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EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PAex31-1.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PAex32-1.htm

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 MARCH 31, 2011 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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ____ No____
 
Indicate by check mark 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__
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
 
 
1

 
 
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 500,000 shares of $0.01 par value 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.  As of May 4, 2011, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).
 
The Series Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of May 4, 2011.

 
 
2

 
 
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
     3.        Quantitative and Qualitative Disclosures about Market Risk                                                                                                                    
     4.        Controls and Procedures       34
   
PART II-OTHER INFORMATION
   
   
     1.        Legal Proceedings             34
     1A.     Risk Factors       34
     2.        Unregistered Sales of Equity Securities and Use of Proceeds     34
     3.        Defaults upon Senior Securities        35
     4.        Reserved     35
     5.        Other Information      35
     6.        Exhibits       35
 
 

 
3

 
 
Item 1.  Consolidated Statements of Condition--unaudited)
 
 
           
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Assets
           
Cash and due from banks
  $ 2,055,525     $ 2,144,390  
Interest bearing deposits with banks
    304,890       304,721  
Federal funds sold
    9,372,000       6,247,000  
Cash & cash equivalents
    11,732,415       8,696,111  
                 
Investment securities:
               
  Held-to-maturity, at amortized cost (fair value of $15,342,230
               
        and $15,242,856 at March 31, 2011 and December 31, 2010, respectively)     15,341,670       15,138,389  
  Available-for-sale, at fair value
    1,259,874       1,338,898  
                 
Loans, net
    41,938,033       45,612,217  
Less: allowance for loan losses
    (743,965 )     (925,905 )
Net loans
    41,194,068       44,686,312  
                 
Bank premises & equipment, net
    1,105,518       1,143,347  
Accrued interest receivable
    377,241       363,348  
Other real estate owned
    2,015,112       1,416,543  
Core deposit intangible
    447,370       491,889  
Prepaid expenses and other assets
    631,158       690,878  
Total Assets
  $ 74,104,426     $ 73,965,715  
 
               
Liabilities & Shareholders' equity
               
Demand deposits, non-interest bearing
  $ 13,714,391     $ 13,528,781  
Demand deposits, interest bearing
    13,896,219       13,802,602  
Savings deposits
    14,061,139       13,856,033  
Time deposits, $100,000 and over
    18,290,783       17,975,595  
Other time deposits
    7,782,491       8,047,679  
 
    67,745,023       67,210,690  
                 
Accrued interest payable
    60,449       56,907  
Accrued expenses and other liabilities
    310,786       400,702  
Total Liabilities
    68,116,258       67,668,299  
                 
Shareholders' equity:
               
Preferred Stock, Series A, non-cumulative., 6%, $.01 par value,   1,368       1,368  
   500,000 shares authorized., 136,842 issued and outstanding
               
 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  
 Additional-paid-in-capital
    14,749,852       14,749,852  
 Accumulated deficit
    (8,815,549 )     (8,508,591 )
 Net unrealized gain on available-for-sale securities
    41,811       44,101  
Total shareholders' equity
    5,988,168       6,297,416  
 
  $ 74,104,426     $ 73,965,715  
                 
 
See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.



 
4

 

Consolidated Statements of Operations—(unaudited)

 
 
 
Quarter ended
   
Quarter ended
 
 
 
March 31,
   
March 31,
 
   
2011
   
2010
 
Interest Income:
           
     Interest and fees on loans
  $ 668,282     $ 693,231  
     Interest on investment securities
    153,231       115,982  
     Interest on Federal Funds sold
    3,244       2,079  
     Interest on time deposits with other banks
    173       726  
Total interest income
    824,930       812,018  
                 
Interest Expense:
               
     Interest on time deposits
    39,793       52,508  
     Interest on demand deposits
    17,710       19,615  
     Interest on savings deposits
    3,420       3,735  
Total interest expense
    60,923       75,858  
                 
Net interest income
    764,007       736,160  
                 
Provision for loan losses
    30,000       30,000  
Net interest income less provision for
               
     loan losses
    734,007       706,160  
                 
Noninterest income:
               
    Customer service fees
    97,285       105,611  
    ATM activity fees
    86,174       90,829  
    Loan syndication fees
    -       30,000  
    Other income
    30,218       40,900  
Total noninterest income
    213,677       267,340  
                 
Non-interest expense
               
     Salaries, wages, and employee benefits
    429,738       428,846  
    Occupancy and equipment
    270,145       254,015  
    Office operations and supplies
    77,356       72,805  
    Marketing and public relations
    22,792       3,264  
    Professional services
    70,731       68,052  
    Data processing
    126,017       115,776  
    Deposit insurance assessments
    42,138       35,324  
    Loan collection and other real estate
    47,572       27,306  
    Other noninterest expense
    168,153       158,577  
Total non-interest expense
    1,254,642       1,163,965  
                 
     Net loss
  $ (306,958 )   $ (190,465 )
                 
     Loss per share-basic
  $ (0.29 )   $ (0.18 )
     Loss per share-diluted
  $ (0.29 )   $ (0.18 )
                 
Weighted average number of shares
    1,065,088       1,065,088  
 
See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.
 
 
 
5

 
 
Consolidated Statements of Cash Flows--(unaudited)
 
             
 
 
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net loss
  $ (306,958 )   $ (190,465 )
Adjustments to reconcile net loss to net cash
         
used in operating activities:
               
Provision for loan losses
    30,000       30,000  
Depreciation expense
    63,018       71,430  
Amortization expense
    53,398       54,662  
Increase in accrued interest receivable and other assets
    45,827       41,559  
Decrease in accrued interest payable and other liabilites
    (86,374 )     (170,380 )
Net cash used in operating activities
    (201,089 )     (163,194 )
                 
Cash flows from investing activities
               
Purchase of investments-Held-to-Maturity
    (1,767,805 )     (1,765,902 )
Proceeds from maturity & principal reductions of investments-Available-for-Sale
    80,000       262,533  
Proceeds from maturity & principal reductions of investments-Held-to-Maturity
    1,555,911       1,976,391  
Net decrease in loans
    2,860,144       330,011  
Purchase of premises and equipment
    (25,190 )     (32,384 )
Net cash provided by investing activities
    2,703,060       770,649  
                 
Cash flows from financing activities
               
Net increase (decrease) in deposits
    534,333       (716,356 )
Net cash provided by (used in) financing activities
    534,333       (716,356 )
                 
Increase (decrease) in cash and cash equivalents
    3,036,304       (108,901 )
                 
Cash and cash equivalents at beginning of period
    8,696,111       6,289,844  
                 
Cash and cash equivalents at end of period
  $ 11,732,415     $ 6,180,943  
                 
Supplemental disclosures of cash flow information
         
Cash paid during the period for interest
  $ 57,381     $ 69,028  
Noncash transfer of loans to other real estate owned
  $ 602,100     $ 474,697  
                 
 
 
See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.
 

 
 
6

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)
 
1. Significant Accounting Policies
 
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, 2010 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 March 31, 2011 and December 31, 2010 and the consolidated results of its operations for the three month periods ended March 31, 2011 and 2010, and its consolidated cash flows for the three months ended March 31, 2011 and 2010.

Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.  An estimate that is particularly susceptible to change in the near term is the allowance for loan losses.

Commitments
In the general course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these commitments.

Contingencies
The Company is from time to time a party to routine litigation in the normal course of its business. Management does not believe that the resolution of this litigation will have a material adverse effect on the financial condition or results of operations of the Company. However, the ultimate outcome of any such litigation, as with litigation generally, is inherently uncertain and it is possible that some litigation matters may be resolved adversely to the Company.

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, an income tax benefit may be required to increase the recorded value of the net deferred tax asset to the expected realizable amount.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
 
 
 
7

 
 
Interest and penalties associated with unrecognized tax benefits, if any, would be recognized in income tax expense in the consolidated statements of operations.
 
Subsequent Events
In accordance with FASB ASC Topic 855, Subsequent Events, management has evaluated subsequent events through May 16, 2011 and has determined that no recognized or non-recognized subsequent events warranted inclusion or disclosure in the interim financial statements as of March 31, 2011.
 
2.  Comprehensive Loss
 
Total comprehensive loss includes net loss 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 loss for the three months ended March 31, 2011 and 2010 was $(309,248) and $(193,892), respectively. The difference between the Company’s net loss and total comprehensive loss 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.
 
3. Net Loss Per Share
 
The calculation of net loss per share follows:

   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
 
Basic:
           
Net loss available to
common shareholders
  $ (306,958 )   $ (190,465 )
Average common shares
outstanding-basic
    1,065,588       1,065,588  
Net loss per share-basic
  $ (0.29 )   $ (0.18 )
Fully Diluted:
               
Average common shares-fully
diluted
    1,065,588       1,065,588  
Net loss per share-fully diluted
  $ (0.29 )   $ (0.18 )
 
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 loss per share calculations.
 

4. New Authoritative Accounting Guidance

FASB ASC Topic 310, “Receivables.” New authoritative accounting guidance (Accounting Standards Update No. 2011-01) under ASC Topic 310, "Receivables", temporarily delayed the effective date of the disclosures about troubled debt restructurings in Update 20 10-20. The delay was intended to allow the Board time to complete its deliberations on what constituted a troubled debt restructuring. In April 2011, new authoritative guidance (Accounting Standards Update No. 2011-02) under ASC Topic 310 was released to assist creditors in determining whether a restructuring is a troubled debt restructuring. This update clarifies the guidance on a whether a creditor has made a concession and whether a debtor is experiencing financial difficulties. In addition, the disclosures that were deferred under ASU 2011-01 will now be required. ASU 2011-02 is effective for the first interim or annual period beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted. The Company will evaluate this new disclosure guidance, but does not expect it to have any effect on the Company's reported financial condition or results of operations.
 
 
 
8

 
 
 5.  Investment Securities
 
The following is a summary of the Company's investment portfolio as of March 31, 2011: 
   
 
Amortized Cost
   
Gross unrealized
gains
   
Gross unrealized
losses
   
 
Fair Value
 
Available-for-sale:
                       
Government Sponsored Enterprises
     residential mortgage-backed
     securities
  $ 1,068,432     $ 62,405     $  -     $ 1,130,837  
Investments in mutual funds
    129,037       -       -       129,037  
    $ 1,197,469     $ 62,405       -     $ 1,259,874  
Held-to-maturity:
                               
U.S. government agencies
  $ 9,905,505     $ 49,297     $ (197,210 )   $ 9,757,592  
Government Sponsored Enterprises
     residential mortgage-backed
     securities
       5,436,165         156,962       (8,489 )       5,584,638  
 
  $ 15,341,670     $ 206,259     $ (205,699 )   $ 15,342,230  
 

 
The following is a summary of the Company's investment portfolio as of December 31, 2010: 
 

   
Amortized Cost
   
Gross unrealized
gains
   
Gross unrealized
losses
   
Fair Value
 
Available-for-sale:
                       
Government Sponsored Enterprises     
     residential mortgage-backed
     securities
  $ 1,144,091     $ 65,822          -     $ 1,209,913  
Investments in mutual funds
    128,915       -       -       128,915  
    $ 1,273,006     $ 65,822       -     $ 1,338,828  
Held-to-maturity:
                               
U.S. government agencies
  $ 10,401,918     $ 90,281     $ (145,356 )   $ 10,346,843  
Government Sponsored Enterprises
     residential mortgage-backed
     securities
      4,736,472         165,675       (6,134 )       4,896,013  
    $ 15,138,390     $ 255,956     $ (151,490 )   $ 15,242,856  
 

 
 
9

 

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of March 31, 2011, are as follows:
 
   
Amortized Cost
   
Fair Value
 
Available-for-Sale
           
Due within one year
  $ -     $ -  
Due after one year through three years
    -       -  
Due after three years through five years
    -       -  
Due five years through ten years
    -       -  
Due  after 10 years
    -       -  
Government Sponsored Enterprises residential mortgage-backed securities
    1,068,432       1,130,837  
     Total debt securities
    1,068,432       1,130,837  
     Investments in mutual funds
    129,037       129,037  
    $ 1,197,469     $ 1,259,874  

Held to maturity
           
Due within one year
  $ -     $ -  
Due after one year through three years
    -       -  
Due after three years through five years
    250,000       249,103  
Due five years through ten years
    8,623,965     $ 8,509,848  
Due  after 10 years
    1,031,540       998,641  
Government Sponsored Enterprises residential mortgage-backed securities
    5,436,165       5,584,638  
    $ 15,341,670     $ 15,342,230  
 
Expected maturities will differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalties.
 
The table below indicates the length of time individual securities, have been in a continuous unrealized loss position at March 31, 2011:
 
(in 000’s)
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Held to maturity:
                                   
U.S. government agencies
  $ 5,671     $ (197 )   $ -     $ -     $ 5,671     $ (197 )
                                                 
Government Sponsored Enterprises
residential mortgage-backed securities
    1,026       (9 )     -       -       1,026       (9 )
     Total
  $ 6,697     $ (206 )   $ -     $ -     $ 6,697     $  (206 )
                                                 
 
The table below indicates the length of time individual securities, have been in a continuous unrealized loss position at December 31, 2010:
 
(in 000’s)
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Held-to-maturity:
                                   
U.S. government agencies
  $ 5,398     $ (145 )   $ -     $ -     $ 5,398     $ (145 )
Government Sponsored Enterprises
residential mortgage-backed securities
    536       (6 )      -        -       536       (6 )
     Total
  $ 5,934     $ (151 )   $ -     $ -     $ 5,934     $ (151 )
 
 
 
10

 
 
U.S. government and agencies. Unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.
 
Government Sponsored Enterprises residential mortgage-backed securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities may be caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.
 
The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary.  This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.  On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.
 
 
 
11

 
 
6. Allowance for Loan Losses
 
The Company 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.
 

 
  For the three months ended March 31, 2011  
(in 000's)
 
 
         
 
   
 
 
   
Commercial and industrial
   
Commercial real estate
   
Residential mortgages
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 301     $ 553     $ 36     $ 36     $ -     $ 926  
Provision for possible loan losses
    -       23       -       -       7       30  
                                                 
Charge-offs
    (62 )     (148 )     -       -       (13 )     (223 )
Recoveries
    -       2       -       3       6       11  
Net charge-offs
    (62 )     (146 )     -       3       (7 )     (212 )
                                                 
Ending balance
  $ 239     $ 430     $ 36     $ 39     $ -     $ 744  
                                                 
Period-end amount allocated to:
                                               
                                                 
 Loans indivdually evaluated for impairment
  $ -     $ 22     $ -     $ -     $ -     $ 22  
 Loans collectively  evaluated for impairment
    239       408       36       39       -       722  
    $ 239     $ 430     $ 36     $ 39     $ -     $ 744  
                                                 
Loans, ending balance:
                                               
 Loans indivdually evaluated for impairment
  $ 439     $ 1,261     $ -     $ 129     $ -     $ 1,829  
 Loans collectively  evaluated for impairment
    3,366       28,503       3,847       2,271       2,122       40,109  
Total
  $ 3,805     $ 29,764     $ 3,847     $ 2,400     $ 2,122     $ 41,938  
                                                 
                   
For the three months ended March 31, 2010
         
 
                                               
Allowance for credit losses
                                               
Beginning balance
                                          $ 727  
Charge-offs:
                                            (131 )
Recoveries:
                                            16  
    Net charge-offs
                                            (115 )
    Provisions for loan losses charged to expense
                                      30  
Ending balance
                                          $ 642  
                                                 
                                                 
                                                 
 
 
 
12

 

 
Nonperforming and Nonaccrual and Past Due Loans
 
Non-accrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received 30 days as of the date such payments were due.  The Bank generally places a loan on non-accrual status when interest or principal is past due 90 days or more.  If it otherwise appears doubtful that the loan will be repaid, management may place the loan on nonaccrual status before the lapse of 90 days. Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection.  When a loan is placed on nonaccrual status, previously accrued and unpaid interest is reversed out of income.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
An age analysis of past due loans, segregated by class of loans, as of March 31, 2011 follows:


       
(In thousands)
       
Accruing
                         
   
Loans
   
Loans 90 or
   
 
                   
   
30-89 Days
   
More Days
         
Total Past
   
Current
       
   
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
   
Loans
   
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ 97,644     $ 10,614     $ 441,234       549,492     $ 1,131,772     $ 1,681,264  
     SBA loans
    -       -       18,223       18,223       195,328       213,551  
     Asset-based
            100,941       -       100,941       1,809,539       1,910,480  
        Total Commercial and industrial
    97,644       111,555       459,457       668,656       3,136,639       3,805,295  
                                                 
Commercial real estate:
                                               
     Commercial mortgages
    150,743       -       741,693       892,436       14,073,818       14,966,254  
     SBA loans
    4,499       11,100       58,123       73,722       481,110       554,832  
     Construction
                                    492,825       492,825  
     Religious organizations
    -       125,908       314,702       440,610       13,309,274       13,749,884  
         Total Commercial real estate
    155,242       137,008       1,114,518       1,406,768       28,357,027       29,763,795  
                                                 
Consumer real estate:
                                               
     Home equity loans
    155,040       291,616       128,785       575,441       1,198,888       1,774,329  
     Home equity lines of credit
    39,118       -       -       39,118       586,415       625,533  
     1-4 family residential mortgages
    -       -       303,028       303,028       3,544,113       3,847,141  
         Total consumer real estate
    194,158       291,616       431,813       917,587       5,329,416       6,247,003  
                                                 
Total real estate
    349,400       428,624       1,546,331       2,324,355       33,686,443       36,010,798  
                                                 
Consumer and other:
                                               
     Consumer installment
    3,176       -       -       3,176       68,233       71,409  
     Student loans
    80,537       83,159       -       163,696       1,668,594       1,832,290  
     Other
    7,489       18,590       -       26,079       192,162       218,241  
         Total consumer and other
    91,202       101,749       -       192,951       1,928,989       2,121,940  
                                                 
         Total loans
  $ 538,246     $ 641,928     $ 2,005,788     $ 3,185,962     $ 38,752,071     $ 41,938,033  
                                                 
 
 
 
13

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

       
 
       
Accruing
                         
   
Loans
   
Loans 90 or
   
 
                   
   
30-89 Days
    More Days        
Total Past
    Current        
   
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
    Loans    
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ 441,507     $ -     $ 504,660       946,166     $ 2,187,239     $ 3,133,405  
     SBA loans
    12,234       -       18,223       30,457       198,265       228,722  
     Asset-based
    -       -       -       -       2,367,443       2,367,443  
        Total Commercial and industrial
    453,741       -       522,883       976,623       4,752,947       5,729,570  
                                                 
Commercial real estate:
                                               
     Commercial mortgages
    125,348       -       1,494,690       1,620,038       14,154,137       15,774,175  
     SBA loans
                    58,123       58,123       1,252,909       1,311,032  
     Religious organizations
    125,908       -       314,702       440,610       13,211,819       13,652,429  
         Total Commercial real estate
    251,256       -       1,867,515       2,118,771       28,618,865       30,737,636  
                                                 
Consumer real estate:
                                               
     Home equity loans
    154,686       142,138       130,181       427,005       1,385,890       1,812,894  
     Home equity lines of credit
    -       -       -       -       714,392       714,392  
     1-4 family residential mortgages
    -       -       260,597       260,597       4,171,454       4,432,051  
         Total consumer real estate
    154,686       142,138       390,778       687,602       6,271,736       6,959,337  
                                                 
Total real estate
    405,941       142,138       2,258,293       2,806,373       34,890,600       37,696,973  
                                                 
Consumer and other:
                                               
     Consumer installment
    7,564       -       -       7,564       73,815       81,379  
     Student loans
    87,464       43,731       -       131,195       1,781,180       1,912,375  
     Other
    12,793       19,238       -       32,031       159,889       191,920  
         Total consumer and other
    107,821       62,969       -       170,790       2,014,884       2,185,674  
                                                 
         Total loans
  $ 967,503     $ 205,107     $ 2,781,176     $ 3,953,786     $ 41,658,431     $ 45,612,217  
                                                 
 
 
Loan Origination/Risk Management.  The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk.  Management reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans.  Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.
 
Credit Quality Indicators.  For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality.  Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating.  The Bank uses a 1 through 7 loan grading system that follows regulatory accepted definitions as follows:

·  
Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments.  Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.
·  
Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention.  Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.
·  
Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. No loss of principal or interest is envisioned.  Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit.  Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However a restructuring of the debt should result in repayment.  The asset is currently protected, but is potentially weak.  This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.
 
 
 
14

 
 
 
·  Risk ratings of “6” are assigned to ‘Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.
·  
Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable.  The borrower's recent performance indicates an inability to repay the debt.  Recovery from secondary sources is uncertain.  The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.
·  
Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets.  They are recommended for charge-off if attempts to recover will be long term in nature.  This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible.  Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.
 
For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality.  Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt.  These credit quality indicators are updated on an ongoing basis.  A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan, but no later than 90 days past due.
 
 
 
15

 
 
 
 
The table below details the Bank’s loans by class according to their credit quality indictors discussed above.
 
                                     
    March 31, 2011  
   
Good/Excellent
   
Satisfactory
   
Pass
   
Special Mention
   
Subtandard
   
Total
 
                                     
                                     
                                     
Commercial and industrial:
                                   
    Commercial
  $ 379,003     $ 720,704     $ 45,659     $ 94,664     $ 441,234     $ 1,681,264  
    SBA loans
    -       90,000       55,643       -       67,908       213,551  
    Asset-based
    -       1,739,605       69,934       100,941       -       1,910,480  
      379,003       2,550,309       171,236       195,605       509,142       3,805,295  
Commercial real estate:
                                               
    Commercial mortgages
    -       12,799,133       668,759       644,364       853,998       14,966,254  
     SBA Loans
            485,609       -       -       69,223       554,832  
    Construction
    -       492,825       -       -       -       492,825  
    Religious organizations
    -       9,945,021       3,004,253       360,000       440,610       13,749,884  
      -       23,722,588       3,673,012       1,004,364       1,363,831       29,763,795  
                                                 
Total commercial loans
  $ 379,003     $ 26,272,897     $ 3,844,248     $ 1,199,969     $ 1,872,973     $ 33,569,090  
                                                 
                                                 
        March 31,2011  
   
Residential Mortgage & Consumer Loans- Performing/Nonperforming
 
   
Performing
           
Nonperforming
   
Total
         
                                                 
Consumer Real Estate:
                                               
     Home equity
  $ 1,645,544             $ 128,785             $ 1,774,329          
     Home equity line of credit
    625,533               -               625,533          
     1-4 family residential mortgages
    3,544,113               303,028               3,847,141          
      5,815,190               431,813               6,247,003          
                                                 
Consumer Other:
                                               
     Consumer Installment
    71,409               -               71,409          
     Student loans
    1,832,290               -               1,832,290          
     Other
    218,240               -               218,240          
      2,121,939               -               2,121,939          
                                                 
Total  consumer loans
  $ 7,937,129             $ 431,813             $ 8,368,942          
                                                 
Total loans
                                          $ 41,938,032  
                                                 
 
 
 
16

 

                                     
    December 31, 2010  
   
Good/Excellent
   
Satisfactory
   
Pass
   
Special Mention
   
Substandard
   
Total
 
                                     
                                     
                                     
Commercial and industrial:
                         
    Commercial
  $ 379,003     $ 2,078,992     $ 72,641     $ 98,109     $ 504,660     $ 3,133,405  
    SBA loans
    -       90,000       70,643       -       68,079       228,722  
    Asset-based
    -       2,082,626       183,875       100,942       -       2,367,443  
      379,003       4,251,618       327,159       199,051       572,739       5,729,570  
Commercial real estate:
                                         
    Commercial mortgages
    -       13,901,585       264,496       -       1,608,094       15,774,175  
     SBA Loans
            1,240,674                       70,358       1,311,032  
    Religious organizations
    -       9,919,609       2,932,210       360,000       440,610       13,652,429  
      -       25,061,868       3,196,706       360,000       2,119,062       30,737,636  
                                                 
Total commercial loans
  $ 379,003     $ 29,313,486     $ 3,523,865     $ 559,051     $ 2,691,801     $ 36,467,206  
                                                 
                                                 
        December 31, 2010  
   
Residential Mortgage & Consumer Loans- Performing/Nonperforming
 
   
Performing
   
Nonperforming
   
Total
         
 
                                               
Consumer Real Estate:
                                         
     Home equity
  $ 1,682,713             $ 130,181             $ 1,812,894          
     Home equity line of credit
    714,392               -               714,392          
     1-4 family residential mortgages
    4,171,454               260,597               4,432,051          
      6,568,559               390,778               6,959,337          
                                                 
Consumer Other:
                                         
     Consumer Installment
    81,379               -               81,379          
     Student loans
    1,912,375               -               1,912,375          
     Other
    191,920               -               191,920          
      2,185,674               -               2,185,674          
                                                 
Total  consumer loans
  $ 8,754,233             $ 390,778             $ 9,145,011          
                                                 
Total loans
                                          $ 45,612,217  
                                                 
 
 
Impaired Loans. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank.   If these factors do not exist, the Bank will record interest payments on the cost recovery basis.
 
In accordance with guidance provided by ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; and the Observable Market Price of a Loan Method.  To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.
 
 
 
17

 
 
Impaired loans as of March 31, 2011 are set forth in the following table.
 
 
 
Unpaid
   
Recorded
   
Recorded
               
 
    Interest  
   
Contractual
   
Investment
    Investment    
Total
         
Average
   
 recognized
 
   
Principal
   
With No
   
With
   
Recorded
   
Related
   
Recorded
   
on impaired
 
   
Balance
   
Allowance
   
Allowance
    Investment     Allowance    
Investment
   
loans
 
                                           
Commercial and industrial:
       
 
                               
     Commercial
  $ 441,234     $ 421,634     $ -     $ 421,634    
 
    $ 482,847     $ -  
     SBA  loans
    18,223       18,223       -       18,223       -       18,223       -  
        Total Commercial and industrial
    459,457       439,857       -       439,857       -       501,070       -  
                                                         
Commercial real estate:
                                                       
     Commercial mortgages
    741,693       656,635       104,658       761,293       19,600       1,243,024       -  
     SBA  Loans
    58,123       58,123       -       58,123       -       58,123       -  
     Religious Organizations
    440,610       440,610       -       440,610       -       440,610       2,778  
         Total Commercial real estate
    1,240,426       1,155,368       104,658       1,260,026       19,600       1,741,757       2,778  
                                                         
         Total Loans
  $ 1,699,883     $ 1,595,225     $ 104,658     $ 1,699,883     $ 19,600     $ 2,646,765     $ 2,778  
                                                         
 
Impaired loans as of December 31, 2010 are set forth in the following table.

 

 
 
Unpaid
   
Recorded
   
Recorded
               
 
    Interest  
   
Contractual
   
Investment
   
Investment
   
Total
         
Average
   
 Recognized
 
   
Principal
   
With No
   
With
   
Recorded
   
Related
   
Recorded
   
on impaired
 
   
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
   
Investment
   
loans
 
                                           
Commercial and industrial:
                                         
     Commercial
  $ 504,660     $ 421,932     $ 82,728     $ 504,660     $ 82,728     $ 72,989     $ 21,304  
     SBA  loans
    20,939       18,223       -       18,223       -       19,747       -  
     Asset-based
    -       -       -       -       -       20,123       -  
        Total Commercial and industrial
    525,599       440,155       82,728       522,883       82,728       112,859       21,304  
                                                         
Commercial real estate:
                                                       
     Commercial mortgages
    1,412,374       577,301       835,073       1,412,374       155,719       1,700,001       25,001  
     SBA  Loans
    150,196       140,439       -       140,439       -       289,225       -  
     Construction
    -       -       -       -       -       338,121       -  
     Religious Organizations
    440,610       440,610       -       440,610       -       311,591       16,986  
         Total Commercial real estate
    2,003,180       1,158,350       835,073       1,993,423       155,719       2,638,938       41,987  
                                                         
         Total Loans
  $ 2,528,779     $ 1,598,506     $ 917,801     $ 2,516,307     $ 238,447     $ 2,751,797     $ 63,291  
                                                         
7.  Fair Value
 
Fair Value Measurement
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
 
The fair value guidance in FASB ASC 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:
 
 
18

 

 
Level 1
·  
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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.”

Level 3 Inputs
·  
Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
·  
These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
 
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value on a Recurring Basis

Securities Available for Sale (“AFS”):  Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow models. Level 2 securities include U.S. agency securities and mortgage backed agency securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
 
Assets and liabilities on the consolidated statements of condition measured at fair value on a recurring basis are summarized below.
 
(in 000’s)
 
Fair Value Measurements at Reporting Date Using:
 
Assets/Liabilities Measured at
Fair Value at March 31, 2011
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
     Investment securities           
     available-for-sale:
 
     Government Sponsored
     Enterprises residential
     mortgage-backed securities
 
     Mutual Funds
 
         Total
 
 
 
 
 
$1,131
 
129
 
$1,260
 
 
 
 
 
$ -
 
129
 
$129
 
 
 
 
 
$1,131
 
         -
 
$1,131
 
 
 
 
-
 
 
-
 
 
19

 

(in 000’s)
 
Fair Value Measurements at Reporting Date Using:
 
 
Assets/Liabilities Measured at
Fair Value at December 31,
2010
 
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
     Investment securities           
     available-for-sale:
 
     Government Sponsored
     Enterprises residential
     mortgage-backed securities
 
     Mutual Funds
 
          Total
 
 
 
 
 
$1,210
 
129
 
$1,339
 
 
 
 
 
$-
 
129
 
$129
 
 
 
 
 
$1,210
 
        -
 
$1,210
 
 
 
 
 
-
 
 
-
 
As of March 31, 2011, the fair value of the Bank’s AFS securities portfolio was approximately $1,260,000.  Over 90% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,131,000 at March 31, 2011.  All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).  The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.  Majority of the AFS securities were classified as level 2 assets at March 31, 2011.  The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information.  There were no transfers between Level 1 and Level 2 assets during the period ended March 31, 2011 and year ended December 31, 2010.
 
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 statements of condition by level within the hierarchy as of March 31, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded during the three months ended March 31, 2011.
 

 Carrying Value at March 31, 2010:
(in 000’s)
 
 
 
Total
Quoted Prices in
Active markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total fair value gain
(loss) during 3
months ended
March 31, 2011
Impaired Loans
 
Other real estate owned (“OREO”)
$83
 
 
598
-
 
 
-
-
 
 
-
$83
 
 
598
$(20)
 
 
-

Carrying Value at December 31, 2010:
(in 000’s)
 
 
 
Total
Quoted Prices in
Active markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
 (Level 3)
Total fair value gain
(loss) during 12
months ended
December 31, 2010
Impaired Loans
 
Other real estate owned (“OREO”)
$679
 
 
1,417
 -
 
 
-
-
 
 
-
$679
 
 
1,417
$(238)
 
 
-
 
Fair value of impaired loans is determined by the fair value of the collateral if the loan is collateral dependent.  Collateral values for loans and other real estate owned are determined by appraisal, which may be discounted based upon management’s review and changes in market conditions.  The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated statements of condition.   The valuation allowance for impaired loans at March 31, 2011 was approximately $20,000.  The valuation allowance for impaired loans at December 31, 2010 was approximately $238,000.
 
 
 
20

 
 
Fair Value of Financial Instruments
 
FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
 
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
 
Cash and cash equivalents: The carrying amounts reported in the statement of condition for cash and cash equivalents approximate those assets’ fair values.
 
Investment securities: Fair values for investment securities available for sale are as described above.  Investment securities held to maturity are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  The carrying amount of accrued interest receivable approximates fair market value.
 
Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated pre­payments, amortizations, and non performance risk.  Prepayments and discount rates were based on current marketplace estimates and 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.
 
Other real estate owned:  The fair value of OREO was determined using appraisals, which may be discounted based on management’s review, changes in market conditions and other liquidation cost.
 
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.
 
Accrued interest payable:  The carrying amounts of accrued interest payable approximate fair value.
 
Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts.  The carrying amount of accrued interest payable approximates fair market value.
 
The fair value of assets and liabilities are depicted below:
                                                                         
    March 31, 2011     December 31, 2010  
(in 000’s)
 
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
(Dollars in thousands)
                       
Assets:
                       
Cash and cash equivalents
  $ 11,732     $ 11,732     $ 8,696     $ 8,696  
Investment securities
    16,601       16,602       16,477       16,582  
Loans, net of allowance for loan losses
    41,194       40,864       44,686       44,698  
Accrued interest receivable
    377       377       363       363  
Liabilities:
                               
Demand deposits
    27,611       27,611       27,331       27,331  
Savings deposits
    14,061       14,061       13,856       13,856  
Time deposits
    26,073       26,073       26,023       26,023  
Accrued interest payable
    60       60       57       57  
 
 
 
21

 

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

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").


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,” “may,” and similar expressions are intended to identify such forward-looking statements.  These forward looking statements include: (a) statements of goals, intentions and expectations; and (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity.  UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company’s, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; and (l) the ability of key third party providers to perform their obligations to UBS and; (m) the Bank and UBS’ success in managing the risks involved in the foregoing.

All written or oral forward-looking statements attributed to UBS are expressly qualified in their entirety by use of the foregoing cautionary statements.  All forward-looking statements included in this Report are based upon information presently available, and UBS assumes no obligation to update any forward-looking statement.
 
 
22

 
 
Overview
 
The Company reported a net loss of approximately $307,000 ($0.29 per common share) for the quarter ended March 31, 2011 compared to a net loss of approximately $190,000 ($0.18 per common share) for the quarter ended March 31, 2011.   The increase in the loss in 2010 is primarily the result of higher loan collection expense, costs associated with foreclosure properties (OREO), an increase in occupancy expense, marketing and public relations expense, and a reduction in noninterest income related to the timing of a loan syndication for which the Bank serves as agent.
 
Although the economy is recovering, the Company is still affected by the lagging effect of the recession which has resulted in asset quality challenges including higher levels of delinquent/nonaccrual loans.  Aggressive collection efforts continue to result in increased legal, collection and foreclosure-related expenses.  The following actions are critical to enhancing the Company’s future financial performance:
 
Proactive management of asset quality to minimize credit losses.  Progress continues to be made in the Bank’s collection, underwriting, and customer relationship management practices. Evidence of these improvements can be seen in the reduction of the level of impaired loans from approximately $2.5 million to approximately $1.7 million and a decline in delinquency ratios from 8.67% at December 31, 2010 to 7.60% at March 31, 2011.  In addition, the Bank’s non-performing loans declined to approximately $2.0 million at March 31, 2011 from $2.8 million at December 31, 2010. Non-performing loans during the quarter were positively affected by charge-offs and transfers to other real estate owned. Management expects to make additional progress during 2011 in reducing the level of non-performing loans and non-performing assets and anticipates that credit quality costs, including loan collection and other real estate owned related costs, will continue to affect reported earnings as the Bank diligently works to reduce the outstanding investment in these assets.
 
Continued core deposit growth.  During the quarter ended March 31, 2011, total deposits increased by approximately $534 thousand, or 0.80 %.  Utilizing its competitive advantage as a community development bank and increased FDIC insurance limits, management continues to call upon corporations and institutions in the region to request core depository relationships to support the Bank’s small business lending strategies.  Management will continue to utilize this strategy as well as other retail deposit marketing strategies to achieve deposit growth that is critical to attaining economies of scale and leveraging capital to maximize the Company’s earnings potential.
 
 
Controlling and managing the net interest margin.  The Bank’s net interest margin for the quarter ended March 31, 2011 declined thirty-seven (37) basis points to 4.40% from 4.77% for the same quarter in 2010. Margin compression is created by the continued low interest rate environment that has resulted in lower yields on loans and investment securities. High levels of non-accrual loans also contribute to the compression. While management actively manages the rates paid on deposit products to “average” market rates to mitigate the effect of the reduction in yield on earning assets, its focus will be on growing the Bank’s core assets and reducing the level of nonaccrual loans to increase net interest income.
 
Controlling and managing noninterest expense.   During the quarter ended March 31, 2011, noninterest expense continued to escalate as a result of legal, collection-related expenses, costs associated with the acquisition and maintenance of foreclosed properties (other real estate) and increased occupancy, marketing and public relations expense.  Data processing expense also increased as a result of the implementation of an enhanced e-banking platform that includes e-statements.  Management will continue to seek savings and efficiencies where possible.
 
Enhancing capital to support growth.   Capital declined as a result of net losses and growth, however, the Bank’s tangible, core, and risk-based capital ratios exceed “minimum” and “well capitalized” for regulatory capital requirements. Management recognizes the importance of establishing and maintaining capital levels to support the Bank’s growth and to remain in compliance with regulatory requirements. Management submitted an application for $1 million in capital from the U.S. Treasury’s Small Business Lending Fund (“ SBLF”) on March 31, 2011.  The application is currently under review.
 

 
23

 

 
Critical Accounting Policies
 
 
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented.  Therefore, actual results could differ from these estimates.
 
The Company 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 Company’s critical accounting policies are presented in Note 1 to the  Company’s audited consolidated financial statements filed as part of the 2010 Annual Report on Form 10-K and in the footnotes to the Company’s unaudited financial statements filed as part of this Form 10-Q.

 
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
March 31, 2011
   
 Quarter ended
March 31, 2010
 
Net interest income
  $ 764     $ 736  
Provision for loan losses
    30       30  
Noninterest income
    214       267  
Noninterest expense
    1,255       1,164  
Net loss
    (307 )     (190 )
Net loss per share-basic and diluted
    (0.29 )     (0.18 )
                 
Balance sheet totals:
 
March 31,
2011
   
December 31,
2010
 
Total assets
  $ 74,104     $ 73,966  
Loans, net
  $ 41,194     $ 44,686  
Investment securities
  $ 16,602     $ 16,477  
Deposits
  $ 67,745     $ 67,211  
Shareholders' equity
  $ 5,988     $ 6,297  
                 
Ratios*:
 
Quarter ended
March 31, 2011
   
Quarter ended
March 31, 2010
 
Return on assets
    (1.65 %)     (1.12 %)
Return on equity
    (20.95 %)     (11.12 %)
*annualized
 
 
 
24

 

 
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. Average funding uses declined approximately $962,000, or 1.37%, during the quarter ended March 31, 2011 compared to the quarter ended December 31, 2010. Average funding sources declined approximately $513,000, or 0.75%, during the quarter ended March 31, 2011 compared to the quarter ended December 31, 2010.

Sources and Uses of Funds Trends

   
March 31, 2011
               
December 31, 2010
 
(Thousands of Dollars, except percentages)
 
Average
   
Increase (Decrease)
   
Increase (Decrease)
   
Average
 
   
Balance
   
Amount
   
%
   
Balance
 
Funding uses:
                       
Loans
  $ 43,579     $ (2,355 )     (5.13 )%   $ 45,934  
Investment securities
                               
Held-to-maturity
    15,406       297       1.97       15,109  
Available-for-sale
    1,243       (82 )     (6.19 )     1,325  
Federal funds sold
    8,861       1,178       15.33       7,683  
Balances with other banks
    305       -       -       305  
Total  uses
  $ 69,394     $ (962 )     (1.37 )%   $ 70,356  
Funding sources:
                               
Demand deposits
                               
Noninterest-bearing
  $ 14,116     $ 349       2.54 %   $ 13,767  
Interest-bearing
    13,681       (771 )     (5.33 )     14,452  
Savings deposits
    14,028       (19 )     (0.14 )     14,047  
Time deposits
    25,954       (72 )     (0.28 )     26,026  
Total sources
  $ 67,779     $ (513 )     (0.75 )%   $ 68,292  


Loans
 
Average loans declined approximately $2.4 million, or 5.13%, during the quarter ended March 31, 2011.  While commercial loan fundings during the quarter totaled approximately $719,000, they were offset by payoffs/paydowns, and charge-offs totaling approximately $223,000 and the transfer of approximately $602,000 of real estate loans to bank ownership following receipt of deeds in lieu of foreclosure.  The Bank continues to maintain stringent underwriting standards especially related to non-owner occupied real estate lending.  The focus is on traditional small business lending for which credit enhancements through the Small Business Administration or other loan guaranty programs may be available to mitigate credit risk.
 
The Bank’s loan portfolio continues to be concentrated in commercial loans that comprise approximately $33.5 million, or 80%, of total loans at March 31, 2011, of which approximately $29.6 million are commercial real estate. Approximately $17.2 million of these loans are owner occupied which may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations for which total loans at March 31, 2011 were approximately $13.7 million, or 41%, of the commercial portfolio.   Management continues to closely monitor this concentration to proactively identify and manage credit risk in light of the current high level of unemployment that may impact the level of tithes and offerings that provide cash flow for repayment.
 
 
 
25

 
 
The composition of the net loans is as follows:
 
   
March 31,
   
December 31,
 
 
 
2011
   
2010
 
             
             
Commercial and industrial:
           
     Commercial
  $ 1,681,264     $ 3,133,405  
     SBA Loans
    213,551       228,722  
     Assets-based
    1,910,480       2,367,443  
        Total Commercial and industrial
    3,805,295       5,729,570  
                 
Commercial real estate:
               
                 
     Commercial mortgages
    14,966,254       15,774,175  
     SBA Loans
    554,832       1,311,032  
     Construction
    492,825       -  
     Religious Organizations
    13,749,884       13,652,429  
         Total Commercial real estate
    29,763,795       30,737,636  
                 
Consumer real estate:
               
     Home equity loans
    1,774,329       1,812,894  
     Home equity lines of credit
    625,533       714,392  
     1-4 family residential mortgages
    3,847,141       4,432,051  
         Total consumer real estate
    6,247,003       6,959,337  
                 
Tota real estate
    36,010,798       37,696,973  
                 
Consumer and other:
               
     Consumer Installment
    71,409       81,379  
     Student loans
    1,832,290       1,912,375  
     Other
    218,241       191,920  
         Total Consumer and other
    2,121,940       2,185,674  
                 
         Loans, net
  $ 41,938,033     $ 45,612,217  
                 
                 
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. 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 allowance for loan losses as a percentage of total loans was 1.77% at March 31, 2011, compared to 2.03% at December 31, 2010.  During the quarter ended March 31, 2011 provisions for loan losses totaled $30,000.  The Bank charged-off approximately $223,000 primarily related to several impaired loans for which collection efforts had been exhausted and specific reserves allocated at December 31, 2010.

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.  The level of impaired loans declined from approximately $2.5 million at December 31, 2010 to approximately $1.7 million at March 31, 2011.  The decline is primarily related to foreclosure activity totaling approximately $602,000 and charge-offs totaling approximately $223,000.  Specific reserves related to impaired loans totaled approximately $20,000 and $238,000 at March 31, 2011 and December 31, 2010, respectively.
 
 
 
26

 

 
At March 31, 2011 and December 31, 2010, loans to religious organizations represented approximately $441,000 of total impaired loans. Management continues to work closely with the leadership of these organizations in an attempt to develop suitable repayment plans. In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.  The Bank is working with collection attorneys to assist with its recovery efforts on all of its impaired loans including forbearance agreements, foreclosure and other collection strategies.

Management uses all available information to recognize losses on loans; however, future additions may be necessary based on further deterioration in economic conditions and market conditions affecting underlying real estate collateral values.  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. 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.

The percentage of allowance to nonperforming loans has improved from 33.30% at December 31, 2010 to 37.09% at March 31, 2011 primarily as a result of foreclosure-related activity that reduced the level of impaired/nonperforming loans.   The level of non-performing residential mortgages increased during the quarter primarily due to one loan for which management is working with the borrower to avoid foreclosure.  Otherwise, the portfolio appears to be stable. The following table sets forth information concerning nonperforming loans and nonperforming assets.


 
27

 
 
(In 000's)
 
March 31,
2011
   
December 31,
2010
 
Commercial and industrial:
           
     Commercial
  $ 441     $ 505  
     SBA loans
    18       18  
        Total Commercial and industrial
    459       523  
                 
Commercial real estate:
               
     Commercial mortgages
    742       1,495  
     SBA loans
    58       58  
     Religious organizations
    315       315  
         Total Commercial real estate
    1,115       1,868  
                 
Consumer real estate:
               
     Home equity loans
    129       130  
     1-4 family residential mortgages
    303       260  
         Total consumer real estate
    432       390  
                 
Total real estate
    1,547       2,258  
                 
         Total nonperforming loans
  $ 2,006     $ 2,781  
         OREO
    2,015       1,417  
         Total nonperforming assets
  $ 4,021     $ 4,198  
                 
Past due 90 days or more and still accruing interest:
               
Commercial and industrial:
               
     Commercial
  $ 10     $ -  
     SBA loans
    -       -  
     Asset-based
    101       -  
        Total Commercial and industrial
    111       -  
                 
Commercial real estate:
               
     SBA loans
    11       -  
     Religious organizations
    126       -  
         Total Commercial real estate
    137       -  
                 
Consumer real estate:
               
     Home equity loans
    292       142  
         Total consumer real estate
    292       142  
                 
Total real estate
    429       142  
                 
Consumer and other:
               
     Student loans
    83       44  
     Other
    19       19  
         Total consumer and other
    102       63  
                 
                 
         Total
  $ 642     $ 205  
                 
Nonperforming loans to total loans
    4.78 %     6.10 %
Nonperforming assests to total loans and OREO
    9.15 %     8.93 %
Nonperforming assests to total assets
    5.43 %     5.66 %
                 
Allowance for loan losses as a percentage of:
               
     Total Loans
    1.77 %     2.03 %
     Total nonperforming loans
    37.09 %     33.30 %
                 
 
 
 
 
28

 
 
 
As represented in the table above, during the quarter ended March 31, 2011, there was an increase in the level of loans that were more than 90 days delinquent and still accruing.  Delinquencies were generally due to a temporary reduction in the cashflow of the borrowers.  Suitable repayment plans have been developed with these borrowers which indicate that both principal and interest will be collected on these loans. There is no other known information about possible credit problems other than those classified as nonaccrual and/or impaired 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 increased on average by approximately $215,000, or 1.31%, during the quarter ended March 31, 2011. The increase was primarily related to an increase in investable funds because of loan payoffs during the quarter.
 
The yield on the investment portfolio declined to 3.60% at March 31, 2011 compared to 3.79% at December 31, 2010 as a result the purchase of securities to serve as collateral as well as the call of higher yielding agency securities during the quarter.  The duration of the portfolio has extended to 2.9 years at March 31, 2011 compared to 2.0 years at December 31, 2010 as a result of the purchase of additional 15 and 20 year government sponsored agency (GSA) mortgage-backed pass-through securities that serve to increase the yield and generate monthly cash flow.   The payments of principal and interest on these pools of GSA loans are guaranteed by these entities that bear the risk of default.  The Bank’s risk is prepayment risk when defaults accelerate the repayment activity.  These loans have longer-term con­tractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. 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.

Deposits

During the quarter ended March 31, 2011 average deposits decreased approximately $513,000, or 0.75%. There was an increase of approximately $349,000, or 2.54%, in noninterest checking account balances offset by a decline of approximately $771,000, or 5.33%, in interest-bearing checking balances (including money market accounts). These fluctuations are created by widely varying depository relationships with several customers in contract-related businesses that receive periodic payments on receivables.  A concerted effort continues to attract and retain core deposits from existing, new, and potential commercial loan customers to stabilize and grow deposit levels.
 
Savings account balances decreased on average by approximately $19,000, or 0.14%, during the quarter ended March 31, 2011.  Management is working to grow and stabilize its core savings accounts by the development of new marketing materials that encourage financial preparedness and increased savings.

Certificates of deposit decreased on average by approximately $72,000, or 0.28%, during the quarter ended March 31, 2011. The Bank has approximately $18.2 million in certificates of deposit with balances of $100,000 or more. Approximately $13 million, or 71%, of these deposits are governmental or quasi-governmental relationships that have a long history with the Bank and are considered stable and core.

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 but 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. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Management believes the Bank has adequate liquidity to support the funding of unused commitments.  The Bank's financial instrument commitments are summarized below:
 
 
 
29

 
 

 
   
March 31,
2011
   
December 31,
2010
   
March 31,
2010
 
Commitments to extend credit
  $ 8,486,000     $ 7,531,000     $ 7,453,000  
Standby letters of credit
    709,000       695,000       -  


The level of commitments increased from approximately $8.2 million at December 31, 2010 to approximately $9.2 million at March 31, 2011 primarily as a result of the approval of several construction lines of credit and the paydown of several working capital lines of credit during the period.

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 $8.6 million in loans are scheduled to mature within one year.
 
By policy, the Bank’s minimum level of liquidity is 6.00% of total assets.  At March 31, 2011, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $11.7 million, or 15.8% of total assets, compared to $8.7 million, or 11.7%, at December 31, 2010. The increase primarily relates to loan payoff activity during the quarter.  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, if necessary:

·  
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 decreased approximately $309,000 compared to December 31, 2010 as a result of a net loss of approximately $307,000 during the three months ended March 31, 2011 and other comprehensive loss of approximately $2,000 from a decrease in 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.  At March 31, 2011, the Company is deemed "well capitalized."  The Company does not anticipate paying dividends in the near future because of regulatory imposed dividend restrictions. The Company will seek to maintain the requisite minimum regulatory capital levels by internal capital generation (retained earnings) and by monitoring its asset growth.  For the last several years, the Company has been the recipient of Bank Enterprise Award (“BEA”) grants from the Community Development Financial Institutions Fund (“CDFI”) of the US Treasury Department for its small business lending activity.  Management will continue to apply for these funds to supplement capital.
 
 
 
30

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

(thousands of dollars, except percentages)
 
March 31,
2011
   
December 31,
2010
 
Total Capital
  $ 5,988     $ 6,297  
Less: Intangible Assets and accumulated other comprehensive loss
    (489 )     (536 )
Tier 1 Capital
    5,499       5,761  
Tier 2 Capital
    567       577  
Total Qualifying Capital
  $ 6,066     $ 6,338  
Risk Adjusted Total Assets (including off-
               
Balance sheet exposures)
  $ 45,195     $ 45,580  
Tier 1 Risk-Based Capital Ratio
    12.17 %     12.64 %
Tier 2 Risk-Based Capital Ratio
    13.42 %     13.91 %
Leverage Ratio
    7.43 %     7.63 %

Results of Operations
Summary

The Company reported a net loss of approximately $307,000 ($0.29 per common share) for the quarter ended March 31, 2011 compared to a net loss of approximately $190,000 ($0.18 per common share) for the quarter ended March 31, 2010.   The increase in the loss in 2011 is primarily the result of increased expenses related to collection and foreclosure activity, increased marketing and public relations expense and a reduction in noninterest income related to the timing of a loan syndication for which the Bank serves as agent.  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
March 31, 2011
               
Three months
ended
March 31, 2010
       
(in 000’s)
 
Average
Balance
   
Interest
   
Yield/Rate
   
Average
Balance
   
Interest
   
Yield/Rate
 
                                     
Assets:
                                   
Interest-earning assets:
                                   
     Loans
  $ 43,579     $ 668       6.13 %   $ 47,661     $ 693       5.82 %
     Investment securities-HTM
    15,406       141       3.66       9,970       100       4.01  
     Investments securities-AFS
    1,243       12       3.86       1,668       16       3.84  
     Federal funds sold
    8,861       3       0.14       3,348       2       0.24  
     Interest bearing balances with other banks
    305       1       0.25       304       1       1.32  
        Total interest-earning assets
    69,394       825       4.76       62,951       812       5.16  
Interest-bearing liabilities
                                               
     Demand deposits
    13,681       18       0.53       10,305       20       0.78  
     Savings deposits
    14,028       3       0.09       14,777       4       0.11  
     Time deposits
    25,954       40       0.62       20,887       52       1.00  
          Total interest-bearing liabilities
    53,663       61       0.45       45,969       76       0.66  
Net interest earnings
          $ 764                     $ 736          
Net yield on interest-earning assets
                    4.40 %                     4.68 %
 
For purposes of computing the average balance, loans are not reduced for nonperforming loans.  Loan fee income is included in interest income on loans but is not considered material.
 
Net interest income increased approximately $28,000 or 3.78%, for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. The net yield on interest-earning assets for the quarter ended March 31, 2011 declined to 4.40% from 4.68% for the same quarter in 2010. The yield on earning assets declined 40 basis points compared to the same quarter in 2010 and the cost of interest-bearing liabilities declined 21 basis points as a result of rate reductions made on the Bank’s deposit products to follow market conditions. The Bank also benefited from growth in average earning assets from approximately $62.9 million in 2010 to approximately $69.4 million in 2011.  The Bank’s yield on loans has been positively affected by the transfer of more than $2 million in nonaccrual loans to OREO and the imposition of default interest rates for several borrowers for noncompliance with note requirements to provide annual financial statements. Management continues to focus on reducing the level of nonaccrual loans and growing its core assets to increase net interest income.  In addition, rates on loan and deposit products are reviewed continuously and modified to manage interest rate risk and minimize margin compression.
 
 
 
31

 
 
Provision for Loan Losses
 
Provisions for loan losses were $30,000 for each of the quarters ended March 31, 2011 and 2010. In general, provision requirements are 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 declined approximately $54,000, or 20.07%, for the quarter ended March 31, 2011, compared to the same quarter in 2010 primarily the result of the shift in timing of a loan syndication for which the Bank serves as agent and receives fee income.  These fees totaling $30,000 were received in April 2011.

Customer service fees declined by approximately $8,000, or 7.88%, for the quarter ended March 31, 2011 compared to 2010.  The decline was primarily a result of a reduction in overdraft and other activity fees on deposit accounts.
 
ATM fees declined approximately $5,000, or 5.13%, for the quarter ended March 31, 2011 compared to 2010.   The Bank’s ATM network continues to experience a reduction in volume because of ATM saturation in the marketplace by both financial and non-financial competitors.  Also, consistent with trends in the industry, ATM usage has declined as consumers move to electronic payment methods utilizing debit and credit cards versus cash.  In March 2011, the Bank increased its surcharge fee for noncustomer use of ATM by approximately 10% to be consistent with the marketplace and enhance profitability of the network.  Methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated.
 
Noninterest Expense

Salaries and benefits increased approximately $1,000, or 0.21%, for the quarter ended March 31, 2011 compared to 2010.  The increase in 2011 is related to the hiring of a senior loan officer in April 2010 offset by other personnel reductions. Management continues to review the organizational structure to maximize efficiencies and increase business development activity.
 
Occupancy expense increased approximately $16,000 or 6.35%, for the quarter ended March 31, 2011 compared to 2010.   The increase in 2011 is attributable to the September 2010 expiration of a sublease the Company had for a retail space it leases at its corporate headquarters for which a replacement tenant has not been secured.

Office operations and supplies expense increased approximately $4,500 or 6.25%, for the quarter ended March 31, 2011 compared to 2010. The increase is related to the cost of branch capture-compatible forms and checks required in conjunction with the implementation of Check 21 technology in October 2010. Management continues to review all office operations expenses including supplies, storage, security, etc. to achieve cost reductions.
 
Marketing and public relations expense increased approximately $20,000, or 598.28%, for the quarter ended March 31, 2011 compared to 2010.  During the quarter ended March 31, 2011, the Company began to push out its new branding message, “So Much More Than Banking” utilizing ads, bus depots, and other relevant marketing strategies.

Professional services expense increased approximately $3,000, or 3.94%, for the quarter ended March 31, 2011 compared to 2011.  The increase is primarily related to higher accounting fees, legal fees and IT consulting fees.

Data processing expenses increased approximately $10,000, or 8.13%, for the quarter ended March 31, 2011 compared to 2010 as a result of the implementation of an enhanced e-banking platform (including e-statements) as well as a 3% annual escalation in core processing fees.
 
 
 
32

 
 
Federal deposit insurance assessments increased approximately $7,000, or 19.29%, for the quarter ended March 31, 2011 compared to 2010. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.   The increase is primarily related to growth in deposits compared to the prior year.
 
Loan and collection expenses increased approximately $20,000, or 74.2%, for the quarter ended March 31, 2011 compared to 2010. This increase is directly related to increased foreclosure activity in the Bank’s commercial loan portfolio that resulted in Sheriff’s sale costs and other expenses associated with the acquisition of other real estate properties.
 
Other noninterest expense increased approximately $10,000, or 6.03%, for the quarter ended March 31, 2011 compared to 2010.  The increase is primarily associated with significant snow removal cost because of record snowfall activity during the quarter.
 
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.
 
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 March 31, 2011, a positive gap position is maintained on a cumulative basis through 1 year of 5.70% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis. This position makes the Bank’s net interest income more favorable in a rising interest rate environment.  The positive gap position is due to loan payoffs during the quarter that resulted in a higher level of Federal Funds Sold that reprice immediately.  Management will review and monitor the structure and rates on investment purchases, new loan originations and renewals to maintain a balanced interest rate risk profile.

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 March 31, 2011, the change in the market value of equity in a +200 basis point interest rate change is -35.2%, in excess of the Bank’s policy limit of 25% and -60.7% in a +400 basis point interest rate change, above the policy limit of 50%.    The limit was exceeded as a result of the high level of fixed rate investment securities purchased during the quarter that decline in value in a rising rate environment.  Because most of these investments are used to secure public funds, management will closely review and monitor rates paid on these funds to mitigate interest rate risk when rates begin to rise.  In addition, management will attempt to mitigate this risk by originating more variable rate loans.  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 measures at March 31, 2011.
 
 
 
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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 during the quarterly period covered by this report 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 2010 Annual Report on Form 10-K except as disclosed below.  The risk factors disclosed in the Company’s 2010 Annual Report on Form 10-K are not the only risks that we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely impact our business
 
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which provides for a broad range of financial reform and will result in a number of new regulations which could significantly impact regulatory compliance costs and the operations of community banks and bank holding companies.  The Dodd-Frank Act, among other things, broadens the base for FDIC insurance assessments which may increase our FDIC insurance premiums; repeals the prohibition on a bank’s payment of interest on demand deposit accounts of commercial clients beginning one year after the date of enactment; and contains provisions affecting corporate governance and executive compensation for publicly traded companies.  The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection with broad authority to develop and implement rules regarding most consumer financial products.  Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional costs, including increased compliance costs.  These changes may also require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply.  These changes may adversely affect our business, financial condition and results of operations.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
 None
 
 
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Item 3.  Defaults Upon Senior Securities.
 
None
 
Item 4. Reserved.
 
None
 
Item 5.  Other Information.
 
None
 
Item 6. Exhibits.
 
a)           Exhibits.
 
 
 
 
 

 
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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: May 16, 2011
/s/ Evelyn F. Smalls
 
Evelyn F. Smalls
 
President & Chief Executive Officer
   
   
Date: May 16, 2011
/s/ Brenda M. Hudson-Nelson
 
Brenda Hudson-Nelson
 
Executive Vice President/Chief Financial Officer
 

 
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Index to Exhibits-FORM 10-Q
 

 
 
 
 
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