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EX-32.2 - UNITED BANCSHARES INC /PAexhibit32_2.htm
EX-31.1 - UNITED BANCSHARES INC /PAexhibit31_1.htm
EX-31.2 - UNITED BANCSHARES INC /PAexhibit31_2.htm
EX-32.1 - UNITED BANCSHARES INC /PAexhibit32_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 JUNE 30, 2014 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 __X__ No____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer___
Accelerated filer___
Non-accelerated filer__
Smaller Reporting Company _X__
 
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 August 1, 2014, 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 A 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 August 1, 2014.

 
2

 
 
FORM 10-Q
 

 
 
3

 
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
Assets:
 
June 30,
2014
   
December 31,
2013
 
Cash and due from banks
  $ 2,223,800     $ 2,340,002  
Interest-bearing deposits with banks
    309,759       306,776  
Federal funds sold
    3,276,000       3,143,000  
   Cash and cash equivalents
    5,809,559       5,789,778  
                 
Investment securities available-for-sale, at fair value
    9,666,704       9,579,979  
                 
Loans held for sale, at fair value
    -       1,645,832  
                 
Loans, net of unearned discounts and deferred fees ($442,088 and $446,523 at
               
    fair value at June 30, 2014 and December 31, 2013, respectively)
    43,099,359       42,710,625  
Less allowance for loan losses
    (657,291 )     (839,133 )
   Net loans
    42,442,068       41,871,492  
 
Bank premises and equipment, net
    587,509       649,159  
Accrued interest receivable
    258,767       256,262  
Other real estate owned
    420,035       433,087  
Prepaid expenses and other assets
    451,048       525,466  
   Total assets
  $ 59,635,690     $ 60,751,055  
 
Liabilities and Shareholders’ Equity
               
 
Liabilities:
               
Demand deposits, noninterest-bearing
  $ 14,808,732     $ 14,526,988  
Demand deposits, interest-bearing
    13,882,075       14,131,452  
Savings deposits
    12,394,078       12,988,388  
Time deposits, under $100,000
    6,718,708       6,683,499  
Time deposits, $100,000 and over
    8,424,119       8,779,518  
   Total deposits
    56,227,712       57,109,845  
 
Accrued interest payable
    13,402       12,722  
Accrued expenses and other liabilities
    353,828       418,604  
   Total liabilities
    56,594,942       57,541,171  
                 
Shareholders’ equity:
               
Series A preferred stock, noncumulative, 6%, $0.01 par value,
   500,000 shares authorized; 136,842 issued and outstanding
    1,368       1,368  
Common stock, $0.01 par value; 2,000,000 shares authorized;
               
   876,921 issued and outstanding
    8,769       8,769  
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
               
   191,667 issued and outstanding
    1,917       1,917  
Additional paid-in-capital
    14,749,852       14,749,852  
Accumulated deficit
    (11,649,175 )     (11,224,976 )
Accumulated other comprehensive loss
    (71,983 )     (327,046 )
   Total shareholders’ equity
    3,040,748       3,209,884  
   Total liabilities and shareholders’ equity
  $ 59,635,690     $ 60,751,055  

The accompanying notes are an integral part of these statements.

 
4


UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Unaudited)
   
Three Months 
ended
June 30, 2014
   
Three Months 
ended
June 30, 2013
   
Six Months
ended
June 30, 2014
   
Six Months
ended
June 30, 2013
 
Interest income:
                       
   Interest and fees on loans
  $ 638,877     $ 630,275     $ 1,286,163     $ 1,258,451  
   Interest on investment securities
    58,857       66,721       119,792       153,339  
   Interest on federal funds sold
    2,236       3,214       4,573       7,607  
   Interest on time deposits with other banks
    164       173       2,987       404  
      Total interest income
    700,134       700,383       1,413,515       1,419,801  
                                 
Interest expense:
                               
   Interest on time deposits
    9,728       12,326       19,503       27,534  
   Interest on demand deposits
    6,750       6,145       13,351       14,889  
   Interest on savings deposits
    1,571       1,678       3,146       3,412  
      Total interest expense
    18,049       20,149       36,000       45,835  
      Net interest income
    682,085       680,234       1,377,515       1,373,966  
      Provision (credit) for loan losses
    30,000       (55,000 )     70,000       15,137  
                                 
     Net interest income after provision (credit) for loan losses
    652,085       735,234       1,307,515       1,358,829  
                                 
Noninterest income:
                               
   Customer service fees
    102,163       101,304       197,975       201,912  
   ATM fee income
    45,292       80,508       87,247       160,157  
   Gain on sale of investment securities
    -       378,248       -       378,248  
   Loan syndication fees
    87,550       88,300       87,550       88,300  
   Loss on sale of other real estate owned
    -       (13,484 )     -       (13,880 )
   Other income
    17,065       19,187       50,307       34,805  
      Total noninterest income
    252,070       654,063       423,079       849,542  
                                 
Noninterest expense:
                               
   Salaries, wages and employee benefits
    396,901       371,532       813,990       748,996  
   Occupancy and equipment
    241,978       264,145       496,503       508,044  
   Office operations and supplies
    69,854       76,454       133,977       154,808  
   Marketing and public relations
    18,846       18,722       37,270       34,702  
   Professional services
    74,534       77,346       146,140       148,180  
   Data processing
    107,029       103,714       219,871       224,579  
   Other real estate expense
    24,573       124,039       37,156       167,544  
   Loan and collection costs
    20,272       38,906       38,928       58,808  
   Deposit insurance assessments
    38,000       37,654       72,000       74,652  
   Other operating
    115,114       180,808       158,958       330,868  
      Total noninterest expense
    1,107,101       1,293,320       2,154,793       2,451,181  
      Net loss before income taxes
    (202,946 )     95,977       (424,199 )     (242,810 )
Provision for income taxes
    -       -       -       -  
      Net (loss) income
  $ (202,946 )   $ 95,977     $ (424,199 )   $ (242,810 )
Net (loss) income per common share—basic and diluted
  $ (0.19 )   $ 0.09     $ (0.40 )   $ (0.23 )
Weighted average number of common shares
    1,068,588       1,068,588       1,068,588       1,068,588  
Comprehensive loss:
                               
 Net (loss) income
  $ (202,946 )   $ 95,977     $ (424,199 )   $ (242,810 )
 Unrealized gains (losses) on available for sale securities
    131,690       (216,085 )     255,063       (222,226 )
  Total comprehensive loss
  $ (71,256 )   $ (120,108 )   $ (169,136 )   $ (465,036 )
 
The accompanying notes are an integral part of these statements.

 
5


UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,

   
2014
   
2013
 
             
Cash flows from operating activities:
           
Net loss
  $ (424,199 )   $ (242,810 )
   Adjustments to reconcile net loss to net cash
               
       used in operating activities:
               
        Provision for loan losses
    70,000       15,137  
        Loss on sale of other real estate
    -       13,880  
        Amortization of premiums on investments
    11,724       44,346  
        Amortization of core deposit intangible
    -       89,039  
        Depreciation on fixed assets
    86,615       73,650  
        Gain on sale of investment securities
    -       (378,248 )
        Write-down of other real estate owned
    13,052       142,506  
        Net change in fair value of financial instruments
    2,579       -  
        Increase in accrued interest receivable  and
               
          other assets
    71,913       34,488  
        Decrease in accrued interest payable and
               
          other liabilities
    (64,096 )     (141,943 )
          Net cash used in operating activities
    (232,412 )     (348,955 )
                 
Cash flows from investing activities:
               
        Purchase of held-to-maturity investment securities
    -       (6,972,202 )
        Proceeds from sale of available-for-sale investment
               
           securities
    -       7,731,841  
        Proceeds from maturity and principal reductions of
               
           available-for-sale investment securities
    156,613       2,904,044  
        Proceeds from the sale of other real estate owned
    -       92,484  
        Proceeds from sale of loans
    1,645,832       -  
        Net increase in loans
    (643,154 )     (792,325 )
        Purchase of bank premises and equipment
    (24,965 )     (164,652 )
Net cash provided by investing activities
    1,134,326       2,799,190  
 
               
Cash flows from financing activities:
               
        Net decrease in deposits
    (882,133 )     (3,409,638 )
        Net cash used in financing activities
    (882,133 )     (3,409,638 )
 
       Net increase (decrease) in cash and cash equivalents
    19,781       (959,403 )
 
Cash and cash equivalents at beginning of period
    5,789,778       10,236,199  
 
Cash and cash equivalents at end of period
  $ 5,809,559     $ 9,276,796  
 
Supplemental disclosure of cash flow information:
               
        Cash paid during the period for interest
  $ 35,320     $ 60,761  
        Noncash transfer of investment securities from held-to-maturity to available-for sale
  $ -     $ 11,895,037  
 
The accompanying notes are an integral part of these 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, 2013 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 June 30, 2014 and December 31, 2013 and the consolidated results of its operations and its cash flows for the three and six months ended June 30, 2014 and 2013.

Management’s Use of Estimates
The preparation of the financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, the determination of the allowance for loan losses, valuation allowance for deferred tax assets, the carrying value of other real estate owned, and the determination of other than temporary impairment for securities.

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 any such 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.

Loans Held for Sale
From time to time, the Bank originates SBA loans for which the guaranteed portion is intended to be sold within a short period of time in the secondary market.  These loans are classified as held-for-sale and carried at estimated fair value based on a loan-by-loan valuation using actual market bids in accordance with the irrevocable option permitted under Accounting Standards Codification (“ASC”) 825-10-25 Financial Instruments. 

Loans
The Bank has both the positive intent and ability to hold the majority of its loans to maturity.  These loans are stated at the amount of unpaid principal, reduced by net unearned discount and an allowance for loan losses.  Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding and accretion of discount.

Loans Held at Fair Value
From time to time, the Bank originates SBA loans for which the un-guaranteed portion is retained after the guaranteed portion is sold in the secondary market.  Management has elected to carry these loans at fair value.  Fair value of these loans is estimated based on the present value of future cashflows for each asset based on their unique characteristics,

 
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market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

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

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

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical charge-off experience, other qualitative factors, and adjustments made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.  The Bank does not allocate reserves for unfunded commitments to fund lines of credit.
 
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Bank will identify and assess loans that may be impaired through any of the following processes:
 
 
 
·
During regularly scheduled meetings of the Asset Quality Committee
 
·
During regular reviews of the delinquency report
 
·
During the course of routine account servicing, annual review, or credit file update
 
·
Upon receipt of verifiable evidence of a material reduction in the value of collateral to a level that creates a less than desirable Loan-to-Value ratio
 
Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Large groups of smaller, homogeneous loans, including consumer installment and home equity loans, 1-4 family residential mortgages, and student loans are evaluated collectively for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
 
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

 
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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.

Income Taxes
Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis 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.
 
Interest and penalties associated with unrecognized tax benefits, if any, would be recognized in income tax expense in the consolidated statements of operations.
 
2. Net Loss Per Share
The calculation of net loss per share follows:
 
   
Three Months Ended June 30, 2014
   
Three Months Ended June 30, 2013
   
Six Months Ended June 30, 2014
   
Six Months Ended June 30, 2013
 
Basic:
                       
Net (loss) income available to common shareholders
  $ (202,946 )   $ 95,977     $ (424,199 )   $ (242,810 )
Average common shares outstanding-basic
    1,068,588       1,068,588       1,068,588       1,068,588  
Net loss per share-basic
  $ (0.19 )   $ 0.09     $ (0.40 )   $ (0.23 )
Diluted:
                               
Average common shares-diluted
    1,068,588       1,068,588       1,068,588       1,068,588  
Net loss per share-diluted
  $ (0.19 )   $ 0.09     $ (0.40 )   $ (0.23 )
 
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.

 
9

 
 3.Changes in Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in other comprehensive income(loss):
   
Three Months Ended June 30, 2014
 
   
Before tax
   
Tax
   
Net of tax
 
(in (000’s)
 
Amount
   
expense
   
Amount
 
Unrealized loss on securities:
                 
Unrealized holding gain arising during period
  $ 198     $ (66 )   $ 132  
Less: reclassification adjustment for gains (losses)
                       
    realized in net loss
    -       -       -  
Other comprehensive gain, net
  $ 198     $ (66 )   $ 132  

   
Three Months Ended June 30, 2013
 
   
Before tax
   
Tax
   
Net of tax
 
(in (000’s)
 
Amount
   
benefit
   
Amount
 
Unrealized loss on securities:
 
 
             
Unrealized holding gain arising during period
  $ (323 )   $ 107     $ (216 )
Less: reclassification adjustment for gains (losses)
                       
     realized in net loss
    -       -       -  
Other comprehensive gain, net
  $ (323 )   $ 107     $ (216 )

   
Six Months Ended June 30, 2014
 
   
Before tax
   
Tax
   
Net of tax
 
(in (000’s)
 
Amount
   
expense
   
Amount
 
Unrealized loss on securities:
                 
Unrealized holding gain arising during period
  $ 381     $ (126 )   $ 255  
Less: reclassification adjustment for gains (losses)
                       
    realized in net loss
    -       -       -  
Other comprehensive gain, net
  $ 381     $ (126 )   $ 255  

   
Six Months Ended June 30, 2013
 
   
Before tax
   
Tax
   
Net of tax
 
(in (000’s)
 
Amount
   
benefit
   
Amount
 
Unrealized loss on securities:
 
 
             
Unrealized holding gain arising during period
  $ (332 )   $ 110     $ (222 )
Less: reclassification adjustment for gains (losses)
                       
     realized in net loss
    -       -       -  
Other comprehensive gain, net
  $ (332 )   $ 110     $ (222 )
 
4. New Authoritative Accounting Guidance
 
ASU 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to residential real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan though completion of a deed in lieu of foreclosure or through a similar legal agreement.  The amendments require interim and annual disclosure of both the amount of the foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of this amendment.
 
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to

 
10

 
elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

5.  Investment Securities

The following is a summary of the Company's investment portfolio: 
(In 000’s)
 
June 30, 2014
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
unrealized
   
Fair
 
   
Cost
   
Gains
   
losses
   
value
 
Available-for-sale:
                       
U.S. Government agency securities
  $ 4,097     $ -     $ (98 )   $ 3,999  
Government Sponsored Enterprises residential mortgage-backed securities
    5,548       54       (63 )     5,539  
Investments in money market funds
    129       -       -       129  
    $ 9,774     $ 54     $ (161 )   $ 9,667  
 
   
December 31, 2013
 
           
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Available-for-sale:
                               
U.S. Government agency securities
  $ 4,097     $ -     $ (295 )   $ 3,802  
Government Sponsored Enterprises residential mortgage-backed securities
    5,841       36       (228 )     5,649  
Investments in money market funds
    129       -       -       129  
    $ 10,067     $ 36     $ (523 )   $ 9,580  
                                 

The amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity as of June 30, 2014, are as follows:

(In 000’s)
 
Amortized Cost
   
Fair Value
 
Due in one year
  $ -     $ -  
Due after one year through five years
    -       -  
Due after five years through ten years
    4,097       3,999  
Government Sponsored Enterprises residential mortgage-backed securities
     5,548       5,539  
 Total debt securities
    9,645       9,538  
 Investments in money market funds
    129       129  
    $ 9,774     $ 9,667  
 
Expected maturities will differ from contractual maturities because the issuers of certain debt securities 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 June 30, 2014:
 
   
Number
   
Less than 12 months
   
12 months or longer
   
Total
 
Description of
 
Of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Securities
 
Securities
   
Value
   
Losses
   
Value
   
losses
   
value
   
Losses
 
                                           
U.S. Government
                                         
    agency securities
    13     $ -     $ -     $ 3,499     $ (98 )   $ 3,499     $ (98 )
                                                         
Government Sponsored Enterprises residential
                                                       
    mortgage-backed securities
    13       -       -       3,371       (63 )     3,371       (63 )
Total temporarily
                                                       
impaired investment
                                                       
     securities
    26     $ -     $ -     $ 6,870     $ (161 )   $ 6,870     $ (161 )
 
 
11

 
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2013:
   
Number
   
Less than 12 months
   
12 months or longer
   
Total
 
Description of
 
of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Securities
 
securities
   
Value
   
Losses
   
Value
   
losses
   
value
   
Losses
 
                                           
U.S. Government
                                         
     agency securities
    15     $ 3,576     $ (270 )   $ 225     $ (25 )   $ 3,801     $ (295 )
                                                         
Government Sponsored Enterprises residential
                                                       
    mortgage-backed securities
    21     $ 4,777     $ (228 )   $ -     $ -     $ 4,777     $ (228 )
Total temporarily
                                                       
impaired investment
                                                       
     securities
    36     $ 8,353     $ (498 )   $ 225     $ (25 )   $ 8,578     $ (523 )
 
Government Sponsored Enterprises residential mortgage-backed securities. Unrealized losses on the Company’s investment in Government Sponsored Enterprises residential mortgage-backed securities were caused by market 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 basis of the Company’s investments. Because the decline in fair value is attributable to changes in market 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired.
 
U.S. Government and Agency Securities. Unrealized losses on the Company's investments in direct obligations of U.S. government agencies were caused by market 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired.
 

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, the Company reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. The Company considers 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, the intent to sell a security or whether it is more likely than not the Company 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, the Company’s ability and intent to hold the security for a period of time that allows for the recovery in value.

 
12

 
6. Loans and Allowance for Loan Losses
The composition of the Bank’s loan portfolio is as follows:
 
(Dollars in thousands)
 
June 30,
2014
   
December 31, 2013
 
Commercial and industrial
  $ 4,703     $ 4,310  
Commercial real estate
    33,266       32,962  
Consumer real estate
    3,726       3,909  
Consumer loans other
    1,404       1,530  
           Total loans
  $ 43,099     $ 42,711  

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates.  The three components are as follows:
 
 
·
Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.  
 
 
·
Historical Charge-Off Component – Applies an eight-quarter rolling historical charge-off rate to all pools of non-classified loans.
 
 
·
Qualitative Factors Component – The loan portfolio is broken down into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.
 
All of these factors may be susceptible to significant change.  During the quarter ended June 30, 2014, the Bank did not change any of its qualitative factors in any segment of the loan portfolio.  In addition, the average historical loss factors were relatively unchanged as there were no significant charge-offs during the quarter. 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 June 30, 2014  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans
other
   
Total
 
Beginning balance
  $ 296     $ 297     $ 20     $ 13     $ 626  
Provision for loan losses
    1       (2 )     31       -       30  
                                         
Charge-offs
    -       -       -       (11 )     (11 )
Recoveries
    -       -       1       11       12  
Net recoveries
    -       -       1       -       1  
                                         
Ending balance
  $ 297     $ 295     $ 52     $ 13     $ 657  

(in 000's)
  For the Three months ended June 30, 2013  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 614     $ 275     $ 48     $ -     $ 937  
Provision (credit) for loan losses
    15       (65 )     (6 )     1       (55 )
                                         
Charge-offs
    (184 )     -       -       (4 )     (188 )
Recoveries
    1       78       2       3       84  
Net (charge-offs) recoveries
    (183 )     78       2       (1 )     (104 )
                                         
Ending balance
  $ 446     $ 288     $ 44     $ -     $ 778  
 
 
13


(in 000's)
  For the Six months ended June 30, 2014  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans
Other
   
Total
 
Beginning balance
  $ 483     $ 280     $ 59     $ 17     $ 839  
Provision for loan losses
    65       15       (10 )     -       70  
                                         
Charge-offs
    (253 )     -       -       (18 )     (271 )
Recoveries
    2       -       3       14       19  
Net recoveries
    (251 )     -       3       (4 )     (252 )
                                         
Ending balance
  $ 297     $ 295     $ 52     $ 13     $ 657  

(in 000's)
  For the Six months ended June 30, 2013
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 891     $ 308     $ 5     $ -     $ 1,204  
Provision for loan losses
    77       (98 )     35       1       15  
                                         
Charge-offs
    (524 )     -       -       (4 )     (528 )
Recoveries
    2       78       4       3       87  
Net (charge-offs) recoveries
    (522 )     78       4       (1 )     (441 )
                                         
Ending balance
  $ 446     $ 288     $ 44       -     $ 778  

 (in 000's)
  June 30, 2014  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
                               
Period-end amount allocated to:
 
 
                         
   
 
                         
 Loans indivdually evaluated for impairment
  $ 121     $ 27     $ -     $ -     $ 148  
 Loans collectively  evaluated for impairment
    176       268       52       13       509  
    $ 297     $ 295     $ 52     $ 13     $ 657  
                                         
Loans, ending balance:
                                       
 Loans individually evaluated for impairment
  $ 229     $ 1,737     $ -     $ -     $ 1,966  
 Loans collectively  evaluated for impairment
    4,474       31,529       3,726       1,404       41,133  
Total
  $ 4,703     $ 33,266     $ 3,726     $ 1,404     $ 43,099  

    December 31, 2013  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
                               
Period-end amount allocated to:
 
 
                         
   
 
                         
 Loans indivdually evaluated for impairment
  $ 378     $ -     $ -     $ -     $ 378  
 Loans collectively  evaluated for impairment
    105       280       59       17       461  
    $ 483     $ 280     $ 59     $ 17     $ 839  
                                         
Loans, ending balance:
                                       
 Loans indivdually evaluated for impairment
  $ 492     $ 1,390     $ -     $ -     $ 1,882  
 Loans collectively  evaluated for impairment
    3,818       31,572       3,909       1,530       40,829  
Total
  $ 4,310     $ 32,962     $ 3,909     $ 1,530     $ 42,711  
 
 
14

 
Nonperforming and Nonaccrual and Past Due Loans
An age analysis of past due loans, segregated by class of loans, as of June 30, 2014 is as follows:
         
Accruing
                         
   
Loans
   
Loans 90 or
                         
(In 000's)
 
30-89 Days
   
More Days
         
Total Past
   
Current
       
   
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
   
Loans
   
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ 75     $ -     $ 181     $ 256     $ 1,827     $ 2,083  
     SBA loans
    -       -       48       48       604       652  
     Asset-based
    -       -       -       -       1,968       1,968  
        Total Commercial and industrial
    75       -       229       304       4,399       4,703  
                                                 
Commercial real estate:
                                               
     Commercial mortgages
    20       -       997       1,017       15,532       16,549  
     SBA loans
    -       -       124       124       427       551  
     Construction
    -       -       -       -       4,191       4,191  
     Religious organizations
    -       -       616       616       11,359       11,975  
         Total Commercial real estate
    20       -       1,737       1,757       31,509       33,266  
                                                 
Consumer real estate:
                                               
     Home equity loans
    -       -       413       413       712       1,125  
     Home equity lines of credit
    -       -       -       -       23       23  
     1-4 family residential mortgages
    -       -       309       309       2,269       2,578  
         Total consumer real estate
    -       -       722       722       3,004       3,726  
                                                 
Total real estate
    20       -       2,459       2,479       34,513       36,992  
                                                 
Consumer and other:
                                               
     Consumer installment
    -       -       -       -       9       9  
     Student loans
    113       122       -       235       1,023       1,258  
     Other
    3       -       -       3       134       137  
         Total consumer and other
    116       122       -       238       1,166       1,404  
                                                 
         Total loans
  $ 211     $ 122     $ 2,688     $ 3,021     $ 40,078     $ 43,099  
                                                 

An age analysis of past due loans, segregated by class of loans, as of December 31, 2013 is as follows:
         
Accruing
                         
   
Loans
   
Loans 90 or
                         
   
30-89 Days
   
More Days
         
Total Past
   
Current
       
(In 000's)
 
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
   
Loans
   
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ -     $ -     $ 444     $ 444     $ 1,214     $ 1,658  
     SBA loans
    -       -       130       130       455       585  
     Asset-based
    -       -       -       -       2,067       2,067  
        Total Commercial and industrial
    -       -       574       574       3,736       4,310  
                                                 
Commercial real estate:
                                               
      Commercial mortgages
    2       442       630       1,094       16,249       17,343  
      SBA loans
    184       -       -       184       382       566  
     Construction
    -       -       -       -       2,456       2,456  
     Religious organizations
    -       -       629       629       11,968       12,597  
         Total Commercial real estate
    206       442       1,259       1,907       31,055       32,962  
                                                 
Consumer real estate:
                                               
     Home equity loans
    209       147       115       471       705       1,176  
     Home equity lines of credit
    -       -       -       -       24       24  
     1-4 family residential mortgages
    125       -       242       367       2,342       2,709  
         Total consumer real estate
    334       147       357       838       3,071       3,909  
                                                 
Total real estate
    540       589       1,616       2,745       34,126       36,871  
                                                 
Consumer and other:
                                               
     Consumer installment
    -       -       -       -       16       16  
     Student loans
    87       141       -       228       1,138       1,366  
     Other
    5       -       -       5       143       148  
         Total consumer and other
    92       141       -       233       1,297       1,530  
                                                 
         Total loans
  $ 632     $ 730     $ 2,190     $ 3,552     $ 39,159     $ 42,711  
 
 
15

 
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 8 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.
 
·
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.
 
 
16

 
The tables below detail the Bank’s loans by class according to their credit quality indictors discussed above.

(In 000's)
  Commercial Loans June 30, 2014  
   
Good/
Excellent
   
Satisfactory
 
Pass
 
Special Mention
   
Substandard
   
Doubtful
   
Total
 
                                       
                                       
         
 
                           
Commercial and industrial:
                                     
    Commercial
  $ 250     $ 1,432   $ 220   $ -     $ 43     $ 138     $ 2,083  
    SBA loans
    -       564     -     40       48       -       652  
    Asset-based
    -       1,797     125     46       -       -       1,968  
      250       3,793     345     86       91       138       4,703  
Commercial real estate:
                                                   
    Commercial mortgages
    -       14,053     845     58       1,278       316       16,550  
     SBA Loans
    -       256     171     -       124       -       551  
    Construction
    -       4,191     -     -       -       -       4,191  
    Religious organizations
    -       9,829     910     619       616       -       11,974  
      -       28,329     1,926     677       2,018       316       33,266  
                                                     
Total commercial loans
  $ 250     $ 32,122   $ 2,271   $ 763     $ 2,109     $ 454     $ 37,969  
 
    Residential Mortgage and Consumer Loans June 30, 2014
   
Performing
   
Nonperforming
   
Total
   
 
                   
Consumer Real Estate:
                   
     Home equity
  $ 712     $ 413     $ 1,125    
     Home equity line of credit
    23       -       23    
     1-4 family residential mortgages
    2,269       309       2,578    
      3,004       722       3,726    
                           
Consumer Other:
                         
     Consumer Installment
    9       -       9    
     Student loans
    1,258       -       1,258    
     Other
    137       -       137    
      1,404       -       1,404    
                           
Total  consumer loans
  $ 4,408     $ 722     $ 5,130    
                           
Total loans
                       
$    43,099

 
17

 
(In 000's)
  Commercial Loans, December 31, 2013  
   
Good/ Excellent
   
Satisfactory
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
 
                                         
Commercial and industrial:
                                         
    Commercial
  $ 250     $ 743     $ 220     $ -     $ 52     $ 393     $ 1,658  
    SBA loans
    -       497       -       40       48       -       585  
    Asset-based
    -       1,897       124       46       -       -       2,067  
      250       3,137       344       86       100       393       4,310  
Commercial real estate:
                                                       
    Commercial mortgages
    -       15,232       883       -       912       316       17,343  
     SBA Loans
    -       265       171       -       150       -       566  
    Construction
    -       2,456       -       -       -       -       2,456  
    Religious organizations
    -       10,414       931       623       629       -       12,597  
      -       28,367       1,985       623       1,671       316       32,962  
                                                         
Total commercial loans
  $ 250     $ 31,504     $ 2,329     $ 709     $ 1,771     $ 709     $ 37,272  
                                                         
                                                         
 
    Residential Mortgage and Consumer Loans December 31, 2013
   
Performing
   
Nonperforming
   
Total
   
 
                   
Consumer Real Estate:
                   
     Home equity
  $ 1,061     $ 115     $ 1,176    
     Home equity line of credit
    24       -       24    
     1-4 family residential mortgages
    2,467       242       2,709    
      3,552       357       3,909    
                           
Consumer Other:
                         
     Consumer Installment
    16       -       16    
     Student loans
    1,366       -       1,366    
     Other
    148       -       148    
      1,530       -       1,530    
                           
Total  consumer loans
  $ 5,082     $ 357     $ 5,439    
                           
Total loans
                       
$  42,711
 
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; or 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.
 
The Company makes partial charge-offs of impaired loans when the impairment is deemed permanent and is considered a loss.  Specific reserves are allocated to cover “other-than-permanent” impairment for which the underlying collateral value may fluctuate with market conditions. In March 2014, the Bank charged off approximately $253,000 related to one impaired loan for which specific reserves had been previously allocated. There were no other partial charge-offs.

 
18

 
Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.
 
Impaired loans as of June 30, 2014 are set forth in the following table.
 
(In 000's)
 
Unpaid Contractual
   
Recorded
Investment
   
Recorded
Investment
   
Total
       
   
Principal
   
With No
   
With
   
Recorded
   
Related
 
   
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
                               
Commercial and industrial:
 
 
   
 
                   
  Commercial
  $ 181     $ 44     $ 137     $ 181     $ 73  
  SBA Loans
    48       -       48       48       48  
     Total commercial and industrial
    229       44       185       229       121  
                                         
Commercial real estate:
                                       
   Commercial mortgages
    997       621       376       997       27  
   SBA Loans
    124       124       -       124       -  
   Religious organizations
    616       616       -       616       -  
     Total commercial real estate
    1,737       1,361       376       1,737       27  
                                         
         Total loans
  $ 1,966     $ 1,405     $ 561     $ 1,966     $ 148  
 
Impaired loans as of December 31, 2013 are set forth in the following table.
 
(In 000's)
 
Unpaid Contractual
   
Recorded Investment
   
Recorded Investment
   
Total
       
   
Principal
   
With No
   
With
   
Recorded
   
Related
 
   
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
                               
Commercial and industrial:
       
 
                   
     Commercial
  $ 444     $ 47     $ 397     $ 444     $ 330  
     SBA loans
    48       -       48       48       48  
       Total commercial and industrial
    492       47       445       492       378  
                                         
Commercial real estate:
                                       
     Commercial mortgages
    630       630       -       630       -  
     SBA Loans
    130       130       -       130       -  
     Religious organizations
    630       630       -       630       -  
         Total commercial real estate
    1,390       1,390       -       1,390       -  
                                         
         Total loans
  $ 1,882     $ 1,437     $ 445     $ 1,882     $ 378  
 
 
19


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. The following tables present additional information about impaired loans.

         
Three Months Ended
         
Three Months Ended
 
(In 000's)
 
 
   
June 30, 2014
   
 
   
June 30, 2013
 
   
Average
   
Interest recognized
   
Average
   
Interest recognized
 
   
Recorded
   
on impaired
   
Recorded
   
on impaired
 
   
Investment
   
Loans
   
Investment
   
Loans
 
                         
Commercial and industrial:
                       
     Commercial
  $ 182     $ -     $ 512     $ -  
     SBA  loans
    48       -       49       -  
     Asset-based
    -       -       88       -  
        Total commercial and industrial
    230       -       649       -  
                                 
Commercial real estate:
                               
     Commercial mortgages
    998       -       639       4  
     SBA loans
    125       -       -       -  
     Religious organizations
    617       -       657       -  
         Total commercial real estate
    1,740       -       1,296       4  
                                 
         Total loans
  $ 1,970     $ -     $ 1,945     $ 4  

         
Six Months Ended
         
Six Months Ended
 
(In 000's)
 
 
   
June 30, 2014
   
 
   
June 30, 2013
 
   
Average
   
Interest recognized
   
Average
   
Interest recognized
 
   
Recorded
   
on impaired
   
Recorded
   
on impaired
 
   
Investment
   
Loans
   
Investment
   
Loans
 
                         
Commercial and industrial:
                       
     Commercial
  $ 269     $ -     $ 626     $ -  
     SBA  loans
    48       -       49       1  
     Asset-based
    -       -       99       -  
        Total commercial and industrial
    317       -       649       1  
                                 
Commercial real estate:
                               
     Commercial mortgages
    875       -       640       -  
     SBA loans
    126       -       -       -  
     Religious organizations
    620       2       614       -  
         Total commercial real estate
    1,621       2       1,254       -  
                                 
         Total loans
  $ 1,938     $ 2     $ 2,028     $ 1  
                                 

 
20

 
Troubled debt restructurings (“TDRs”).  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal.  The terms of these loans do not include any financial concessions and are consistent with the current market.  Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties).  Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring.  Therefore, the Company had no troubled debt restructurings at June 30, 2014 and December 31, 2013.
 
7. Other Real Estate Owned
 
Other real estate owned (“OREO”) consists of properties acquired as a result of deed in-lieu-of foreclosure and foreclosures. Properties or other assets are classified as OREO and are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense.

 
Activity in other real estate owned for the periods was as follows:
 

(in 000's)
 
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
                         
Beginning balance
  $ 433     $ 718     $ 433     $ 775  
Additions, transfers from loans
    -       -       -       -  
Proceeds from sales
    -       (65 )     -       (92 )
      433       653       433       683  
Write-downs and net gains (losses) on sales
    (13 )     (126 )     (13 )     (156 )
Ending Balance
  $ 420     $ 527     $ 420     $ 527  
 
The following schedule reflects the components of other real estate owned:
 
(in 000's)
 
June 30, 2014
   
December 31, 2013
 
Commercial real estate
  $ 191     $ 191  
Residential real estate
    229       242  
     Total
  $ 420     $ 433  
 
The following table details the components of net expense of other real estate owned:
 
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
(in 000's)
 
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
Insurance
  $ 7     $ 4     $ 11     $ 10  
Professional fees
    -       -       -       -  
Real estate taxes
    4       5       11       11  
Utilities
    1       -       2       2  
Other
    -       2       -       2  
Transfer-in write-up
    -       -       -       -  
Impairment charges (net)
    13       113       13       143  
    Total
  $ 25     $ 124     $ 37     $ 168  
 
8.  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:
 
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
 
·
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.

Loans Held for Sale. Fair values are estimated by using actual quoted market bids on a loan by loan basis.
 
Loans Held at Fair Value. Fair values are estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

 
21

 
Assets on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.
 
(in 000’s)
       
Fair Value Measurements at Reporting Date Using:
 
             
   
Assets
Measured at Fair Value at June 30, 2014
   
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:                        
U.S. Government agency securities
  $ 3,999     $ -     $ 3,999     $ -  
Government Sponsored Enterprises residential mortgage-backed securities
    5,539       -       5,539       -  
Money Market Funds
    129       129       -       -  
         Total
  $ 9,667     $ 129     $ 9,538     $ -  
Loans held at fair value
  $ 442     $ -     $ -     $ 442  
 
(in 000’s)
       
Fair Value Measurements at Reporting Date Using:
 
             
   
Assets
Measured at Fair Value at
December 31, 2013
   
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:                        
U.S. Government Agency securities
  $ 3,802     $ -     $ 3,802     $ -  
Government Sponsored Enterprises residential mortgage-backed securities
     5,649       -       5,649        -  
Money Market Funds
    129       129       -       -  
     Total
  $ 9,580     $ 129     $ 9,541     $ -  
Loans held for sale
  $ 1,646     $ -     $ 1,646     $ -  
Loans held at fair value
  $ 447     $ -     $ -     $ 447  
 
The fair value of the Bank’s AFS securities portfolio was approximately $9,667,000 and $9,580,000 at June 30, 2014, and December 31, 2013, respectively. At June 30, 2014, approximately 57% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of approximately $5,539,000.  At December 31, 2013, approximately 59% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of approximately $5,649,000.  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.  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 June 30, 2014 and year ended December 31, 2013.

 
22

 
When estimating the fair value of Level 3 financial instruments, management uses various observable and unobservable inputs.  These inputs include estimated cashflows, prepayment speeds, average projected default rate and discount rates as follows:
 
(in 000’s)
Assets measured at fair value
 
June 30,
2014
Fair value
   
December 31, 2013
Fair Value
 
Principal valuation techniques
Significant observable inputs
 
June 30, 2014
Range of inputs
   
December 31, 2013
Range of inputs
 
Loans held at fair value:
  $ 442     $ 447  
Discounted cash flow
Constant prepayment rate
 
7.194% to 7.456%
   
7.74% to 7.985%
 
                   
Weighted average discount rate
 
8.031% to 8.033%
   
9.106% to 9.111%
 
                   
Weighted average life
 
3.97 yrs to 4.00 yrs
   
4.08 yrs to 4.11 yrs
 
                   
Average projected default rate
    18 %     18 %
 
Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, fair value as determined by management may fluctuate from period to period.
 
The following table summarizes additional information about assets measured at fair value on a recurring basis for which level 3 inputs were utilized to determine fair value:
 
(in 000’s)
 
Loans held at
fair value
 
Balance at December 31, 2013
  $ 447  
Origination of loans
    -  
Principal repayments
    (2 )
Change in fair value of financial instruments
    (3 )
Balance at June 30, 2014
  $ 442  
 
Fair Value on a Nonrecurring Basis
 
Certain assets are not measured at fair value on a recurring 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 carried on the consolidated balance sheet by level within the hierarchy as of June 30, 2014 and December 31, 2013, for which a nonrecurring change in fair value has been recorded during the six months ended June 30, 2014 and year ended December 31, 2013.

 
 Carrying Value at June 30, 2014:
(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 6 months ended
 
 
Impaired loans
  $ 1,966     $ -     $ -     $ 1,966     $ (27 )
Other real estate owned (“OREO”)
     420        -        -        420       (13 )
 
 
23


Carrying Value at December 31, 2013:
(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
 
 
Impaired Loans
  $ 1,882     $ -     $ -     $ 1,882     $ (59 )
Other real estate owned (“OREO”)
       433          -         -         433       ( 157 )
 
The measured impairment for collateral dependent of impaired loans is determined by the fair value of the collateral less estimated liquidation costs.  Collateral values for loans and OREO are determined by annual or more frequent appraisals if warranted by volatile market conditions, which may be discounted up to 10% based upon management’s review and the estimated cost of liquidation. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made on the appraisal process by the appraisers for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation allowance for impaired loans is adjusted as necessary based on changes in the value of collateral as well as the cost of liquidation.  It is included in the allowance for loan losses in the consolidated statements of condition.
 
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.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
 
Loans Held at Fair Value: The fair value of loans held at fair value was estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, default and voluntary prepayments as well as loan specific assumptions for losses and recoveries.

Loans Held for Sale. Fair values for loans held for sale are estimated by using actual quoted market bids on a loan by loan basis.
 
Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated pre­payments, amortizations, and non performance risk.  Prepayments and discount rates were based on current marketplace estimates and rates.
 
 Accrued interest receivable:  The carrying amount of accrued interest receivable approximates fair value.
 
Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts).  The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation.  The Treasury yield curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.
 
 
24

 
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
 
 
          June 30, 2014      December 31, 2013  
(in 000’s)
 
Level in
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Value Hierarchy
   
Amount
   
Value
   
Amount
   
Value
 
(Dollars in thousands)
                             
Assets:
                             
Cash and cash equivalents
 
Level 1
    $ 5,810     $ 5,810     $ 5,790     $ 5,790  
Available for sale securities
    (1 )     9,667       9,667       9,580       9,580  
Loans held for sale
 
Level 2
      -       -       1,646       1,646  
Loans, net of allowance for loan losses
    (2 )     42,442       42,749       42,711       43,304  
Accrued interest receivable
 
Level 2
      259       259       256       256  
Liabilities:
                                       
Demand deposits
 
Level 2
      28,691       28,691       28,658       28,658  
Savings deposits
 
Level 2
      12,394       12,394       12,988       12,988  
Time deposits
 
Level 2
      15,143       15,162       15,463       15,472  
Accrued interest payable
 
Level 2
      13       13       13       13  
 
(1) Level 1 for money market funds; Level 2 for all other securities.
(2) Level 2 for non-impaired loans; Level 3 for impaired loans, Level 3 for $442,000 and $447,000 held at fair value at June 30, 2014 and December 31, 2013, respectively.

9. Regulatory
On January 31, 2012, the Bank entered into stipulations consenting to the issuance of Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”).  The material terms of the Consent Orders are identical.  The requirements and status of items included in the Consent Orders are as follows:

Requirement
 
Status
Increase participation of the Bank’s board of directors in the Bank’s affairs by having the board assume full responsibility for approving the Bank’s policies and objectives and for supervising the Bank’s management;
 
Board participation improved with attendance at board and committee meetings.
     
Have and retain qualified management, and notify the FDIC and the Department of any changes in the Bank’s board of directors or senior executive officers;
 
A management assessment was completed in June 2012 in conjunction with the required management review and written management plan with benchmarks for recommended enhancements.
     
Retain a bank consultant acceptable to the FDIC and the Department to develop a written analysis and assessment of the Bank’s management needs and thereafter formulate a written management plan;
 
An engagement letter from a qualified consultant was received and approved by the Bank’s regulators.  Upon acceptance, the review commenced in May 2012 and was completed in June 2012.
     
Formulate and implement written profit and budget plans for each year during which the orders are in effect;
 
Profit and budget plans have been prepared and submitted to regulators as required annually.
 
 
 
Develop and implement a strategic plan for each year during which the orders are in effect, to be revised annually;
 
An annual comprehensive strategic plan was prepared and submitted to regulators as required.
     
Develop a written capital plan detailing the manner in which the Bank will meet and maintain a ratio of Tier 1 capital to total assets (“leverage ratio”) of at least 8.5% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) of at least 12.5%, within a reasonable but unspecified time period;
 
A capital plan with quarterly benchmarks was prepared and submitted to regulators as required annually.
     
 
 
25

 
Requirement
 
Status
Formulate a written plan to reduce the Bank’s risk positions in each asset or loan in excess of $100,000 classified as “Doubtful” or “Substandard” at its regulatory examination;
 
A classified asset reduction plan with quarterly benchmarks measured against capital was prepared and submitted as required.
     
Eliminate all assets classified as “Loss” at its current regulatory examination;
 
All assets classified as “Loss” have been eliminated.
     
Revise the Bank’s loan policy to establish and monitor procedures for adherence to the loan policy and to eliminate credit administration and underwriting deficiencies identified at its current regulatory examination;
 
The Bank’s loan policy has been revised to include enhanced monitoring procedures and submitted as required.
     
Develop a comprehensive policy and methodology for determining the allowance for loan and lease losses;
 
The ALLL policy and methodology for determining the allowance for loan losses were submitted as required.
     
Develop an interest rate risk policy and procedures to identify, measure, monitor and control the nature and amount of interest rate risk the Bank takes;
 
The Bank’s interest rate risk policy and procedures were submitted to regulators as required.
     
Revise its liquidity and funds management policy and update and review the policy annually;
 
The Bank’s liquidity policy and contingency plan were submitted to regulators for review as required.
     
Refrain from accepting any brokered deposits;
 
The Bank did not accept brokered deposits.
     
Refrain from paying cash dividends without prior approval of the FDIC and the Department;
 
The Bank did not pay cash dividends.
     
Establish an oversight committee of the board of directors of the Bank with the responsibility to ensure the Bank’s compliance with the orders, and
 
An oversight committee consisting of three outside directors and one inside director was established and meets periodically to ensure compliance with the orders.
     
Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the orders.
 
Quarterly reports were prepared and submitted   as required.

The Orders will remain in effect until modified or terminated by the FDIC and the Department and do not restrict the Bank from transacting its normal banking business.  The Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions.  Customer deposits remain fully insured to the highest limits set by the FDIC.  The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Consent Orders.

As of June 30, 2014 and December 31, 2013, the Bank’s tier one leverage capital ratio was 5.12% and 5.67%, respectively, and its total risk based capital ratio was 9.23% and 9.48%, respectively.   Year-to-date losses continue to erode capital.  Also, the total risk based capital ratio decreased because of an increase in loans that carry a higher risk weight than cash or investments.  Management has developed and submitted a Capital Plan that focuses on the following:

 
1.
Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital.
 
2.
External equity investments—an investment banker has been engaged to help the Bank generate external capital investments.

As a result of the above actions, management believes that the Bank has and will continue to attempt to comply with the terms and conditions of the Orders and will continue to operate as a going concern and an independent financial institution for the foreseeable future.

 
26



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 companies, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), 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; (l) the recent downgrade , and any future downgrades, in the credit rating of the United States Government and federal agencies; (m) changes in technology being more expensive or difficult than expected; (n) the ability of key third party providers to perform their obligations to UBS and; (o) the Bank and UBS’ success in managing the risks involved in the foregoing, and (m) failure to comply with the Consent Orders with the FDIC and the Pennsylvania Department of Banking.

All written or oral forward-looking statements attributed to the Company 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.

 
27


Overview
 
The Company reported a net loss of approximately $203,000 ($0.19 per common share) for the quarter ended June 30, 2014 compared to net income of approximately $96,000 ($0.09 per common share) for the same quarter in 2013.   The Company reported a net loss of approximately $424,000 ($0.40 per common share) for the six months ended June 30, 2014 compared to a net loss of approximately $243,000 ($0.23 per common share) for the same period in 2013.   Net income during the quarter in 2013 was primarily related to a nonrecurring gain on the sale of investment securities.  Although there has been a reduction in noninterest expenses, operating losses continue as a result of a decline in the Bank’s average earning assets related to deposit attrition resulting in the inability to achieve economies of scale. Management remains committed to further improving the Company’s operating performance by implementing more effective strategies to achieve and sustain profitability, augment capital, and manage loan and other real estate portfolios. The following actions are crucial to enhancing the Company’s future financial performance:
 
Increase Capital.  The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood; however, capital continues to decline as a result of operating losses.  A concentrated effort will be made to stabilize and strengthen the Bank’s capital by the following:
 
 
·
Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital.  Refer to the Earnings Enhancement discussion below.
 
·
External equity investments—Potential investors will be sought in 2014 to generate a minimum investment of $1 million.
 
The Bank is a CDFI and may have the ability to utilize programs of the U.S. Treasury’s CDFI Fund to supplement capital.  The Bank Enterprise Award (BEA) Program and Technical Assistance (TA) Program were created to support FDIC-insured financial institutions, like the Bank, around the country that are dedicated to financing and supporting community and economic development activities. These programs complement the community development activities of insured depository institutions (i.e., banks and thrifts) by providing financial incentives to expand investments in CDFIs and to increase lending, investment, and service activities within economically distressed communities. In May 2014, an application was submitted for a grant from the BEA Fund for which notification of award is expected to be received by September 30, 2014.
 
Manage asset quality to minimize credit losses and reduce collection costs. Asset quality trends showed some improvement during the quarter ended June 30, 2014 compared to the first quarter in 2014 with a reduction in delinquencies; however, the level of classified loans remained relatively unchanged. Management will seek to make further progress by enhancing its underwriting and customer relationship management practices.  In addition, proactive monitoring of the loan portfolio is essential to the identification of emerging problem credits and is performed during bi-weekly Asset Quality Committee meetings.  In conjunction with its regulatory orders, management has developed a Classified Asset Reduction Plan that is being utilized to reduce the level of non-performing assets. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary and may result in increased loan and collection expense.
 
Earnings enhancement plan. Management seeks to increase noninterest income and further reduce noninterest expense to achieve core earnings. A strategy of increased SBA loan origination with sales of the guaranteed portion in the secondary market for a gain has been initiated.   Although there were no sales during the quarter, there is a growing pipeline of SBA loans that are expected to close during 2014.  In addition, management will seek new sources of fee income by offering other products including merchant services, insurance, and other relevant services for small businesses.
 
Improvement has been made in reducing and controlling noninterest expense in 2014 compared to 2013; however, the Bank’s noninterest expense remains elevated when compared to its peer group.  The Bank continues to incur a higher level of professional service fees (audit and legal) because of its SEC filing requirements as a result of having in excess of 1,200 shareholders. Further savings and efficiencies, where possible, including the following:

 
1.
Review and re-negotiation of significant contracts (i.e. data processing, credit card, Electronic Funds Transfer(“EFT”) services, etc.)-The Bank’s EFT contract expires in August 2014 at which time EFT services will be consolidated with the Bank’s core vendor to achieve operational and cost efficiencies.
 
2.
Sale and/or other disposition of other real estate properties to reduce ongoing carrying costs— The Bank has gradually reduced the level of other real estate and related expenses.
 
 
28

 
The amortization of the Bank’s core deposit intangible related to a premium paid for a branch acquisition was completed in October 2013.  Going forward, the completion of this amortization reduces the Bank’s amortization expense by more than $100,000 annually.
 
Another challenge to increased earnings has been the reduction in the volume of earning assets. Although the Bank’s net interest margins and related net interest income increased slightly compared to 2013 because of a shift in asset allocation to higher yielding loans instead of investments and Federal Funds Sold; asset growth is restricted because of the Bank’s current capital levels.  Management must continue to balance asset growth with capital adequacy requirements.

Significant 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 significant accounting policies are presented in Note 1 to the  Company’s audited consolidated financial statements filed as part of the 2013 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
June 30, 2014
   
 
 
 
Quarter ended
June 30, 2013
   
 
 
 
Six Months ended
June 30, 2014
   
 
 
 
Six Months ended
June 30, 2013
 
Statement of operations information:
                       
Net interest income
  $ 682     $ 680     $ 1,377     $ 1,374  
Provision for loan losses
    30       (55 )     70       15  
Noninterest income
    252       654       423       850  
Noninterest expense
    1,107       1,293       2,155       2,451  
Net (loss) income
    (203 )     96       (424 )     (243 )
Net (loss) income per share-basic and diluted
    (0.19 )     0.09       (0.40 )     (0.23 )
                                 
Balance Sheet information:
 
June 30,
2014
   
December 31, 2013
                 
Total assets
  $ 59,636     $ 60,751                  
Loans, net
    42,442       41,871                  
Investment securities
    9,667       9,580                  
Deposits
    56,228       57,110                  
Shareholders' equity
    3,041       3,210                  
                                 
Ratios*:
 
Quarter ended
June 30, 2014
   
Quarter ended
June 30, 2013
                 
Return on assets
    (1.35 )%     0.23 %                
Return on equity
    (25.57 )     3.82 %                
*annualized

 
29

 
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 $775,000, or 1.33% during the quarter ended June 30, 2014 compared to the quarter ended March 31, 2014. Average funding sources declined approximately $449,000, or 0.79%, during the same quarter.

Sources and Uses of Funds Trends
(Thousands of Dollars, except
percentages)
   
June 30, 2014
               
March 31, 2014
 
 
 
Average
   
Increase (Decrease)
   
Increase (Decrease)
   
Average
 
   
Balance
   
Amount
   
%
   
Balance
 
Funding uses:
                       
Loans
  $ 43,201     $ (354 )     (0.81 )%   $ 43,555  
    Investment Securities
    9,887       (134 )     (1.34 )     10,021  
Federal funds sold
    4,173       (290 )     (6.50 )     4,463  
Balances with other banks
    310       3       0.98       307  
Total  uses
  $ 57,571     $ (775 )     (1.33 )   $ 58,346  
Funding sources:
                               
Demand deposits
                               
Noninterest-bearing
  $ 14,675     $ (161 )     (1.09 )   $ 14,836  
Interest-bearing
    13,943       116       0.84       13,827  
Savings deposits
    12,793       (142 )     (1.10 )     12,935  
Time deposits
    15,279       (262 )     (1.69 )     15,541  
Total sources
  $ 56,690     $ (449 )     (0.79 )   $ 57,139  
 
Loans
Average loans decreased by approximately $354,000, or 0.81%, during the quarter ended June 30, 2014. Although the Bank originated more than $1.5 million in loans during the quarter, payoffs and paydowns totaled approximately $1.4 million during the quarter.  In addition, in January 2014, the Bank’ sold the guaranteed portion of SBA loans totaling approximately $1.4 million which was consistent with its strategy of building both outstanding loans as well as fee income from loan sales. The Bank’s commercial loan pipeline continues to grow with a specific focus on SBA loan origination. At June 30, 2014, the pipeline totaled more than $6 million in loans that are expected to close during the second half of 2014.  The Bank’s consumer and residential mortgage loan portfolios continue to decline as a result of residential mortgages and home equity repayment activity as consumers refinance to take advantage of the continued low interest rate environment.  The Bank does not originate residential mortgage loans and made a strategic shift in its lending program in 2012 to phase out consumer lending, including home equity loans and lines of credit.

The Bank’s loan portfolio continues to be concentrated in commercial real estate loans that comprise approximately $33.2 million, or 77.19%, of total loans at June 30, 2014 of which approximately $16.3 million are owner occupied.  The Bank continues to have a strong niche in lending to religious organizations for which total loans at June 30, 2014 were approximately $12 million, or 36%, of the commercial real estate portfolio.   Management closely monitors this concentration to proactively identify and manage credit risk in light of the current economic conditions that could negatively impact the level of tithes and offerings that provide cash flow for repayment.  The composition of the net loans is as follows:

 
30



   
June 30,
   
December 31,
 
(In 000's)
 
2014
   
2013
 
             
             
Commercial and industrial:
           
     Commercial
  $ 2,083     $ 1,658  
     SBA loans
    652       585  
     Asset-based
    1,968       2,067  
        Total commercial and industrial
    4,703       4,310  
                 
Commercial real estate:
               
                 
     Commercial mortgages
    16,549       17,343  
     SBA loans
    551       566  
     Construction
    4,191       2,456  
     Religious organizations
    11,975       12,597  
         Total commercial real estate
    33,266       32,962  
                 
Consumer real estate:
               
     Home equity loans
    1,125       1,176  
     Home equity lines of credit
    23       24  
     1-4 family residential mortgages
    2,578       2,709  
         Total consumer real estate
    3,726       3,909  
                 
Total real estate
    36,992       36,871  
                 
Consumer and other:
               
     Consumer installment
    9       16  
     Student loans
    1,258       1,366  
     Other
    137       148  
         Total consumer and other
    1,404       1,530  
                 
         Loans, net
  $ 43,099     $ 42,711  
 
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 charge-off history and various qualitative factors including delinquency trends, loan terms, regulatory environment, economic conditions, concentrations of credit risk and other relevant data.  The Bank utilizes an eight rolling quarter historical loss factor as management believes this best represents the current trends and market conditions.  The allowance for loan losses as a percentage of total loans was 1.52% at June 30, 2014 compared to 1.89% at December 31, 2013.  The reduction is related to a $253,000 charge-off of the portion of one impaired loan during the quarter ended March 31, 2014 for which a specific reserve was previously allocated.

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.  Impaired loans totaled approximately $1,966,000 at June 30, 2014 compared to $1,882,000 at December 31, 2013. The valuation allowance associated with impaired loans was approximately $148,000 and $378,000, at June 30, 2014 and December 31, 2013, respectively. The increase in impaired loans is attributable to the transfer of one commercial real estate loan totaling $376,000 to impairment status during the quarter ended March 31, 2014 that was offset by the charge-off of approximately $253,000 related to one impaired commercial and industrial loan for which a specific reserve had been previously allocated.  Management continues to work to reduce the level of classified and impaired loans. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary.

At June 30, 2014 and December 31, 2013, loans to religious organizations represented approximately $615,000 and $630,000, respectively, of total impaired loans. Management continues to work closely with its attorneys and the leadership of these organizations in an attempt to develop suitable repayment plans to avoid foreclosure.  In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.

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
 
 
31

 
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 decreased from 38.31% at December 31, 2013 to 24.44% at June 30, 2014 primarily as a result of charge-off activity as well as an increased level of nonperforming consumer and commercial mortgage loans during the quarter ended March 31, 2014. The level of nonperforming loans to total loans increased from 5.28% at December 31, 2013 to 6.25% at June 30, 2014. Approximately 91% of nonperforming loans are secured by real estate which serves to mitigate the risk of loss.

Loans more than 90 days past due that are still in the process of collection for which the full payment of principal and interest can reasonably be expected are not considered nonperforming.  The following table sets forth information concerning nonperforming loans and nonperforming assets.

(In 000's)
 
June 30,
2014
   
December 31, 2013
 
Commercial and industrial:
           
     Commercial
  $ 181     $ 444  
     SBA loans
    48       -  
     Asset-based
    -       130  
        Total commercial and industrial
    229       574  
                 
Commercial real estate:
               
     Commercial mortgages
    997       630  
     SBA loans
    124       -  
     Religious organizations
    616       629  
         Total commercial real estate
    1,737       1,259  
                 
Consumer real estate:
               
     Home equity loans
    413       115  
     1-4 family residential mortgages
    309       242  
         Total consumer real estate
    722       357  
                 
Total real estate
    2,459       1,616  
                 
                 
         Total nonperforming loans
    2,688       2,190  
         OREO
    420       433  
         Total nonperforming assets
  $ 3,108     $ 2,623  
                 
Nonperforming loans to total loans
    6.25 %     5.28 %
Nonperforming assets to total loans and OREO
    7.15 %     6.26 %
Nonperforming assets to total assets
    5.21 %     4.33 %
                 
Allowance for loan losses as a percentage of:
               
     Total loans
    1.52 %     1.89 %
     Total nonperforming loans
    24.44 %     38.31 %

 
32

 
The following table sets forth information related to loans past due 90 days or more and still accruing interest.

(In 000's)
 
June 30,
2014
   
December 31,
 2013
 
Commercial real estate:
           
     Commercial mortgages
  $ -     $ 442  
         Total commercial real estate
    -       442  
                 
Consumer real estate:
               
     Home equity loans
    -       147  
         Total consumer real estate
    -       147  
                 
Consumer and other:
               
     Student loans
    122       141  
         Total consumer and other
    122       141  
                 
         Total
  $ 122     $ 730  
 
Investment Securities and Other Short-term Investments
Average investment securities decreased by approximately $134,000, or 1.34%, during the quarter ended June 30, 2014. The decrease was related to monthly paydown activity in the mortgage-backed security portfolio.
 
The average yield on the investment portfolio was 2.39% for the quarter ended June 30, 2014 compared to 2.52% for the quarter ended December 31, 2013.  The duration of the portfolio shortened to 3.9 years at June 30, 2014 compared to 4.7 years at December 31, 2013 as a result of market rate changes during the year.  Amortizing GSE mortgage-backed securities approximate 58% of the portfolio. The payments of principal and interest on these pools of GSE loans serve to provide monthly cashflow and 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 relatively short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.

Deposits
During the quarter ended June 30, 2014, average deposits decreased approximately $449,000, or 0.79%. The decline was concentrated in the Bank’s certificate of deposit account balances that fell by $262,000, or 1.69%, as the result of the non-renewal of a corporate deposit.  In general, the Bank is not seeking certificates of deposit from its corporate customers as they generally carry a higher cost and are more labor intensive because of rollover negotiations and setup.  Money market accounts are preferred because of their core nature as well as their flexibility and lower cost.

Average savings deposits declined by approximately $142,000, or 1.10%, as a result of general attrition as well as a customer in the construction industry that maintained reserve funds that were utilized at project completion.

Interest bearing checking account balances grew by $116,000, or 0.84%, while noninterest bearing checking account balances declined by $161,000, or 1.09%, as a result of customers that receive contract-related funding for which there are wide fluctuations in balances.   As small business loans are originated, primary operating accounts are required to be maintained at the Bank which serves to grow core deposits.
 
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.
 
 
33


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:
 
 
   
June 30,
2014
   
December 31,
2013
 
Commitments to extend credit
  $ 12,296,000     $ 10,278,928  
Standby letters of credit
    1,035,000       1,050,832  

The level of commitments at June 30, 2014 increased during the quarter as a result several approved but unfunded SBA loans totaling $3 million that are projected to fund and close during the quarter ended September 30, 2014.  After funded, the guaranteed portion of these loans will be sold in the secondary market.  In addition, more than $4 million of the Bank’s outstanding commitments consist of unused lines of credit with Fortune 500 corporations for which the Bank leads and/or participates in syndications that are not expected to be drawn upon.

Liquidity
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.

By policy, the Bank’s minimum level of liquidity is 6.00% of total assets.  At June 30, 2014, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $5.8 million, or 9.74% of total assets, relatively unchanged compared to $5.8 million, or 9.53%, at December 31, 2013.
 
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. In conjunction with the investment transaction executed in 2013, the Bank reclassified its entire portfolio to available-for-sale; thereby, increasing sources of liquidity.  Some 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.

Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity.  Approximately $13 million in loans are scheduled to mature within one year.
 
To ensure the ongoing adequacy of liquidity, the following contingency strategies will be utilized in order of priority, if necessary:
 
 
·
Seek non-public deposits from existing private sector customers; specifically, additional deposits from members of the National Bankers Association will be considered a potential source.
 
·
Sell participations of existing commercial credits to other financial institutions in the region and/or NBA member banks based on participation agreements.

The Bank’s contingent funding sources  include the Discount Window at the Federal Reserve Bank for which it currently has $750,000 in securities pledged that result in borrowing capacity of approximately $617,000.  In light of the Bank’s regulatory Orders and “Troubled Bank” designation, 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.

 
34

 
Interest rate sensitivity
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 June 30, 2014, a positive gap position is maintained on a cumulative basis through 1 year of 9.22% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis and represents a decline from the December 31, 2013 positive gap position of 9.58%. This decrease resulted from the reduction in Federal Funds Sold created by a decline in deposit balances.  This position makes the Bank’s net interest income more favorable in a rising interest rate environment. The most recent economic forecast suggests no further decline in rates but rather increases.  Therefore, management does not believe the interest rate risk associated with the Bank’s current position to be significant.  Management will continue review and monitor the structure and rates on investment purchases, new loan originations and renewals to manage the interest rate risk profile within acceptable limits.

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 June 30, 2014, the change in the market value of equity in a +200 basis point interest rate change is -35.7%, in excess of the policy limit of 25%, and -65.2% in a +400 basis point interest rate change, in excess of the policy limit of -50%.  The exception to policy is primarily related to the decline in capital as well as the 2013 bond transaction for which longer term fixed rate bonds and mortgage-backed securities were purchased that decline in value when interest rates rise.  The analysis is prepared on a static basis however, because more than 50% of the portfolio includes amortizing securities, market risk should gradually decline as cashflows are reinvested in the current market.  Also, management will continue to mitigate this risk by originating more variable rate loans or structure short maturity balloon mortgages.  Although the economic value of equity is in excess of policy, interest-rate exposure is considered reasonable and manageable at June 30, 2014.

Capital Resources
Total shareholders' equity decreased approximately $169,000 compared to December 31, 2013 as a result of the net loss of approximately $424,000 during the six months ended June 30, 2014 offset by other comprehensive income of approximately $255,000 related to a decrease in the unrealized loss on the securities classified as available-for-sale.
 
The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood.  A concentrated effort will be made to stabilize and strengthen the Bank’s capital through the generation of core profitability from Bank operations and external investment.  The Bank will seek to raise additional equity investments to comply with its regulatory order.
 
Federal and state banking laws impose on financial institutions such as UBS and the Bank certain minimum requirements for capital adequacies.  The Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk rated assets of 8%.  At least half of the total capital must be composed of “Tier I Capital” which is defined as common equity, retained earnings and qualified perpetual preferred stock, less certain intangibles.  The remainder may consist of “Tier II Capital” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance.  Also, federal banking regulatory agencies have established minimum leverage capital requirements for banking organizations.  Under these requirements, banking organizations must maintain a minimum of Tier I Capital to adjusted average quarterly assets equal to 3% to 5%, subject to bank regulatory evaluation of an organization’s overall safety and soundness.  Under the federal banking regulations, a financial institution would be deemed to “adequately capitalized” or better if it exceeds the minimum federal regulatory capital requirements.  A financial institution would be deemed “undercapitalized” if it fails to meet the minimum capital requirements and significantly undercapitalized if it has a total risk based capital ratio that is less than 6%, Tier I risk based capital ratio is less than 3%, or a leverage ratio that is less than 3% and “critically
 
 
35

 
undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to less than 2%.  UBS and the Bank are “adequately-capitalized” for regulatory capital purposes based upon the most recent notification under regulatory framework for prompt corrective action.
 
On January 31, 2012, the Bank entered into a Consent Order with its primary regulators that requires the development of a written capital plan ("Capital Plan") that details the manner in which the Bank will meet and maintain a Leverage Ratio of at least 8.50% and a Total Risk-Based Capital Ratio of at least 12.50%.  At a minimum, the Capital Plan must include specific benchmark Leverage Ratios and Total Risk-Based Capital Ratios to be met at each calendar quarter-end, until the required capital levels are achieved.
 
As indicated in table below, the Bank’s risk-based capital ratios are above the general minimum requirements but below those required by the Consent Orders.    Management has developed a Capital Plan that includes profitability and external investment to improve its capital ratios.   The Company and the Bank do not anticipate paying dividends in the near future.
 
The Bank’s risk-based capital ratios are above the general minimum requirements but below those required by the Consent Orders.  The Company and the Bank’s actual capital amounts and ratios are as follows:

(In 000’s)                                   
                                                   
    Actual     For capital 
Adequacy purposes 
   
To be well capitalized under
Prompt corrective actions provisions
 
June 30, 2014
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total capital to risk-weighted assets:
                                   
     Consolidated
  $ 3,559       9.23 %   $ 3,086       8.00 %     N/A    
 
 
     Bank
    3,559       9.23       3,086       8.00 %   $ 3,858       10.00 %
Tier I capital to risk-weighted assets:
                                               
     Consolidated
    3,075       7.97       1,543       4.00 %     N/A          
     Bank
    3,075       7.97       1,543       4.00 %     2,315       6.00 %
Tier I capital to average assets:
                                               
     Consolidated
    3,075       5.12       2,401       4.00 %     N/A          
      Bank
    3,075       5.12       2,401       4.00 %     3,002       5.00 %
 
 (In 000’s)  
                                                                                     
    Actual     For capital 
Adequacy purposes 
   
To be well capitalized under
Prompt corrective actions provisions
 
December 31, 2013
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
Total capital to risk-weighted assets:
                                   
     Consolidated
  $ 4,067       9.48 %   $ 3,427       8.00 %     N/A        
     Bank
    4,067       9.48       3,427       8.00 %   $ 4,284       10.00 %
Tier I capital to risk-weighted assets:
                                               
     Consolidated
    3,525       8.22       1,713       4.00 %     N/A          
     Bank
    3,525       8.22       1,713       4.00 %     2,570       6.00 %
Tier I capital to average assets:
                                               
     Consolidated
    3,525       5.67       2,485       4.00 %     N/A          
      Bank
    3,525       5.67       2,485       4.00 %     3,107       5.00 %

Results of Operations

Summary

The Company reported a net loss of approximately $203,000 ($0.19 per common share) for the quarter ended June 30, 2014 compared to net income of approximately $96,000 ($0.09 per common share) for the same quarter in 2013.   The Company reported a net loss of approximately $424,000 ($0.40 per common share) for the six months ended June 30, 2014 compared to a net loss of approximately $243,000 ($0.23 per common share) for the same period in 2013.   Net income for the quarter in 2013 was the result of a nonrecurring gain on the sale of investment securities.  Although there has been a reduction in noninterest expenses, operating losses continue as a result of a decline in the Bank’s average earning assets related to deposit attrition resulting in the inability to achieve economies of scale.  A detailed explanation of each component of operations is included in the sections below.
 
 
36


Net Interest Income

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

Average Balances, Rates, and Interest Income and Expense Summary
     Three months ended June 30, 2014     Three months ended June 30, 2013  
(in 000’s)
 
Average Balance
   
Interest
   
Yield/Rate
   
Average Balance
   
Interest
   
Yield/Rate
 
                                     
Assets:
                                   
Interest-earning assets:
                                   
     Loans
  $ 43,201     $ 639       5.92 %   $ 41,128     $ 630       6.13 %
     Investment securities
    9,887       59       2.39       10,655       67       2.52  
     Federal funds sold
    4,173       2       0.19       6,241       3       0.19  
     Interest bearing balances with other banks
    310       -       -       306       -       -  
        Total interest-earning assets
    57,571       700       4.86       58,330       700       4.80  
Interest-bearing liabilities
                                               
     Demand deposits
    13,943       6       0.17       12,975       6       0.18  
     Savings deposits
    12,793       2       0.06       13,635       2       0.06  
     Time deposits
    15,279       10       0.26       16,253       12       0.30  
          Total interest-bearing liabilities
    42,015       18       0.17       42,863       20       0.19  
Net interest income
          $ 682                     $ 680          
Net yield on interest-earning assets
                    4.73 %                     4.66 %
 
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.
 
    Six months ended June 30, 2014     Six months ended June 30, 2013  
(in 000’s)
 
Average Balance
   
Interest
   
Yield/Rate
   
Average Balance
   
Interest
   
Yield/Rate
 
                                     
Assets:
                                   
Interest-earning assets:
                                   
     Loans
  $ 43,377     $ 1,286       5.93 %   $ 41,329     $ 1,258       6.09 %
     Investment securities
    9,954       120       2.41       11,942       154       2.56  
     Federal funds sold
    4,317       5       0.23       7,371       8       0.22  
     Interest bearing balances with other banks
    308       3       1.95       306       -       -  
        Total interest-earning assets
    57,956       1,414       4.88       60,948       1,420       4.66  
Interest-bearing liabilities
                                               
     Demand deposits
    13,884       13       0.19       14,111       15       0.21  
     Savings deposits
    12,860       3       0.05       13,947       3       0.04  
     Time deposits
    15,409       20       0.26       16,437       28       0.34  
          Total interest-bearing liabilities
    42,153       36       0.17       44,495       46       0.21  
Net interest income
          $ 1,378                     $ 1,374          
Net yield on interest-earning assets
                    4.76 %                     4.51 %
 
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 $2,000, or 0.27%, for the quarter ended June 30, 2014 compared to the same quarter in 2013 and increased approximately $4,000, or 0.26%, for the six months ended June 30, 2014 compared to the same period in 2013. Although the level of average earning assets declined by approximately $3 million, the net yield improved compared to 2013 primarily as a result of a shift in the allocation of assets to higher yielding loans versus lower yielding investments or Federal Funds Sold.  In addition, there was a reduction in the cost of funds to follow market conditions.

 
37

 
Rate-Volume Analysis of Changes in Net Interest Income
 

                                     
   
Three months ended June 30, 2014
compared to 2013
   
Three months ended June 30, 2013
compared to 2012
 
   
Increase (decrease) due to
   
Increase (decrease) due to
 
(Dollars in thousands)
 
Volume
   
Rate
   
Net
   
Volume
   
Rate
   
Net
 
Interest earned on:
                                   
Loans
  $ 32     $ (23 )   $ 9     $ (19 )   $ (42 )   $ (61 )
Investment securities
    (5 )     (3 )     (8 )     (87 )     (12 )     (99 )
    Federal funds sold
    (1 )     -       (1 )     (2 )     1       (1 )
    Interest bearing balances with other banks
    -       -       -       -       -       -  
Total Interest-earning assets
    26       (26 )     -       (108 )     (53 )     (161 )
Interest paid on:
                                               
Demand deposits
    -       -       -       (3 )     (7 )     (10 )
Savings deposits
    -       -       -       -       (1 )     (1 )
Time deposits
    (1 )     (1 )     (2 )     (9 )     (11 )     (20 )
Total interest-bearing liabilities
    (1 )     (1 )     (2 )     (12 )     (19 )     (31 )
Net interest income
  $ 27     $ (25 )   $ 2       (96 )     (34 )   $ (130 )
 

   
Six months ended June 30, 2014
compared to 2013
   
Six months ended June 30, 2013
compared to 2012
 
   
Increase (decrease) due to
   
Increase (decrease) due to
 
(Dollars in thousands)
 
Volume
   
Rate
   
Net
   
Volume
   
Rate
   
Net
 
Interest earned on:
                                   
Loans
  $ 63       (35 )     28     $ (19 )   $ (11 )   $ (30 )
Investment securities
    (27 )     (6 )     (33 )     (36 )     (13 )     (49 )
    Federal funds sold
    (4 )     1       (3 )     -       -       -  
    Interest bearing balances with other banks
    -       2       2       (1 )     1       -  
Total Interest-earning assets
    32       (38 )     (6 )     (56 )     (23 )     (79 )
Interest paid on:
                                               
Demand deposits
    -       (2 )     (2 )     (2 )     (4 )     (6 )
Savings deposits
    -       -       -       -       -       -  
Time deposits
    (2 )     (6 )     (8 )     (3 )     (5 )     (8 )
Total interest-bearing liabilities
    (2 )     (8 )     (10 )     (5 )     (9 )     (14 )
Net interest income
  $ 34     $ (30 )   $ 4     $ (51 )   $ (14 )   $ (65 )
 
For the quarter ended June 30, 2014 compared to the same period in 2013, there was an increase in net interest income of approximately $27,000 due to changes in volume offset by a decrease of approximately $25,000 due to changes in rate. For the six months ended June 30, 2014 compared to the same period in 2013, there was an increase in net interest income of approximately $34,000 due to changes in volume offset by a decrease of approximately $30,000 due to changes in rate. The increase in 2014 is primarily related to the increase in the volume of loans coupled with a reduction in the rates paid on deposits.

Provision for Loan Losses
There was a provision for loan losses of $30,000 for the quarter ended June 30, 2014 compared to a negative provision of $55,000 for the same quarter in 2013. There was a provision for loan losses of $70,000 for the six months ended June 30, 2014 compared to a provision of $15,000 for the same period in 2013.    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.)

 
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Noninterest Income
The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account fees, overdrafts, account analysis, ATM fees and other customer service fees.  Noninterest income decreased approximately $402,000, or 61.46%, for the quarter ended June 30, 2014 compared to the same quarter in 2013 and decreased approximately $426,000, or 50.20%, for the six months ended June 30, 2014 compared to the same period in 2013..

Customer service fees increased by approximately $1,000, or 0.85%, for the quarter ended June 30, 2014 compared to 2013 but declined by approximately $4,000, or 1.95%, for the six months ended June 30, 2014 compared to the same period in 2013.  The decrease is primarily related to a lower level of activity fees (overdraft, low balance, etc.) on deposit accounts and lower debit card usage fees.

ATM activity fees declined by approximately $35,000, or 43.74%, for the quarter ended June 30, 2014 compared to the same period in 2013 and declined by approximately $73,000, or 45.52%, for the six months ended June 30, 2014 compared to the same period in 2013. The decline is related to the expiration and non-renewal of the Bank’s ATM contract with Rite Aid that resulted in the removal of ATM from stores in July 2013. The Bank is actively seeking to place machines in other high volume locations.
 
During the quarter ended June 30, 2013, in conjunction with a bond transaction, the Bank sold securities with a book value totaling approximately $7.4 million, for which a gain of approximately $378,000 was recognized. Proceeds from the sale were reinvested in replacement securities.  No securities were sold in 2014.

The Bank serves as agent in the syndication of several credit facilities for national companies.  Loan syndication fees were relatively unchanged and totaled approximately $88,000 for the quarter and six months ended June 30, 2014 and 2013.

Noninterest Expense
Salaries and benefits increased approximately $25,000, or 6.83%, for the quarter ended June 30, 2014 compared to 2013 and increased approximately $65,000, or 8.68%, for the six months ended June 30, 2014 compared to the same period in 2013.  In August 2013, as required by the Consent Orders, a senior lending officer was hired to support the Bank’s business development and credit administration function.  In addition, the Bank’s medical insurance expense increased approximately $18,000, or 25%, during the compared to 2013 as a result of increased personnel utilization and a general increase in the cost of insurance.

Occupancy and equipment expense decreased approximately $22,000, or 8.39%, for the quarter ended June 30, 2014 compared to 2013 and decreased approximately $12,000, or 2.27%, for the six months ended June 30, 2014 compared to the same period in 2013. The decrease is primarily related to a reduction in equipment maintenance expense associated with the removal of Rite Aid ATMs in July 2013.

Office operations and supplies expense decreased by approximately $7,000, or 8.63%, for the quarter ended June 30, 2014 compared to 2013 and decreased by approximately $21,000, or 13.46%, for the six months ended June 30, 2014 compared to the same period in 2013 as a result of a change in vendors, a conscious effort to reduce the utilization of supplies and a shift to electronic transmission of branch-related items that reduced paper usage.

Marketing and public relations expense was relatively unchanged for the quarter ended June 30, 2014 compared to 2013 but increased approximately $3,000, or 7.40%, for the six months ended June 30, 2014 compared to the same period in 2013 as a result of shareholder-related communications costs.

Professional services expense decreased approximately $3,000, or 3.64%, for the quarter ended June 30, 2014 compared to 2013 and decreased approximately $2,000, or 1.38%, for the six months ended June 30, 2014 compared to the same period in 2013.  The decline was related to a $20,000 reduction in legal fees that was mostly offset by an increase audit expenses because of the Bank’s Consent Orders.
 
Data processing expenses increased approximately $3,000, or 3.20%, for the quarter ended June 30, 2014 compared to 2013 and decreased approximately $5,000, or 2.10%, for the six months ended June 30, 2014 compared to the same period in 2013. The increase for the quarter was primarily related to the annual escalation related to the Bank’s core processor; however, for six months ended June 30, 2014, there was a reduction in electronic funds transfer processing cost related to the Bank’s ATM network.
 
 
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Federal deposit insurance assessments were relatively unchanged at $38,000 for the quarters ended June 30, 2014 and 2013.  Assessments decreased approximately $3,000, or 3.55%, for the six months ended June 30, 2014 compared to the same period in 2013. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.   The decrease is primarily related to the reduction in the Bank’s total assets.
 
Net other real estate expenses declined approximately $99,000, or 80.14%, for the quarter ended June 30, 2014    compared to 2013 and declined approximately $130,000, or 77.82%, for the six months ended June 30, 2014 compared to the same period in 2013.  The decrease was primarily the result of a reduction in the net write-downs of other real estate properties because of property sales and general value stabilization.
 
Loan and collection expenses decreased approximately $19,000, or 47.9%, for the quarter ended June 30, 2014 compared to 2013 and decreased approximately $20,000, or 33.8%, for the six months ended June 30, 2014 compared to the same period in 2013. The decrease is related to a reduction in collection-related legal fees that are directly related to a lower level of foreclosure/collection activity compared to the same period in 2013.
 
Other operating expenses decreased approximately $66,000, or 36.33%, for the quarter ended June 30, 2014 compared to the same period in 2013 and decreased approximately $172,000, or 51.96%, for the six months ended June 30, 2014 compared to the same period in 2013.  The decrease is primarily related to the completion of the amortization of a core deposit intangible in October 2013 for which the annual amortization expense was approximately $180,000.  In addition, there was a reduction in the Bank’s Pennsylvania Bank Shares Tax as a result of a change in the tax computation methodology that will result in an annual savings of approximately $75,000.
 
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.
 

Not applicable.
 
 
As of June 30, 2014, 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 and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 
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The Bank is a defendant in certain claims and legal actions arising in the ordinary course of business.  In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.
 
 
There have not been any material changes to the risk factors disclosed in the Company’s 2013 Annual Report on Form 10-K except as disclosed below.  The risk factors disclosed in the Company’s 2013 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.
 
Failure to Comply with the FDIC and Pennsylvania Department of Banking Consent Orders
 
The Bank has entered into Consent Orders with the FDIC and the Department which, among other provisions, require the Bank to increase its tier one leverage capital ratio to 8.5% and its total risk based capital ratio to 12.5%.  As of June 30, 2014, the Bank’s tier one leverage capital ratio was 5.12% and its total risk based capital ratio was 9.23%.  Refer to the Regulatory Orders section.  The Bank’s failure to comply with the terms of the Consent Orders could result in additional regulatory supervision and/or actions.  The ability of the Bank to continue as a going concern is dependent on many factors, including achieving required capital levels, earnings and fully complying with the Consent Orders.  The Consent Orders raise substantial doubt about the Bank’s ability to continue as a going concern.
 
 
 None
 
 
None
 
 
None
 
 
None
 
 
a)           Exhibits.
 
Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
41


 
 
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:  August 14, 2014
/s/ Evelyn F. Smalls
 
Evelyn F. Smalls
 
President & Chief Executive Officer
   
   
Date: August 14, 2014
/s/ Brenda M. Hudson-Nelson
 
Brenda Hudson-Nelson
 
Executive Vice President/Chief Financial Officer


 
 
 
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Index to Exhibits-FORM 10-Q

Exhibit 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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