UNITED BANCSHARES INC /PA - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - UNITED BANCSHARES INC /PA	ex322.htm
EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PA	ex312.htm
EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PA	ex311.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PA	ex321.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012 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__

Smaller Reporting Company _X__

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

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

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 November 6, 2012, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).

The Series A Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of November 6, 2012.

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	27

3.	Quantitative and Qualitative Disclosures about Market Risk	40

4.	Controls and Procedures	41

	PART II-OTHER INFORMATION


1.	Legal Proceedings	41

1A.	Risk Factors	41

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

3.	Defaults upon Senior Securities	41

4	Mine Safety Disclosures	41

5.	Other Information	41

6.	Exhibits	42

Table of Contents

Item 1.

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Assets:	September 30, 2012			December 31, 2011
Cash and due from banks	$	2,469,242		$	2,778,924
Interest-bearing deposits with banks		305,919			305,405
Federal funds sold		8,928,000			11,413,000
Cash and cash equivalents		11,703,161			14,497,329

Investment securities:
Available-for-sale, at fair value		1,087,754			1,280,874

Held-to-maturity, at amortized cost (fair value of $13,073,977 and $17,738,368 at September 30, 2012 and December 31 2011, respectively)		12,398,742			17,209,295

Loans, net of unearned discount		40,673,453			41,502,205
Less allowance for loan losses		(868,811	)		(867,019	)
Net loans		39,804,642			40,635,186
Bank premises and equipment, net		495,671			988,170
Assets held for sale		356,758			-
Accrued interest receivable		325,189			342,029
Other real estate owned		1,177,092			1,284,390
Intangible assets		193,954			313,811
Prepaid expenses and other assets		388,233			465,838
Total assets		67,931,196			77,016,922
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits, noninterest-bearing		15,447,155		$	14,373,040
Demand deposits, interest-bearing		16,426,916			16,886,633
Savings deposits		14,167,210			14,688,985
Time deposits, under $100,000		7,428,258			7,768,057
Time deposits, $100,000 and over		9,752,863			17,583,743
Total deposits		63,222,402			71,300,458
Accrued interest payable		26,537			58,361
Accrued expenses and other liabilities		304,530			397,187
Total liabilities		63,553,469			71,756,006

Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 136,842 issued and outstanding		1,368			1,368
Common stock, $0.01 par value; 2,000,000 shares authorized;
876,921 issued and outstanding		8,769			8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value; 191,667 issued and outstanding		1,917			1,917
Additional paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(10,421,772	)		(9,539,831	)
Accumulated other comprehensive income		37,593			38,841
Total shareholders’ equity		4,377,727			5,260,916
Total liabilities and shareholders’ equity	$	67,931,196		$	77,016,922

The accompanying notes are an integral part of these statements.

Table of Contents

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three Months ended September 30, 2012			Three Months ended September 30, 2011			Nine Months ended September 30, 2012			Nine Months ended September 30, 2011
Interest income:
Interest and fees on loans		666,685		$	654,573		$	1,986,527			1,974,564
Interest on investment securities		97,097			157,717			349,568			467,805
Interest on federal funds sold		3,847			6,164			12,777			13,479
Interest on time deposits with other banks		176			175			524			521
Total interest income		767,805			818,629			2,349,396			2,456,369

Interest expense:
Interest on time deposits		18,110			37,208			66,242			115,751
Interest on demand deposits		11,612			20,184			36,738			57,641
Interest on savings deposits		1,760			2,680			5,317			9,571
Total interest expense		31,482			60,072			108,297			182,963
Net interest income		736,323			758,557			2,241,099			2,273,406
Provision for loan losses		61,000			30,000			121,000			100,000
Net interest income after provision for loan losses		675,323			728,557			2,120,099			2,173,406

Noninterest income:
Customer service fees		103,435			93,319			296,326			286,654
ATM fee income		77,545			88,535			238,316			265,314
Loan syndication fees		-			-			80,000			80,000
Gain (loss) on sale of other real estate		(5,968	)		-			(5,968	)		111,291
Gain on sale of loans		69,163			-			69,163			-
Other income		15,610			16,930			55,167			68,556
Total noninterest income		259,785			198,784			733,004			811,815

Noninterest expense:
Salaries, wages and employee benefits		385,971			417,229			1,192,480			1,262,393
Occupancy and equipment		261,700			273,563			802,297			821,232
Office operations and supplies		81,453			76,585			231,576			229,167
Marketing and public relations		5,186			14,323			28,675			72,748
Professional services		104,666			56,405			256,198			199,187
Data processing		114,602			117,964			352,603			368,394
Other real estate valuation allowance		127,050			-			153,298			3,879
Loan and collection costs		49,451			34,642			142,429			137,485
Deposit insurance assessments		43,085			40,892			70,509			125,122
Other operating		169,180			176,792			504,979			523,421
Total noninterest expense		1,342,344			1,208,395			3,735,044			3,743,028
Net loss before income taxes		(407,235	)		(281,054	)		(881,941	)		(757,807	)
Provision for income taxes		-			-			-			-
Net loss	$	(407,235	)	$	(281,054	)	$	(881,941	)	$	(757,807	)
Net loss per common share—basic and diluted	$	(0.38	)	$	(0.26	)	$	(0.83	)	$	(0.71	)
Weighted average number of common shares		1,065,588			1,065,588			1,065,588			1,065,588
Comprehensive Loss
Net Loss	$	(407,235	)	$	(281,054	)	$	(881,941	)	$	(757,807	)
Unrealized losses on available for sale securities		(884	)		(4,050	)		(1,248	)		(5,529	)
Total comprehensive loss	$	(408,119	)	$	(285,104	)	$	(883,189	)	$	(763,336	)

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

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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30,

	2012			2011

Cash flows from operating activities:
Net loss	$	(881,941	)	$	(757,806	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses		121,000			100,000
Loss (gain) on sale of other real estate		5,968			(111,291	)
Gain on sale of loans		(69,163	)		-
Amortization of premiums on investments		90,818			43,250
Amortization of core deposit intangible		133,559			133,559
Depreciation on fixed assets		167,930			188,113
Write-down of other real estate owned		153,298			1,306
Decrease in accrued interest receivable and
other assets		80,745			146,762
Decrease in accrued interest payable and
other liabilities		(124,481	)		(94,262	)
Net cash used in operating activities		(322,267	)		(350,368	)

Cash flows from investing activities:
Purchase of held-to-maturity investment securities		(4,860,337	)		(9,912,036	)
Purchase of investments securities available-for-sale		-			(264,403	)
Proceeds from maturity and principal reductions of
available-for-sale investment securities		188,107			251,656
Proceeds from maturity and principal reductions of
held-to-maturity investment securities		9,583,837			7,643,619
Proceeds from the sale of other real estate owned		22,832			844,238
Proceeds from sale of loans		637,621			-
Net decrease in loans		66,285			3,140,354
Purchase of bank premises and equipment		(32,190	)		(88,161	)
Net cash provided by investing activities		5,606,155			1,615,267

Cash flows from financing activities:
Net (decrease) increase in deposits		(8,078,056	)		4,907,474
Net cash (used in) provided by financing activities		(8,078,056	)		4,907,474
Net (decrease) increase in cash and cash equivalents		(2,794,168	)		6,172,373
Cash and cash equivalents at beginning of period		14,497,329			8,696,111
Cash and cash equivalents at end of period	$	11,703,161		$	14,868,484
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	140,121		$	233,531
Noncash transfer of loans to other real estate owned	$	74,800		$	602,100
Noncash transfer of bank premises to assets held for sale	$	356,758		$	-

The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)

1. Significant Accounting Policies

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

During interim periods, the Company follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers are encouraged to refer to the Company's Form 10-K for the fiscal year ended December 31, 2011 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 September 30, 2012 and December 31, 2011 and the consolidated results of its operations and its cash flows for the three and nine months ended September 30, 2012 and 2011.

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.

Assets Held For Sale

Assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Assets classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.

Allowance for Loan Losses

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

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

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience, other qualitative factors, and adjustments made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. The Bank does not allocate reserves for unfunded commitments to fund lines of credit.

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A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank will identify and assess loans that may be impaired through any of the following processes:

·	During regularly scheduled meetings of the Asset Quality Committee

·	During regular reviews of the delinquency report

·	During the course of routine account servicing, annual review, or credit file update

·	Upon receipt of verifiable evidence of a material reduction in the value of collateral to a level that creates a less than desirable LTV ratio

Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller, homogeneous loans, including consumer installment and home equity loans, 1-4 family residential mortgages, and student loans are evaluated collectively for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Non-accrual and Past Due Loans.

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

Income Taxes

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

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

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

2. Net Loss Per Share

The calculation of net loss income per share follows:

	Three Months Ended September 30, 2012	Three Months Ended September 30, 2011	Nine Months Ended September 30, 2012	Nine Months Ended September 30, 2011
Basic:
Net loss available to common shareholders	$(407,236)	$(281,056)	$(881,941)	$(757,804)
Average common shares outstanding-basic	1,065,588	1,065,588	1,065,588	1,065,588
Net loss per share-basic	$ (0.38)	$ (0.26)	$ (0.83)	$ (0.71)
Diluted:
Average common shares-diluted	1,065,588	1,065,588	1,065,588	1,065,588
Net loss per share-diluted	$ (0.38)	$ (0.26)	$ (0.83)	$ (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.

3.New Authoritative Accounting Guidance

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 adopted ASU No. 2011-04 as of March 31, 2012 as reflected in Note 7.

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 adopted ASU 2011-05 during the quarter ended March 31, 2012 and presents comprehensive loss in a a separate statement.

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In December 2011, the FASB issued an update (“ASU” No. 2011-12, Presentation of Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05) which under ASU 2011-05 defers the effective date pertaining to reclassification adjustments out of other accumulated other comprehensive income (AOCI). Concerns were raised that reclassifications of items out of AOCI would be costly for preparers and may add unnecessary complexity to financial statements. All other requirements in ASU 2011-05 are not affected by this Update. This amendment is effective for interim and annual periods beginning after December 15, 2011.

In December 2011, the FASB issued Accounting Standards Update ASU 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This Update affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information is intended to enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact of ASU 2011-11 on its consolidated financial statements.

4. Investment Securities

The following is a summary of the Company's investment portfolio as of September 30, 2012:

(In 000’s)
	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	903	$	56	$	-		$	959
Investments in money market funds		129		-		-			129
	$	1,032	$	56		-		$	1,088
Held-to-maturity:
U.S. government agencies	$	3,355	$	171	$	-		$	3,526
Government Sponsored Enterprises residential mortgage-backed securities		9,044		505		(1	)		9,548
	$	12,399	$	676	$	(1	)	$	13,074

The following is a summary of the Company's investment portfolio as of December 31, 2011:

(In 000’s)
	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,094	$	58	$	-		$	1,152
Investments in money market funds		129		-		-			129
	$	1,223	$	58	$	-		$	1,281
Held-to-maturity:
U.S. government agencies	$	7,531	$	158	$	-		$	7,689
Government Sponsored Enterprises residential mortgage-backed securities		9,678		373		(2	)		10,049
	$	17,209	$	531	$	(2	)	$	17,738

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The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of September 30, 2012, are as follows:

(In 000’s)	Amortized Cost		Fair Value
Available-for-Sale
Due in one year	$	-		$	-
Due after one year through five years		-			-
Due after five years through ten years		-			-
Government Sponsored Enterprises residential mortgage-backed securities		903			959
Total debt securities	$	903		$	959
Investments in money market funds	$	129		$	129
	$	1,032		$	1,088
Held-to-maturity
Due in one year	$	-			-
Due after one year through five years		250			270
Due after five years through ten years		3,105			3,256
Government Sponsored Enterprises residential mortgage-backed securities		9,044			9,548
	$	12,399		$	13,074

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 September 30, 2012:

(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:
Government Sponsored Enterprises residential mortgage-backed securities		$	255		$	(1	)		$	-		$	-		$	255		$	(1	)
Total		$	255		$	(1	)		$	-		$	-		$	255		$	(1	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2011:

(in 000’s)	Less Than 12 Months							12 Months or Greater						Total
Description of Securities	Fair Value			Unrealized Losses				Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Held-to-maturity:
Government Sponsored Enterprises residential mortgage-backed securities		$	1,018		$	(2	)		$	-		$	-		$	1,018		$	(2	)
Total		$	1,018		$	(2	)		$	-		$	-		$	1,018		$	(2	)

Government Sponsored Enterprises residential mortgage-backed securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities were 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 basis 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired.

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

5. Loans and Allowance for Loan Losses

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates. The three components are as follows:

·	Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.

·	Historical Charge-Off Component – Applies an eight-quarter historical charge-off rate to all pools of non-classified loans.

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

All of these factors may be susceptible to significant change. There were no changes in qualitative factors during the quarter ended September 30, 2012. During the period, the average historical loss factors improved for commercial real estate loans, the most significant category, due to minimal charge-off activity. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

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

(in 000's)				For the Nine months ended September 30, 2012
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans other			Total
Beginning balance	$	387		$	412		$	68		$	-		$	867
Provision for possible loan losses		172			(56	)		-			5			121

Charge-offs		(56	)		-			(80	)		(16	)		(152	)
Recoveries		-			8			14			11			33
Net charge-offs		(56	)		8			(66	)		(5	)		(119	)

Ending balance	$	503		$	364		$	2		$	-		$	869

(in 000's)				For the Nine months ended September 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		55			23			15		7			100

Charge-offs		(62	)		(148	)		-		(42	)		(252	)
Recoveries		1			5			4		15			25
Net charge-offs		(61	)		(143	)		4		(27	)		(227	)

Ending balance	$	295		$	433		$	71		-		$	799

(in 000's)				For the Three Months ended September 30, 2012
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans other			Total
Beginning balance	$	496		$	367		$	43		$	-		$	906
Provision for possible loan losses		63			(6	)		1			3			61

Charge-offs		(56	)		-			(43	)		(7	)		(106	)
Recoveries		-			3			1			4			8
Net charge-offs		(56	)		3			(42	)		(3	)		(98	)

Ending balance	$	503		$	364		$	2		$	-		$	869

(in 000's)			For the Three Months ended September 30, 2011
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other			Total
Beginning balance	$	280	$	432	$	55	$	-		$	767
Provision for possible loan losses		15		-		15		-			30

Charge-offs		-		-		-		(5	)		(5	)
Recoveries		-		1		1		5			7
Net charge-offs		-		1		1		-			2

Ending balance	$	295	$	433	$	71	$	-		$	799

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(in 000's)			As of September 30, 2012

	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$	503	$	-	$	-	$	-	$	503
Loans collectively evaluated for impairment		-		364		2		-		366
	$	503	$	364	$	2	$	-	$	869
Loans, ending balance:
Loans individually evaluated for impairment	$	626	$	1,120	$	-	$	-	$	1,746
Loans collectively evaluated for impairment		3,267		29,019		4,806		1,835		38,927
Total	$	3,893	$	30,139	$	4,806	$	1,835	$	60,673

(in 000's)			As of December 31, 2011

	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$	308	$	-	$	-	$	-	$	308
Loans collectively evaluated for impairment		79		412		68		-		559
	$	387	$	412	$	68	$	-	$	867
Loans, ending balance:
Loans individually evaluated for impairment	$	592	$	1,095	$	-	$	-	$	1,687
Loans collectively evaluated for impairment		3,138		29,102		5,586		1,989		39,815
Total	$	3,730	$	30,197	$	5,586	$	1,989	$	41,502

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2012 is as 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	$	75	$	340	$	479	$	894	$	698	$	1,592
SBA loans		-		-		-		-		127		127
Asset-based		-		-		99		99		2,075		2,174
Total Commercial and industrial		75		340		578		993		2,900		3,893

Commercial real estate:
Commercial mortgages		131		-		732		863		13,552		14,415
SBA loans		-		-		-		-		628		628
Construction		-		-		-		-		2,530		2,530
Religious organizations		806		-		387		1,193		11,373		12,566
Total Commercial real estate		937		-		1,119		2,056		28,083		30,139

Consumer real estate:
Home equity loans		121		188		64		373		1,096		1,469
Home equity lines of credit		-		-		-		-		26		26
1-4 family residential mortgages		-		-		227		227		3,084		3,311
Total consumer real estate		121		188		291		600		4,206		4,806

Total real estate		1,058		188		1,410		2,656		32,289		34,945

Consumer and other:
Consumer installment		3		-		-		3		35		38
Student loans		24		108		-		132		1,498		1,630
Other		4		-		-		4		163		167
Total consumer and other		31		108		-		139		1,696		1,835

Total loans	$	1,164	$	636	$	1,988	$	3,788	$	36,885	$	40,673

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An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 is as 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	$	32	$	-	$	491	$	523	$	963	$	1,486
SBA loans		-		-		-		-		235		235
Asset-based		-		-		101		101		1,908		2,009
Total commercial and industrial		32		-		592		624		3,106		3,730

Commercial real estate:
Commercial mortgages		99		-		677		776		13,901		14,677
SBA loans		-		-		-		-		476		476
Construction		-		-		-		-		1,391		1,391
Religious organizations		559		173		418		1,150		12,503		13,653
Total commercial real estate		658		173		1,095		1,926		28,271		30,197

Consumer real estate:
Home equity loans		173		152		106		431		1,714		2,145
Home equity lines of credit		-		-		38		38		47		85
1-4 family residential mortgages		-		-		301		301		3,055		3,356
Total consumer real estate		173		152		445		770		4,816		5,586

Total real estate		831		325		1,540		2,696		33,087		35,783

Consumer and other:
Consumer installment		-		-		-		-		58		58
Student loans		112		146		-		258		1,503		1,761
Other		3		-		-		3		167		170
Total consumer and other		115		146		-		261		1,728		1,989

Total loans	$	978	$	471	$	2,132	$	3,581	$	37,921	$	41,502

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

Credit Quality Indicators. For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating. The Bank uses a 1 through 8 loan grading system that follows regulatory accepted definitions as follows:

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

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

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

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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.

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

Classified Loans by Class
(In 000's)	September 30, 2012
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard	Doubtful	Total



Commercial and industrial:
Commercial	$	250	$	87	$	758	$	19

UNITED BANCSHARES INC /PA - FORM 10-Q - November 14, 2012

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