SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 OR

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________

UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

0-25976

Commission File Number

Pennsylvania	23-2802415
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

30 S. 15th Street, Suite 1200, Philadelphia, PA	19102
(Address of principal executive office)	(Zip Code)

(215) 351-4600

(Registrant's telephone number, including area code)

N/A

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

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes _X_ No____

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

Large accelerated filer___ Accelerated filer___ Non-accelerated filer_X_ Smaller Reporting Company ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes_____ No_X__

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No _____  Not Applicable.

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

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 a Series 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.  As of October 31, 2008, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).  There are 33,500 shares of Common Stock held in treasury stock at October 31, 2008.

The Series Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A of which 111,842 shares are issued and outstanding and 31,308 shares are held in treasury stock as of October 31, 2008.

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FORM 10-Q

Index

Item No. Page

PART I-FINANCIAL INFORMATION

1.	Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
3.	Quantitative and Qualitative Disclosures about Market Risk	22
4.	Controls and Procedures	23
PART II-OTHER INFORMATION
1.	Legal Proceedings	23
1A.	Risk Factors	23
2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
3.	Defaults upon Senior Securities	24
4	Submission of Matters to a Vote of Security Holders	24
5.	Other Information	24
6.	Exhibits	24

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Item1. Consolidated Financial Statements (unaudited)

Consolidated Balance Sheets

	(unaudited)
	September 30,			December 31,
	2008			2007
Assets
Cash and due from banks		2,595,227			3,875,911
Interest bearing deposits with banks		294,482			289,095
Federal funds sold		3,717,000			9,755,000
Cash & cash equivalents		6,606,709			13,920,006
Investment securities:
Held-to-maturity, at amortized cost(fair value of $9,310,740.		9,328,065			10,466,053
and $10,493,820 at September 30, 2008 and December 31, 2007, respectively)
Available-for-sale, at market value		3,030,316			3,470,363
Loans , net of unearned discount		49,764,828			45,183,839
Less: allowance for loan losses		(953,202	)		(589,526	)
Net loans		48,811,626			44,594,313
Bank premises & equipment, net		1,587,951			966,494
Accrued interest receivable		464,774			399,243
Core deposit intangible		892,565			1,026,124
Prepaid expenses and other assets		382,620			393,855
Total Assets		71,104,626			75,236,451
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing		12,404,508			12,762,066
Demand deposits, interest bearing		11,539,208			11,712,926
Savings deposits		17,174,671			19,912,673
Time deposits, $100,000 and over		12,307,685			13,380,822
Time deposits		8,813,241			8,315,998
		62,239,314			66,084,485
Accrued interest payable		116,822			134,845
Accrued expenses and other liabilities		512,166			331,711
Total Liabilities		62,868,302			66,551,041
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value,		1,368			1,368
500,000 shrs auth., 136,842 issued
Common stock, $.01 par value; 2,000,000 shares authorized;
876,921 shares issued and outstanding		8,769			8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
191,667 shares issued and outstanding		1,917			1,917
Treasury Stock, 33,500 common shares and 6,308 shares preferred, at cost
Additional-paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(6,541,841	)		(6,082,165	)
Net unrealized gain on available-for-sale securities		16,261			5,669
Total Shareholders' equity		8,236,324			8,685,410
		71,104,626			75,236,451

See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.

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Consolidated Statements of Operations
(unaudited)
	Quarter ended			Quarter ended		Nine months ended			Nine months ended
	September 30,			September 30,		September 30,			September 30,
	2008			2007		2008			2007
Interest Income:
Interest and fees on loans		859,632			910,457		2,528,326			2,625,652
Interest on investment securities		155,493			189,241		457,566			571,013
Interest on Federal Funds sold		24,757			131,667		123,611			419,339
Interest on time deposits with other banks		1,859			4,471		5,592			12,356
Total interest income		1,041,741			1,235,836		3,115,095			3,628,360
Interest Expense:
Interest on time deposits		131,885			192,119		438,948			573,759
Interest on demand deposits		27,525			49,557		93,762			124,951
Interest on savings deposits		20,825			84,537		83,636			219,122
Total interest expense		180,235			326,213		616,346			917,832
Net interest income		861,506			909,623		2,498,749			2,710,528
Provision for loan losses		278,000			10,000		293,000			70,000
Net interest income less provision for
loan losses		583,506			899,623		2,205,749			2,640,528
Noninterest income:
Customer service fees		133,496			150,093		423,235			426,085
ATM activity fees		125,529			109,198		338,016			346,463
Loan Syndication Fees		0			25,000		80,000			95,000
Other income		17,315			16,920		54,431			110,751
Total noninterest income		276,340			301,211		895,682			978,299
Non-interest expense
Salaries, wages, and employee benefits		391,950			410,341		1,194,411			1,222,625
Occupancy and equipment		278,232			281,680		818,689			771,059
Office operations and supplies		81,535			79,024		252,176			234,655
Marketing and public relations		35,985			17,815		83,207			90,797
Professional services		62,500			52,487		168,748			186,111
Data processing		129,480			116,292		380,009			341,434
Deposit insurance assessments		42,000			40,200		120,193			114,397
Other noninterest expense		186,629			197,640		543,675			583,353
Total non-interest expense		1,208,311			1,195,479		3,561,108			3,544,431
Net income	$	(348,465	)	$	5,355	$	(459,677	)	$	74,396
Earnings per share-basic	$	(0.33	)	$	0.005	$	(0.43	)	$	0.07
Earnings  per share-diluted	$	(0.33	)	$	0.005	$	(0.43	)	$	0.07
Weighted average number of shares		1,068,588			1,068,588		1,068,588			1,068,588

See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.

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Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2007
Cash flows from operating activities
Net income (loss)	$	(459,677	)	$	74,396
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses		293,000			70,000
Depreciation and amortization		356,005			350,737
Decrease in accrued interest receivable and other assets		(54,296	)		80,090
Increase in accrued interest payable and other liabilites		162,432			62,214
Net cash provided by operating activities		297,465			637,436
Cash flows from investing activities
Purchase of investments-Available-for-Sale	$	0			(504,359	)
Purchase of investments-Held-to-Maturity		(5,253,199	)		(3,275,751	)
Proceeds from maturity & principal reductions of investments-Available-for-Sale		454,765			340,447
Proceeds from maturity & principal reductions of investments-Held-to-Maturity		6,383,696			4,665,432
Net increase in loans		(4,510,313	)		(620,093	)
Purchase of loans		0			(1,718,061	)
Purchase of premises and equipment		(840,539	)		(306,332	)
Net cash used in investing activities		(3,765,590	)		(1,418,717	)
Cash flows from financing activities
Net (decrease)increase in deposits		(3,845,171	)		1,473,084
Net cash used in (provided by) financing activities		(3,845,171	)		1,473,084
Decrease in cash and cash equivalents		(7,313,297	)		691,803
Cash and cash equivalents at beginning of period		13,920,006			12,619,159
Cash and cash equivalents at end of period	$	6,606,709			13,310,962
Supplemental disclosures of cash flow information
Cash paid during the period for interest	$	598,323			909,597

See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

United Bancshares, Inc. (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956.  The Company's principal activity is the ownership and management of its wholly owned subsidiary, United Bank of Philadelphia (the "Bank").

During interim periods, the Company follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission.  Readers are encouraged to refer to the Company's Form 10-K for the fiscal year ended December 31, 2007 when reviewing this Form 10-Q.  Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of September 30, 2008 and December 31, 2007 and the consolidated results of its operations for the three and nine month periods ended September 30, 2008 and 2007, and its consolidated cash flows for the nine month periods ended September 30, 2008 and 2007.

2.  Share Based Payment

In 1998, the Company adopted a Stock Option Plan.  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.  These options remain outstanding and exercisable at September 30, 2008.

The Bank utilizes fair value based accounting for stock-based compensation with 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 nine months ended September 30, 2008 and 2007 as no options were granted under the Plan during these periods.  All options were fully vested at December 31, 2007 and remain outstanding at September 30, 2008.

3.  Comprehensive Income

Total comprehensive income includes net income and other comprehensive income or loss that is comprised of unrealized gains and losses on investment securities available for sale, net of taxes.  The Company’s total comprehensive income (loss) for the three months ended September 30, 2008 and 2007 was a loss of $(343,250)  and income of $27,957, respectively, and for the nine months ended September 30, 2008 and 2007 was a loss of $(449,085) and income of $82,122, respectively. The difference between the Company’s net income (loss) and total comprehensive income for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.

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4.  Net Income(Loss) Per Share

 The calculation of net income per share follows:

	Nine Months Ended September 30, 2008	Nine Months Ended September 30, 2007
Basic:
Net income (loss) available to shareholders	$(459,677)	$74,396
Average common shares outstanding-basic	1,065,088	1,065,088
Net income (loss) per share-basic	($0.42)	$0.07
Fully Diluted:
Average common shares-fully diluted	1,065,088	1,065,088
Net income (loss) per share-fully diluted	($0.42)	$0.07

Options to purchase 29,694 shares of common stock are not included in the computation of diluted EPS 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.

5.   New Accounting Pronouncements

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

6.  Fair Value

Effective January 1, 2008, the Company adopted SFAS 157 Fair Value Measurement, which provides a framework for measuring fair value under generally accepted accounting principles.   SFAS 157 applies to all financial instruments that are being measured and reported on a fair value basis with the exception of nonfinancial assets and nonfinancial liabilities that are recognized and disclosed at fair value on a non-recurring basis for which fair value disclosures have been delayed under FASB Staff Position (FSP) No. SFAS 157-2 “Effective date of FASB Statement No. 157” to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

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

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Fair Value Measurement

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

Level 1

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

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

Level 2

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

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

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

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

Level 3 Inputs

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

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

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

Fair Value on a Recurring Basis

The table below presents the balances of assets and liabilities on the consolidated balance sheets at their fair value as of September 30, 2008 by level within the SFAS No. 157 fair value measurement hierarchy.

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(in 000’s)  Fair Value Measurements at Reporting Date Using:

	Assets/Liabilities Measured at Fair Value at September 30, 2008	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant other observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets: Investment securities available-for-sale	$3,030		$3,030	-

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

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets and liabilities carried on the consolidated balance sheets by level within the SFAS No. 157 hierarchy as of September 30, 2008, for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2008.

  Carrying Value at September 30, 2008:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant other observable Inputs (Level 2)	Significant Unobservable Inputs  (Level 3)	Total Fair Value Losses for the Nine Months Ended September 30, 2008
Assets: Impaired Loans	$ 2,556	-	-	$ 2,556	$285

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

The valuation allowance for impaired loans is included in the allowance for loan and lease losses in the consolidated balance sheets.  The valuation allowance for impaired loans at September 30, 2008 was $451,478.  Fair value losses increased approximately $266,000 for the nine months ended September 30, 2008.

6. Critical Accounting Policies

Allowance for Loan Losses

The Bank considers that the determination 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. The following table presents an analysis of the allowance for loan losses.

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(in 000’s)	Nine months ended September 30, 2008	Nine months ended September 30, 2007
Balance at January 1	$590	$561
Charge-offs:
Commercial loans	(26)	(91)
Consumer loans	(43)	(126)
Total charge-offs	(69)	(217)
Recoveries	138	114
Net recoveries(charge-offs)	69	(103)
Additions charged to operations	293	70
Balance at September  30	$952	$528

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 Company 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.

Special Cautionary Notice Regarding Forward-looking Statements

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 or 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 companies, 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 and the war in Iraq) and the U.S. Government’s response to those events or the U.S. Government becoming involved in an additional conflict in a foreign country; (i) the accuracy of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities; (j) technological changes being more difficult or expensive than anticipated; (k) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (l) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; and (m) UBS’ success in managing the risks involved in the foregoing.

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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 document are based upon information presently available and UBS assumes no obligation to update any forward-looking statement.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

In response to the financial crisis affecting the overall banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted.  On October 14, 2008 the United States Treasury and banking regulators announced in a joint statement the details of new government programs under EESA.  These programs are the Trouble Asset Relief Program (“TARP”) and the FDIC Temporary Liquidity Guaranty Program (“TLGP”).  Under TARP, the Treasury will use $250 billion of its $700 billion available under EESA to purchase $125 billion of preferred stock in nine major financial institutions.  The remaining $125 billion will be available for the purchase of preferred stock in qualified smaller financial institutions.  The preferred stock would pay a five percent per annum dividend for the first five years and a nine percent per annum dividend thereafter.  The Treasury will receive warrants to purchase a participating institution’s common stock equal to fifteen percent of the Treasury’s total investment in the participating institution.  The participating institution’s executives must agree to certain compensation restrictions and the participating institutions must agree to certain other restrictions.  

In addition to creation of TARP, the EESA included a provision increasing the amount of deposits insured by the FDIC from $100,000 to $250,000 until December, 2009.  Under TLGP, the FDIC is temporarily providing a one hundred percent guaranty of the senior debt of all FDIC insured institutions and their holding companies, as well as deposits in non-interest bearing transaction deposit accounts.  Non-interest bearing deposit transaction accounts under this program will have full insurance coverage through December 31, 2009.  All FDIC institutions will be immediately covered for the first thirty days at no charge.  After the initial thirty days or December 5, 2008, institutions may elect to opt out of the program by giving notice to the FDIC.  Those institutions that do not opt out of the program will be charged a ten basis point fee on deposit amounts in excess of $250,000.

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Also, under TLGP, senior unsecured debt issued before June 30, 2009 will be fully insured.  All FDIC insured institutions will be covered immediately under this program for the first thirty days at no charge.  After thirty days or December 5, 2008, an institution may elect to opt out.  If an institution does not opt out of the program, it will incur an annualized fee of seventy-five basis points on the amount of debt insured under this program.  Coverage of newly issued debt will extend to June 30, 2012, even if the maturity of the debt is after that date.  The newly issued unsecured senior debt covered by the program includes promissory notes, commercial paper, interbank funding and any unsecured portion of secured debt.

The Company has made the decision to participate in the TLGP program.  There is no assurance that the recently enacted legislation will stabilize the financial industry as intended and that it is difficult to accurately determine the impact participating or not participating in these programs will have on the Company.

Overview

The Bank incurred a net loss of $348 thousand ($0.32 per common share) for the quarter ended September 30, 2008 compared to net income of $5 thousand ($0.005 per common share) for the quarter ended September 30, 2007.  The Bank had a net loss of $460 thousand ($0.42 per common share) for the nine months ended September 30, 2008 compared to net income of $74 thousand ($0.07 per common share) for the nine months ended September 30, 2007.  The 2008 financial results have been negatively impacted by increased provisions for loan losses and a reduction in average earning assets due to deposit attrition.

The level of impaired loans requiring reserve increased from $2.0 million at December 31, 2007 to $2.6 million at September 30, 2008 with associated specific reserves of $451 thousand and $188 thousand, respectively. During the quarter ended September 30, 2008, the Bank added an additional specific reserve of $263 thousand for one loan to a road repair company for which it received notice that its operations had ceased.  Management will continue its collection efforts through liquidation of the underlying collateral.

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

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Deposit growth remains one of management’s primary challenges.  This challenge is compounded by the low interest rate environment and the current regulatory environment.  Recent financial institution failures (including Freddie Mac and Fannie Mae) although not directly related to the Bank, create more concern with depositors that may have balances in excess of  the FDIC’s insurance limit that was increased to $250,000 per depositor in October 2008.   For the nine months ended September 30, 2008, the Bank experienced deposit attrition totaling $4 million primarily in its savings deposit balances that declined by $2.7 million.  Deposit reductions were the result of normal business use of funds for several construction contractors and not-for-profit entities. Management will continue its attempt to build on relationships with regional corporations, small businesses and community to overcome these challenges.

Selected Financial Data

The following table sets forth selected financial data for each of the following periods:

(Thousands of dollars, except per share data)	Quarter ended September 30, 2008	Quarter ended September 30, 2007
Net interest income	$862	$910
Provision for loan losses	278	10
Noninterest income	276	301
Noninterest expense	1,208	1,195
Net income (loss)	(348)	5
Earnings (loss) per share-basic and diluted	$(0.32)	$0.005
Balance sheet totals:	September 30, 2008	December 31, 2007
Total assets	$71,105	$75,236
Loans, net	$48,812	$44,594
Investment securities	$12,358	$13,936
Deposits	$62,239	$66,084
Shareholders' equity	$8,236	$8,685
Ratios:	Quarter ended September 30, 2008	Quarter ended September 30, 2007
Return on assets	(0.64%)	.03%
Return on equity	(5.97%)	0.33%
Tangible Equity to assets ratio	10.22%	9.71%

Financial Condition

Sources and Uses of Funds

The financial condition of the Bank can be evaluated in terms of trends in its sources and uses of funds.  The comparison of average balances in the following table indicates how the Bank has managed these elements.

Sources and Uses of Funds Trends

	September 30, 2008			June 30, 2008
(Thousands of Dollars, except percentages)	Average	Increase (Decrease)		Average
	Balance	Amount	%	Balance
Funding uses:
Loans	$49,443	$1,338	2.78%	$48,105
Investment securities
Held-to-maturity	9,691	287	3.05	9,404
Available-for-sale	3,081	(154)	(4.76)	3,235
Federal funds sold	4,968	70	1.43	4,898
Balances with other banks	294	2	0.68	292
Total  uses	$67,477	$1,543	2.34%	$65,934
Funding sources:
Demand deposits
Noninterest-bearing	$13,245	$546	4.30%	$12,699
Interest-bearing	11,761	1,649	16.31	10,112
Savings deposits	17,641	(578)	(3.17)	18,219
Time deposits	20,788	153	0.74	20,636
Total sources	$63,435	$1,769	2.87%	$61,666

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Loans

Average loans increased $1.3 million, or 2.78%, during the quarter ended September 30, 2008 primarily as a result of the origination and funding of $1 million in commercial loans and $500 thousand in student loans.  The recent turmoil in the capital markets has resulted in the Bank’s inability to sell its student loans.  Because of this, the Bank has temporarily suspended its student loan origination activity.  Only those student loans for which commitments had been made at September 19, 2008 will be funded.  At September 30, 2008, these commitments totaled $744 thousand and represent funding requirements through June 2009.

The Bank’s loan portfolio remains heavily concentrated in commercial loans that comprise $37.2 million, or 74.7%, of total loans at September 30, 2008.   Approximately $15.8 million of these loans are secured by owner occupied commercial real estate that may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations for which total loans now approximate $13.8 million, or 37.1%, of the commercial portfolio.   Management actively monitors this concentration to minimize potential credit risk.

Allowance for Loan Losses

The allowance for loan losses reflects management’s continuing evaluation of the loan portfolio, the diversification and size of the portfolio, and adequacy of collateral.  The allowance for loan losses as a percentage of total loans was 1.92% at September 30, 2008 compared to 1.30% at December 31, 2007. Provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis.  This analysis includes specific reserves allocated to impaired loans based on underlying recovery values as well as a general reserve based on many qualitative factors including charge-off history, delinquency trends, loan terms, regulatory environment, economic conditions, concentrations of credit risk and other relevant data. The level of impaired loans requiring reserve increased from $2.0 million at December 31, 2007 to $2.6 million at September 30, 2008 with associated specific reserves of $451 thousand and $188 thousand, respectively. Loans deemed “impaired” are those for which borrowers are no longer able to pay in accordance with the terms of their loan agreements.  The Bank’s source of repayment is generally the net liquidation value of the underlying collateral.  During the quarter ended September 30, 2008, the Bank added an additional specific reserve of $263 thousand for one loan to a road repair company for which it received notice that its operations had ceased.  The underlying collateral including receivables and equipment are not deemed sufficient to repay the debt. Management will continue its collection efforts through liquidation of the underlying collateral. The Bank is working with a collection attorney to assist with its recovery efforts on all other impaired loans including forbearance agreements, foreclosure and other collection strategies.  Based on a recent evaluation, the risk related to these credits is mitigated by strong collateral positions in real estate or guarantees of the SBA.

Management uses available information to recognize losses on loans; however, 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 basedon their judgments of information available to them at the time of the examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

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ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)	September 30, 2008	December 31, 2007
Allowance for loan losses	$953	$590
Total Impaired Loans (includes non-accrual loans)	$2,556	$2,045
Total non-accrual loans	$1,559	$  745
Allowance for loan losses as a percentage of:
Total Loans	1.92%	1.30%
Total  nonperforming loans	61.13%	79.00%
Net(charge-offs) recoveries as a percentage of average loans	0.14%	(0.21)%

Nonperforming and Nonaccrual Loans

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 policy of the Bank 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 non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal and interest on the loan appears to be available.

(Dollars in thousands)	September 30, 2008	December 31, 2007
Nonperforming loans:
Commercial	$1,270	$552
Installment	71	58
Residential Real Estate	218	136
Total	$1,559	$745

At September 30, 2008, non-accrual loans increased to $1.5 million from $745 thousand at December 31, 2007.    This increase is primarily related to several additional commercial loans and one residential mortgage loan that are more than 90 days delinquent.  These loans have been classified as “impaired’ with specific reserves allocated as required based on estimated liquidation values of collateral.  Management continues to aggressively pursue collection of non-accrual and previously charged-off loans. There is no other known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms.

Investment Securities and Other Short-term Investments

Investment securities were relatively unchanged-- increasing on average by only $133 thousand, or 1.05%, during the quarter ended September 30, 2008 from the quarter ending June 30, 2008.  The yield on the investment portfolio is 4.83% at September 30, 2008 compared to 4.98% at December 31, 2007.  The duration of the portfolio remains relatively short at 3.0 years with 51% allocated to government sponsored agency mortgage-backed securities and 49% allocated to callable agency securities.  Management’s goal is to maintain a portfolio with a short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.

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During the quarter ended September 30, 2008, several financial entities failed and were taken over by the Federal Government including Fannie Mae and Freddie Mac, the most significant mortgage market makers in the country.  Financial institutions holding equity positions in either of these entities experienced permanent impairment in value resulting in write-offs.  The Bank holds fixed income debt and mortgage-backed securities of these entities for which there was no negative impact on value.  The most significant risk associated with the Bank’s investments is “optionality” whereby callable debt securities may be called or the speeds at which mortgage-backed securities pay may quicken creating additional liquidity in a declining rate environment.  The result would be a reduction in yield on the portfolio.

Deposits

During the quarter ended September 30, 2008, average deposits increased $1.8 million, or 2.87%, from the quarter ending June 30, 2008.  The most significant increase was in the Bank’s interest bearing checking accounts that increased by $1.6 million, or 16.31%, during the quarter primarily as a result of one non-profit customer receiving its annual funding of $2 million in July 2008.  These funds are expected to decline to an average of $400 thousand by December 31, 2008. Savings account balances for which the Bank once offered premium interest rates declined by $578 thousand, or 4.30%, during the quarter.  With increased competition in the region as well as declining interest rates, the Bank is no longer able to utilize rates to attract deposits.   Management is seeking to capitalize on the FDIC’s increase in insurance limit from $100,000 to $250,000, effective October 14, 2008.  The Bank has a number of customers that deposited up to the insurance limit of $100,000 from which it will solicit increased deposit levels.  Management will continue to focus its marketing efforts on existing customers and other large corporations headquartered or doing business in the region that seek to positively impact community.  In addition, the Bank will better enforce the deposit requirements of its commercial loan customers.

Certificates of deposit increased by $152 thousand, or 0.74%, as a result of several customers shifting from lower rate savings products to certificates of deposit. While the Bank has $12.3 million in certificates of deposit with balances of $100,000 or more, approximately $8 million, or 66%, of these deposits are with governmental or quasi-governmental entities that have a long history with the Bank and are considered stable. Based on discussions with these entities, no further reduction in certificates held is anticipated.

Commitments and Lines of Credit

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. Commitments to extend credit fluctuate with the completion and conversion of construction lines of credit to permanent commercial mortgage loans and/or the closing of loans approved not funded from one period to another.

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.  Management believes the Bank has adequate liquidity to support the funding of unused commitments. The Bank's financial instrument commitments at September 30, 2008 are summarized below:

Commitments to extend credit $12,411,000

There are no outstanding letters of credit.

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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 to enhance consistent growth of net interest income through periods of changing interest rates.

The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest.  Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity.  Approximately $10.2 million in loans are scheduled to mature within one year.

By policy, the Bank’s minimum level of liquidity is 6.00% of total assets.  At September 30, 2008, the Bank had total short-term liquidity, including cash and federal funds sold, of $6.6 million, or 9.29%, of total assets compared to $13.9 million, or 18.48%, at December 31, 2007.  The decline in liquidity is primarily the result of net loan fundings that totaled  $4.5 million coupled with a $3.8 million decline in deposits for the nine months ended September 30, 2008.  The portion of the Bank’s investment portfolio classified as available-for-sale could also provide liquidity. However, the majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank.  Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.  To ensure the ongoing adequacy of liquidity, the following strategies will be utilized in order of priority:

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

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

The Bank’s contingent funding sources  include the Discount Window at the Federal Reserve Bank for which it currently has $1.75 million in securities pledged that result in borrowing capacity of $1.5 million. Liquidity will continue to be closely monitored and managed to minimize risk and ensure that adequate funds are available to meet daily customer requirements and loan demand.

Capital Resources

Total shareholders' equity declined approximately $449 thousand compared to December 31, 2007 as a result of a net loss of $460 thousand during the nine months ended September 30, 2008 offset by other comprehensive income of $11 thousand from unrealized gains on investment securities classified as available-for-sale. As reflected in the table below, the Company’s risk-based capital ratios are above the minimum regulatory requirements.  The Company and the Bank do not anticipate paying dividends in the near future because of regulatory imposed dividend restrictions.

	Company	Company
(thousands of dollars, except percentages)	September 30, 2008	December 31, 2007
Total Capital	$8,236	$8,685
Less: Intangible Assets and accumulated other comprehensive  gain (loss)	(909)	(1,026)
Tier 1 Capital	7,327	7,659
Tier 2 Capital	599	571
Total Qualifying Capital	$7,926	$8,230
Risk Adjusted Total Assets (including off-
Balance sheet exposures)	$47,911	$45,667
Tier 1 Risk-Based Capital Ratio	15.29%	16.77%
Tier 2 Risk-Based Capital Ratio	16.54%	18.03%
Leverage Ratio	10.21%	10.33%

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	Bank	Bank
Total Capital	$8,000	$8,335
Less: Intangible Assets and accumulated other comprehensive gain (loss)	(909)	(1,185)
Tier 1 Capital	7,091	7,150
Tier 2 Capital	599	556
Total Qualifying Capital	7,690	$7,706
Risk Adjusted Total Assets (including off-
Balance sheet exposures)	$47,911	$44,464
Tier 1 Risk-Based Capital Ratio   (Minimum Ratio- 4.00%)	14.91%	16.08%
Tier 2 Risk-Based Capital Ratio   (Minimum Ratio- 8.00%)	16.17%	17.33%
Leverage Ratio                            (Minimum Ratio- 4.00%)	9.88%	9.93%

Results of Operations

Summary

The Bank incurred a net loss of $348 thousand ($0.32 per common share) for the quarter ended September 30, 2008 compared to net income of $5 thousand ($0.005 per common share) for the quarter ended September 30, 2007.  The Bank had a net loss of $460 thousand ($0.42 per common share) for the nine months ended September 30, 2008 compared to net income of $74 thousand ($0.07 per common share) for the nine months ended September 30, 2007.  A detailed explanation of each component of earnings is included in the sections below.

Net Interest Income

Average Balances, Rates, and Interest Income and Expense Summary

		Three  months ended September 30, 2008			Three  months ended September 30, 2007
(Dollars in thousands)	Average Balance	Interest	Yield/Rate	Average Balance	Interest	Yield/Rate
Assets:
Interest-earning assets:
Loans	$49,443	$860	6.96%	$45,013	$910	8.09%
Investment securities-HTM	9,691	117	4.83	12,114	148	4.87
Investments securities-AFS	3,081	38	4.93	3,240	42	5.19
Federal funds sold	4,968	25	2.01	10,434	132	5.05
Interest bearing balances with other banks	294	2	2.72	286	4	5.59
Total interest-earning assets	67,477	1,042	6.18	71,087	1,236	6.95
Interest-bearing liabilities
Demand deposits	11,761	27	0.92	10,407	50	1.90
Savings deposits	17,641	21	0.48	20,342	85	1.66
Time deposits	20,788	132	2.54	21,701	192	3.54
Total interest-bearing liabilities	50,190	180	1.43	52,450	326	2.49
Net interest earnings		$862			$910
Net yield on interest-earning assets			5.11%			5.12%

Net interest income decreased $48 thousand, or 5.92%, for the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007 and decreased $212 thousand, or 7.81%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The yield on earning assets for the quarter ended September 30, 2008 declined to 6.18% from 6.95% for the same three months in 2007 as a result of a 275 basis point reduction in the prime lending and Federal Funds Sold rates from September 2007 to September 2008. While the yield on earning assets decreased 77 basis points, the cost of interest-bearing liabilities declined 106 basis points as a result of rate reductions made on the Bank’s deposit products to follow market conditions. As a result, the Bank did not experience margin compression. The reduction in the Bank’s net interest income during the three months ended September 30, 2008 compared to 2007 was caused by a $3.6 million reduction in earning assets. Management will focus on growing its core assets to increase net interest income.  In addition, rates on loan and deposit products will continue to be reviewed and modified to manage interest rate risk and minimize margin compression.

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Provision for Loan Losses

Provisions for loan losses were $278 thousand for the quarter ended September 30, 2008 compared to $10 thousand for the same quarter in 2007. Provisions for loan losses were $293 thousand for the nine months ended September 30, 2008 compared to $70 thousand for the same period in 2007. The Bank was not affected by the recent fallout in the sub-prime lending market as it was not a lender or purchaser of this type of residential mortgage loan.  The requirement for additional provisions was based on credit losses inherent in the loan portfolio and the review and analysis of the loan portfolio in accordance with the Bank’s Allowance for Loan Loss policies and procedures. (Refer to Allowance for Loan Losses above for discussion and analysis of credit quality.)

Noninterest Income

The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account fees, overdrafts, account analysis, ATM fees and other customer service fees.  Noninterest income decreased $25 thousand, or 8.26%, for the quarter for  ending September 30, 2008, compared to the same quarter in 2007. Noninterest income decreased $83 thousand, or 8.44%, for the nine months ended September 30, 2008, compared to 2007.   In June 2007, the Bank was awarded a one-time $50 thousand grant from the City of Philadelphia.  This grant served as a match to a $50 thousand grant the Bank was awarded in 2006 by the Commonwealth of Pennsylvania’s Department of Community and Economic Development to provide Small Business and Non-profit bridge loan financing to the community.

Customer service fees decreased by $17 thousand, or 11.06%, for the quarter ended September 30, 2008, compared to 2007 and decreased $3 thousand, or 0.67%, for the nine months ended September 30, 2008 compared to 2007 primarily as a result of a decrease in overdraft fees on deposit accounts.  In mid September 2008, in line with market conditions, the Bank increased the activity fees it charges its customers for overdrafts and low account balances.

 ATM fees increased $17 thousand, or 14.96%, for the quarter ended September 30, 2008, compared to 2007 but declined $8 thousand, or 2.44%, for the nine months ended September 30, 2008 compared to 2007.  The Bank has experienced an overall year-to-year decline in ATM usage. Studies continue to show that consumers are moving towards the use of non-cash payment systems including debit cards and credit cards.  In July 2008, management imposed a 50% increase in its surcharge fee in effort to boost the overall profitability of the network.

Loan syndication fees decreased $25 thousand for the quarter ended September 30, 2008 and decreased $15 thousand for the nine months ended September 30, 2008. Fluctuations are a result of the change in the timing of one credit facility. The Bank continues to serve as agent/arranger for two (2) facilities for which annual fees are projected to be a minimum of $130 thousand.  Management is actively pursuing growth in this line of business and will market this service to local corporations.

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Noninterest Expense

Salaries and benefits decreased $18 thousand, or 4.48%, for the quarter ended September 30, 2008 compared to 2007 and decreased $28 thousand, or 2.31%, for the nine months ended September 30, 2008 compared to 2007. The decline is primarily related to an open Senior Lending Officer position that became vacant in March 2008.  A search is underway to fill this position.  Management continues to review the organizational structure to maximize efficiencies and increase business development activity.

Occupancy expense decreased $3 thousand, or 1.22%, for the quarter ended September 30, 2008 compared to 2007 but increased $48 thousand, or 6.18%, for the nine months ended September 30, 2008 compared to 2007.  The increase is primarily attributable to leasehold improvement expenses that were incurred to renovate the interior/exterior of the Bank’s Wadsworth Avenue branch in 2007. In March 2008, the Bank completed leasehold improvements on its new branch located in Progress Plaza and relocated in April 2008 at which time it began paying higher rent expense. Interior and exterior improvements began at the Bank’s West Philadelphia branch in May 2008.  These leasehold improvements have resulted in increased depreciation expense.

Office operations and supplies expense increased $3 thousand, or 3.18%, for the quarter September 30, 2008 compared to 2007 and increased $18 thousand, or 7.47%, for the nine months ended September 30, 2008 compared to 2007 primarily related to additional telephone expense resulting from additional high speed lines to improve communication in the Bank’s wide area network. Management continues to review all office operations expenses including supplies, storage, security, etc. to determine if additional expense reductions can be made.

Marketing and public relations expense increased $18 thousand, or 102%, for the quarter ending September 30, 2008 compared to 2007 but declined $8 thousand, or 8.36%, for the nine months ended September 30, 2008 compared to 2007. During the quarter ended September 30, 2008, the Bank ran a series of ads related to its brokerage of reduced rate health and dental insurance offered through its alliance with AETNA to small business owners.  In 2008, the Bank reduced its overall advertising placements (billboards, radio, etc) and discontinued the use of a retained external marketing consultant.

Professional services expense increased approximately $10 thousand, or 19.08%, for the quarter ended September 30, 2008 compared to the same quarter in 2007 but decreased $17 thousand, or 9.33%, for the nine months ended September 30, 2008 compared to 2007.  During the quarter ended September 30, 2008, the Bank retained a consultant to assist with its search for a new Senior Lending Officer. In addition, a public relations consultant was retained to assist with media placement and improved visibility for the Bank.  Year-to-date expenses are lower in 2008 because the Bank used consultants in 2007 to assist with information technology matters.

Data processing expenses increased $13 thousand, or 11.34% for the quarter ended September 30, 2008 compared to the same quarter in 2007 and increased $25 thousand, or 11.28% for the nine months ended September 30, 2008 compared to 2007.  The increase relates to an annual increase of 6% by the Bank’s core service provider and the implementation of a new e-banking platform that is integrated with the Bank’s core system.  This platform is used by the Bank’s consumer and corporate customers to perform cash management transactions.  The increase is also related to the Bank’s ATM processing expense—specifically, net interchange expense.  More Bank customers are using non-proprietary ATMs for which the Bank is charged a fee versus non-customers using the Bank’s ATM network for which it receives a fee.

Federal deposit insurance assessments increased $2 thousand, or 4.48%, for the quarter ended September 30, 2008 compared to 2007 and increased $6 thousand, or 5.07%, for the nine months ended September 30, 2008 compared to 2007.  Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.  In October 2008, the FDIC, under its new TPLG program, temporarily increased the level of insurance per depositor from $100,000 to $250,000 through December 31, 2009.  Although not yet known, this action is expected to result in an increase in insurance assessments.  Refer to the preample to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a summary of the new TLGP program and related cost.

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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.

Regulatory Matters

The FDIC became the Bank’s primary regulator on January 1, 2008.  Taking into account the results of the 2007 regulatory examinations, the FDIC and the Pennsylvania Department of Banking issued new regulatory orders (“Orders”) to replace a Written Agreement the Bank had with the Federal Reserve, its former regulator, and the Department of Banking.  Management believes that the Bank is substantially in compliance with the conditions of the Orders and continues to address all matters as required.  Failure to comply could result in additional regulatory supervision and/or actions.

Dividend Restrictions

The Company 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(10%) 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 a bank is less than fifty percent (50%) of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking.

Under the Federal Reserve Act, the Federal Reserve Board has the power to prohibit the payment of cash dividends by a bank holding company if it determines that such a payment would be an unsafe or unsound practice or constitutes a serious risk to the financial soundness or stability of the subsidiary bank.  As a result of these laws and regulations, the Bank, and therefore the Company, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists.  The Company does not anticipate that dividends will be paid for the foreseeable future.

The FDIC generally prohibits all payments of dividends by a bank that is in default of any assessment to the FDIC. Under the Orders, the Bank is prohibited from paying dividends. (See “Regulatory Matters” above)

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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 which 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 critical to measuring the interest sensitivity gap, or excess 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.

At September 30, 2008, a slight asset sensitive position is maintained on a cumulative basis through 1 year of 1.04% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis. This position is relatively neutral to increasing or declining interest rates with little or no impact on net interest income.

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.  A simulation model is 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.  This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments.  The market value of portfolio equity is defined as the present value of the Company’s existing assets, liabilities and off-balance-sheet instruments.  At September 30, 2008, the change in the market value of equity in a +200 basis point interest rate change is 33.5%--in excess of the Bank’s policy limit of 25%.  This result is largely caused by decline in value of the Bank’s investment and loan portfolios in a rising rate environment.  Management will work to mitigate this risk by originating more variable rate loans and/or purchasing floating rate mortgage-backed securities. However, based on these models, with the exception of the market value measure, interest-rate exposure is not considered significant and is within the policy limits of the Bank on all other measures at September 30, 2008.

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Item 4.  Controls and Procedures

As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Evelyn F. Smalls, and Chief Financial Officer, Brenda M. Hudson-Nelson, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings.

As of the date of this report, there have not been any changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect its internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors disclosed in the Company’s 2007 Annual Report on Form 10-K except as follows:

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

During 2008, economic conditions have continued to worsen creating historic levels of financial institution failures and increased unemployment rates.  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.  Further 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.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 None

Item 3.  Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5.  Other Information.

None

Item 6. Exhibits.

a)           Exhibits.

Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Signatures

Pursuant to the requirements 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: November 14, 2008	/s/ Evelyn F. Smalls
	Evelyn F. Smalls
	President & Chief Executive Officer
Date: November 14, 2008	/s/ Brenda M. Hudson-Nelson
	Brenda Hudson-Nelson
	Executive Vice President/Chief Financial Officer

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Index to Exhibits-FORM 10-Q

Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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