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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 MARCH 31, 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.29 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk41 

Item 4.  Controls and Procedures41 

PART II - OTHER INFORMATION42 

Item 1. Legal Proceedings.42 

Item 1A. Risk Factors.42 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.43 

Item 3.  Defaults Upon Senior Securities.43 

Item 4. Mine Safety Disclosures.43 

Item 5.  Other Information.43 

Item 6.  Exhibits.43 


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PART I - OTHER INFORMATION

 

Item 1.  Financial Statements (unaudited)

 

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

Assets:

 

March 31, 2016

 

December 31, 2015

 

Cash and due from banks

$ 1,873,827   

$ 2,107,359   

Interest-bearing deposits with banks

310,849   

310,739   

Federal funds sold

6,484,000   

8,364,000   

  Cash and cash equivalents

8,668,676   

10,782,098   

 

 

 

Investment securities available-for-sale, at fair value

7,307,995   

7,572,029   

 

 

 

Loans held for sale

2,331,995   

3,260,761   

 

 

 

Loans held at fair value

2,990,075   

2,458,930   

 

 

 

Loans, net of unearned discounts and deferred fees

31,717,320   

33,519,042   

Less allowance for loan losses

(384,354)  

(418,013)  

  Net loans

31,332,966   

33,101,029   

 

Bank premises and equipment, net

471,198   

492,730   

Accrued interest receivable

190,379   

175,416   

Other real estate owned

462,977   

479,627   

Servicing asset

243,573   

199,781   

Prepaid expenses and other assets

502,274   

461,837   

  Total assets

$ 54,502,108   

$ 58,984,238   

 

Liabilities and Shareholders’ Equity

 

 

 

Liabilities:

 

 

Demand deposits, noninterest-bearing

$ 15,858,955   

$ 16,417,150   

Demand deposits, interest-bearing

12,588,299   

13,605,888   

Savings deposits

11,521,650   

11,680,878   

Time deposits, under $250,000

7,362,050   

7,505,729   

Time deposits, $250,000 and over

4,251,876   

6,752,759   

  Total deposits

51,582,830   

55,962,404   

 

Accrued interest payable

11,432   

9,157   

Accrued expenses and other liabilities

363,118   

332,915   

  Total liabilities

51,957,380   

56,304,476   

 

 

 

Shareholders’ equity:

 

 

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

500,000 shares authorized; 99,442 issued and outstanding at March 31, 2016 and December 31, 2015

993   

993   

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

 

 

826,921 issued and outstanding at March 31, 2016 and December 31, 2015

8,269   

8,269   

Additional paid-in-capital

14,752,644   

14,752,644   

Accumulated deficit

(12,261,799)  

(12,062,818)  

Accumulated other comprehensive income (loss)

44,621   

(19,326)  

  Total shareholders’ equity

2,544,728   

2,679,762   

  Total liabilities and shareholders’ equity

54,502,108   

$ 58,984,238   

 

See accompanying notes to the unaudited consolidated financial statements.


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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

Three Months ended

March 31, 2016

Three Months ended

March 31, 2015

Interest income:

 

 

  Interest and fees on loans

$ 539,305   

$ 662,678   

  Interest on investment securities

44,253   

47,748   

  Interest on federal funds sold

9,642   

1,291   

  Interest on time deposits with other banks

119   

162   

     Total interest income

593,319   

711,879   

 

 

 

Interest expense:

 

 

  Interest on time deposits

8,504   

9,955   

  Interest on demand deposits

6,112   

6,117   

  Interest on savings deposits

1,418   

1,472   

     Total interest expense

16,034   

17,544   

     Net interest income

577,285   

694,335   

     Credit to provision for loan losses

(35,000)  

(60,000)  

 

 

 

    Net interest income after provision for loan losses

612,285   

754,335   

 

 

 

Noninterest income:

 

 

  Customer service fees

85,855   

96,278   

  ATM fee income

26,720   

31,404   

  Gain on sale of loans

212,559   

473,706   

  Net change in fair value of financial instruments

(72,062)  

(270,574)  

  Loss on sale of other real estate

(2,495)  

-   

  Other income

37,674   

4,977   

     Total noninterest income

288,251   

335,791   

 

 

 

Noninterest expense:

 

 

  Salaries, wages and employee benefits

391,940   

399,013   

  Occupancy and equipment

238,156   

252,504   

  Office operations and supplies

83,300   

68,460   

  Marketing and public relations

16,395   

17,852   

  Professional services

73,158   

90,451   

  Data processing

108,748   

97,472   

  Other real estate expense

13,632   

(40,032)  

  Loan and collection costs

28,402   

57,281   

  Deposit insurance assessments

34,200   

32,200   

  Other operating

111,586   

100,291   

     Total noninterest expense

1,099,517   

1,075,492   

     Net (loss) income before income taxes

(198,981)  

14,634   

Provision for income taxes

-   

-   

     Net (loss) income

$ (198,981)  

$ 14,634   

Net (loss) income per common share—basic and diluted

$ (0.24)  

$ 0.01   

Weighted average number of common shares outstanding

826,921   

1,046,679   

Comprehensive (loss) income:

 

 

Net (loss) income

$ (198,981)  

$ 14,634   

Unrealized gains on available for sale securities

63,947   

57,188   

 Total comprehensive (loss) income

$ (135,034)  

$ 71,822   

See accompanying notes to the unaudited consolidated financial statements.


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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended March 31,

 

2016

2015

 

 

 

Cash flows from operating activities:

 

 

Net (loss) income

$ (198,981)  

$ 14,634   

  Adjustments to reconcile net (loss) income to net cash

 

 

      provided by operating activities:

 

 

       Credit to provision for loan losses

(35,000)  

(60,000)  

       Amortization of premiums on investments

       Loss on disposition of other real estate

       Amortization of servicing asset   

                     3,384

                      2,495

                      4,562

                   4,410

                        -

                           -   

       Depreciation on fixed assets

45,964   

44,075   

       Net change in fair value of financial instruments

72,062   

270,574   

       Gain on sale of loans

(212,559)  

(473,706)  

       Write-up of other real estate owned

-   

(52,392)  

       Proceeds from the sale of loans held-for-sale

2,109,215   

4,407,339   

       Loans originated for sale

(1,571,097)  

(1,623,731)  

       Increase in accrued interest receivable  and

 

 

         other assets

(103,754)  

(123,200)  

       Increase in accrued interest payable and

 

 

         other liabilities

32,479   

37,311   

         Net cash provided by operating activities

148,769   

2,445,314   

 

 

 

Cash flows from investing activities:

 

 

       Proceeds from maturity and principal reductions of

 

 

          available-for-sale investment securities

824,696   

545,813   

       Purchase of securities available-for-sale

(500,099)  

(24)  

       Net decrease in loans

1,803,063   

1,586,686   

       Proceeds from sale of other real estate

14,155   

-   

       Purchase of bank premises and equipment

(24,432)  

(16,236)  

Net cash provided by investing activities

2,117,383   

2,116,239   

 

 

 

Cash flows from financing activities:

 

 

       Net decrease in deposits

(4,379,574)  

(1,701,313)  

       Net cash used in financing activities

(4,379,574)  

(1,701,313)  

      

      Net (decrease) increase in cash and cash equivalents

(2,113,422)  

2,860,240   

 

Cash and cash equivalents at beginning of period

10,782,098   

3,236,582   

 

Cash and cash equivalents at end of period

$ 8,668,676   

$ 6,096,822   

 

Supplemental disclosure of cash flow information:

 

 

       Cash paid during the period for interest

$ 13,759   

$ 12,729   

       Noncash transfer of loans to other real estate owned

$          -   

$ 91,609   

 

See accompanying notes to the unaudited consolidated financial 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.  Because this report is based on an interim period, certain information and footnote disclosures normally included in the Annual Report on Form 10-K have been condensed or omitted. Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of March 31, 2016 and December 31, 2015 and the consolidated results of its operations and its cash flows for the three months ended March 31, 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

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 fair value based on a loan-by-loan valuation using actual market bids.  Any change in the balance of the loan and its fair value is recorded as income or expense in each reporting period.  When the guaranteed portion of the loan is sold, the gain on the sale is reduced by the income previously recognized as part of the fair value adjustment.

 

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 in accordance with the irrevocable option permitted under Accounting Standards Codification (“ASC”) 825-10-25 Financial Instruments.  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 within 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) Income Per Share

The calculation of net (loss) income per share follows:

 

Three Months Ended
March 31, 2016

Three Months Ended
March 31, 2015

Basic:

 

 

Net (loss) income available to common shareholders

$ (198,981)  

$ 14,634   

Average common shares outstanding-basic

826,921   

1,046,679   

Net (loss) income per share-basic

$ (0.24)  

$ 0.01   

Diluted:

 

 

Average common shares-diluted

826,921   

1,046,679   

Net (loss) income  per share-diluted

$ (0.24)  

$ 0.01   


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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.

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 accumulated other comprehensive income:

 

 

 

Three Months Ended March 31, 2016

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Beginning balance

$ (29)  

$ 10   

$ (19)  

Unrealized gain on securities:

 

 

 

Unrealized holding gain arising during period

95   

(31)  

64   

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

-   

-   

-   

Other comprehensive gain, net

95   

(31)  

64   

Ending balance

$ 66   

$ (21)  

$ 45   

 

 

 

Three Months Ended March 31, 2015

 

Before tax

 

Net of tax

(in (000’s)

Amount

Taxes

Amount

Beginning balance

$ (21)  

$ 8   

$ (13)  

Unrealized gain on securities:

 

 

 

Unrealized holding gain arising during period

86   

(29)  

57   

Less: reclassification adjustment for gains (losses)

 

 

 

   realized in net loss

-   

-   

-   

Other comprehensive gain, net

86   

(29)  

57   

Ending balance

$ 65   

$ (21)  

$ 44   

 

 

4. New Authoritative Accounting Guidance

ASU 2014-9 (Topic 606), “Revenue from Contracts with Customers”.  The Company adopted ASU 2014-9 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, investment securities and derivatives, that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposits, loan syndication fees, ne gains on SBA loan sales and the net gain on sale of OREO. The adoption of this ASU did not have an impact to our Consolidated Financial Statements.

ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments” Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. ASU 2016-13 is effective for the annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

ASU 2016-02 (Topic 842), “Leases” Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual


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periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

ASU 2016-01 (Subtopic 825-10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities” Issued in January 2016, ASU 2016-01 provides that equity investments will be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and related disclosures.

ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” Issued on August 15, 2014, ASU 2014-15 describes how an entity should assess its ability to meet obligations and sets disclosure requirements for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used with existing auditing standards. The new standard applies to all entities for the first annual period ending after December 15, 2016, and interim periods thereafter. The Company is evaluating the effect that ASU 2014-15 will have on its consolidated financial statements and related disclosures as adoption of the new accounting standard could result in a different conclusion.

 

5.  Investment Securities

 

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

(In 000’s)

March 31, 2016

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Fair

 

Cost

Gains

Losses

Value

Available-for-sale:

 

 

 

 

U.S. Government agency securities

$ 3,448   

$ 3   

$ (5)  

$ 3,446   

Government Sponsored Enterprises residential mortgage-backed securities

3,663   

73   

(4)  

3,732   

Investments in money market funds

130   

-   

-   

130   

 

$ 7,241   

$ 76   

$ (9)  

$ 7,308   

 

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 March 31, 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

 

3,448

 

 

3,446

Government Sponsored Enterprises residential mortgage-backed securities

 

 

3,664

 

 

 

3,732

Total debt securities

 

7,112

 

 

7,178

Investments in money market funds

 

130

 

 

130

 

$

7,242

 

$

$ 7,308

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.


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There were no sales of securities during the three months ended March 31, 2016 and 2015.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2016 (in 000’s):

                             (in 000’s)

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

2   

$ 495   

$ (5)  

$ -   

$ -   

$ 495   

$ (5)  

 

 

 

 

 

 

 

 

Government Sponsored Enterprises residential

 

 

 

 

 

 

 

   mortgage-backed securities

2   

-   

-   

232   

(4)  

232   

(4)  

Total temporarily

 

 

 

 

 

 

 

impaired investment

 

 

 

 

 

 

 

    securities

4   

$ 495   

$ (5)  

$ 232   

$ (4)  

$ 727   

$ (9)  

 

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

                              (in 000’s)

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.  


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As of March 31, 2016 and December 31, 2015, investment securities with a carrying value of $4,711,000 and $7,076,000, respectively, were pledged as collateral to secure public deposits and contingent borrowing at the Discount Window.

6. Loans and Allowance for Loan Losses

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

(in 000’s)

 

March 31,

2016

December 31, 2015

Commercial and industrial

$ 3,216   

$ 3,062   

Commercial real estate

24,598   

26,414   

Consumer real estate

2,794   

2,841   

Consumer loans other

1,109   

1,202   

          Total loans

$ 31,717   

$ 33,519   

 

At March 31, 2016 and December 31, 2015, unamortized net deferred fees totaled $305,326 and $253,139 respectively, and are included in the related loan accounts. At March 31, 2016 and December 31, 2015, the unearned discount totaled $23,539 and $22,272, respectively, and is included in the related loan accounts.

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 portfolio segments of non-classified loans.  

Qualitative Factors Component – The loan portfolio is broken down into portfolio segments, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component. 

All of these factors may be susceptible to significant change.  During the quarter ended March 31, 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 minimal charge-offs during the quarter. Credits to the provision for the three months ended March 31, 2016 and 2015 were primarily related to the improvement in commercial and industrial historical loss factors as well as the origination of SBA loans that are accounted for at fair value and not included in the calculation of the allowance for loan losses.  To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.   The following table presents an analysis of the allowance for loan losses.


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(in 000's)

For the Three months ended March 31, 2016

 

Commercial and

industrial

Commercial real

estate

Consumer real estate

  Consumer loans

Other

 

Total

Beginning balance

$151  

$250  

$8 

$ 

$418  

Provision (credit) for loan losses

(32) 

(9) 

6 

 

(35) 

 

 

 

 

 

 

Charge-offs

 

 

- 

(2) 

(2) 

Recoveries

 

 

- 

 

 

Net (charge-offs)recoveries

 

 

- 

 

 

 

 

 

 

 

 

Ending balance

$120  

$241  

$14 

$ 

$384  

 

(in 000's)

For the Three months ended March 31, 2015

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

Other

Total

Beginning balance

$403  

$300 

$20 

$12  

$735  

Credit for loan losses

(60) 

- 

- 

 

(60) 

 

 

 

 

 

 

Charge-offs

 

- 

- 

(12) 

(12) 

Recoveries

 

- 

1 

15  

17  

Net recoveries

 

- 

1 

 

 

 

 

 

 

 

 

Ending balance

$344  

$300 

$21 

$15  

$680  

 

(in 000's)

 

March 31, 2016

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

other

Total

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

$9 

$110 

$- 

$- 

$119 

Loans collectively  evaluated for impairment

111 

131 

14 

9 

265 

 

$120 

$241 

$14 

$9 

$384 

 

 

 

 

 

 

Loans, ending balance:

 

 

 

 

 

Loans individually evaluated for impairment

$194 

$2,034 

$- 

$- 

$2,228 

Loans collectively  evaluated for impairment

3,022 

22,564 

2,794 

1,109 

29,489 

Total

$3,216 

$24,598 

$2,794 

$1,109 

$31,717 

 

(in 000's)

 

 

December 31, 2015

 

 

 

Commercial and

industrial

Commercial real

estate

Consumer real

estate

Consumer loans

other

Total

 

 

 

 

 

 

Period-end amount allocated to:

 

 

 

 

 

 

 

 

 

 

 

Loans indivdually evaluated for impairment

$- 

$91 

$- 

$- 

$91 

Loans collectively  evaluated for impairment

151 

159 

8 

9 

327 

 

$151 

$250 

$8 

$9 

$418 

 

 

 

 

 

 

Loans, ending balance:

 

 

 

 

 

Loans indivdually 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 March 31, 2016 is as follows:

 

 

Accruing

Nonaccrual

 

 

 

 

Loans

Loans 90 or

Loans 90 or

 

 

 

(In 000's)

30-89 Days

More Days

More Days

Total Past

Current

 

 

Past Due

Past Due

Past Due

Due Loans

Loans

Total Loans

Commercial and industrial:

 

 

 

 

 

 

    Commercial

$58 

$- 

$110 

$168 

$1,349 

$1,517 

    SBA loans

- 

- 

40 

40 

215 

255 

    Asset-based

- 

- 

289 

289 

1,155 

1,444 

       Total Commercial and industrial

58 

- 

439 

497 

2,719 

3,216 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

    Commercial mortgages

- 

27 

1,323 

1,350 

10,953 

12,303 

    SBA loans

- 

- 

266 

266 

500 

766 

    Construction

- 

- 

- 

- 

1,235 

1,235 

    Religious organizations

- 

- 

445 

445 

9,849 

10,294 

        Total Commercial real estate

- 

27 

2,034 

2,061 

22,537 

24,598 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

    Home equity loans

31 

148 

358 

537 

345 

882 

    Home equity lines of credit

- 

- 

- 

- 

20 

20 

    1-4 family residential mortgages

- 

- 

129 

129 

1,763 

1,892 

        Total consumer real estate

31 

148 

487 

666 

2,128 

2,794 

 

 

 

 

 

 

 

Total real estate

31 

175 

2,521 

2,727 

24,665 

27,392 

 

 

 

 

 

 

 

Consumer and other:

 

 

 

 

 

 

    Student loans

100 

85 

- 

185 

822 

1,007 

    Other

- 

1 

- 

1 

101 

102 

        Total consumer and other

100 

86 

- 

186 

923 

1,109 

 

 

 

 

 

 

 

        Total loans

$189 

$261 

$2,960 

$3,410 

$28,307 

$31,717 

 

 

 

 

 

 

 

 

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

 

 

Accruing

Nonaccrual

 

 

 

 

Loans

Loans 90 or

Loans 90 or

 

 

 

 

30-89 Days

More Days

More Days

Total Past

Current

 

(In 000's)

Past Due

Past Due

Past Due

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:

 

 

 

 

 

 

    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  


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should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality.  Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt.  These credit quality indicators are updated on an ongoing basis.  A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan, but no later than 90 days past due. 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.

 

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

 

 

 

 

 

 

 

 

 

(In 000's)

 

 

Commercial Loans

March 31, 2016

 

 

 

 

Good/

Excellent

 

Satisfactory

 

Pass

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

   Commercial

$ 300   

$ 949   

$ 15   

$ -   

$ 253   

$ -   

$ 1,517   

   SBA loans

-   

215   

-   

-   

40   

-   

255   

   Asset-based

-   

863   

216   

-   

289   

76   

1,444   

 

300   

2,027   

231   

-   

582   

76   

3,216   

Commercial real estate:

 

 

 

 

 

 

 

   Commercial mortgages

-   

8,408   

1,965   

580   

1,128   

222   

12,303   

    SBA Loans

-   

500   

-   

-   

266   

-   

766   

   Construction

-   

1,235   

-   

-   

-   

-   

1,235   

   Religious organizations

38   

9,096   

-   

715   

445   

-   

10,294   

 

38   

19,239   

1,965   

1,295   

1,839   

222   

24,598   

 

 

 

 

 

 

 

 

Total commercial loans

$ 338   

$ 21,266   

$ 2,196   

$ 1,295   

$ 2,421   

$ 298   

$ 27,814   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage and

Consumer Loans

March 31, 2016

 

 

Performing

 

Nonperforming

 

Total

 

 

 

 

 

 

Consumer Real Estate:

 

 

 

 

 

    Home equity

$ 524   

 

$ 358   

 

$ 882   

    Home equity line of credit

20   

 

-   

 

20   

    1-4 family residential mortgages

1,763   

 

129   

 

1,892   

 

2,307   

 

487   

 

2,794   

 

 

 

 

 

 

Consumer Other:

 

 

 

 

 

    Student loans

1,007   

 

-   

 

1,007   

    Other

102   

 

-   

 

102   

 

1,109   

 

-   

 

1,109   

 

 

 

 

 

 

Total  consumer loans

$ 3,416   

 

$ 487   

 

$ 3,903   


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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 

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 during the three months ended March 31, 2016.  


18


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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 March 31, 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

$110 

$110 

$- 

$110 

$- 

 SBA Loans

40 

40 

- 

40 

- 

 Asset-based

289 

- 

46 

46 

9 

    Total commercial and industrial

439 

150 

46 

196 

9 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

  Commercial mortgages

1,535 

808 

515 

1,323 

106 

  SBA Loans

266 

- 

266 

266 

4 

  Religious organizations

445 

445 

- 

445 

- 

    Total commercial real estate

2,246 

1,253 

781 

2,034 

110 

 

 

 

 

 

 

        Total loans

$2,685 

$1,403 

$827 

$2,228 

$119 

 

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 

439 

- 

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 

$1,991 

$524 

$2,515 

$91 


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Table of Contents


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

March 31, 2016

Three Months Ended

March 31, 2015

 

Average

Interest recognized

Average

Interest recognized

 

Recorded

on impaired

Recorded

on impaired

 

Investment

Loans

Investment

Loans

 

 

 

 

 

Commercial and industrial:

 

 

 

 

    Commercial

$109 

$- 

$335 

$- 

    SBA  loans

39 

- 

62 

- 

    Asset-based

46 

- 

15 

1 

       Total commercial and industrial

194 

- 

412 

1 

 

 

 

 

 

Commercial real estate:

 

 

 

 

    Commercial mortgages

1,329 

2 

869 

- 

    SBA loans

268 

2 

116 

- 

    Religious organizations

454 

- 

513 

- 

        Total commercial real estate

2,051 

4 

1,498 

- 

 

 

 

 

 

        Total loans

$2,245 

$4 

$1,910 

$1 

 

Troubled debt restructurings (“TDRs”).  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal.  The terms of these loans do not include any financial concessions and are not 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 March 31, 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

 

March 31, 2016

March 31, 2015

 

 

 

Beginning balance

$480  

$564 

Additions, transfers from loans

 

92 

Sales

(17) 

- 

 

463  

656 

Write-ups (Write-downs)

 

52 

Ending Balance

$463  

$708 


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Table of Contents


There were no loans in the process of foreclosure at March 31, 2016 and December 31, 2015.

 

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

(in 000's)

March 31, 2016

December 31, 2015

Commercial real estate

$297 

$297 

Residential real estate

166 

183 

    Total

$463 

$480 

 

The following table details the components of net expense of other real estate owned:

 

 

Three  Months Ended

Three  Months Ended

(in 000's)

March 31, 2016

March 31, 2015

Insurance

$4 

$ 

Professional fees

4 

 

Real estate taxes

6 

 

Utilities

- 

 

Transfer-in write-up

- 

(52) 

Impairment charges (net)

- 

 

   Total

$14 

$(40) 

8.  Fair Value  

Fair Value Measurement

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance in FASB ASC 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

 

Level 1

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

 

Level 2

Quoted prices for similar assets or liabilities in active markets.   

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

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


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Table of Contents


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.  

 

Loans Held for Sale. Fair values are estimated by using actual indicative 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.  

 

Servicing Assets. Fair values for servicing assets related to 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.  

 

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
March 31, 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

$ 3,446   

$ -   

$ 3,446   

$ -   

Government Sponsored Enterprises residential mortgage-backed securities

3,732   

-   

3,732   

-   

Money market funds

130   

130   

-   

-   

        Total

$ 7,308   

$ 130   

$ 7,178   

$ -   

Loans held for sale

$ 2,332   

$ -   

$ 2,332   

$ -   

Loans held at fair value

$ 2,990   

$ -   

$ -   

$ 2,990   

Servicing asset

$ 244   

$ -   

$ -   

$ 244   


22


Table of Contents


(in 000’s)

 

Fair Value Measurements at Reporting Date Using:

 

 

Assets/Liabilities 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   

Servicing asset

$ 200   

$ -   

$ -   

$ 200   

The fair value of the Bank’s AFS securities portfolio was approximately $7,308,000 and $7,572,000 at March 31, 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 March 31, 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:

(in 000’s)

Assets measured at fair value

March 31,

2016

Fair value

December 31,

2015

Fair Value

Principal

valuation

techniques

Significant

observable inputs

March 31,

2016

Range of inputs

December 31,

2015

Range of inputs

Loans held at fair value:

$ 2,990  

$ 2,459

Discounted cash flow

Constant prepayment rate

7.135% to 9.763%

7.10% to 9.88%

 

 

 

 

Weighted average discount rate

7.79% to 10.01%

7.76% to 9.94%

 

 

 

 

Weighted average life

3.29 yrs to   8.91 yrs

3.40 yrs to  8.78 yrs


23


Table of Contents


(in 000’s)

Assets measured at fair value

March 31,

2016

Fair value

December 31,

2015

Fair Value

Principal

valuation

techniques

Significant

observable inputs

March 31,

2016

Range of inputs

December 31,

2015

Range of inputs

Servicing asset

$244

$ 200

Discounted cash flow

Constant prepayment rate

5.29% to 10.20%

6.57% to 10.27%

 

 

 

 

Weighted average discount rate

9.47% to 14.73%

11.94 % to 16.23%

 

 

 

 

Weighted average life

3.29 yrs to    8.91 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

696

Principal repayments

(93)

Change in fair value of financial instruments

(62)

Balance at March 31, 2016

$2,990

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

 

Carrying Value at March 31, 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

 

$708

 

$    -

 

$      -

 

$ 708

 

$ -

 

Other real estate owned (“OREO”)

 

$  463

 

$    -

 

$     -

 

$  463

 

-

 

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

 

$ 479

 

$    -

 

$      -

 

$  479

 

$         -

 

Other real estate owned (“OREO”)

 

$    480

 

   $       -

 

$        -

 

$     480

 

$    39


24


Table of Contents


 

The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level 3 measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. At March 31, 2016 and December 31, 2015, the fair values shown above exclude estimated selling costs of $116,000 and $96,000.

 

OREO is carried at the lower of cost or fair value, which is measured at the foreclosure date. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level 2 measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as Level 3 measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

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 indicative 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


25


Table of Contents


cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.

Accrued interest payable:  The carrying amounts of accrued interest payable approximate fair value.

Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts.  The carrying amount of accrued interest payable approximates fair market value.

The fair value of assets and liabilities are depicted below:

 

 

March 31, 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

$ 8,669   

$ 8,669   

$ 10,782   

$ 10,782   

Available for sale securities

(1)

7,308   

7,308   

7,572   

7,572   

Loans held for sale

Level 2

2,332   

2,332   

3,261   

3,261   

Loans held at fair value

Level 3

2,990   

2,990   

2,459   

2,459   

Loans, net of allowance for loan losses

(2)

31,333   

31,378   

33,101   

33,082   

Servicing asset

Level 3

244   

244   

200   

200   

Accrued interest receivable

Level 2

190   

190   

175   

175   

Liabilities:

 

 

 

 

 

Demand deposits

Level 2

28,447   

28,447   

30,022   

30,022   

Savings deposits

Level 2

11,522   

11,522   

11,681   

11,681   

Time deposits

Level 2

11,614   

11,596   

14,259   

14,242   

Accrued interest payable

Level 2

11   

11   

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.


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Requirement

Status

Formulate a written plan to reduce the Bank’s risk positions in each asset or loan in excess of $100,000 classified as “Doubtful” or “Substandard” at its regulatory examination;

A classified asset reduction plan with quarterly benchmarks measured against capital was prepared and submitted as required.

 

 

Eliminate all assets classified as “Loss” at its current regulatory examination;

All assets classified as “Loss” have been eliminated.

 

 

Revise the Bank’s loan policy to establish and monitor procedures for adherence to the loan policy and to eliminate credit administration and underwriting deficiencies identified at its current regulatory examination;

The Bank’s loan policy has been revised to include enhanced monitoring procedures and submitted as required.

 

 

Develop a comprehensive policy and methodology for determining the allowance for loan and lease losses;

The ALLL policy and methodology for determining the allowance for loan losses were submitted as required.

 

 

Develop an interest rate risk policy and procedures to identify, measure, monitor and control the nature and amount of interest rate risk the Bank takes;

The Bank’s interest rate risk policy and procedures were submitted to regulators as required.

 

 

Revise its liquidity and funds management policy and update and review the policy annually;

The Bank’s liquidity policy and contingency plan were submitted to regulators for review as required.

 

 

Refrain from accepting any brokered deposits;

The Bank did not accept brokered deposits.

 

 

Refrain from paying cash dividends without prior approval of the FDIC and the Department;

The Bank did not pay cash dividends.

 

 

Establish an oversight committee of the board of directors of the Bank with the responsibility to ensure the Bank’s compliance with the orders, and

An oversight committee consisting of three outside directors and one inside director was established and meets periodically to ensure compliance with the orders.

 

 

Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the orders.

Quarterly reports were prepared and submitted   as required.

 

In an effort to restore the Bank to profitability and increased capital levels, its regulators, FDIC and Department of Banking amended and restated the prior Order on April 25, 2018.  This amended Order serves as a prescriptive Restoration Plan providing benchmarks for capital, earnings and asset quality.  The Board of Directors is optimistic about the Bank’s ability to achieve the requirements as stated.  This Order represents a more tailored approach by regulators to strengthen and preserve minority-owned financial institutions like United Bank of Philadelphia.  The priority for the Board of Directors and management is to promptly comply with the Order.  The Order 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 March 31, 2016 and December 31, 2015, the Bank’s tier one leverage capital ratio was 4.52% and 4.57%, respectively, and its total risk based capital ratio was 8.02% and 8.50%, respectively. The net loss during the quarter resulted in a decrease in the capital ratios. 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--In March 2017 and September 2017, the Company received a external investments of $675,000 and $250,000, respectively, from other financial institutions. External capital investments will continue to be sought.   

 

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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10.  Subsequent Events

In 2016, correspondence was sent to financial institutions in the region to encourage them to consider an investment for CRA credit. In March 2017, the Bank received a preferred stock investment from Fulton Financial totaling $675,000 and in September 2017, an investment of $250,000 was received from Bryn Mawr Trust.   At June 30, 2018, the Bank’s tier one leverage capital ratio was 4.77% and its total risk based capital ratio was 9.20%, which is considered “adequately capitalized” under the regulatory framework for prompt and corrective action.  The Bank’s growth and other operating factors such as the need for additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios.


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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) any 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 (p) 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 loss of approximately $199,000 ($0.24 per common share) for the quarter ended March 31, 2016 compared to net income of approximately $15,000 ($0.01 per common share) for the same quarter in 2015. The decline in financial performance is primarily related to a reduction in interest income on loans as a result of the payoff of higher interest rate construction loans in 2015. Management remains committed to 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 continue to 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   

Manage asset quality to minimize credit losses and reduce collection costs. Asset quality trends have remained relatively flat with modest improvement in the Bank’s total classified assets. Management will seek to make progress by continuing to enhance its pre-screening, underwriting and customer relationship management practices. Prudent credit administration practices are essential to the identification of emerging problem credits. In addition, Asset Quality Committee meetings will continue to be held on a bi-weekly basis to review existing and emerging problems as well as develop/confirm loss mitigation strategies. In conjunction with its regulatory orders, management has developed a Classified Asset Reduction Plan that is being utilized to manage the level of non-performing assets. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary and may result in increased loan and collection expense.  

Earnings enhancement plan. Management seeks to increase noninterest income and further reduce noninterest expense to achieve core earnings. The primary strategy will continue to focus on increasing SBA loan origination activity and selling the guaranteed portion in the secondary market for a gain.   During 2015 and 2014, noninterest income totaling approximately $643,000 and $581,000, respectively was recognized utilizing this strategy. Approximately $140,000 SBA-related income was recognized for the quarter ended March 31, 2016 compared to $203,000 for the same quarter in 2015. A shift in strategy from prior years is that management will target SBA loans that can be fully funded at closing to avoid lengthy construction delays that extend the secondary market eligibility and recognition of income.   

While expense reductions were achieved during the quarter in personnel and occupancy expense, there was an increase in other noninterest expense including data processing and other real estate expense as the Bank works to reduce its classified assets. Management will seek additional expense reductions, where possible, by performing a line-by-line expense review to identify additional savings.

Another challenge to increased earnings is the restriction on asset growth because of the Bank’s current capital levels; however, the Bank’s net interest margin has remained a significant strength but declined in during the quarter as a result of a reduction in the loan to deposit ratio.  During 2015, a number of higher yielding NRIA construction loans paid off without replacement.  To increase the Bank’s net interest margin, management will seek to shift excess liquidity into higher yielding loans instead of investments and Federal Funds Sold while managing the cost of funds. In addition, management will continue to balance asset growth with capital adequacy requirements.

 

Significant Accounting Policies

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented.  Therefore, actual results could differ from these estimates.  

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies.   The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and


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composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses.   All of these factors may be susceptible to significant change.   To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.   

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

March 31, 2016

 

 

 

Quarter ended

March 31, 2015

Statement of operations information:

 

 

Net interest income

$577

$694

Credit provision for loan losses

(35)

(60)

Noninterest income

288

336

Noninterest expense

1,100

1,075

Net income (loss)

(199)

15

Net income (loss) per share-basic and diluted

(0.24)

0.01

 

 

 

Balance Sheet information:

March 31, 2016

December 31, 2015

Total assets

$  54,502

$  58,984

Net loans

   36,655

   38,821

Investment securities

    7,308

    7,572

Deposits

  51,583

  55,962

Shareholders' equity

   2,545

   2,680

 

 

 

Ratios*:

Quarter ended

March 31, 2016

Quarter ended

March 31, 2015

Return on assets

(1.40)%

0.02%

Return on equity

(30.47)%

0.48%

*annualized

 

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 $2.3 million, or 4.10% during the quarter ended March 31, 2016 compared to the quarter ended December 31, 2015. Average funding sources decreased approximately $2.4 million, or 4.26%, during the same quarter.

 

Sources and Uses of Funds Trends

( dollars in 000’s)

March 31, 2016

 

 

December 31, 2015

 

Average

Increase (Decrease)

Increase (Decrease)

Average

 

Balance

Amount

%

Balance

Funding uses:

 

 

 

 

Loans

$37,998

$    (94)

    (0.25)%

$38,092

    Investment Securities

7,534

   (152)

(1.98)

7,686

Federal funds sold

8,159

 (2,064)

(20.19)

10,223

Balances with other banks

311

-

-

311

Total  uses

$54,002

$  (2,310)

(4.10)%

$56,312

Funding sources:

 

 

 

 

Demand deposits

 

 

 

 

Noninterest-bearing

$16,808

$  878

5.51%

$ 15,930

Interest-bearing

12,977

(1,201)

(8.47)

 14,178

Savings deposits

11,531

(134)

(1.15)

 11,665

Time deposits

12,430

(1,934)

(13.46)

 14,364

Total sources

$53,746

$(2,391)

(4.26)%

$ 56,137


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Loans

Average loans decreased by approximately $94,000, or 0.25%, during the quarter ended March 31, 2016. Funding activity during the quarter was generally offset by loan sales, payoffs and paydowns.   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 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 $25 million, or 77%, of total loans at March 31, 2016 of which approximately $ 18 million are owner occupied.  The Bank continues to have a strong niche in lending to religious organizations for which total loans at March 31, 2016 were approximately $10.3 million, or 42%, of the commercial real estate portfolio. Management closely monitors this concentration to proactively identify and manage credit risk for any conditions that might negatively impact the level of tithes and offerings that provide cash flow for repayment.  The composition of the net loans is as follows:

 

 

March 31,

December 31,

(In 000's)

2016

2015

 

 

 

 

 

 

Commercial and industrial:

 

 

    Commercial

$ 1,517   

$ 1,535   

    SBA loans

255   

40   

    Asset-based

1,444   

1,487   

       Total commercial and industrial

3,216   

3,062   

 

 

 

Commercial real estate:

 

 

 

 

 

    Commercial mortgages

12,303   

13,774   

    SBA loans

766   

353   

    Construction

1,235   

2,175   

    Religious organizations

10,294   

10,112   

        Total commercial real estate

24,598   

26,414   

 

 

 

Consumer real estate:

 

 

    Home equity loans

882   

897   

    Home equity lines of credit

20   

20   

    1-4 family residential mortgages

1,892   

1,924   

        Total consumer real estate

2,794   

2,841   

 

 

 

Total real estate

27,392   

29,255   

 

 

 

Consumer and other:

 

 

    Student loans

1,007   

1,081   

    Other

102   

121   

        Total consumer and other

1,109   

1,202   

 

 

 

        Loans, net

$ 31,717   

$ 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


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the current trends and market conditions.  The allowance for loan losses as a percentage of total loans was 1.21% at March 31, 2016 compared to 1.25% 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 $2,228,000 at March 31, 2016 compared to $2,515,000 at December 31, 2015. The valuation allowance associated with impaired loans was approximately $119,000 and $91,000, at March 31, 2016 and December 31, 2015, respectively. The decrease in impaired loans is attributable to repayment activity related to several loans; however, the increase in the valuation allowance is related to a reduction in the projected net realizable value on one loan. 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 March 31, 2016 and December 31, 2015, loans to religious organizations represented approximately $445,000 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 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 12.97% and 13.92% at March 31, 2016 and December 31, 2015, respectively. The percentage of nonperforming loans to total loans increased from 8.96% at December 31, 2015 to 9.33% at March 31, 2016 as a reduction in total loans outstanding. Approximately 90% 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.


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(In 000's)

March 31, 2016

December 31, 2015

Commercial and industrial:

 

 

    Commercial

$ 110   

$ 110   

    SBA loans

40   

40   

    Asset-based

289   

289   

        Total commercial and industrial

439   

439   

 

 

 

Commercial real estate:

 

 

    Commercial mortgages

1,323   

1,335   

    SBA loans

266   

271   

    Religious organizations

445   

471   

        Total commercial real estate

2,034   

2,077   

 

 

 

Consumer real estate:

 

 

    Home equity loans

358   

358   

    1-4 family residential mortgages

129   

129   

        Total consumer real estate

487   

487   

 

 

 

Total real estate

2,521   

2,564   

 

 

 

        Total nonperforming loans

2,960   

3,003   

        OREO

463   

480   

        Total nonperforming assets

$ 3,423   

$ 3,483   

 

 

 

 

March 31, 2016

December 31, 2015

Nonperforming loans to total loans

9.33 %

8.96 %

Nonperforming assets to total loans and OREO

10.64 %

10.24 %

Nonperforming assets to total assets

6.28 %

5.90 %

 

 

 

Allowance for loan losses as a percentage of:

 

 

    Total loans

1.21 %

1.25 %

    Total nonperforming loans

12.97 %

13.92 %

 

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

 

(In 000's)

March 31,

2016

December 31,

2015

Commercial real estate:

 

 

    Commercial mortgages

$ 27   

$ 39   

        Total commercial real estate

27   

39   

 

 

 

Consumer real estate:

 

 

   Home equity loans

148   

125   

        Total consumer real estate

148   

125   

 

 

 

Consumer and other:

 

 

    Student loans

85   

129   

    Other

1   

-   

        Total consumer and other

86   

129   

        Total

$ 261   

$ 293   

 

Investment Securities and Other Short-term Investments

Average investment securities decreased by approximately $152,000, or 1.98%, during the quarter ended March 31, 2016. The decrease was primarily related to paydowns in mortgage-backed securities.

The average yield on the investment portfolio decreased slightly to 2.34% for the quarter ended March 31, 2016 compared to 2.35% for the quarter ended March 31, 2015. The duration of the portfolio shortened to 2.6 years at March 31, 2016 compared to 3.7 years at December 31, 2015 as a result of market rate shifts during the year.  Amortizing GSE mortgage-backed securities approximate 51% of the portfolio. The payments of principal and interest


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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 March 31, 2016, average deposits decreased approximately $2,391,000, or 4.26%. The decrease was concentrated in interest-bearing demand deposit accounts that decreased on average by approximately $1,201,000, or 8.47%, and certificates of deposit that declined by approximately $1,934,000, or 13.46%, during the quarter. The decline was primarily related to a $2.5 million reduction in the City of Philadelphia certificate of deposit to improve the Bank’s leverage capital position.  

 

Noninterest bearing checking account balances increased on average by $878,000, or 5.51%, during the quarter ended March 31, 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 $134,000, or 1.15%, as a result of normal 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:  

 

 

(in 000’s)

March 31,

2016

December 31,

2015

Commitments to extend credit

$6,420

$5,903

Standby letters of credit

$  333

$  333

 

The level of commitments increased during the quarter ended March 31, 2016 as a result of the growing SBA loan pipeline. More than $1.6 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 March 31, 2016, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $8.7 million, or 15.90% of total assets, compared to $10.8 million, or 18.27%, at December 31, 2015.  The decrease is primarily related to a $2.5 million reduction in the City of Philadelphia’s deposit to de-leverage the Bank’s balance sheet.


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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, the majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank.  Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.

 

Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity.  Approximately $9.2 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 (“NBA”)lk 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 $700,000. 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 March 31, 2016, a positive gap position is maintained on a cumulative basis through 1 year of 12.85% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis, down from the December 31, 2015 positive gap position of 17.28%. This positive gap position is caused by a high level of loans maturing and/or repricing in one to three months.  This position makes the Bank’s net interest income more favorable in a rising interest rate environment. 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 March 31, 2016, the change in the market value of equity in a +200 basis point interest rate change is -26.7, in excess of the policy limit of 25%, and -50.4% in a +400 basis point interest rate change, slightly above the policy limit of -50%.   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 March 31, 2016.

 

Capital Resources

Total shareholders’ equity decreased approximately $135,000, or 5.03%, during the quarter ended March 31, 2016. The decrease is attributable to the net loss of approximately $199,000 offset by other comprehensive income related to an unrealized gain on the securities classified as available-for-sale totaling approximately $64,000.   

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


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with raising a minimum investment of $2 million.  In March 2017, the Bank received a $675,000 equity investment from another financial institution in the region.  In addition, $250,000 from another financial institution was received in September 2017.

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 2015 Annual Report in 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 March 31, 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 following table presents the capital ratios of the Company and the Bank as of March 31, 2016 and December 31, 2015:  

(In 000’s)                                                    

 

Actual

March 31, 2016

Minimum to be “Well Capitalized”

 

Amount

Ratio

Amount

Ratio

Total (Tier II) capital to risk weighted assets:

 

 

 

 

    Company

$2,806

8.02%

N/A

 

    Bank

2,806

8.02

$3,498

10.00%

Tier I capital to risk weighted assets

 

 

 

 

    Company

2,444

6.99

N/A

 

    Bank

2,444

6.99

$2,798

8.00%

Common equity Tier I capital to risk weighted assets

 

 

 

 

    Company

2,444

6.99

N/A

 

     Bank

2,444

6.99

 $2,274

6.50%

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

 

 

 

 

    Company

2,444

4.52

N/A

 

     Bank

2,444

4.52

$2,701

5.00%

 

(In 000’s)                

 

Actual

March 31, 2016

Minimum to be “Well Capitalized”

March 31, 2015

Amount

Ratio

Amount

Ratio

Total (Tier II) capital to risk weighted assets:

 

 

 

 

    Company

$3,081

8.50%

N/A

 

    Bank

3,081

8.50

$3,623

10.00%

Tier I capital to risk weighted assets

 

 

 

 

    Company

2,663

7.35

N/A

 

    Bank

2,663

7.35

$2,899  

8.00%

Common equity Tier I capital to risk weighted assets

 

 

 

 

    Company

2,663

7.35

N/A

 

     Bank

2,663

7.35

 $2,355

6.50%

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

 

 

 

 

    Company

2,663

4.57

N/A

 

     Bank

2,663

4.57

$2,915

5.00%


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Results of Operations

 

Summary

 

The Company reported a net loss of approximately $199,000 ($0.24 per common share) for the quarter ended March 31, 2016 compared to net income of approximately $15,000 ($0.01 per common share) for the same quarter in 2015. The decline in financial performance is primarily related to a reduction in interest income on loans as a result of the payoff of higher interest rate construction loans in 2015. 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  

March 31, 2016

 

 

Three  months ended  

March 31, 2015

 

(in 000’s)

Average Balance

 

Interest

 

Yield/Rate

Average Balance

 

Interest

 

Yield/Rate

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

    Loans

$37,998

$539

5.67%

$ 46,729

$ 662

5.68%

    Investment securities

8,159

44

2.34

8,182

 48

2.35

    Federal funds sold

7,534

10

0.49

2,545

1

0.20

    Interest bearing balances with other banks

311

-

-

310

1

0.32

       Total interest-earning assets

54,002

593

4.39

57,766

712

4.93

Interest-bearing liabilities

 

 

 

 

 

 

    Demand deposits

12,977

6

0.18

13,351

6

0.18

    Savings deposits

11,531

1

0.03

12,090

2

0.07

    Time deposits

12,430

9

0.29

15,806

10

0.25

         Total interest-bearing liabilities

36,938

16

0.17

41,247

18

0.17

Net interest income

 

$577

 

 

$694

 

Net yield on interest-earning assets

 

 

4.27%

 

 

4.81%

For purposes of computing the average balance, loans include all loans including loans held for sale and held at fair value.  Loan balances are not reduced for nonperforming loans.  Loan fee income is included in interest income on loans but is not considered material.

Net interest income decreased approximately $117,000, or 16.86%, for the quarter ended March 31, 2016 compared to the same quarter in 2015. Although the yield on loans was relatively unchanged, the volume of loans declined compared to 2015 primarily as a result of the completion and payoff of several 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 March 31, 2016 compared to 2015

Three months ended March 31, 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

$ (123)  

$ -   

$ (123)  

$ 48   

$ (33)  

$ 15   

Investment securities

(4)  

-   

(4)  

(12)  

(1)  

(13)  

   Federal funds sold                                             

7   

2   

9   

(1)  

-   

(1)  

   Interest bearing balances with other banks

-   

(1)  

(1)  

-   

(2)  

(2)  

Total Interest-earning assets

(120)  

1   

(119)  

35   

(36)  

(1)  

Interest paid on:

 

 

 

 

 

 

Demand deposits

-   

-   

-   

-   

(1)  

(1)  

Savings deposits

-   

(1)  

(1)  

-   

1   

1   

Time deposits

(2)  

1   

(1)  

-   

-   

-   

Total interest-bearing liabilities

(2)  

-   

(2)  

-   

-   

-   

Net interest income

$ (123)  

$ 6   

$ (117)  

$ 35   

$ (36)  

$ (1)  

 

 

 

 

 

 

 


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For the quarter ended March 31, 2016 compared to the same period in 2015, there was a decrease in net interest income of approximately $123,000 due to changes in volume offset by an increase of approximately $6,000 due to changes in rate. Average loans declined by more than $8.7 million compared to the same period in 2015 as a result of payoffs without replacement.

 

Provision for Loan Losses

There was a credit to the provision for loan losses of $35,000 and $60,000, respectively, for the quarters ended March 31, 2016 and 2015. The level of provisions is primarily related to lower loan originations, loan payoff activity as well as a reduction net charge-offs and the 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.)  In addition, there is an increasing level of SBA loans accounted for at fair value that are not included in the allowance calculation.

 

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 decreased approximately $48,000, or 14.16%, for the quarter ended March 31, 2016 compared to the same quarter in 2015 primarily related to a reduction in SBA-related income including gains on sales as well as fair value adjustments.

 

Customer service fees declined approximately $10,000, or 10.83%, for the quarter ended March 31, 2016 compared to 2015.  ATM activity fees declined by approximately $5,000, or 14.92%, for the quarter ended March 31, 2016 compared to the same period in 2015. The decline is related to 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.  

In conjunction with its SBA loan origination strategy, the Bank recognized income of approximately $140,000 and $203,000, respectively, for the three months ended March 31, 2016 and 2015, on the sale of the guaranteed portion of SBA loans and on SBA loans that were held-for-sale and accounted for at fair value under ASC 825, Financial Instruments. The decline is related to lower loan origination volume during the quarter.  Management plans to continue to increase its SBA loan volume and related gains on sales as its primary strategy to enhance and stabilize earnings.

Other income increased approximately $33,000 for the quarter ended March 31, 2016 compared to the same period in 2015.  The increase is primarily related to the shortening in the period to escheat dormant accounts resulting in a significant number of accounts closed and escheated to the Commonwealth of Pennsylvania for which the Bank charged a per account administrative fee for this service.

 

Noninterest Expense

Salaries and benefits declined approximately $7,000, or 1.77%, for the quarter ended March 31, 2016 compared to 2015.  The decline is primarily related to unfilled positions within the Bank’s branch network.

 

Occupancy and equipment expense decreased approximately $14,000, or 5.68%, for the quarter ended March 31, 2016 compared to 2015. The decrease for the quarter is primarily related to a reduction in depreciation expense for fully depreciated furniture and equipment.

 

Office operations and supplies expense increased by approximately $15,000, or 21.68%, for the quarter ended March 31, 2016 compared to 2015 primarily because of increased branch security expense.  The branches are operating with fewer full time staff that may increase the potential risk of crime; therefore, the Bank increased the presence of security guards to compensate.

 

Professional services expense decreased approximately $17,000, or 19.12%, for the quarter ended March 31, 2016 compared to 2015 primarily as a result of a lower level of fees paid in relation to the Bank’s year-end audit.

Data processing expenses increased approximately $11,000, or 11.57%, for the quarter ended March 31, 2016 compared to 2015.  The increase is primarily related to annual contract escalation in core processor and EFT expenses


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Federal deposit insurance assessments increased approximately $2,000, or 6.21%, for the quarter ended March 31, 2016 compared to 2015. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.

Net other real estate expenses increased approximately $54,000, or 134%, for the quarter ended March 31, 2016   compared to 2015.  The increase was primarily the result of approximately $52,000 transfer-in write-up during the same quarter in 2015 for one property where the net liquidation value exceeded the Bank’s loan balance.  

Loan and collection expenses declined approximately $29,000, or 50.42%, for the quarter ended March 31, 2016 compared to 2015 as a result of a reduction in sheriff sale and legal fees related to foreclosure/collection activity the Bank experienced in 2015.

Other operating expenses increased approximately $12,000, or 11.51%, for the quarter ended March 31, 2016 compared to 2015.   The increase is related to an increase in the Pennsylvania Bank Shares Tax.

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


(a) Evaluation of Disclosure Controls and Procedures.

 

The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of the end of the period covered by this Report (the “Evaluation Date”). A control system, no matter how well designed and operated, can provide only reasonable, not absolute insurance, that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic and annual reports.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report due to the material weakness described below.

 

(b) Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework, management has concluded that our


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internal control over financial reporting was not effective as of March 31, 2016 due to the material weakness described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis by the company’s internal controls.  Based on our evaluation under the framework, management has concluded that material weaknesses existed in the internal controls as of March 31, 2016 in connection with credit administration matters and the timeliness of financial reporting related to the identification and support for asset quality matters that could have a material effect on the consolidated financial statements.

To address the material weaknesses, we have established the following procedures: (1) Implement a new credit administration monitoring system for items requiring follow-up/annual reviews; (2) Implement an appraisal monitoring procedure for all impaired loans; and (3) Together with credit administration in conjunction with monthly Asset Quality Committee Meetings, identify and provide appropriate supporting documentation for material asset quality-related matters that could affect the consolidated financial statements of the Company.  Management believes that this change will address material weaknesses in the financial controls that were in existence as of March 31, 2016. Additional changes will be implemented as determined necessary.

 

Although our remediation efforts have been implemented, our material weaknesses will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively.  

 

(c) Changes in Internal Control Over Financial Reporting.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this Report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Act which permits small reporting companies, such as the Company, to provide only management’s report in this annual report.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

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 2015 Annual Report on Form 10-K except as disclosed below.  The risk factors disclosed in the Company’s 2015 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 March 31, 2016, the Bank’s tier one leverage capital ratio was 4.52% and its total risk based capital ratio was 8.02%.  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


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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.

 

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