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EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PAusbi_ex31z1.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, 2016 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__


1


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

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

Applicable only to corporate issuers:

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

United Bancshares, Inc. (sometimes herein also referred to as the “Company” or “UBS”) has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and 500,000 shares of $0.01 par value 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 November 30, 2018, the aggregate number of the shares of the Registrant’s Common Stock issued was 826,921.  

The Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A and 7,000 as Series B for which there were 99,442 and 1,350 shares are issued, respectively as of November 30, 2018.


2


FORM 10-Q

 

 

Index

Item No.

Page

 

PART I - OTHER INFORMATION4 

Item 1.  Financial Statements (unaudited)4 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.28 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk40 

Item 4.  Controls and Procedures40 

PART II - OTHER INFORMATION40 

Item 1. Legal Proceedings.40 

Item 1A. Risk Factors.41 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.41 

Item 3.  Defaults Upon Senior Securities.41 

Item 4. Mine Safety Disclosures.41 

Item 5.  Other Information.41 

Item 6.  Exhibits.41 


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Table of Contents


PART I - OTHER INFORMATION

 

Item 1.  Financial Statements (unaudited)

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

Assets:

 

June 30, 2016

 

December 31, 2015

Cash and due from banks

$2,009,676

$2,107,359

Interest-bearing deposits with banks

311,012

310,739

Federal funds sold

2,902,000

8,364,000

  Cash and cash equivalents

5,222,688

10,782,098

 

 

 

Investment securities available-for-sale, at fair value

6,702,889

7,572,029

 

 

 

Loans held for sale

7,136,996

3,260,761

 

 

 

Loans held at fair value

3,237,904

2,458,930

 

 

 

Loans, net of unearned discounts and deferred fees

30,713,493

33,519,042

Less allowance for loan losses

(354,563)

(418,013)

  Net loans

30,358,930

33,101,029

 

Bank premises and equipment, net

 

462,764

 

492,730

Accrued interest receivable

202,565

175,416

Other real estate owned

Core Deposit intangible

446,777

251,582

479,627

199,781

Prepaid expenses and other assets

478,041

461,837

  Total assets

$54,501,137

$58,984,238

 

Liabilities and Shareholders’ Equity

 

 

 

Liabilities:

 

 

Demand deposits, noninterest-bearing

$16,045,953

$16,417,150

Demand deposits, interest-bearing

12,372,375

13,605,888

Savings deposits

11,322,524

11,680,878

Time deposits, under $100,000

4,002,748

7,505,729

Time deposits, $100,000 and over

7,563,345

6,752,759

  Total deposits

51,306,945

55,962,404

 

Accrued interest payable

 

12,998

 

9,157

Accrued expenses and other liabilities

294,812

332,915

  Total liabilities

51,614,756

56,304,476

 

 

 

Shareholders’ equity:

 

 

Series A preferred stock, noncumulative, 6%, $0.01 par value,

500,000 shares authorized; 124,342 issued and outstanding at June 30, 2015 and 136,842 issued and outstanding at December 31, 2014

 

 

993

 

 

993

Common stock, $0.01 par value; 2,000,000 shares authorized;

 

 

826,921 issued and outstanding at June 30, 2015 and 876,921 issued and    outstanding at December 31, 2014

 

8,269

 

8,269

Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;

 

 

  191,667 issued and outstanding at December 31, 2014

-

-

Additional paid-in-capital

14,752,644

14,752,644

Accumulated deficit

(11,946,971)

(12,062,818)

Accumulated other comprehensive loss

71,261

(19,326)

  Total shareholders’ equity

2,886,382

2,679,762

  Total liabilities and shareholders’ equity

$54,501,137

$58,984,238

The accompanying notes are an integral part of these statements.


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Table of Contents


UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

Three Months ended

June 30, 2016

Three Months ended

June 30, 2015

Six Months ended

June 30, 2016

Six Months ended

June 30, 2015

Interest income:

 

 

 

 

  Interest and fees on loans

$ 689,160

$      582,012

$1,228,940

$1,244,690

  Interest on investment securities

40,699

44,843

84,952

92,591

  Interest on federal funds sold

7,585

2,968

17,227

4,259

  Interest on time deposits with other banks

171

164

290

326

     Total interest income

737,615

629,987

1,331,409

1,341,866

 

 

 

 

 

Interest expense:

 

 

 

 

  Interest on time deposits

8,852

9,837

17,356

19,792

  Interest on demand deposits

5,987

6,162

12,099

12,279

  Interest on savings deposits

1,398

1,465

2,816

2,937

     Total interest expense

16,237

17,464

32,271

35,008

     Net interest income

721,378

612,523

1,299,138

1,306,858

     (Credit) provision for loan losses

30,000

(40,000)

(5,000)

(100,000)

 

 

 

 

 

    Net interest income after provision for loan losses

691,378

652,523

1,304,138

1,406,858

 

 

 

 

 

Noninterest income:

 

 

 

 

  Customer service fees

90,412

139,274

176,267

235,552

  ATM fee income

29,294

31,745

56,014

63,149

  Gain on sale of loans

99,414

-

311,973

473,706

  Loss on sale of other real estate

-

(2,289)

(2,495)

(2,289)

  Net change in fair value of financial instruments

-

32,143

(73,873)

(238,431)

  Loan syndication fees

-

85,000

-

85,000

  Other income

486,485

21,633

524,159

26,610

     Total noninterest income

705,605

307,506

992,045

643,297

 

 

 

 

 

Noninterest expense:

 

 

 

 

  Salaries, wages and employee benefits

372,676

404,366

764,616

803,379

  Occupancy and equipment

240,481

249,740

478,637

502,244

  Office operations and supplies

83,114

81,922

166,414

150,382

  Marketing and public relations

11,325

8,337

27,720

26,189

  Professional services

75,973

74,964

149,131

165,415

  Data processing

100,547

89,615

209,295

187,087

  Other real estate expense

22,800

(23,182)

57,000

(63,214)

  Loan and collection costs

23,929

46,490

37,561

103,771

  Deposit insurance assessments

30,174

34,200

58,576

66,400

  Other operating

119,612

111,526

231,198

211,598

     Total noninterest expense

1,080,631

1,077,978

2,180,148

2,153,251

     Net loss before income taxes

316,352

(117,949)

116,035

(103,096)

 

Provision for income taxes

-

-

-

-

     Net profit (loss)

$316,352

$ (117,949)

$   116,035

$  (103,096)

Net loss per common share—basic and diluted

$     0.38

$      (0.14)

$        0.14

$        (0.10)

Weighted average number of common shares

826,921

826,921

826,921

986,262

Comprehensive loss:

 

 

 

 

Net profit (loss)

$316,352

$    (117,949)

$116,035

$   (103,096)

Unrealized (losses) gains on available for sale securities

26,639

(78,421)

90,586

(21,233)

 Total comprehensive profit (loss)

$342,991

$     (196,370)

$206,621

$   (124,329)

 

 

 

 

 

The accompanying notes are an integral part of these statements.


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Table of Contents


UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

 

 

2016

2015

 

 

 

Cash flows from operating activities:

 

 

Net loss

$ 116,035

$  (103,096)

  Adjustments to reconcile net loss to net cash

 

 

      provided by operating activities:

 

 

       (Credit)provision for loan losses

(5,000)

(100,000)

       Amortization of premiums on investments

7,111

9,083

       Proceeds from the sale of other real estate  

30,355

40,913

       Depreciation on fixed assets

92,791

88,678

       Net change in fair value of financial instruments

(73,873)

238,431

       Gain on sale of loans

(311,973)

(473,706)

       Loss on sale of other real estate

2,495

2,289

       (Write-up) Write-down of other real estate owned

-

(88,460)

       Proceeds from the sale of loans held-for-sale

3,137,250

4,407,339

       Amortization of servicing asset

11,317

-

       Loans originated for sale

(7,406,612)

(1,823,367)

       (Increase) decrease in accrued interest receivable  and

 

 

         other assets

(106,471)

(180,910)

       Increase (decrease) in accrued interest payable and

 

 

         other liabilities

(34,262)

(4,937)

         Net cash provided by operating activities

(4,540,837)

2,012,257

 

 

 

Cash flows from investing activities:

 

 

       Proceeds from maturity and principal reductions of

 

 

          available-for-sale investment securities

3,302,847

1,064,615

       Purchase of securities available-for-sale

(2,350,234)

(49)

       Net decrease (increase) in loans

2,747,098

4,014,805

       Purchase of bank premises and equipment

(62,825)

(48,464)

Net cash provided by (used in) investing activities

3,636,886

5,030,907

 

 

 

Cash flows from financing activities:

 

 

       Net decrease in deposits

(4,655,459)

(1,957,519)

       Net cash used in financing activities

(4,655,459)

(1,957,519)

      

      Net increase in cash and cash equivalents

 

(5,559,410)

 

5,085,645

 

Cash and cash equivalents at beginning of period

 

10,782,098

 

3,236,582

 

Cash and cash equivalents at end of period

 

$5,222,688

 

$  8,322,227

 

Supplemental disclosure of cash flow information:

 

 

       Cash paid during the period for interest

$28,430

$      37,107

       Noncash transfer of loans to other real estate

$-

$    148,241

The accompanying notes are an integral part of these statements.


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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, 2015 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, 2016 and December 31, 2015 and the consolidated results of its operations and its cash flows for the three and six months ended June 30, 2016 and 2015.

 

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, the fair value of loans held at fair value, valuation allowance for deferred tax assets, the carrying value of other real estate owned, 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 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 Held at Fair Value

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


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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.  

 

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.


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Non-accrual and Past Due Loans.

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

 

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, 2016

Three Months Ended
June 30, 2015

Six Months Ended
  June 30, 2016

Six Months Ended
  June 30, 2015

Basic:

 

 

 

 

Net loss available to common shareholders

$ 316,352

$ (117,949)

$ 116,035  

$  (103,096)

Average common shares outstanding-basic

 826,921

 826,921

  826,921

986,262

Net loss per share-basic

$  0.38

$  (0.14)

$  0.14

$ (0.10)

Diluted:

 

 

 

 

Average common shares-diluted

826,921

826,921

826,921

986,262

Net loss per share-diluted

$ 0.38

$   (0.14)

$  0.14

$  (0.10)

 

Wells Fargo (formerly Wachovia Corporation) owned 241,666 shares of UBS Common Stock (50,000 voting shares); however, on February 18, 2015, Wells Fargo returned all shares (voting and non voting) for cancellation.


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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.

3.Changes in Accumulated Other Comprehensive Income

 

The following table presents the changes in other comprehensive income:

 

Three Months Ended June 30, 2016

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Unrealized loss on securities:

 

 

 

Unrealized holding loss arising during period

$ 40   

$    13   

$     27    

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

      -

       -

        -

Other comprehensive loss, net

$ 40  

$    13   

$     27    

 

 

 

Three Months Ended June 30, 2015

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Unrealized gain on securities:

 

 

 

Unrealized holding gain arising during period

$  (104)  

$  26

$  (78)

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

    -

    -

    -

Other comprehensive income, net

$  (104)

$  26

$  (78)

 

 

 

Six Months Ended June 30, 2016

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Unrealized loss on securities:

 

 

 

Unrealized holding loss arising during period

$ 135   

$    44   

$     91    

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

      -

       -

        -

Other comprehensive loss, net

$ 135  

$    44   

$     91    

 

 

 

Six Months Ended June 30, 2015

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Unrealized gain on securities:

 

 

 

Unrealized holding gain arising during period

$  (32)  

$  11

$  (21)

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

    -

    -

    -

Other comprehensive income, net

$  (32)

$  11

$  (21)

 

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 adoption of this amendment had no impact on the Company’s consolidated financial statements.

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, 2017, 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


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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 2018.

 

5.  Investment Securities

 

The following is a summary of the Company's investment portfolio: 

(In 000’s)

June 30, 2016

 

 

Gross

Gross

 

 

Amortized

Unrealized

unrealized

Fair

 

Cost

Gains

losses

Value

Available-for-sale:

 

 

 

 

U.S. Government agency securities

$  2,950

$      3  

$   -   

$  2,953  

Government Sponsored Enterprises residential   mortgage-backed securities

3,517

103

-   

3,620

Investments in money market funds

130

-

-   

130

 

$6,597

$  106   

$   -  

$  6,703  

 

December 31, 2015

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Fair

 

Cost

Gains

Losses

Value

Available-for-sale:

 

 

 

 

U.S. Government agency securities

$  3,697

$      3

$   (38)

$   3,662

Government Sponsored Enterprises residential mortgage-backed securities

3,774

36

     (30)

 3,780

Investments in money market funds

130

   -

        -    

130

 

$  7,601

$   39

$   (68)

$  7,572

 

 

 

 

 

 

The amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity as of June 30, 2016, 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

 

2,950 

 

 

2,953 

Government Sponsored Enterprises residential mortgage-backed securities

 

3,517 

 

 

3,620 

Total debt securities

 

6,467 

 

 

6,573 

Investments in money market funds

 

130 

 

 

130 

 

 

$6,597 

 

 

$6,703 

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, 2016:

 

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

9   

$ 2,703   

$ 3   

$ -   

$ -   

$ 2,703   

$ 3   

 

 

 

 

 

 

 

 

Government Sponsored Enterprises residential

 

 

 

 

 

 

 

   mortgage-backed securities

55   

2,042   

50   

53   

1,341   

3,383   

103   

Total temporarily

 

 

 

 

 

 

 

impaired investment

 

 

 

 

 

 

 

    Securities

64   

$ 4,745   

$ 53   

$ 53   

$ 1,341   

$ 6,086   

$ 106   


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The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2015:

 

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

9   

$ 2,416   

$ (32)  

$ 243   

$ (6)  

$ 2,659   

$ (38)  

 

 

 

 

 

 

 

 

Government Sponsored Enterprises residential

 

 

 

 

 

 

 

   mortgage-backed securities

8   

1,486   

(19)  

227   

(11)  

1,713   

(30)  

Total temporarily

 

 

 

 

 

 

 

impaired investment

 

 

 

 

 

 

 

    securities

17   

$ 3,902   

$ (51)  

$ 470   

$ (17)  

$ 4,372   

$ (68)  

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.  

 

6. Loans and Allowance for Loan Losses

The composition of the Bank’s loan portfolio is as follows:

(Dollars in thousands)

 

June 30,

2016

December 31, 2015

Commercial and industrial

$ 2,904

$  3,062

Commercial real estate

24,066

26,414

Consumer real estate

2,709

2,841

Consumer loans other

1,042

1,202

          Total loans

$ 30,722

$ 33,519


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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 six months ended June 30, 2016 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 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.

(in 000's)

 

For the Three months ended June 30, 2016

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

Beginning balance

$120 

$241 

$14 

$9 

$384 

Provision (credit) for loan losses

- 

- 

- 

- 

- 

 

 

 

 

 

 

Charge-offs

- 

- 

- 

- 

- 

Recoveries

- 

- 

- 

- 

- 

Net (charge-offs) recoveries

- 

- 

- 

- 

- 

 

 

 

 

 

 

Ending balance

$87 

$245 

$13 

$10 

$355 

(in 000's)

 

For the Three months ended June 30, 2015

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

Beginning balance

$344  

$300  

$21 

$15  

$680  

Provision (credit) for loan losses

24  

(64) 

- 

 

(40) 

 

 

 

 

 

 

Charge-offs

(48) 

 

- 

(2) 

(50) 

Recoveries

 

 

2 

 

 

Net (charge-offs) recoveries

(48) 

 

2 

 

(44) 

 

 

 

 

 

 

Ending balance

$320  

$236  

$23 

$17  

$596  

(in 000's)

 

For the Six months ended June 30, 2016

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

Beginning balance

$151  

$250  

$ 

$ 

$418  

Provision (credit) for loan losses

(5) 

 

 

 

(5) 

 

 

 

 

 

 

Charge-offs

 

(41) 

(22) 

(3) 

(66) 

Recoveries

 

 

 

 

 

Net (charge-offs) recoveries

 

(41) 

 

 

(58) 

 

 

 

 

 

 

Ending balance

$87  

$245  

$13  

$10  

$355  

(in 000's)

 

For the Six months ended June 30, 2015

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

Beginning balance

$403  

$300  

$20 

$12  

$735  

Provision (credit) for loan losses

(36) 

(64) 

- 

 

(100) 

 

 

 

 

 

 

Charge-offs

(48) 

 

- 

(14) 

(62) 

Recoveries

 

 

3 

19  

23  

Net (charge-offs)recoveries

(47) 

 

3 

 

(39) 

 

 

 

 

 

 

Ending balance

$320  

$236  

$23 

$17  

$596  


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(in 000's)

 

June 30, 2016

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$          -    

 

$        71

 

$          -

 

$         -

 

$         71

Loans collectively  evaluated for impairment

 

173

 

 

99

 

2

 

10

 

284

 

$      173

$      170

$         2

$      10

$       355

 

 

 

 

 

 

Loans, ending balance:

 

 

 

 

 

Loans individually evaluated for impairment

 

$      437

 

$    1,747

 

$          -

 

$         -

 

$    2,184

Loans collectively  evaluated for impairment

 

2,468

 

22,319

 

2,709

 

1,042

 

28,538

Total

$   2,905

$  24,066

$  2,709

$  1,042

$  30,722

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$         -

 

$        91       

 

$          -

 

$         -

 

$       91

Loans collectively  evaluated for impairment

 

151

 

159

 

8

 

9

 

327

 

$    151

$       50

$         8

$        9

$     418

 

 

 

 

 

 

Loans, ending balance:

 

 

 

 

 

Loans individually evaluated for impairment

 

$     439

 

$   2,076

 

$         -

 

$         -

 

$   2,515

Loans collectively  evaluated for impairment

 

2,623

 

24,338

 

2,841

 

1,202

 

31,004

Total

$  3,062

$ 26,414

$ 2,841

$ 1,202

$ 33,519


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Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of June 30, 2016 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

$        -

$     -

$     109

$    109

$   1,348

$    1,457

    SBA loans

-

-

39

39

-

39

    Asset-based

-

-

289

289

1,120

1,409

       Total Commercial and industrial

-

-

437

437

2,468

2,905

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

    Commercial mortgages

-

18

1,280

1,298

11,538

12,836

    SBA loans

-

-

263

263

325

588

    Construction

-

-

-

-

1,250

1,250

    Religious organizations

-

-

204

204

9,188

9,392

        Total Commercial real estate

-

18

1,747

1,765

22,301

24,066

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

    Home equity loans

-

147

333

480

353

833

    Home equity lines of credit

-

-

-

-

20

20

    1-4 family residential mortgages

-

-

129

129

1,727

1,856

        Total consumer real estate

-

147

462

609

2,100

2,709

 

 

 

 

 

 

 

Total real estate

-

165

2,209

2,374

24,401

26,775

 

 

 

 

 

 

 

Consumer and other:

 

 

 

 

 

 

    Consumer installment

-

-

-

-

-

-

    Student loans

24

71

-

95

826

921

    Other

-

1

-

1

120

121

        Total consumer and other

24

72

-

96

946

1,042

 

 

 

 

 

 

 

        Total loans

$    24

$  237

$  2,646

$  2,907

$  27,815

$ 30,722   

 

 

 

 

 

 

 

 

An age analysis of past due loans, segregated by class of loans, as of December 31, 2015 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

$     -

$       -

$   110

$   110

$   1,425

$   1,535

    SBA loans

-

-

40

40

-

40

    Asset-based

11

-

289

300

1,187

1,487

       Total Commercial and industrial

11

-

439

450

2,612

3,062

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

     Commercial mortgages

169

39

1,335

1,543

12,231

13,774

     SBA loans

-

-

271

271

82

353

    Construction

-

-

-

-

2,175

2,175

    Religious organizations

-

-

471

471

9,641

10,112

        Total Commercial real estate

169

39

2,077

2,285

24,129

26,414

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

    Home equity loans

56

125

358

539

358

897

    Home equity lines of credit

-

-

-

-

20

20

    1-4 family residential mortgages

35

-

129

164

1,760

1,924

        Total consumer real estate

91

125

487

703

2,138

2,841

 

 

 

 

 

 

 

Total real estate

260

164

2,564

2,988

26,267

29,255

 

 

 

 

 

 

 

Consumer and other:

 

 

 

 

 

 

    Consumer installment

-

-

-

-

-

-

    Student loans

66

129

-

195

886

1,081

    Other

2

-

-

2

119

121

        Total consumer and other

68

129

-

197

1,005

1,202

 

 

 

 

 

 

 

        Total loans

$    339

$    293

$    3,003

$    3,635

$    29,884

$  33,519


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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


16


Table of Contents


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.

 

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, 2016

 

 

 

 

Good/

Excellent

 

Satisfactory

 

Pass

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

   Commercial

$   250

$   894

$    12

$      48

$    253

$  -

$  1,457

   SBA loans

-

-

-

-

39

-

39

   Asset-based

-

834

210

-

289

76

1,409

 

250

1,728

222

48

581

76

2,905

Commercial real estate:

 

 

 

 

 

 

 

   Commercial mortgages

-

9,035

1,937

567

1,076

221

12,836

    SBA Loans

-

325

-

-

263

-

588

   Construction

-

1,250

-

-

-

-

1,250

   Religious organizations

35

6,274

1,882

997

204

-

9,392

 

35

16,884

3,819

1,564

1,543

221

24,066

 

 

 

 

 

 

 

 

Total commercial loans

$  285

$  18,612

$  4,041

$  1,612

$  2,124

$  297

$ 26,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage and

Consumer Loans

June 30, 2016

 

 

 

 

Performing

 

Nonperforming

 

Total

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate:

 

 

 

 

 

 

 

    Home equity

$   500

 

$   333

 

$   833

 

 

    Home equity line of credit

20

 

-

 

20

 

 

    1-4 family residential mortgages

1,727

 

129

 

1,856

 

 

 

2,247

 

462

 

2,709

 

 

 

 

 

 

 

 

 

 

Consumer Other:

 

 

 

 

 

 

 

    Consumer Installment

-

 

-

 

-

 

 

    Student loans

921

 

-

 

921

 

 

    Other

121

 

-

 

121

 

 

 

1,042

 

-

 

1,042

 

 

 

 

 

 

 

 

 

 

Total  consumer loans

$  3,289

 

$   462

 

$  3,751

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

 

 

 

 

$ 30,722


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Table of Contents


(In 000's)

 

 

Commercial Loans,

December 31, 2015

 

 

 

 

Good/

Excellent

 

Satisfactory

 

Pass

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

   Commercial

$    285

$    922

$    16

$    58

$    254

$    -

$    1,535

   SBA loans

-

-

-

-

40

-

40

   Asset-based

-

900

222

-

289

76

1,487

 

285

1,822

238

58

583

76

3,062

Commercial real estate:

 

 

 

 

 

 

 

   Commercial mortgages

-

10,689

1,098

613

1,151

223

13,774

    SBA Loans

-

82

-

-

271

-

353

   Construction

-

2,175

-

-

-

-

2,175

   Religious organizations

-

7,624

1,131

886

471

-

10,112

 

-

20,570

2,229

1,499

1,893

223

26,414

 

 

 

 

 

 

 

 

Total commercial loans

$    285

$    22,392

$    2,467

$    1,557

$    2,476

$    299

$  29,476

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

Residential Mortgage and

Consumer Loans

December 31, 2015

 

 

 

 

 

 

 

Performing

 

Nonperforming

Total

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate:

 

 

 

 

 

 

 

    Home equity

$    539

 

$    358

 

$    897

 

 

    Home equity line of credit

20

 

-

 

20

 

 

    1-4 family residential mortgages

1,795

 

129

 

1,924

 

 

 

2,354

 

487

 

2,841

 

 

 

 

 

 

 

 

 

 

Consumer Other:

 

 

 

 

 

 

 

    Consumer Installment

-

 

-

 

-

 

 

    Student loans

1,081

 

-

 

1,081

 

 

    Other

121

 

-

 

121

 

 

 

1,202

 

-

 

1,202

 

 

 

 

 

 

 

 

 

 

Total  consumer loans

$  3,556

 

$    487

 

$    4,043

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

 

 

 

 

$  33,519

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. There were no partial charge-offs.  


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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, 2016 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

$   109

$   109

$ -

$  109

$ -

 SBA Loans

39

39

-

39

-

 Asset-based

289

46

243

289

-

    Total commercial and industrial

437

194

243

437

-

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

  Commercial mortgages

1,280

806

474

1,280

67

  SBA Loans

263

163

100

263

4

  Religious organizations

204

204

-

204

-

    Total commercial real estate

1,747

1,173

574

1,747

71

 

 

 

 

 

 

        Total loans

$  2,184

$ 1,367

$  817

$ 2,184

$  71

Impaired loans as of December 31, 2015 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

$  818

$    353

$  -

$    353

$   -

    SBA loans

46

-

46

46

-

    Asset-based

40

40

-

40

-

      Total commercial and industrial

904

393

46

439

-

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

    Commercial mortgages

1,334

810

524

1,334

91

    SBA Loans

271

271

-

271

-

    Religious organizations

471

471

-

471

-

        Total commercial real estate

2,076

1,552

524

2,076

91

 

 

 

 

 

 

        Total loans

$2,980

$ 1,945

$   570

$  2,515

$ 91


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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.

 

(In 000's)

Three Months Ended

June 30, 2016

Three Months Ended

June 30, 2015

 

Average

Interest recognized

Average

Interest recognized

 

Recorded

on impaired

Recorded

on impaired

 

Investment

Loans

Investment

Loans

 

 

 

 

 

Commercial and industrial:

 

 

 

 

    Commercial

$   109

$      -

$    201

$       -

    SBA  loans

39

-

46

1

    Asset-based

289

3

73

1

       Total commercial and industrial

437

3

320

2

 

 

 

 

 

Commercial real estate:

 

 

 

 

    Commercial mortgages

1,308

4

934

-

    SBA loans

264

-

113

-

    Religious organizations

242

-

487

-

        Total commercial real estate

1,814

4

1,534

-

 

 

 

 

 

        Total loans

$   2,251

$     7

$  1,854

$    2

 

 

 

 

 

 

(In 000's)

Six Months Ended

June 30, 2016

Six Months Ended

June 30, 2015

 

Average

Interest recognized

Average

Interest recognized

 

Recorded

on impaired

Recorded

on impaired

 

Investment

Loans

Investment

Loans

 

 

 

 

 

Commercial and industrial:

 

 

 

 

    Commercial

$ 109

$     -

$  200

$    -

    SBA  loans

39

-

46

2

    Asset-based

289

-

40

1

       Total commercial and industrial

437

-

286

3

 

 

 

 

 

Commercial real estate:

 

 

 

 

    Commercial mortgages

1,097

13

896

-

    SBA loans

103

5

112

-

    Religious organizations

348

-

488

-

        Total commercial real estate

1,548

18

1,496

-

 

 

 

 

 

        Total loans

$   1,985

          $    18

      $  1,782

               $   3

 

 

 

 

 

 

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


20


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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, 2016 and December 31, 2015.

 

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, 2016

June 30, 2015

June 30, 2016

June 30, 2015

 

 

 

 

 

Beginning balance

$564  

$708  

$433  

$564  

Additions, transfers from loans

237  

59  

477  

148  

Sales

(305) 

(43) 

(140) 

(43) 

 

496  

726  

770  

669  

        Write-ups (downs)

(49) 

33  

(13) 

88  

Ending Balance

$447  

$757  

$757  

$757  

 

The following schedule reflects the components of other real estate owned:

(in 000's)

June 30, 2016

December 31, 2015

Commercial real estate

$  316

$ 297

Residential real estate

  131

183

    Total

$  447

$ 480

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, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Insurance

$2 

$ 

$6 

$ 

Legal Fees

16 

 

16 

 

Professional fees

- 

 

4 

 

Real estate taxes

4 

 

10 

 

Utilities

1 

 

1 

 

Other

- 

 

- 

10  

Transfer-in write-up

49 

(31) 

49 

(88) 

Impairment charges (net)

- 

 

- 

 

   Total

$72 

$(23) 

$86 

$(63) 

 

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


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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 for loans for which the guaranteed portion is intended to be sold are estimated by using actual quoted market bids on a loan by loan basis. Fair values for the un-guaranteed portion of SBA loans 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.  


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Table of Contents


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, 2016

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

$ 2,953   

$ -   

$ 2,953   

$ -   

Government Sponsored Enterprises residential mortgage-backed securities

3,620   

-   

3,620   

-   

 

Money Market Funds

130   

130   

-   

-   

 

        Total

$ 6,703   

$ 130   

$ 6,573   

$ -   

 

Loans held for sale

$ 7,137   

$ -   

$ 7,137   

$ -   

Loans held at fair value

$ 3,238   

$ -   

$ -   

$ 3,238   

 

(in 000’s)

 

Fair Value Measurements at Reporting Date Using:

 

Assets Measured at
Fair Value at
December 31, 2015

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

$ 3,662   

$ -   

$ 3,662   

$ -   

Government Sponsored Enterprises residential mortgage-backed securities

3,780   

-   

3,780   

-   

 

Money Market Funds

130   

130   

-   

-   

 

        Total

$ 7,572   

$ 130   

$ 7,442   

$ -   

 

Loans held for sale

$ 3,261   

$ -   

$ 3,261   

$ -   

Loans held at fair value

$ 2,459   

$ -   

$ -   

$ 2,459   

The fair value of the Bank’s AFS securities portfolio was approximately $7,572,000 and $7,442,000 at June 30, 2016 and December 31, 2015, respectively. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).  The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.  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 periods ended June 30, 2016 and 2015.

 

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:


23


Table of Contents


(in 000’s)

 

Assets measured at fair value

June 30,

2016

Fair value

December 31,

2015

Fair Value

Principal valuation techniques

Significant observable inputs

June 30,

2016

Range of inputs

December 31, 2015

Range of inputs

Loans held at fair value:

$ 3,238

$ 2,459

Discounted cash flow

Constant prepayment rate

7.33% to   10.189 %

7.10% to 9.88%

 

 

 

 

Weighted average discount rate

7.22% to   10.12%

7.76% to 9.94%

 

 

 

 

Weighted average life

3.20yrs to    9.86 yrs

3.40 yrs to  8.78 yrs

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, 2015

$   2,459

Origination of loans

-

Principal repayments

-

Change in fair value of financial instruments

-

Balance at June 30, 2016

$   3,238

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, 2016 and December 31, 2015, for which a nonrecurring change in fair value has been recorded during the six months ended June 30, 2016 and year ended December 31, 2015.

 

Carrying Value at June 30, 2016:

(in 000’s)

 

 

 

Total

Quoted Prices in Active markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total fair value gain (loss) during 3 months ended

 

Impaired loans

 

$ 2,184

 

$   -

 

$   -

 

$ 2,184

 

$   -

 

Other real estate owned (“OREO”)

 

$     447

 

$   -

 

$    -

 

$     447

 

    -

 

Carrying Value at December 31, 2015:

(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

 

$ 2,424

 

  $       -

 

$      -

 

$  2,424

 

            $   -   

 

Other real estate owned (“OREO”)

 

$    480

 

   $        -

 

$        -

 

$    480

 

$   39

The measured impairment for collateral dependent 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


24


Table of Contents


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 for sale:  Fair values for loans held for sale are estimated by using actual quoted market bids on a loan by loan basis.

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 (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.

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.


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Table of Contents


The fair value of assets and liabilities are depicted below:

 

 

 

June 30, 2016

December 31, 2015

(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

$ 5,223

$ 5,223

$ 10,782

$  10,782

Available for sale securities

(1)

6,703

6,703

7,572

7,572

Loans held for sale

Level 2

7,137

7,137

3,261

3,261

Loans held at fair value

Level 3

3,238

3,238

2,459

2,459

Loans, net of allowance for loan losses

(2)

30,359

30,359

33,101

33,082

Accrued interest receivable

Level 2

203

203

175

175

Liabilities:

 

 

 

 

 

Demand deposits

Level 2

28,418

28,418

30,022

30,022

Savings deposits

Level 2

11,323

11,323

11,681

11,681

Time deposits

Level 2

11,566

11,566

14,259

14,242

Accrued interest payable

Level 2

13

13

9

9

(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.  

 

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.

 

 

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.


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Requirement

Status

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 20, 2016 and December 31, 2015, the Bank’s tier one leverage capital ratio was 5.06% and 4.57%, respectively, and its total risk based capital ratio was 8.56% and 8.50%, respectively. The net loss for the six months ended June 30, 2015 resulted in a decline in the tier one leverage ratio; however, the total risk based capital ratio increased because of the decrease in loans during the period that generally 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.


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

 

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

 

 

Special Cautionary Notice Regarding Forward-looking Statements

 

Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (“UBS”) to be materially different from future results, performance or achievements expressed or implied by such forward looking statements.  The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements.  These forward looking statements include: (a) statements of goals, intentions and expectations; and (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity.  UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance 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.

 


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Overview

The Company reported a net profit of approximately $ 316,000 ($ 0.38 per common share) for the quarter ended June 30, 2016 compared to a net loss of approximately $118,000 ($0.14 per common share) for the same quarter in 2015. The Company reported a net profit of approximately $116,000 ($0.14 per common share) for the six months ended June 30, 2016 compared to a net loss of approximately $103,000 ($0.10 per common share) for the same period in 2015. The improvement in financial performance is primarily related to the Bank’s SBA loan strategy as well as a reduction in the provision for loan losses.  Management remains committed to further improving the Company’s operating performance by continuing to implement its profit enhancement strategies that are centered on small business lending products and services. The following actions are critical to ensure continued improvement in the Company’s 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 continue to be sought in 2017 

Earnings enhancement plan. Management seeks to increase noninterest income and further reduce noninterest expense to achieve core earnings. The primary strategy continues to be to increase SBA loan origination and sell the guaranteed portion in the secondary market for a gain.   During the six months ended June 30, 2016, noninterest income totaling approximately $236,000 (including fair value adjustments) was recognized utilizing this strategy. At June 30, 2016, the pipeline of SBA loans was more than $6 million and continues to grow.   

General improvement has been made in reducing and controlling noninterest expense; however, there was an increase in legal fees and loan and collection related costs as a result of foreclosure activity during the quarter.  Further, 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. While there has been some improvement in noninterest expense, management will continue to seek further savings and efficiencies, where possible.

Another challenge to increased earnings is the restriction on asset growth because of the Bank’s current capital levels; however, the net interest margin continues to be a significant source of strength. The low cost of funds is the primary contributing factor. Management will continue to balance asset growth with capital adequacy requirements.

Manage asset quality to minimize credit losses and reduce collection costs. Asset quality trends showed some improvement during the quarter with a decline in nonperforming loans and delinquencies. Management will seek to make further progress by adhering to its underwriting standards as well as good 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.   Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary and may result in increased loan and collection expense. During the six months ended June 30, 2016, the Bank foreclosed collateral related to several non-performing loans and added approximately $200,000 to its other real estate owned portfolio.

 

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.   


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The Company’s significant accounting policies are presented in Note 1 to the  Company’s audited consolidated financial statements filed as part of the 2015 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, 2016

 

Quarter ended

June 30, 2015

 

Six Months ended

June 30, 2016

 

Six Months ended June 30, 2015

Statement of operations information:

 

 

 

 

Net interest income

$721,378

$ 613

$1,299

$1,307

(Credit) provision for loan losses

30

 (40)

(5)

(100)

Noninterest income

706

308

992

643

Noninterest expense

1,081

1,078

2,180

2,153

Net loss

316

(118)

116

(103)

Net loss per share-basic and diluted

0.38

(0.14)

0.14

(0.10)

 

 

 

 

 

Balance Sheet information:

June 30, 2016

December 31, 2015

Total assets

$ 54,501

$  58,984

Loans, net

30,359

  33,101

Investment securities

6,703

   7,572

Deposits

51,307

  55,962

Shareholders' equity

2,886

  2,680

 

 

 

Ratios*:

Quarter ended

June 30, 2016

Quarter ended

June 30, 2015

Return on assets

0.18 %

(0.79)%

Return on equity

4.10 %

(15.26)  

*annualized


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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 decreased approximately $ 2,103,000 or 3.89% during the quarter ended June 30, 2016 compared to the quarter ended March 31, 2016. Average funding sources decreased approximately $2,309,000 or 4.30%, during the same quarter.

 

Sources and Uses of Funds Trends

(Thousands of Dollars, except

percentages)

June 30, 2016

 

 

March 31, 2016

 

Average

Increase (Decrease)

Increase (Decrease)

Average

 

Balance

Amount

                   %

Balance

Funding uses:

 

 

 

 

Loans

$ 37,957

$       (41)

(0.11)%

$37,998

   Investment Securities

    7,225

(309)

(4.10)%

7,534

Federal funds sold

    6,406

    (1,753)

            (21.49)%

8,159

Balances with other banks

       311

            -

           -%

      311

Total  uses

$  51,899

$ (2,103)

             (3.89)%

$54,002

Funding sources:

 

 

 

 

Demand deposits

 

 

 

 

Noninterest-bearing

$  16,054

$    (754)

(4.49)%

$16,808

Interest-bearing

12,465

(512)

(3.95)%

12,977

Savings deposits

11,311

(220)

(1.91)%

11,531

Time deposits

11,607

(823)

(6.62)%

12,430

Total sources

$  51,437

 $ (2,309)

(4.30)%

$53,746

 

Loans

Average loans decreased by approximately $41,000, or 0.11%, during the quarter ended June 30, 2016. Funding activity during the quarter exceeded $1.5 million but was offset by payoffs and sale activity totaling close to $4 million.  During the six months ended June 30, 2015, the guaranteed portion of SBA loans originated in late 2014 were sold. In addition, the Bank participates in an investor real estate funding program (“NRIA”) whereby it provides funding during the construction phase and permanent “take-out” financing is pre-arranged at completion.  During the six months ended June 30, 2015, the construction related to approximately $2.8 million of these loans was completed and the loans were paid off.   Participation in this program is ongoing and dependent on the Bank’s overall liquidity level and other funding requirements.

 

The Bank’s commercial loan pipeline continues to grow as a result of its small business banking focus specifically targeting SBA loans. This strategy is designed to generate fee income from sales of the guaranteed portion as well as build loan volume.  There are a significant number of small businesses in the region that may fall below minimum business loan levels of the money center banks in the region which provides an opportunity for the Bank to continue to grow its SBA lending as a niche business. Management will continue to work in alliance with its third party SBA loan origination group, commercial real estate brokers, accountants, lawyers, SBA brokers, and other centers of influence to build loan volume.  

 

The Bank’s commercial loan pipeline continues to grow with a specific focus on SBA loan origination. At June 30, 2015, the pipeline totaled approximately $6.3 million in loans that are expected to close during 2015. 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 $24.1 million, or 78%, of total loans at June 30, 2016 of which approximately $14.7 million are owner occupied.  The Bank continues to have a strong niche in lending to religious organizations for which total loans at June 30, 2016 were approximately $9.2 million, or 39%, of the commercial real estate portfolio. Management closely monitors this concentration to proactively identify and manage credit risk for any conditions might negatively impact the level of tithes and offerings that provide cash flow for repayment.  The composition of the net loans is as follows:


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June 30,

December 31,

(In 000's)

2016

2015

 

 

 

 

 

 

Commercial and industrial:

 

 

    Commercial

$ 1,457

$  1,535

    SBA loans

39

40

    Asset-based

1,409

1,487

       Total commercial and industrial

2,905

3,062

 

 

 

Commercial real estate:

 

 

 

 

 

    Commercial mortgages

12,836

13,774

    SBA loans

588

353

    Construction

1,250

2,175

    Religious organizations

9,392

10,112

        Total commercial real estate

24,066

26,414

 

 

 

Consumer real estate:

 

 

    Home equity loans

833

897

    Home equity lines of credit

20

20

    1-4 family residential mortgages

1,856

1,924

        Total consumer real estate

2,709

2,841

 

 

 

Total real estate

26,775

29,255

 

 

 

Consumer and other:

 

 

    Consumer installment

-

-

    Student loans

921

1,081

    Other

121

121

        Total consumer and other

1,042

1,202

 

 

 

        Loans, net

$  30,722

$ 33,519

 

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 1.16% at June 30, 2016 compared to 1.80% at December 31, 2015.

 

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 $2,184,000 at June 30, 2016 compared to $2,424,000 at December 31, 2015. The valuation allowance associated with impaired loans was approximately $71,000 and $91,000, at June 30, 2016 and December 31, 2015, respectively. The decrease in impaired loans is attributable to foreclosure activity as well as the charge-off of one loan totaling approximately $48,000 for which there was a specific reserve 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, 2016 and December 31, 2015, loans to religious organizations represented approximately $204,000 and $471,000, 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 values.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the


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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 was 13.42% down from 13.92% at December 31, 2015.  The level of nonperforming loans to total loans decreased from 8.40% at December 31, 2015 to 8.96% at June 30, 2016 as a result of foreclosure activity related to several impaired loans. Approximately 83.5% 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, 2016

December 31, 2015

Commercial and industrial:

 

 

    Commercial

$    109

$   110

    SBA loans

    Asset-based

39

289

40

289

       Total commercial and industrial

437

439

 

 

 

Commercial real estate:

 

 

    Commercial mortgages

1,280

1,335

    SBA loans

263

271

    Religious organizations

204

471

        Total commercial real estate

1,747

2,077

 

 

 

Consumer real estate:

 

 

    Home equity loans

333

358

    1-4 family residential mortgages

129

129

        Total consumer real estate

462

487

 

 

 

Total real estate

2,209

2,564

 

 

 

        Total nonperforming loans

2,646

3,003

        OREO

447

480

        Total nonperforming assets

$  3,093

$  3,483

 

 

 

Nonperforming loans to total loans

8.40%

8.96%

Nonperforming assets to total loans and OREO

9.68%

10.24%

Nonperforming assets to total assets

5.67%

5.90%

 

 

 

Allowance for loan losses as a percentage of:

 

 

    Total loans

1.16%

1.25%

    Total nonperforming loans

13.42%

13.92%


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Table of Contents


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

 

(In 000's)

June 30,

2016

December 31,

2015

Commercial real estate:

 

 

    Commercial mortgages

$  18

$  39

        Total commercial real estate

18

39

 

 

 

Consumer real estate:

 

 

    Home equity loans

147

125

        Total consumer real estate

147

125

 

 

 

Consumer and other:

 

 

    Student loans

71

1

129

        Total consumer and other

72

129

        Total

$  237

$ 293

Investment Securities and Other Short-term Investments

Average investment securities decreased by approximately $309,000, or 4.10%, during the quarter ended June 30, 2016. The decrease was primarily related to the call of one $250,000 agency security and mortgage-backed security paydowns during the quarter ended June 30, 2016.

The average yield on the investment portfolio declined to 2.25% for the six months ended June 30, 2016 compared to 2.29% for the six months ended June 30, 2015.  The decline is a result of calls of higher yielding bonds during the period. The duration of the portfolio shortened to 3.5 years at June 30, 2015 compared to 3.9 years at December 31, 2014 as a result of market rate shifts during the year.  Amortizing GSE mortgage-backed securities approximate 53% 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, 2016, average deposits decreased approximately $2,309,000, or 4.30%. The decrease was concentrated in time deposit accounts that decreased on average by approximately $823,000, or 6.62%, during the quarter. The decline was primarily related to several corporate certificates of deposit that were not renewed at maturity.

 

Noninterest bearing checking account balances decreased on average by $754,000, or 4.49%, during the quarter ended June 30, 2016.   As small business loans are originated, primary operating accounts are required to be maintained at the Bank which serves to grow core deposits; however, balances fluctuate with normal business activity.   

 

Average savings deposits declined by approximately $220,000, or 1.91%, as a result of general attrition.

 

Commitments and Lines of Credit

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Commitments to extend credit fluctuate with the completion and conversion of construction lines of credit to permanent commercial mortgage loans and/or the closing of loans approved but not funded from one period to another.

 

Many of the commitments are expected to expire without being drawn upon. The total commitment amounts do not necessarily represent future cash requirements.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Management believes the Bank has adequate liquidity to support the funding of unused commitments. The Bank's financial instrument commitments are summarized below:  


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June 30,

2016

December 31,

2015

Commitments to extend credit

$  4,552,423

$5,903,000

Standby letters of credit

     377,996

333,000

 

The level of commitments decreased during the six months ended June 30, 2015 as a result of the funding of a $1.6 million SBA loan.  In addition, close to $3 million construction loans were completed and paid off during the period. More than $3 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, 2016, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $5.2 million, or 9.6% of total assets, compared to $10.8 million, or 18.3%, at December 31, 2015.  The increase is related to approximately $ 4.4 million proceeds from the sale of the guaranteed portion SBA loans and loan payoffs received during the six months ended June 30, 2015.

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 addition, the Bank’s investment portfolio is classified as available-for-sale; however, majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank.  Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.

 

Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity.  Approximately $11.2 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 $708,000. 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.

 

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, 2016, a positive gap position is maintained on a cumulative basis through 1 year of 15.93% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis, increased from the December 31, 2015 positive gap position of 17.28%. This position is caused by an increasing level of loans maturing and/or repricing in one to three months due to the Banks’ growing variable rate SBA loan portfolio. This position makes the Bank’s net interest income


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more favorable in a rising interest rate environment. The most recent economic forecast suggests no further decline in rates but rather increases beginning in late 2015.  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, 2016, the change in the market value of equity in a +200 basis point interest rate change is -20%, in excess of the policy limit of 25%, and -46.6% in a +400 basis point interest rate change, below the policy limit of -50%.   These levels represent an improvement from 2015 when the +400 basis point change was -41.4%.  Management is strategically working to bring this measure into compliance with policy limits 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, 2016.

 

Capital Resources

Total shareholders’ equity increased approximately $207,000, or 7.7%, during the six months ended June 30, 2016. The decrease is attributable to a net loss of approximately $116,000 plus other comprehensive loss related to an unrealized loss on the securities classified as available-for-sale totaling approximately $91,000.   

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. In 2013, an investment banker was engaged to assist with raising a minimum investment of $2 million.  Although the Bank has approximately $750,000 in commitments from several financial institutions in the region, the timing of these investments is uncertain.

On January 1, 2015, new regulatory risk-based capital rules became effective. These new capital requirements, commonly referred to as “Basel III” regulatory reforms increased the minimum Tier I capital ratio in order to be considered well-capitalized from 6.0% to 8.0%. In addition, a new capital ratio, the Common Equity Tier I ratio was introduced, with a minimum, well-capitalized level of 6.5%. The new rules provided for smaller banking institutions (less than $250 billion in consolidated assets) an opportunity to make a one-time election to opt out of including most elements of accumulated other comprehensive income in regulatory capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. On April 30, 2015, in connection with the filing of its March 31, 2015 Call Report, the Bank elected to opt-out of including these items in regulatory capital. For more information regarding Basel III, refer to Part I, Item 1 of the Company’s 2014 Annual Report on Form 10-K, under the heading “Capital Adequacy.” There is no official regulatory guideline for the tangible common equity to tangible asset ratio.

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. At June 30, 2016, capital benchmarks had not been met; however, management will continue to execute its capital strategies. The Company and the Bank do not anticipate paying dividends in the near future.

The Bank meets the minimum capital levels to be considered “well capitalized” with the exception of Total capital to risk weighted assets.  The following table presents the capital ratios of the Company and the Bank as of June 30, 2016 and December 31, 2015:  


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Actual

June 30, 2016

Actual

December 31, 2016

Minimum to be “Well Capitalized”

 

Amount

Ratio

 

 

Amount

Ratio

Total (Tier II) capital to risk weighted assets:

 

 

 

 

 

 

    Company

$3,109

  8.56%

$3,081

 8.50%

N/A

 

    Bank

 3,109

8.56

3,081

8.50

$3,623

10.00%

Tier I capital to risk weighted assets

 

 

 

 

 

 

   Company

2,754

7.58

2,663

7.35

N/A

 

    Bank

2,754

7.58

2,663

7.35

$2,899  

8.00%

Common equity Tier I capital to risk weighted assets

 

 

 

 

 

 

     Company

2,754

7.58

2,663

7.35

N/A

 

     Bank

2,754

7.58

2,663

7.35

 $2,355

6.50%

Tier I Leverage ratio (Tier I capital to total quarterly average assets)

 

 

 

 

 

 

     Company

2,754

5.06

2,663

4.57

N/A

 

     Bank

2,754

5.06

2,663

4.57

$2,915

5.00%

Tangible common equity to tangible assets

 

 

 

 

 

 

     Company

2,754

5.06

2,663

4.52

N/A

N/A

     Bank

2,754

5.06

2,663

4.52

N/A

N/A

Results of Operations

 

Summary

 

The Company reported a net profit of approximately $ 316,000 ($ 0.38 per common share) for the quarter ended June 30, 2016 compared to a net loss of approximately $118,000 ($0.14 per common share) for the same quarter in 2015. The Company reported a net profit of approximately $116,000 ($0.14 per common share) for the six months ended June 30, 2016 compared to a net loss of approximately $103,000 ($0.10 per common share) for the same period in 2015. The improvement in financial performance is primarily related to the Bank’s SBA loan strategy as well as a reduction in the provision for loan losses.   A detailed explanation of each component of operations is included in the sections below.

 

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, 2016

 

 

Three  months ended  

June 30, 2015

 

(in 000’s)

Average Balance

 

Interest

 

Yield/Rate

Average Balance

 

Interest

 

Yield/Rate

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

    Loans

$37,957

$689

 7.26%

$42,767

$582

 5.44%

    Investment securities

7,225

41

2.25

7,865

45

2.29

    Federal funds sold

6,406

8

0.47

5,597

3

0.21

    Interest bearing balances with other banks

311

-

-

310

 -

 -

       Total interest-earning assets

51,899

737

5.68

56,539

630

4.46

Interest-bearing liabilities

 

 

 

 

 

 

    Demand deposits

12,465

6

0.19

13,178

6

0.18

    Savings deposits

11,311

1

0.05

12,086

1

0.03

    Time deposits

11,607

9

0.31

14,886

10

0.27

         Total interest-bearing liabilities

35,383

16

0.18

40,150

17

0.18

Net interest income

 

$721

 

 

$613

 

Net yield on interest-earning assets

 

 

5.56%

 

 

4.34%


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Six months ended  

June 30, 2016

 

 

Six  months ended  

June 30, 2015

 

(in 000’s)

Average Balance

 

Interest

 

Yield/Rate

Average Balance

 

Interest

 

Yield/Rate

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

    Loans

$37,978

$1,229

  6.47%

$44,722

$1,245

  5.57%

    Investment securities

7,380

85

2.30

8,022

93

2.32

    Federal funds sold

7,282

17

0.47

4,080

4

0.20

    Interest bearing balances with other banks

311

-

-

310

-

-

       Total interest-earning assets

52,951

1,331

5.03

57,134

1,342

4.70

Interest-bearing liabilities

 

 

 

 

 

 

    Demand deposits

12,720

12

0.19

13,265

12

0.18

    Savings deposits

11,421

3

0.05

12,089

3

0.05

    Time deposits

12,019

17

0.29

15,343

20

0.28

         Total interest-bearing liabilities

36,160

32

0.18

40,697

35

0.17

Net interest income

 

$1,299

 

 

$1,307

 

Net yield on interest-earning assets

 

 

4.91%

 

 

4.58%

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 improved approximately $109,000, or 17.77%, for the quarter ended June 30, 2016 compared to 2015. Net interest income declined approximately $8,000, or 0.59%, for the six months ended June 30, 2016 compared to 2015.  The decrease is primarily related to the reduction in the yield on loans compared to 2014 as a result of the completion and payoff of higher yielding construction loans related to the NRIA program in which the Bank participates.

 

Rate-Volume Analysis of Changes in Net Interest Income

 

 

 

 

 

 

 

 

Three months ended June 30, 2016 compared to 2015

Three months ended June 30, 2015 compared to 2014

 

Increase (decrease) due to

Increase (decrease) due to

(Dollars in thousands)

Volume

Rate

Net

Volume

Rate

Net

Interest earned on:

 

 

 

 

 

 

Loans

$ (71)

$  178

$  107

$ (6)

$  (51)

$  (57)

Investment securities

(4)

-

(4)

(12)

(2)

(14)

   Federal funds sold                                             

1

4

5

1

-

1

   Interest bearing balances with other banks

-

-

-

-

-

-

Total Interest-earning assets

(74)

182

108

(17)

(53)

(70)

Interest paid on:

 

 

 

 

 

 

Demand deposits

-

-

-

-

-

-

Savings deposits

-

-

-

-

-

-

Time deposits

(2)

-

(2)

-

-

-

Total interest-bearing liabilities

(2)

-

(2)

-

-

-

Net interest income

$ (76)

182

106

$  (17)

(53)

(70)

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016 compared to 2015

Six months ended June 30, 2015 compared to 2014

 

Increase (decrease) due to

Increase (decrease) due to

(Dollars in thousands)

Volume

Rate

Net

Volume

Rate

Net

Interest earned on:

 

 

 

 

 

 

Loans

$(202)

$ 186

$(16)

$ 41

$ (82)

$(41)

Investment securities

(7)

(1)

(8)

(24)

(3)

(27)

   Federal funds sold                                             

3

10

13

-

(1)

(1)

   Interest bearing balances with other banks

-

-

-

-

(3)

(3)

Total Interest-earning assets

(206)

195

(11)

17

(89)

(72)

Interest paid on:

 

 

 

 

 

 

Demand deposits

-

-

-

 (1)

-

(1)

Savings deposits

-

-

-

-

-

-

Time deposits

(4)

-

(4)

-

-

-

Total interest-bearing liabilities

(4)

-

(4)

(1)

-

(1)

Net interest income

$ (210)

$195

$(15)

$ 18

$(89)

$(71)

 

 

 

 

 

 

 

For the quarter ended June 30, 2016 compared to the same period in 2015, there was a decrease in net interest income of approximately $76,000 due to changes in volume and an increase of approximately $182,000 due to changes in rate. For the six months ended June 30, 2016 compared to the same period in 2015, there was a decrease in net interest income of


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approximately $210,000 due to changes in volume offset by an increase of approximately $195,000 due to changes in rate. Rate declines were a result of several variable rate commercial loans re-setting at the current low interest rates as well as the payoff of several higher yielding NRIA construction loans at completion.

 

Provision for Loan Losses

There was a provision for loan losses of $30,000 for the quarter ended June 30, 2016 compared to a negative provision of $40,000 for the same quarter in 2015. There was a negative provision for loan losses of $5,000 for the six months ended June 30, 2016 compared to a provision of $100,000 for the same period in 2015. The decrease in provisions is primarily related to lower loan originations, loan payoff activity as well as a reduction net charge-offs and related historical loss factors.  In general, provision requirements are based on credit losses inherent in the loan portfolio and the review and analysis of the loan portfolio in accordance with the Bank’s Allowance for Loan Loss policies and procedures. (Refer to Allowance for Loan Losses above for discussion and analysis of credit quality.)  

 

Noninterest Income

The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account fees, overdrafts, account analysis, ATM fees, SBA loan related income and other customer service fees.  Noninterest income increased approximately $398,000, or 129.46%, for the quarter ended June 30, 2016 compared to the same quarter in 2015. Noninterest income increased approximately $381,000, or 59.20%, for the six months ended June 30, 2016 compared to the same period in 2015. The increase in 2016 is primarily related to other noninterest income.

 

Customer service fees decreased approximately $49,000, or 35.08% for the quarter ended June 30, 2016 compared to 2015.   ATM activity fees declined by approximately $2,000, or 7.72%, for the quarter ended June 30, 2016 compared to the same period in 2015. Customer service fees decreased approximately $59,000, or 25.17% for the six months ended June 30, 2016 compared to 2015.  ATM activity fees declined by approximately $7,000, or 11.30%, for the six months ended June 30, 2016 compared to the same period in 2015.  The increase in customer service fees is the result of a higher level of overdraft fees related to several business customers.  The decline in ATM fees is related to the termination of the contract with Rite Aid in 2014 as well as lower volume which is consistent with trends in the industry; ATM usage has declined as consumers continue to move to electronic payment methods utilizing debit and credit cards versus cash.  

 

Noninterest Expense

Salaries and benefits decreased approximately $32,000, or 7.84%, for the quarter ended June 30, 2016 compared to 2015 as a result of an escalation in medical insurance costs during the policy renewal period in March.  Salaries and benefits decreased approximately $39,000, or 4.82%, for the six months ended June 30, 2016 compared to 2015 as a result of several unfilled positions within the Bank’s branch network as well as the elimination of the business development position in February 2015.

 

Occupancy and equipment expense increased approximately $9,000, or 3.71%, for the quarter ended June 30, 2016 compared to 2015. Occupancy and equipment expense increased approximately $24,000, or 4.70%, for the six months ended June 30, 2016 compared to 2015.  The increase is primarily related to higher real estate taxes and common area maintenance expenses for the Bank’s leased branches.

 

Office operations and supplies expense increased by approximately $1,000, or 1.46%, for the quarter ended June 30, 2016 compared to 2015.  Office operations and supplies expense were relatively consistent at $16,000, or 10.66%, for the six months ended June 30, 2016 compared to 2015.  The increase is primarily related to increased branch security expense because the branches are operating with fewer full time staff people that may increase the potential risk of crime; therefore, the Bank increased the presence of security guards to compensate.

 

Professional services expense increased by approximately $1,000 for the quarter ended June 30, 2016 compared to 2015.  Professional services expense increased approximately $16,000, or 9.84%, for the six months ended June 30, 2016 compared to the same period in 2015 as a result of increased audit cost.

Data processing expenses increased approximately $11,000, or 12.20%, for the quarter ended June 30, 2016 compared to 2015.  Data processing expenses decreased approximately $16,000, or 9.84%, for the six months ended June 30, 2016 compared to 2015. The decrease is primarily related to the consolidation of the Bank’s EFT vendor with its core processor in late 2014.


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Federal deposit insurance assessments decreased approximately $11,400 or 33.33%, for the quarter ended June 30, 2016 compared to 2015. Federal deposit insurance assessments decreased approximately $9,000, or 14.16%, for the six months ended June 30, 2016 compared to 2015.  Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.  The Bank’s deposit levels declined in 2015 compared to 2014, resulting in lower assessments.  

Net other real estate expenses increased approximately $47,000, or 203%, for the quarter ended June 30, 2016   compared to 2015.  Net other real estate expenses increased approximately $150,000, or 237%, for the six months ended June 30, 2016 compared to 2015. The decrease was primarily the result of approximately $88,000 transfer-in write-ups related to several properties where the net liquidation value exceeded the Bank’s loan balance.  

Loan and collection expenses decreased approximately $16,000, or 35%, for the quarter ended June 30, 2016 compared to 2015. Loan and collection expenses increased approximately $45,000, or 43.55%, for the six months ended June 30, 2016 compared to 2015. The increase is a result of sheriff sale and legal fees related foreclosure/collection activity.

Other operating expenses increased approximately $8,000, or 7.25%, for the quarter ended June 30, 2016 compared to 2015. Other operating expenses increased approximately $20,000, or 9.26%, for the six months ended June 30, 2016 compared to 2015. In 2014, there was a reduction in the Bank’s Pennsylvania Bank Shares Tax as a result of a change in the tax computation methodology that resulted in the reversal of more than $50,000 in accrued expenses; 2015 expenses are representative of a normalized expense based on the current tax methodology.

Dividend Restrictions

The Company has never declared or paid any cash or stock dividends.  The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent (10%) of the net earnings of the bank for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend.  If the surplus of a bank is less than fifty percent (50%) of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking.

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4.  Controls and Procedures

 

As of June 30, 2016, 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.

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.


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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.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors disclosed in the Company’s 2014 Annual Report on Form 10-K except as disclosed below.  The risk factors disclosed in the Company’s 2014 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, 2016, the Bank’s tier one leverage capital ratio was 5.06% and its total risk based capital ratio was 8.56%.  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.  

 

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

 

None

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

None

 

Item 5.  Other Information.

 

None

 

Item 6. Exhibits.  

 

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.


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNITED BANCSHARES, INC.

 

 

Date:  November 30, 2018

/s/ Evelyn F. Smalls             

 

Evelyn F. Smalls

 

President & Chief Executive Officer

 

 

 

 

Date: November 30, 2018

/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.


43