UNITED BANCSHARES INC /PA - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PA	ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - UNITED BANCSHARES INC /PA	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PA	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PA	ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

_X_

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011 OR

___

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

UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

0-25976

Commission File Number

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

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

(215) 351-4600

(Registrant's telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ____ No____

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

Large accelerated filer___

Accelerated filer___

Non-accelerated filer_X_

Smaller Reporting Company ___

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

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

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

Applicable only to corporate issuers:

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

United Bancshares, Inc. (sometimes herein also referred to as the “Company” or “UBS”) has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and 500,000 shares of $0.01 par value Series A Preferred Stock.

The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. As of August 3, 2011, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).

The Series Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of August 3, 2011.

FORM 10-Q

Index

Item No.

Page

PART I-FINANCIAL INFORMATION

1.	Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
3.	Quantitative and Qualitative Disclosures about Market Risk	35
4.	Controls and Procedures	35

PART II-OTHER INFORMATION

1.	Legal Proceedings	36
1A.	Risk Factors	36
2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
3.	Defaults upon Senior Securities	36
4	Reserved	37
5.	Other Information	37
6.	Exhibits	37

Item 1. Consolidated Statements of Condition (unaudited)

	June 30,			December 31,
	2011			2010
Assets
Cash and due from banks	$	3,058,895		$	2,144,390
Interest bearing deposits with banks		305,060			304,721
Federal funds sold		8,725,000			6,247,000
Cash and cash equivalents		12,088,955			8,696,111

Investment securities:
Held-to-maturity, at amortized cost (fair value of $18,162,813		17,975,609			15,138,389
and $15,242,856 at June 30, 2011 and December 31, 2010, respectively)
Available-for-sale, at fair value		1,206,370			1,338,898

Loans		41,576,588			45,612,217
Less: allowance for loan losses		(767,434	)		(925,905	)
Net loans		40,809,154			44,686,312

Bank premises & equipment, net		1,096,588			1,143,347
Accrued interest receivable		372,145			363,348
Other real estate owned		1,285,696			1,416,543
Core deposit intangible		402,850			491,889
Prepaid expenses and other assets		649,310			690,878
Total Assets	$	75,886,677		$	73,965,715

Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing	$	14,478,260		$	13,528,781
Demand deposits, interest bearing		14,469,720			13,802,602
Savings deposits		14,180,661			13,856,033
Time deposits, $100,000 and over		18,645,055			17,975,595
Other time deposits		7,921,036			8,047,679
		69,694,732			67,210,690

Accrued interest payable		64,760			56,907
Accrued expenses and other liabilities		307,998			400,702
Total Liabilities		70,067,490			67,668,299

Shareholders' equity:
Preferred Stock, Series A, non-cumulative, 6%, $.01 par value,		1,368			1,368
500,000 shares authorized, 136,842 issued
Common stock, $.01 par value; 2,000,000 shares authorized;
876,921 shares issued and outstanding		8,769			8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
191,667 shares issued and outstanding		1,917			1,917
Additional-paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(8,985,342	)		(8,508,591	)
Net unrealized gain on available-for-sale securities		42,623			44,101
Total Shareholders' equity		5,819,187			6,297,416
	$	75,886,677		$	73,965,715

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

Consolidated Statements of Operation (unaudited)

	Quarter ended			Quarter ended			Six months ended			Six months ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
Interest income:
Interest and fees on loans	$	651,709		$	688,509		$	1,319,991		$	1,381,740
Interest on investment securities		156,857			156,176			310,088			272,158
Interest on federal funds sold		4,071			2,910			7,315			4,989
Interest on time deposits with other banks		172			176			346			902
Total interest income		812,809			847,771			1,637,740			1,659,789

Interest expense:
Interest on time deposits		38,750			53,130			78,543			105,638
Interest on demand deposits		19,747			19,890			37,457			39,505
Interest on savings deposits		3,471			3,584			6,891			7,319
Total interest expense		61,968			76,604			122,891			152,462

Net interest income		750,841			771,167			1,514,849			1,507,327

Provision for loan losses		40,000			377,000			70,000			407,000
Net interest income less provision for
loan losses		710,841			394,167			1,444,849			1,100,327

Noninterest income:
Customer service fees		96,050			112,555			193,335			218,166
ATM activity fees		90,605			94,844			176,779			185,673
Loan syndication fees		80,000			50,000			80,000			80,000
Net gain on sale of other real estate		111,291			-			111,291			-
Other income		21,408			43,809			51,626			84,709
Total noninterest income		399,354			301,208			613,031			568,548

Non-interest expense
Salaries, wages, and employee benefits		415,426			441,506			845,164			870,352
Occupancy and equipment		277,524			255,225			547,669			509,240
Office operations and supplies		75,226			69,131			152,582			141,936
Marketing and public relations		35,633			9,485			58,425			12,749
Professional services		72,051			99,001			142,782			167,053
Data processing		124,413			117,117			250,430			232,893
Deposit insurance assessments		42,092			35,829			84,230			71,153
Loan and collection expense		59,200			66,424			106,722			93,730
Other noninterest expense		177,414			163,026			346,627			321,603
Total non-interest expense		1,278,979			1,256,744			2,534,631			2,420,709

Net loss	$	(168,784	)	$	(561,369	)	$	(476,751	)	$	(751,834	)

Loss per share-basic	$	(0.16	)	$	(0.53	)	$	(0.45	)	$	(0.71	)
Loss per share-diluted	$	(0.16	)	$	(0.53	)	$	(0.45	)	$	(0.71	)

Weighted average number of shares		1,065,588			1,065,588			1,065,588			1,065,588

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

Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2011			2010
Cash flows from operating activities
Net loss	$	(476,751	)	$	(751,834	)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for loan losses		70,000			407,000
Gain on sale of other real estate		111,291			-
Depreciation expense		126,135			141,898
Amortization expense		109,420			107,719
Decrease in accrued interest receivable and other assets		32,771			159,825
Decrease in accrued interest payable and other liabilites		(84,851	)		(20,274	)
Net cash (used in) provided by operating activities		(111,985	)		44,334

Cash flows from investing activities
Purchase of investments-Held-to-Maturity		(7,623,124	)		(10,846,763	)
Proceeds from maturity & principal reductions of investments-Available-for-Sale		130,225			337,144
Proceeds from maturity & principal reductions of investments-Held-to-Maturity		4,785,904			6,009,940
Net decrease (increase) in loans		3,807,158			(515,447	)
Purchase of premises and equipment		(79,376	)		(35,148	)
Net cash provided by (used in) investing activities		1,020,787			(5,050,274	)

Cash flows from financing activities
Net increase in deposits		2,484,042			5,584,912
Net cash provided by financing activities		2,484,042			5,584,912

Increase in cash and cash equivalents		3,392,844			578,972

Cash and cash equivalents at beginning of period		8,696,111			6,289,844

Cash and cash equivalents at end of period	$	12,088,955		$	6,868,816

Supplemental disclosures of cash flow information
Cash paid during the period for interest	$	115,038		$	140,193
Noncash transfer of loans to other real estate owned	$	602,100		$	689,084

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)

1. Significant Accounting Policies

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

During interim periods, the Company follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers are encouraged to refer to the Company's Form 10-K for the fiscal year ended December 31, 2010 when reviewing this Form 10-Q. Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of June 30, 2011 and December 31, 2010 and the consolidated results of its operations for the three and six month periods ended June 30, 2011 and 2010, and its consolidated cash flows for the three and six month periods ended June 30, 2011 and 2010.

Management’s Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, the determination of the allowance for loan losses, valuation allowance for deferred tax assets and consideration of impairment of other intangible assets.

Commitments

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

Contingencies

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

Income Taxes

Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. For financial reporting purposes, a valuation allowance of 100% of the net deferred tax asset has been recognized to offset the net deferred tax assets related to cumulative temporary differences and tax loss carryforwards. If management determines that the Company may be able to realize all or part of the deferred tax asset in the future, an income tax benefit may be required to increase the recorded value of the net deferred tax asset to the expected realizable amount.

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

Interest and penalties associated with unrecognized tax benefits, if any, would be recognized in income tax expense in the consolidated statements of operations.

2. Comprehensive Loss

Total comprehensive loss includes net loss and other comprehensive income or loss that is comprised of unrealized gains and losses on investment securities available for sale, net of taxes. The Company’s total comprehensive loss for the three months ended June 30, 2011 and 2010 was $(168,981) and $(556,253), respectively. The Company’s total comprehensive loss for the six months ended June 30, 2011 and 2010 was $(478,229) and $(750,144), respectively. The difference between the Company’s net loss and total comprehensive loss for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.

3. Net Loss Per Share

The calculation of net loss per share follows:

	Three Months Ended June 30, 2011	Three Months Ended June 30, 2010	Six Months Ended June 30, 2011	Six Months Ended June 30, 2010
Basic:
Net loss available to common shareholders	($168,784)	(561,369)	($476,751)	($751,834)
Average common shares outstanding-basic	1,065,588	1,065,588	1,065,588	1,065,588
Net loss per share-basic	($0.16)	($0.53)	($0.45)	($0.71)
Diluted:
Average common shares-diluted	1,065,588	1,065,588	1,065,588	1,065,588
Net loss per share-diluted	($0.16)	($0.53)	($0.45)	($0.71)

The preferred stock is non cumulative and the Company is restricted from paying dividends. Therefore, no effect of the preferred stock is included in the loss per share calculations.

4. New Authoritative Accounting Guidance

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB ASC Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Company's adoption of this ASU on June 15, 2011 did not have a material impact on the Company's consolidated financial position or results of operations.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments to the Codification in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company is evaluating the impact of ASU 2011-04 on its consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU 2011-05 on the presentation of its consolidated financial statements.

4. Investment Securities

The following is a summary of the Company's investment portfolio as of June 30, 2011:

(In 000’s) Available-for-sale:	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Government Sponsored Enterprises residential mortgage-backed securities	$	1,014	$	63	$	-		$	1,077
Investments in mutual funds		129		-		-			129
	$	1,143	$	63		-		$	1,206
Held-to-maturity:
U.S. government agencies	$	8,530	$	83	$	(95	)	$	8,518
Government Sponsored Enterprises residential mortgage-backed securities		9,446		219		(19	)		9,646
	$	17,976	$	302	$	( 114	)	$	18,163

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

(In 000’s)

	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,144	$	66	$	-		$	1,210
Investments in mutual funds		129		-		-			129
	$	1,273	$	66	$	-		$	1,339
Held-to-maturity:
U.S. government agencies	$	10,402	$	90	$	(145	)	$	10,347
Government Sponsored Enterprises residential mortgage-backed securities		4,736		166		(6	)		4,896
	$	15,138	$	256	$	(151	)	$	15,243

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of June 30, 2011, are as follows:

(In 000’s)	Amortized Cost		Fair Value
Available-for-Sale
Due within one year	$	-	$	-
Due after one year through three years		-		-
Due after three years through five years		-		-
Due five years through ten years		-		-
Due after 10 years		-		-
Government Sponsored Enterprises residential mortgage-backed securities		1,014		1,077
Total debt securities	$	1,014	$	1,077

Held-to-maturity
Due within one year	$	-	$	-
Due after one year through three years		-		-
Due after three years through five years		250		253
Due five years through ten years		7,250	$	7,260
Due after 10 years		1,030		1,004
Government Sponsored Enterprises residential mortgage-backed securities		9,446		9,646
	$	17,976	$	18,163

Expected maturities will differ from contractual maturities because the issuers of certain debt securities have the right to call or prepay their obligations without any penalties.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2011:

(in 000’s)	Less Than 12 Months					12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-maturity:
U.S. government agencies	$	4,148	$	(95	)	$	-	$	-	$	4,148	$	(95	)

Government Sponsored Enterprises residential mortgage-backed securities		2,310		(19	)		-		-		2,310		(19	)
Total	$	6,458	$	(114	)	$	-	$	-	$	6,458	$	(114	)

The table below indicates the length of time individual securities, have been in a continuous unrealized loss position at December 31, 2010:

(in 000’s)	Less Than 12 Months					12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-maturity:
U.S. government agencies	$	5,398	$	(145	)	$	-	$	-	$	5,398	$	(145	)
Government Sponsored Enterprises residential mortgage-backed securities		536		(6	)		-		-		536		(6	)
Total	$	5,934	$	(151	)	$	-	$	-	$	5,934	$	(151	)

U.S. government and agencies. Unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2011.

Government Sponsored Enterprises residential mortgage-backed securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities may be caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2011.

The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.

5. Allowance for Loan Losses

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

The following table presents an analysis of the allowance for loan losses.

(in 000's)	For the six months ended June 30, 2011
	Commercial and industrial			Commercial real estate			Consumer real estate		Consumer loans other			Total
Beginning balance	$	301		$	553		$	52	$	20		$	926
Provision for possible loan losses		40			23			-		7			70

Charge-offs		(62	)		(148	)		-		(37	)		(247	)
Recoveries		1			4			3		10			18
Net charge-offs		(61	)		(144	)		3		(27	)		(229	)

Ending balance	$	280		$	432		$	55	$	-		$	767

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	27		$	-		$	-	$	-		$	27
Loans collectively evaluated for impairment		253			432			55		-			740
	$	280		$	432		$	55	$	-		$	767

Loans, ending balance:
Loans indivdually evaluated for impairment	$	621		$	1,148		$	-	$	-		$	1,769
Loans collectively evaluated for impairment		3,053			28,740			6,010		2,005			39,808
Total	$	3,674		$	29,888		$	6,010	$	2,005		$	41,577

				For the six months ended June 30, 2010
Allowance for credit losses
Beginning balance												$	727
Charge-offs:													(309	)
Recoveries:													20
Net charge-offs													(289	)
Provisions for loan losses charged to expense													407
Ending balance												$	845


(in 000's)	For the Quarter ended June 30, 2011
	Commercial and industrial			Commercial real estate			Consumer real estate		Consumer loans other			Total
Beginning balance	$	239		$	430		$	55	$	20		$	744
Provision for possible loan losses		40			-			-		-			40

Charge-offs		-			-			-		(24	)		(24	)
Recoveries		1			2			-		4			7
Net charge-offs		1			2			-		(20	)		(17	)

Ending balance	$	280		$	432		$	55	$	-		$	767

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	10		$	-		$	-	$	-		$	10
Loans collectively evaluated for impairment		270			432			55		-			757
	$	280		$	432		$	55	$	-		$	767

Loans, ending balance:
Loans indivdually evaluated for impairment	$	621		$	1,148		$	-	$	-		$	1,769
Loans collectively evaluated for impairment		3,053			28,740			6,010		2,005			39,808
Total	$	3,674		$	29,888		$	6,010	$	2,005		$	41,577

				For the Quarter ended June 30, 2010
Allowance for credit losses
Beginning balance												$	642
Charge-offs:													(178	)
Recoveries:													4
Net charge-offs													(174	)
Provisions for loan losses charged to expense													377
Ending balance												$	845

Nonperforming and Nonaccrual and Past Due Loans

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

An age analysis of past due loans, segregated by class of loans, as of June 30, 2011 follows:


(In 000's)			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	38	$	-	$	502		540	$	1,023	$	1,563
SBA loans		50		-		18		68		186		254
Asset-based		-		-		101		101		1,756		1,857
Total Commercial and industrial		88		-		621		709		2,965		3,674

Commercial real estate:
Commercial mortgages		-		-		651		651		14,487		15,138
SBA loans		-		9		58		67		477		544
Construction		-		-		-		-		611		611
Religious organizations		-		-		439		439		13,156		13,595
Total Commercial real estate		0		9		1,148		1,157		28,731		29,888

Consumer real estate:
Home equity loans		13		-		128		141		1,616		1,757
Home equity lines of credit		39		-		-		39		547		586
1-4 family residential mortgages		58		-		260		318		3,349		3,667
Total consumer real estate		109		-		388		497		5,513		6,010

Total real estate		109		9		1,536		1,654		34,244		35,898

Consumer and other:
Consumer installment		-		1		3		4		63		67
Student loans		72		75		-		147		1,627		1,774
Other		2		-		-		2		162		164
Total consumer and other		74		76		3		153		1,852		2,005

Total loans	$	271	$	85	$	2,160	$	2,516	$	39,061	$	41,577

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

(In 000's)			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	442	$	-	$	505		946	$	2,187	$	3,133
SBA loans		12		-		18		30		198		229
Asset-based		-		-				-		2,367		2,367
Total Commercial and industrial		454		-		523		977		4,753		5,729

Commercial real estate:
Commercial mortgages		125		-		1,495		1,620		14,154		15,774
SBA loans						58		58		1,253		1,311
Religious organizations		126		-		315		441		13,213		13,653
Total Commercial real estate		251		-		1,868		2,119		28,620		30,738

Consumer real estate:
Home equity loans		155		142		130		427		1,386		1,813
Home equity lines of credit		-		-		-		-		714		714
1-4 family residential mortgages		-		-		261		261		4,171		4,432
Total consumer real estate		155		142		391		688		6,271		6,959

Total real estate		406		142		2,259		2,806		34,891		37,697

Consumer and other:
Consumer installment		8		-		-		8		74		82
Student loans		87		44		-		131		1,781		1,912
Other		13		19		-		32		160		192
Total consumer and other		108		63		-		171		2,016		2,186

Total loans	$	968	$	205	$	2,782	$	3,954	$	41,659	$	45,612

Loan Origination/Risk Management. The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans. Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

Credit Quality Indicators. For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating. The Bank uses a 1 through 7 loan grading system that follows regulatory accepted definitions as follows:

Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments. Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.

Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention. Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.

Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. No loss of principal or interest is envisioned. Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit. Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However a restructuring of the debt should result in repayment. The asset is currently protected, but is potentially weak. This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.

Risk ratings of “6” are assigned to ‘Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.

Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The borrower's recent performance indicates an inability to repay the debt. Recovery from secondary sources is uncertain. The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.

Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets. They are recommended for charge-off if attempts to recover will be long term in nature. This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible. Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

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

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


(In 000's)					June 30,2011
	Good/Excellent		Satisfactory		Pass		Special Mention		Subtandard		Total



Commercial and industrial:
Commercial	$	379	$	575	$	69	$	38	$	502	$	1,564
SBA loans		-		130		56		-		68		254
Asset-based		-		1,686		70		-		101		1,857
		379		2,392		195		38		671		3,674
Commercial real estate:
Commercial mortgages		-		13,575		801		-		762		15,139
SBA Loans				477		-		-		67		544
Construction		-		611		-		-		-		611
Religious organizations		-		9,815		2,981		360		439		13,595
		-		24,478		3,783		360		1,267		29,888

Total commercial loans	$	379	$	26,870	$	3,977	$	398	$	1,938	$	33,563


					June 30,2011
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing				Nonperforming				Total

Consumer Real Estate:
Home equity	$	1,629			$	128			$	1,757
Home equity line of credit		586				-				586
1-4 family residential mortgages		3,407				260				3,667
		5,622				388				6,010

Consumer Other:
Consumer Installment		64				3				67
Student loans		1,774				-				1,774
Other		164				-				164
		2,002				3				2,005

Total consumer loans	$	7,624			$	391			$	8,015

Total loans											$	41,577


(In 000's)	December 31, 2010
	Good/Excellent		Satisfactory		Pass		Special Mention		Subtandard		Total



Commercial and industrial:
Commercial	$	379	$	2,079	$	72	$	98	$	505	$	3,133
SBA loans		-		90		71		-		68		229
Asset-based		-		2,083		184		101		-		2,368
		379		4,252		327		199		573		5,730
Commercial real estate:
Commercial mortgages		-		13,902		264		-		1,608		15,774
SBA Loans				1,241		-		-		70		1,311
Religious organizations		-		9,920		2,932		360		441		13,653
		-		25,063		3,196		360		2,119		30,738

Total commercial loans	$	379	$	29,315	$	3,523	$	559	$	2,692	$	36,468


	December 31, 2010
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing				Nonperforming				Total

Consumer Real Estate:
Home equity	$	1,683			$	130			$	1,813
Home equity line of credit		714				-				714
1-4 family residential mortgages		4,171				261				4,432
		6,568				391				6,959

Consumer Other:
Consumer Installment		81				-				81
Student loans		1,912				-				1,912
Other		192				-				192
		2,185				-				2,185

Total consumer loans	$	8,753			$	391			$	9,144

Total loans											$	45,612

Impaired Loans. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis.

In accordance with guidance provided by ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; and the Observable Market Price of a Loan Method. To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.

Impaired loans as of June 30, 2011 are set forth in the following table.


(In 000's)	Unpaid		Recorded		Recorded								Interest
	Contractual		Investment		Investment		Total				Average		recognized
	Principal		With No		With		Recorded		Related		Recorded		on impaired
	Balance		Allowance		Allowance		Investment		Allowance		Investment		loans

Commercial and industrial:
Commercial	$	502	$	475	$	27	$	502	$	27	$	471	$	-
SBA loans		18		18		-		18		-		18		-
Asset-based		101		101				101				17		-
Total Commercial and industrial		621		594		27		621		27		506		-

Commercial real estate:
Commercial mortgages		651		651		-		651		-		946		-
SBA Loans		58		58		-		58		-		58		-
Religious Organizations		439		439		-		439		-		440		3
Total Commercial real estate		1,148		1,148		-		1,148		-		1,444		3

Total Loans	$	1,769	$	1,742	$	27	$	1,769	$	27	$	1,951	$	3

Impaired loans as of December 31, 2010 are set forth in the following table.

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interst Collected
	Principal		With No		With		Recorded		Related		Recorded		on impaired
	Balance		Allowance		Allowance		Investment		Allowance		Investment		loans

Commercial and industrial:
Commercial	$	505	$	422	$	83	$	505	$	83	$	73	$	21
SBA loans		21		18		-	$	18		-		20		-
Asset-based		-		-		-		-		-		20		-
Total Commercial and industrial		526		440		83		523		83		113		21

Commercial real estate:
Commercial mortgages		1,412		577		835		1,412		156		1,700		25
SBA Loans		150		140		-		140		-		289		-
Construction		-		-		-		-		-		338		-
Religious Organizations		441		441		-		441		-		312		17
Total Commercial real estate		2,003		1,158		835		1,993		156		2,639		42

Total Loans	$	2,529	$	1,599	$	918	$	2,516	$	238	$	2,752	$	63

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 had no troubled debt restructurings at June 30, 2011 and December 31, 2010.

7. Fair Value

Fair Value Measurement

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

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

Level 1

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

Level 2

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

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

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

Level 3 Inputs

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

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

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Value on a Recurring Basis

Securities Available for Sale (“AFS”): Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow models. Level 2 securities include U.S. agency securities and mortgage backed agency securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Assets on the consolidated statements of condition measured at fair value on a recurring basis are summarized below.

(in 000’s)			Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,077	$	-	$	1,077	$	-
Mutual Funds		129		129		-	-
Total	$	1,206	$	129	$	1,077	$	-

(in 000’s)			Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,210	$	-	$	1,210	$	-
Mutual Funds		129		129		-	-
Total	$	1,339	$	129	$	1,210	$	-

As of June 30, 2011, the fair value of the Bank’s AFS securities portfolio was approximately $1,206,000. Over 90% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,077,000 at June 30, 2011. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. The majority of the AFS securities were classified as level 2 assets at June 30, 2011. The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information. There were no transfers between Level 1 and Level 2 assets during the period ended June 30, 2011 and year ended December 31, 2010.

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated statements of condition by level within the hierarchy as of June 30, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded during the six months ended June 30, 2011 and year ended December 31, 2010.

Carrying Value at June 30, 2011:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total fair value gain (loss) during 6 months ended June 30, 2011
Impaired Loans	$-	-	-	$-	$(27)
Other real estate owned (“OREO”)	-	-	-	-	-

Carrying Value at December 31, 2010:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total fair value gain (loss) during 12 months ended December 31, 2010
Impaired Loans	$679	-	-	$679	$(238)
Other real estate owned (“OREO”)	1,417	-	-	1,417	-

Fair value of impaired loans is determined by the fair value of the collateral if the loan is collateral dependent. Collateral values for loans and OREO are determined by appraisal, which may be discounted based upon management’s review and changes in market conditions. The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated statements of condition. The valuation allowance for impaired loans at June 30, 2011 was approximately $27,000. The valuation allowance for impaired loans at December 31, 2010 was approximately $238,000. The reduction during the six months ended June 30, 2011 was the result of the charge-off of loans for which there was a valuation allowance.

The fair value of OREO was determined using appraisals, which may be discounted based on management’s review, changes in market conditions and other liquidation cost.

Fair Value of Financial Instruments

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the statement of condition for cash and cash equivalents approximate those assets’ fair values.

Investment securities: Fair values for investment securities available-for-sale are as described above. Investment securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of accrued interest receivable approximates fair value.

Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments, amortizations, and non performance risk. Prepayments and discount rates were based on current marketplace estimates and pricing. Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve. The carrying amount of accrued interest receivable approximates fair value.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation. The Treasury Yield Curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.

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

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

The fair value of assets and liabilities are depicted below:

	June 30, 2011				December 31, 2010
(in 000’s)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
(Dollars in thousands)
Assets:
Cash and cash equivalents	$	12,088	$	12,088	$	8,696	$	8,696
Investment securities		19,182		19,369		16,477		16,582
Loans, net of allowance for loan losses		40,809		40,998		44,686		44,698
Accrued interest receivable		372		372		363		363
Liabilities:
Demand deposits		28,548		28,548		27,331		27,331
Savings deposits		14,181		14,181		13,856		13,856
Time deposits		26,566		26,607		26,023		26,023
Accrued interest payable		65		65		57		57

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

Special Cautionary Notice Regarding Forward-looking Statements

Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (“UBS”) to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward looking statements include: (a) statements of goals, intentions and expectations; and (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity. UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company’s, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; (l) the recent downgrade , and any future downgrades, in the credit rating of the United States Government and federal agencies; (m) changes in technology being more expensive or difficult than expected; (n) the ability of key third party providers to perform their obligations to UBS and; (o) the Bank and UBS’ success in managing the risks involved in the foregoing.

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

Overview

The Company reported a net loss of approximately $169,000 ($0.16 per common share) for the quarter ended June 30, 2011 compared to a net loss of approximately $561,000 ($0.53 per common share) for the quarter ended June 30, 2010. The Company reported a net loss of approximately $477,000 ($0.45 per common share) for the six months ended June 30, 2011 compared to a net loss of approximately $752,000 ($0.71 per common share) for the quarter ended June 30, 2010. The reduction in the loss in 2011 is primarily related to a net gain on the sale of OREO and lower provisions for loan losses because of improving asset quality trends. However, aggressive collection efforts continue to result in increased legal, collection and foreclosure-related expenses.

Management believes that the following actions are critical to enhancing the Company’s future financial performance:

Proactive management of asset quality to minimize credit losses. Progress has been made in the Bank’s collection, underwriting, and customer relationship management practices. Evidence of these improvements can be seen in the reduction of the level of impaired loans from approximately $2.5 million at December 31, 2010 to approximately $1.8 million at June 30, 2011 and a decline in the delinquency ratio from 8.67% at December 31, 2010 to 6.05% at June 30, 2011. In addition, the Bank’s non-performing loans declined to approximately $2.1 million at June 30, 2011 from $2.8 million at December 31, 2010. Non-performing loans have been affected by charge-offs and transfers to OREO. During the quarter ended June 30, 2011, management sold $730,000 of its OREO portfolio for a net gain of approximately $111,000. During 2011, management expects to make further progress in reducing the level of non-performing loans and non-performing assets and anticipates that credit quality costs, including loan collection and OREO-related costs, will continue to affect reported earnings as the Bank diligently works to reduce the outstanding investment in these assets.

Continued core deposit growth. During the six months ended, total deposits increased by approximately $2.5 million, or 3.70%. Utilizing its competitive advantage as a community development bank and increased FDIC insurance limits, management continues to call upon corporations and institutions in the region to request core depository relationships to support the Bank’s small business lending strategies. Management will continue to utilize this strategy as well as other retail deposit marketing strategies to achieve deposit growth that is critical to attaining economies of scale and leveraging capital to maximize the Company’s earnings potential.

Controlling and managing the net interest margin. The Bank’s net interest margin continues to decline—falling to 4.26% for the quarter ended June 30, 2011 compared to 4.50% for the same quarter in 2010. Margin compression is created by the continued low interest rate environment that has resulted in lower yields on loans, federal funds sold and investment securities. Although improving, the relative high level of non-accrual loans also contributes to the compression. While management actively manages the rates paid on deposit products to “average” market rates in attempt to mitigate the effect of the reduction in yield on earning assets, deposit rates have generally “bottomed out”. Management will continue to focus on growing the Bank’s core assets and reducing the level of nonaccrual loans to increase net interest income.

Controlling and managing noninterest expense. During the quarter ended June 30, 2011, noninterest expense continued to escalate as a result of legal, collection-related expenses, costs associated with the maintenance of foreclosed properties (OREO) and increased occupancy, marketing and public relations expense. Data processing expense also increased as a result of the implementation of an enhanced e-banking platform that includes e-statements. Management will continue to seek savings and efficiencies where possible.

Enhancing capital to support growth. Capital declined as a result of net losses and growth, however, the Bank’s tangible, core, and risk-based capital ratios exceed “minimum” and “well capitalized” for regulatory capital requirements. Management recognizes the importance of establishing and maintaining capital levels to support the Bank’s growth and to remain in compliance with regulatory requirements. Management submitted an application for $1 million in capital from the U.S. Treasury’s Small Business Lending Fund (“SBLF”) on March 31, 2011; however, as a result of restrictions on the payment of dividends, the application was withdrawn. An application for Bank Enterprise Award grant funds from the U.S. Treasury’s CDFI Fund has been submitted to supplement capital.

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’s significant accounting policies are presented in Note 1 to the Company’s audited consolidated financial statements filed as part of the 2010 Annual Report on Form 10-K and in the footnotes to the Company’s unaudited financial statements filed as part of this Form 10-Q.

Selected Financial Data

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

(Thousands of dollars, except per share data)	Quarter ended June 30, 2011			Quarter ended June 30, 2010			Six Months ended June 30, 2011			Six Months ended June 30, 2010
Statement of income information:
Net interest income	$	751		$	771		$	1,515		$	1,507
Provision for loan losses		40			377			70			407
Noninterest income		399			301			613			569
Noninterest expense		1,279			1,257			2,535			2,421
Net loss		(169	)		(561	)		(477	)		(752	)
Net loss per share-basic and diluted		(0.16	)		(0.53	)		(0.45	)		(0.71	)

Statement of condition information:	June 30, 2011			December 31, 2010
Total assets	$	75,887		$	73,966
Loans, net	$	40,809		$	44,686
Investment securities	$	19,182		$	16,477
Deposits	$	69,695		$	67,211
Shareholders' equity	$	5,819		$	6,297

Ratios*:	Quarter ended June 30, 2011			Quarter ended June 30, 2010
Return on assets		(0.89	%)		(3.07	%)
Return on equity		(11.62	%)		(33.10	%)

*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 increased approximately $1,186,000, or 1.71% during the quarter ended June 30, 2011 compared to the quarter ended March 31, 2011. Average funding sources increased approximately $1,843,000, or 2.72%, during the quarter ended June 30, 2011 compared to the quarter ended December 31, 2010.

Sources and Uses of Funds Trends

	June 30, 2011								March 31, 2011
(Thousands of Dollars, except percentages)	Average		Increase (Decrease)			Increase (Decrease)			Average
	Balance		Amount			%			Balance
Funding uses:
Loans	$	41,793	$	(1,786	)		(4.10	)%	$	43,579
Investment securities
Held-to-maturity		16,945		1,539			9.99			15,406
Available-for-sale		1,180		(63	)		(5.07	)		1,243
Federal funds sold		10,357		1,496			16.88			8,861
Balances with other banks		305		-			-			305
Total uses	$	70,580	$	1,186			1.71	%	$	69,394
Funding sources:
Demand deposits
Noninterest-bearing	$	14,793	$	677			4.80	%	$	14,116
Interest-bearing		14,447		766			5.60			13,681
Savings deposits		14,119		91			0.65			14,028
Time deposits		26,263		309			1.19			25,954
Total sources	$	69,622	$	1,843			2.72	%	$	67,779

Loans

Average loans declined approximately $1,786,000, or 4.10%, during the quarter ended June 30, 2011. While commercial loan fundings during the quarter totaled approximately $1,016,000, they were offset by payoffs/paydowns, charge-offs and transfers to OREO following receipt of deeds in lieu of foreclosure late in the quarter ending March 31, 2011. The Bank continues to maintain stringent underwriting standards especially related to non-owner occupied real estate lending. The focus is on traditional commercial and industrial (i.e. working capital, receivables, etc.) small business lending for which credit enhancements through the Small Business Administration or other loan guaranty programs may be available to mitigate credit risk.

The Bank’s loan portfolio continues to be concentrated in commercial loans that comprise approximately $33.6 million, or 81%, of total loans at June 30, 2011, of which approximately $30.0 million are commercial real estate. Approximately $16.2 million of these loans are owner occupied which may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations for which total loans at June 30, 2011 were approximately $13.6 million, or 41%, of the commercial portfolio. Management continues to closely monitor this concentration to proactively identify and manage credit risk in light of the high level of unemployment that could impact the level of tithes and offerings that provide cash flow for repayment.

The composition of the net loans is as follows:

	June 30,		December 31,
(In 000's)	2011		2010


Commercial and industrial:
Commercial	$	1,563	$	3,133
SBA loans		254		229
Asset-based		1,857		2,367
Total commercial and industrial		3,673		5,730

Commercial real estate:

Commercial mortgages		15,138		15,774
SBA loans		544		1,311
Construction		611		-
Religious organizations		13,595		13,653
Total commercial real estate		29,887		30,738

Consumer real estate:
Home equity loans		1,757		1,813
Home equity lines of credit		586		714
1-4 family residential mortgages		3,667		4,432
Total consumer real estate		6,010		6,959

Total real estate		35,897		37,698

Consumer and other:
Consumer installment		67		82
Student loans		1,774		1,912
Other		164		192
Total consumer and other		2,005		2,186

Loans, net	$	41,575	$	45,613

Allowance for Loan Losses

The allowance for loan losses reflects management’s continuing evaluation of the loan portfolio, the diversification and size of the portfolio, and adequacy of collateral. Provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis. This analysis includes specific reserves allocated to impaired loans based on underlying recovery values as well as a general reserve based on many qualitative factors including charge-off history, delinquency trends, loan terms, regulatory environment, economic conditions, concentrations of credit risk and other relevant data. The allowance for loan losses as a percentage of total loans was 1.84% at June 30, 2011, compared to 2.03% at December 31, 2010. During the six months ended June 30, 2011 provisions for loan losses totaled $70,000. The Bank charged-off approximately $247,000 primarily related to several impaired loans for which collection efforts had been exhausted and specific reserves allocated at December 31, 2010.

Loans deemed “impaired” are those for which borrowers are no longer able to pay in accordance with the terms of their loan agreements. The Bank’s source of repayment is generally the net liquidation value of the underlying collateral. The level of impaired loans declined from approximately $2.5 million at December 31, 2010 to approximately $1.8 million at June 30, 2011. The decline is primarily related to foreclosure activity totaling approximately $602,000 and charge-offs totaling approximately $247,000. Specific reserves related to impaired loans totaled approximately $27,000 and $238,000 at June 30, 2011 and December 31, 2010, respectively.

At June 30, 2011 and December 31, 2010, loans to religious organizations represented approximately $440,000 of total impaired loans. Management continues to work closely with the leadership of these organizations in an attempt to develop suitable repayment plans. In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration. The Bank is working with collection attorneys to assist with its recovery efforts on all of its impaired loans including forbearance agreements, foreclosure and other collection strategies.

Management uses all available information to recognize losses on loans; however, future additions may be necessary based on further deterioration in economic conditions and market conditions affecting underlying real estate collateral values. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

The percentage of allowance to nonperforming loans has improved from 33.30% at December 31, 2010 to 35.51% at June 30, 2011 primarily as a result of foreclosure-related activity that reduced the level of impaired/nonperforming loans. The following table sets forth information concerning nonperforming loans and nonperforming assets.

(In 000's)	June 30, 2011			December 31, 2010
Commercial and industrial:
Commercial	$	502		$	505
SBA loans		18			18
Asset-based		101			-
Total Commercial and industrial		621			523

Commercial real estate:
Commercial mortgages		651			1,495
SBA loans		58			58
Religious organizations		439			315
Total Commercial real estate		1,148			1,868

Consumer real estate:
Home equity loans		128			130
1-4 family residential mortgages		260			261
Total consumer real estate		388			391

Total real estate		1,536			2,259

Consumer and other:
Consumer installment		3			-
Student loans		-			-
Other		-			-
Total consumer and other		3			-

Total nonperforming loans	$	2,160		$	2,782
OREO		1,286			1,417
Total nonperforming assets	$	3,446		$	4,199

Past due 90 days or more and still accruing interest:
Commercial and industrial:
Commercial	$	-		$	-
SBA loans		-			-
Asset-based		-			-
Total Commercial and industrial		-			-

Commercial real estate:
SBA loans		9			-
Religious organizations		-			-
Total Commercial real estate		9			-

Consumer real estate:
Home equity loans		-			142
Total consumer real estate		-			142

Total real estate		9			142

Consumer and other:
Student loans		75			44
Other		1			19
Total consumer and other		76			63


Total	$	85		$	205

Nonperforming loans to total loans		5.20	%		6.10	%
Nonperforming assets to total loans and OREO		8.04	%		8.93	%
Nonperforming assets to total assets		4.41	%		5.66	%

Allowance for loan losses as a percentage of:
Total Loans		1.84	%		2.03	%
Total nonperforming loans		35.51	%		33.29	%

Investment Securities and Other Short-term Investments

Investment securities increased on average by approximately $1,476,000, or 8.87%, during the quarter ended June 30, 2011. The increase was primarily related to an increase in investable funds because of proceeds from the sale of OREO as well as increased deposit levels during the quarter.

The yield on the investment portfolio declined to 3.42% at June 30, 2011 compared to 3.79% at December 31, 2010 as a result the purchase of securities to serve as collateral for governmental deposits as well as the call of higher yielding agency securities during the period. The duration of the portfolio has extended to 3.1 years at June 30, 2011 compared to 2.0 years at December 31, 2010 as a result of the purchase of additional 15 and 20 year government sponsored agency (GSA) mortgage-backed pass-through securities that serve to generate monthly cash flow. The payments of principal and interest on these pools of GSA loans are guaranteed by these entities that bear the risk of default. The Bank’s risk is prepayment risk when defaults accelerate the repayment activity. These loans have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. Management’s goal is to maintain a portfolio with a short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.

Deposits

During the quarter ended June 30, 2011 average deposits increased approximately $1,843,000, or 2.72%. There was an increase of approximately $677,000, or 4.80%, in noninterest checking account balances and an increase of approximately $766,000, or 5.60%, in interest-bearing checking balances (including money market accounts). These increases were a result of an influx of funds related to depository relationships with several customers in contract-related businesses that receive periodic payments on receivables. A concerted effort continues to attract and retain core deposits from existing, new, and potential commercial loan customers to stabilize and grow deposit levels.

Savings account balances increased on average by approximately $91,000, or 0.65%, during the quarter ended June 30, 2011. Management is working to grow and stabilize its core savings accounts utilizing new marketing materials that encourage financial preparedness and increased savings through direct deposit.

Certificates of deposit increased on average by approximately $309,000, or 1.19%, during the quarter ended June 30, 2011. The increase is related to an additional deposit the Bank received from another financial institution because of its CDFI designation that qualifies for Community Reinvestment Act (“CRA”) credit. The Bank has approximately $18.2 million in certificates of deposit with balances of $100,000 or more. Approximately $13.0 million, or 71%, of these deposits are governmental or quasi-governmental relationships that have a long history with the Bank and are considered stable and core.

Commitments and Lines of Credit

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

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

	June 30, 2011		December 31, 2010		June 30, 2010
Commitments to extend credit	$	9,085,000	$	7,531,000	$	7,453,000
Standby letters of credit		739,000		695,000		-

The level of commitments increased from approximately $8.2 million at December 31, 2010 to approximately $9.8 million at June 30, 2011 primarily as a result of the approval of several construction lines of credit and the paydown of several revolving working capital lines of credit during the period which increased the availability under those lines of credit.

Liquidity and Interest Rate Sensitivity Management

The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity. Approximately $9.1 million in loans are scheduled to mature within one year.

By policy, the Bank’s minimum level of liquidity is 6.00% of total assets. At June 30, 2011, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $12.1 million, or 15.9% of total assets, compared to $8.7 million, or 11.7%, at December 31, 2010. The increase primarily relates to increased deposits as well as proceeds from the sale of OREO. The portion of the Bank’s investment portfolio classified as available-for-sale could also provide liquidity. However, the majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank. Therefore, they are restricted from use to fund loans or to meet other liquidity requirements. To ensure the ongoing adequacy of liquidity, the following strategies will be utilized in order of priority, if necessary:

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

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

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

Capital Resources

Total shareholders' equity decreased approximately $478,000 compared to December 31, 2010 as a result of a net loss of approximately $477,000 during the six months ended June 30, 2011 and other comprehensive loss of approximately $1,000 from a decrease in unrealized gains on investment securities classified as available-for-sale. As reflected in the table below, the Company’s risk-based capital ratios are above the minimum regulatory requirements. At June 30, 2011, the Company is deemed "well capitalized." The Company does not anticipate paying dividends in the near future because of regulatory imposed dividend restrictions. The Company will seek to maintain the requisite minimum regulatory capital levels by internal capital generation (retained earnings) and by monitoring its asset growth. For the last several years, the Company has been the recipient of Bank Enterprise Award (“BEA”) grants from the Community Development Financial Institutions Fund (“CDFI”) of the US Treasury Department for its small business lending activity. An application was submitted in June 2011 for additional grant funds to supplement capital. The Treasury will make notifications of award in September 2011.

In addition, the Small Business Lending Fund (“SBLF”) of the U.S. Treasury is another source that the Company sought to support its capital position. The Small Business Jobs and Credit Act established a $30 billion Small Business Lending Fund for interested community banks with $10 billion or less in assets. The Company submitted an application for $1 million in March 2011. However, subsequent to the submission of the application, the Treasury restricted the award of SBLF funds to financial institutions that did not have restrictions on the payment of dividends. The Company currently has a restriction on the payment of dividends and therefore is not qualified for these funds. Therefore, the application was withdrawn.

The Company and the Bank’s actual capital amounts and ratios are as follows:

(in 000’s)	Actual		For capital Adequacy purposes		To be well capitalized under Prompt corrective actions provisions
As of June 30, 2011	Amount	Ratio	Amount	Ratio	Amount	Ratio
Total capital to risk-weighted assets:
Consolidated	$5,936	13.30%	$3,575	8.00%	N/A
Bank	5,874	13.16	3,570	8.00%	$4,463	10.00%
Tier I capital to risk-weighted assets:
Consolidated	5,376	12.05	1,787	4.00%	N/A
Bank	5,314	11.91	1,785	4.00%	$2,678	6.00%
Tier I capital to average assets:
Consolidated	5,376	7.13	3,019	4.00%	N/A
Bank	5,314	7.05	3,017	4.00%	$3,771	5.00%

(in 000’s)	Actual		For capital Adequacy purposes		To be well capitalized under Prompt corrective actions provisions
As of December 31, 2010	Amount	Ratio	Amount	Ratio	Amount	Ratio
Total capital to risk-weighted assets:
Consolidated	$6,338	13.91%	$3,652	8.00%	N/A
Bank	6,268	13.75	3,646	8.00%	$4,558	10.00%
Tier I capital to risk-weighted assets:
Consolidated	5,761	12.64	1,826	4.00%	N/A
Bank	5,691	12.49	1,823	4.00%	$2,735	6.00%
Tier I capital to average assets:
Consolidated	5,761	7.63	3,024	4.00%	N/A
Bank	5,691	7.53	3,022	4.00%	$3,777	5.00%

Results of Operations

Summary

The Company reported a net loss of approximately $169,000 ($0.16 per common share) for the quarter ended June 30, 2011 compared to a net loss of approximately $561,000 ($0.53 per common share) for the quarter ended June 30, 2010. The Company reported a net loss of approximately $477,000 ($0.45 per common share) for the six months ended June 30, 2011 compared to a net loss of approximately $752,000 ($0.71 per common share) for the six months ended June 30, 2010. The reduction in the loss in 2011 is primarily related to lower provisions for loan losses because of improving asset quality trends. However, aggressive collection efforts continue to result in increased legal, collection and foreclosure-related expenses. The results for 2011 were also boosted by the net gain on the sale of OREO of approximately $111,000. A detailed explanation of each component of earnings is included in the sections below.

Net Interest Income

Average Balances, Rates, and Interest Income and Expense Summary

		Three months ended June 30, 2011			Three months ended June 30, 2010
(in 000’s)	Average Balance	Interest	Yield/Rate	Average Balance	Interest	Yield/Rate

Assets:
Interest-earning assets:
Loans	$41,793	652	6.24%	$47,132	$689	5.85%
Investment securities-HTM	16,945	146	3.45	14,564	140	3.85
Investments securities-AFS	1,180	10	3.73	1,502	16	4.26
Federal funds sold	10,357	4	0.15	5,098	3	0.24
Interest bearing balances with other banks	305	1	1.31	304	-	-
Total interest-earning assets	70,580	813	4.61	68,600	848	4.95
Interest-bearing liabilities
Demand deposits	14,447	20	0.55	11,459	20	0.70
Savings deposits	14,119	3	0.08	14,549	4	0.11
Time deposits	26,263	39	0.59	25,033	53	0.85
Total interest-bearing liabilities	54,829	62	0.45	51,041	77	0.60
Net interest earnings		751			$771
Net yield on interest-earning assets			4.26%			4.50%

For purposes of computing the average balance, loans are not reduced for nonperforming loans. Loan fee income is included in interest income on loans but is not considered material.

		Six months ended June 30, 2011			Six months ended June 30, 2010
(in 000’s)	Average Balance	Interest	Yield/Rate	Average Balance	Interest	Yield/Rate

Assets:
Interest-earning assets:
Loans	$42,681	$1,320	6.19%	$47,342	$1,382	5.84%
Investment securities-HTM	16,180	290	3.58	12,281	240	3.91
Investments securities-AFS	1,211	20	3.30	1,584	32	4.04
Federal funds sold	9,613	7	0.15	4,228	5	0.24
Interest bearing balances with other banks	305	1	0.66	304	1	0.66
Total interest-earning assets	69,990	1,638	4.68	65,739	1,660	5.05
Interest-bearing liabilities
Demand deposits	14,067	37	0.53	10,886	40	0.73
Savings deposits	14,074	7	0.10	14,721	7	0.10
Time deposits	26,110	79	0.61	22,972	106	0.92
Total interest-bearing liabilities	54,251	123	0.45	48,579	153	0.63
Net interest earnings		$1,515			$1,507
Net yield on interest-earning assets			4.33%			4.58%

For purposes of computing the average balance, loans are not reduced for nonperforming loans. Loan fee income is included in interest income on loans but is not considered material.

Net interest income declined approximately $20,000 or 2.64%, for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. Net interest income increased approximately $7,500 or 0.50%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The net yield on interest-earning assets for the quarter ended June 30, 2011 declined to 4.26% from 4.50% for the same quarter in 2010 and declined to 4.33% for the six months ended June 30, 2011 compared to 4.58% for the same period in 2010. Although the yield on loans increased 39 basis points as a result of the transfer of more than $2 million in nonaccrual loans to OREO and the imposition of default interest rates for several borrowers for noncompliance with note requirements to provide annual financial statements, the overall yield on interest-bearing assets declined by 34 basis points. This decline was the result of a reduction in average outstanding loans because of slow origination activity and payoffs that resulted in a shift in earning assets from loans to lower yielding federal funds sold and other investments. The reduction in yields on federal funds sold and other investments was also a contributing factor in the decline.

The cost of interest-bearing liabilities fell 15 basis points compared to the quarter ended June 30, 2010 and 18 basis points for the six months June 30, 2011 compared to the same period in 2010 as a result of rate reductions made on the Bank’s deposit products to follow market conditions. However, deposit rates have “bottomed-out”, leaving little room to make further downward adjustments.

The Bank was not able to fully capitalize on the $2 million growth in deposits/earning assets because of the declining margins related to the factors noted above—both decline in loan volume as well as hitting the deposit rate floor. Management continues to focus on reducing the level of nonaccrual loans, increasing loan origination activity and growing its core deposits to increase net interest income.

Provision for Loan Losses

The provision for loan losses was $40,000 for the three months ended June 30, 2011 compared to $377,000 for the same quarter in 2010. The provision for loan losses was $70,000 for the six months ended June 30, 2011 compared to $407,000 for the same period in 2010. In general, provision requirements are based on credit losses inherent in the loan portfolio and the review and analysis of the loan portfolio in accordance with the Bank’s Allowance for Loan Loss policies and procedures. During 2010, the Bank experienced a significant increase in its impaired loans for which specific reserves were required. (Refer to Allowance for Loan Losses above for discussion and analysis of credit quality.)

Noninterest Income

The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account fees, overdrafts, account analysis, ATM fees and other customer service fees. Noninterest income increased approximately $98,000, or 32.58%, for the quarter ended June 30, 2011, compared to the same quarter in 2010 and increased approximately $44,000, or 7.82%, for the six months ended June 30, 2011, compared to the same period in 2010. The increase was primarily related to the net gain on the sale of OREO.

Customer service fees declined by approximately $17,000, or 14.66%, for the quarter ended June 30, 2011 compared to 2010 and decreased approximately $25,000, or 11.38%, for the six months ended June 30, 2011 compared to the same period in 2010. The decline was primarily a result of a reduction in overdraft and other activity fees on deposit accounts.

ATM fees declined approximately $4,000, or 4.47%, for the quarter ended June 30, 2011 compared to 2010 and declined approximately $9,000 or 4.79%, for the six months ended June 30, 2011 compared to the same period in 2010. The Bank’s ATM network continues to experience a reduction in volume because of ATM saturation in the marketplace by both financial and non-financial competitors. Also, consistent with trends in the industry, ATM usage has declined as consumers continue to move to electronic payment methods utilizing debit and credit cards versus cash. In March 2011, the Bank increased its surcharge fee for noncustomer use of ATM to be consistent with the marketplace and enhance profitability of the network; however, there was only a modest improvement. Methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated including a more cost effective network communication system.

The Bank serves as arranger/agent for loan syndications for several major corporations throughout the country. In this capacity, the Bank arranges back-up lines/letters of credit with other minority banks for which it receives agent/administrative fees. For the six months ended June 30, 2011 and 2010, these fees totaled $80,000. Management may seek to expand these credit services in 2011 as the economy moves out of recession.

Noninterest Expense

Salaries and benefits decreased approximately $26,000, or 5.91%, for the quarter ended June 30, 2011 compared to 2010 and decreased approximately $25,000, or 3.89%, for the six months ended June 30, 2011 compared to the same period in 2010. This decline is the result of the severance of unproductive personnel in the lending/credit administration area of the Bank in April 2011. Management continues to review the organizational structure to maximize efficiencies, increase utilization/productivity and increase business development activity.

Occupancy expense increased approximately $22,000, or 8.74%, for the quarter ended June 30, 2011 compared to 2010 and increased approximately $38,000, or 7.55%, for the six months ended June 30, 2011 compared to the same period in 2010. The increase in 2011 is attributable to the September 2010 expiration of a sublease the Company had for a retail space it leases at its corporate headquarters for which a replacement tenant has not been secured.

Office operations and supplies expense increased approximately $6,000, or 8.82%, for the quarter ended June 30, 2011 compared to 2010 and increased approximately $11,000, or 7.50% for the six months ended June 30, 2011 compared to the same period in 2010.. The increase is related to the cost of branch capture-compatible forms and checks required in conjunction with the implementation of Check 21 technology in October 2010. Management continues to review all office operations expenses including supplies, storage, security, etc. to achieve cost reductions.

Marketing and public relations expense increased approximately $26,000, or 275.68%, for the quarter ended June 30, 2011 compared to 2010 and increased approximately $46,000, or 358.27%, for the six months ended June 30, 2011 compared to the same period in 2010. In 2011, the Company began to push out its new branding message, “So Much More Than Banking” utilizing newspaper and magazine ads, bus depots, and other relevant marketing strategies.

Professional services expense decreased approximately $27,000, or 27.22%, for the quarter ended June 30, 2011 compared to 2010 and decreased approximately $25,000, or 14.53%, for the six months ended June 30, 2011 compared to the same period in 2010. The decrease is primarily related to lower consulting fees. In 2010, the Bank utilized a consultant to assist with the preparation of its strategic plan.

Data processing expenses increased approximately $7,000, or 7.23%, for the quarter ended June 30, 2011 compared to 2010 and increased approximately $18,000, or 7.53% for the six months ended June 30, 2011 compared to the same period in 2010 as a result of the implementation of an enhanced e-banking platform (including e-statements) as well as a 3% annual escalation in core processing fees.

Federal deposit insurance assessments increased approximately $6,000, or 17.48%, for the quarter ended June 30, 2011 compared to 2010 and increased approximately $13,000, or 18.38%, for the six months ended June 30, 2011 compared to the same period in 2010. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings. The increase is primarily related to growth in deposits compared to the prior year.

Loan and collection expenses decreased approximately $7,000, or 10.88%, for the quarter ended June 30, 2011 compared to 2010 but increased approximately $13,000, or 13.86%, for the six months ended June 30, 2011 compared to the same period in 2010. This increase is directly related to increased foreclosure activity in the Bank’s commercial loan portfolio that resulted in Sheriff’s sale costs and other expenses associated with the acquisition of OREO properties.

Dividend Restrictions

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to prime or other short term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are critical to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations.

At June 30, 2011, a positive gap position is maintained on a cumulative basis through 1 year of 4.35% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis. This position makes the Bank’s net interest income more favorable in a rising interest rate environment. The positive gap position is due to loan payoffs and the sale of OREO during the quarter that resulted in a higher level of Federal Funds Sold that reprice immediately. Management will review and monitor the structure and rates on investment purchases, new loan originations and renewals to maintain a balanced interest rate risk profile.

While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. A simulation model is used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company’s existing assets, liabilities and off-balance-sheet instruments. At June 30, 2011, the change in the market value of equity in a +200 basis point interest rate change is -32.4%, in excess of the Bank’s policy limit of 25% and -59.7 % in a +400 basis point interest rate change, above the policy limit of 50%. The limit was exceeded as a result of the high level of fixed rate investment securities purchased during the quarter that decline in value in a rising rate environment. Because most of these investments are used to secure public funds, management will closely review and monitor rates paid on these funds to mitigate interest rate risk when rates begin to rise. In addition, management will attempt to mitigate this risk by originating more variable rate loans and purchasing variable rate MBS securities. However, based on these models, with the exception of the market value measure, interest-rate exposure is not considered significant and is within the policy limits of the Bank on all measures at June 30, 2011.

Item 4. Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors disclosed in the Company’s 2010 Annual Report on Form 10-K except as disclosed below. The risk factors disclosed in the Company’s 2010 Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely impact our business

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which provides for a broad range of financial reform and will result in a number of new regulations which could significantly impact regulatory compliance costs and the operations of community banks and bank holding companies. The Dodd-Frank Act, among other things, broadens the base for FDIC insurance assessments which may increase our FDIC insurance premiums; repeals the prohibition on a bank’s payment of interest on demand deposit accounts of commercial clients beginning one year after the date of enactment; and contains provisions affecting corporate governance and executive compensation for publicly traded companies. The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection with broad authority to develop and implement rules regarding most consumer financial products. Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional costs, including increased compliance costs. These changes may also require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply. These changes may adversely affect our business, financial condition and results of operations.

The Standard & Poors Downgrade in U.S. Government and Federal Agency Securities may Adversely Impact our Business.

On August 5, 2011, S&P downgraded the United States long term debt ratings from its AAA rating to AA+ and downgraded the credit ratings of certain long term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long term U.S. debt. The federal bank regulatory agencies issued guidance on August 5, 2011 regarding the impact of the S&P downgrade upon risk based capital treatment. The agencies advised banks that for risk based capital purposes, the risk rates for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government sponsored entities will not change. The downgrade could adversely affect the market value of U.S. government and federal agency securities on our balance sheet and could adversely affect the ability of those securities to serve as collateral for borrowing, as well as have other material adverse affects on the operation of our business and our financial results and condition.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Reserved.

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: August 15, 2011	/s/ Evelyn F. Smalls
	Evelyn F. Smalls
	President & Chief Executive Officer


Date: August 15, 2011	/s/ Brenda M. Hudson-Nelson
	Brenda Hudson-Nelson
	Executive Vice President/Chief Financial Officer

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.

Attached files

UNITED BANCSHARES INC /PA Reports

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