

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48. TITLE

Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.

49. PRIOR LEASE

On the Rent Commencement Date, the existing Lease Agreement, between Landlord and Tenant for other space in the Center shall automatically terminate, and Tenant shall vacate such premises on or before that date. Tenant shall be responsible for compliance with all terms and conditions of such prior lease to the extent they relate to the period prior to its termination date, or expressly survive lease termination.

50. WAIVER OF JURY TRIAL

LANDLORD AND TENANT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER, ON OR IN RESPECT TO ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT HEREUNDER, TENANT'S USE OR OCCUPANCY OF THE PREMISES AND/OR CLAIM OF INJURY OR DAMAGES.

IN WITNESS WHEREOF Landlord and Tenant, intending to be legally bound hereby, have each duly executed this Lease under their respective seals as of the day and year first above written.

UNITED BANK OF PHILADELPHIA(Tenant)

By: ______________________________________________

Its: _____________________________________________

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PROGRESS TRUST, INC. (Landlord)

By: _____________________________________________

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EXHIBIT “B”

LANDLORD’S WORK

Landlord shall perform the work set forth herein prior to delivery of the Premises to Tenant. Any work beyond that set forth herein required to enable Tenant to operate its business in the Premises shall be the sole responsibility of Tenant.

1.FLOORING: Concrete floors throughout ready for Tenant's finish.

2.WALLS: Provide unpainted and insulated drywall (taped and spackled) along the front and side walls. The rear wall shall be exposed uninsulated Concrete Masonry Units or brick. Demising walls between stores shall extend to the underside of the roof deck.

3.STORE DOORS: Storefront with doors per plans approved by Landlord and Tenant. Panic hardware will be provided on the rear door or as required by applicable building codes.

4.WINDOWS. Windows will be supplied in accordance with plans approved by Landlord and Tenant.

5.PLUMBING: Rough-in ¾ inch water service shall be provided at location per approved plans. Landlord shall provide individual meter.

6.HEATING, VENTILATION AND AIR CONDITIONING (HVAC): A new self contained heating and air conditioning roof top unit is included and is sized based on one (1) ton per 400 square feet of floor area. One drop supply duct and return lined duct into Tenant's space is included. Branch ductwork, diffusers and return air grilles, are not included and are to be supplied by the Tenant. Tenant is responsible for maintenance and cost of the HVAC system servicing Tenant's Premises utilizing Landlord approved contractor.

7.ELECTRICAL: 200 amp 208/120 service panel and meter at location per approved plans. .

8.FIRE PROTECTION: Tenant space shall be sprinklered in applicable codes and delivered with heads turned up. Any modifications required shall be the responsibility of the Tenant.

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EX-10.K

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT, effective as of October 2, 2006 (the “Effective Date”) between United Bank of Philadelphia, a bank organized and incorporated under the laws of the Commonwealth of Pennsylvania, with offices at 30 S. 15^th Street (the “Bank”) and Terrence D. Barclift (the “Executive”), who resides at 201 N. 8^th Street, Unit 204; Philadelphia, Pennsylvania 19106.

WITNESSETH:

WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-charted commercial bank; and

WHEREAS, the Executive is currently serving as Senior Vice President and Senior Lending Officer of the Bank; and

WHEREAS, the Bank desires to continue to have the benefits of the Executive’s services as Senior Vice President and Senior Lending Officer and the Executive desires to continue to serve in such capacity for the Bank;

WHEREAS, the parties desire to enter into this Employment Agreement setting forth the terms and conditions of the employment relationship between the Bank and the Executive;

NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein the Bank and the Executive, each intending to be legally bound hereby, agree as follows:

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 1 of 7

1.   Duties and Term.  

a.Duties and Authority. The Bank hereby employs the Executive to serve in the capacity of Senior Vice President and Senior Lending Officer of the Bank and the Executive agrees to continue in employment in such capacity with the Bank from the Effective Date hereof through the term of this Agreement. As Senior Vice President and Senior Lending Officer, the Executive will be responsible for the development and management of commercial lending business for the Bank. He will provide oversight to the entire lending process with direct guidance to the relationship managers and the underwriting/credit process. In addition, the executive will develop, update and oversee the Bank’s Loan Policy to ensure sound asset quality practices are adhered to on an ongoing basis. His leadership will also be required in the Bank’s overall strategic planning process to ensure that appropriate goals and strategies are outlined to ensure that the loan portfolio is key to the Bank achieving and sustaining profitability.

b.Devotion to Duties. During the term of this Agreement, the Executive will devote substantially all of his skill, knowledge and working time to the conscientious performance of his duties, except for vacation time in accordance with the Employer’s vacation policies and Section 2(e), absence for sickness or similar disability in accordance with the Employer’s paid time off policies, and authorized leaves of absence. To the extent that it does not significantly interfere with the performance of the Executive’s duties hereunder, it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, if and to the extent approved by the Board, and (ii) manage personal investments.

c.Term of Agreement. The term of the Executive’s employment under this Agreement shall commence upon the Effective Date of this Agreement and shall continue until September 30, 2008 unless the employment of the Executive is sooner terminated pursuant to Section 3, 4, or 5 of this Agreement. The term of this Agreement shall be extended upon

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 2 of 7

agreement of the parties at any time prior to the expiration date. The period during which the Executive is employed pursuant to this Agreement shall be referred to as the “Employment Term.”

2.   Compensation.  

a.Base Salary. During the first year of the Employment Term, the Bank shall pay the Executive an annual base salary (“Base Salary”) of $110,000 payable in equal bi-weekly installments or as the parties otherwise agree. Executive Management will review the Executive’s Base Salary annually during the Executive’s Employment Period and, at its discretion, may increase (but not decrease) such Base Salary from time to time based upon the performance of the Executive, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Board shall consider relevant. Any increase in annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement.

b.Annual Bonus. During each year of the Employment Term, the Executive shall have the opportunity to receive an annual cash bonus (“Annual Bonus”) for each fiscal year. The specifics of the bonus/incentive program is being developed and will be attached to this Agreement as Addendum A.

c.Employee Benefit Plans. During the Employment Term, the Executive shall be entitled to participate in all retirement, health and other welfare plans maintained by the Bank, as they may be established or amended from time to time, at levels commensurate with his then current period of service, compensation, and position.

d.Life Insurance. The Bank shall provide term life insurance on the life of the Executive payable to the beneficiary designated by the Executive in an amount equal to two times his Base Salary.

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 3 of 7

e.Vacation. The Executive shall be entitled to four (4) weeks of vacation per year, which shall be taken at such time or times as the Executive and the Bank reasonably agree.

f.Reimbursement of Expenses. The Bank shall reimburse the Executive for all items of travel, entertainment and other expense reasonably incurred by him on behalf of the Bank upon presentation to the Bank of appropriate documentation reflecting such items of expense.

g.Automobile Allowance. The Bank shall reimburse the Executive for the cost of leasing an automobile and the cost of insurance on such automobile up to a maximum amount of $500 per month.

3.   Death or Total Disability of the Executive.  

a.Death. In the event of the death of the Executive during the Employment Term, this Agreement shall terminate effective as of the date of the Executive’s death, and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof.

b.Total Disability. In the event of the Total Disability, as that term is defined in this Section 3(b), of the Executive for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Executive’s employment hereunder after such 90 consecutive days of Total Disability by giving the Executive 30 days’ written notice thereof and, upon expiration of such 30-day period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder; except as set forth in Section 5 hereof. The term “Total Disability,” as used in this Section 3(b), shall mean a mental, emotional or physical injury, illness or incapacity which, in the reasonable opinion of the Bank, renders the Executive unable to perform the principal duties, functions and responsibilities required of him hereunder.

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 4 of 7

4.Discharge for Cause. The Bank may immediately discharge the Executive and terminate his employment hereunder for the following reasons: (i) conviction for commission of any felony, or an equivalent offense involving dishonesty with respect to the Bank, during the Employment Term; (ii) the willful engaging by the Executive in conduct or willfully failing to act in accordance with his duties, which is demonstrably and materially injurious to the Bank, whether monetarily or otherwise, including acts and omissions that constitute gross negligence; (iii) the Executive’s commission of an act of material dishonesty or fraud in his duties; (iv) the continual and willful failure to perform his duties after being given a 30-day written notice thereof and a reasonable opportunity to be heard and improve; or (v) his breach of any fiduciary duty owing to the Bank. No act or failure to act by an Executive shall be considered “willful” unless done or not done by the Executive in bad faith and without reasonable belief that the Executive’s action or omission was in the best interest of the Bank. Upon discharge by the Bank in accordance with this Section 4, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, other than as set forth in Section 5 hereof.

5.Termination of this Agreement for Reasons Other than Discharge for Cause.

a.General. Except as otherwise provided in Section 5(b), upon termination of this Agreement, all obligations of the Bank and the Executive shall immediately cease; provided, however, the Bank shall pay the Executive the unpaid portion, if any, of the Executive’s Base Salary accrued for the period up to the date of termination and payable to the Executive pursuant to Section 2(a) hereof, and all vested, nonforfeitable amounts owing and accrued at the date of termination under any compensation or benefit plan, program, or arrangements in which the Executive theretofore participated, under the terms and conditions of such plans, programs, and arrangements.

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 5 of 7

6.Amendments. No provisions of the Agreement may be modified, waived, or discharged unless such modification, waiver or discharge is approved by the Board or a person authorized thereby and is agreed to in writing by the Executive and such officer as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions.

7.Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

8.Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles, except as insofar as federal law may be applicable.

9.Assignment. This Agreement is personal to each of the parties. Neither party may assign or delegate any of its, or his, rights or obligations without the prior written consent of the other.

10.Notices. All notices, consents and other communications to be given hereunder shall be in writing and shall be delivered personally or sent by certified mail, return receipt requested, postage prepaid, and addressed to the parties at their respective addresses set forth in the first paragraph of this Agreement. Any party may from time to time change its address for purposes of notices to that party by notice specifying a new address, but no change shall be deemed to have been given until it is actually received by the party to whom the notice is being given.

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 6 of 7

11.Entire Agreement. Except as otherwise expressly provided herein, this Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Executive by any other person or entity) are merged herein and superseded hereby.

IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Executive this 23^rd day of August, 2006.

UNITED BANK OF PHILADELPHIA

BY: /s/ Evelyn F. Smalls

President and Chief Executive Officer

/s/ L. Armstead Edwards

Chairman of the Board

/s/ Terrence D. Barclift

Terrence D. Barclift

EMPLOYMENT AGREEMENT WITH

TERRENCE D. BARCLIFT

Page 7 of 7

EX-31.1

CERTIFICATIONS

I, Evelyn F. Smalls, Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of United Bancshares, Inc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this annual report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  April 5, 2007/s/ Evelyn F. Smalls

Evelyn F. Smalls, Chief Executive Officer

EX-31.2

CERTIFICATIONS

I, Brenda Hudson-Nelson, Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of United Bancshares, Inc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this annual report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 5, 2007/s/ Brenda Hudson-Nelson

Brenda Hudson-Nelson, Chief Financial Officer

EX-32.1

Certification Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of United Bancshares, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Evelyn F. Smalls, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. '1350, as adopted pursuant to '906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Evelyn F. Smalls

Evelyn F. Smalls

Chief Executive Officer

April 5, 2007

EX-32.2

Certification Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of United Bancshares, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brenda M. Hudson-Nelson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. '1350, as adopted pursuant to '906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Brenda M. Hudson-Nelson

Brenda M. Hudson-Nelson

Chief Financial Officer

April 5, 2007