UNITED BANCSHARES INC /PA - FORM 10-Q

Attached files

file	filename
EX-32.2 - UNITED BANCSHARES INC /PA	exhibit32_2.htm
EX-31.1 - UNITED BANCSHARES INC /PA	exhibit31_1.htm
EX-31.2 - UNITED BANCSHARES INC /PA	exhibit31_2.htm
EX-32.1 - UNITED BANCSHARES INC /PA	exhibit32_1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

_X_

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014 OR

___

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

UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

0-25976

Commission File Number

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

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

(215) 351-4600

(Registrant's telephone number, including area code)

N/A

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

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

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

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

Large accelerated filer___

Accelerated filer___

Non-accelerated filer__

Smaller Reporting Company _X__

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

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

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

Applicable only to corporate issuers:

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

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

The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. As of August 1, 2014, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).

The Series A Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of August 1, 2014.

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	40
	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	41

Index

Item 1.

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Assets:	June 30, 2014			December 31, 2013
Cash and due from banks	$	2,223,800		$	2,340,002
Interest-bearing deposits with banks		309,759			306,776
Federal funds sold		3,276,000			3,143,000
Cash and cash equivalents		5,809,559			5,789,778

Investment securities available-for-sale, at fair value		9,666,704			9,579,979

Loans held for sale, at fair value		-			1,645,832

Loans, net of unearned discounts and deferred fees ($442,088 and $446,523 at
fair value at June 30, 2014 and December 31, 2013, respectively)		43,099,359			42,710,625
Less allowance for loan losses		(657,291	)		(839,133	)
Net loans		42,442,068			41,871,492
Bank premises and equipment, net		587,509			649,159
Accrued interest receivable		258,767			256,262
Other real estate owned		420,035			433,087
Prepaid expenses and other assets		451,048			525,466
Total assets	$	59,635,690		$	60,751,055
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits, noninterest-bearing	$	14,808,732		$	14,526,988
Demand deposits, interest-bearing		13,882,075			14,131,452
Savings deposits		12,394,078			12,988,388
Time deposits, under $100,000		6,718,708			6,683,499
Time deposits, $100,000 and over		8,424,119			8,779,518
Total deposits		56,227,712			57,109,845
Accrued interest payable		13,402			12,722
Accrued expenses and other liabilities		353,828			418,604
Total liabilities		56,594,942			57,541,171

Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 136,842 issued and outstanding		1,368			1,368
Common stock, $0.01 par value; 2,000,000 shares authorized;
876,921 issued and outstanding		8,769			8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
191,667 issued and outstanding		1,917			1,917
Additional paid-in-capital		14,749,852			14,749,852
Accumulated deficit		(11,649,175	)		(11,224,976	)
Accumulated other comprehensive loss		(71,983	)		(327,046	)
Total shareholders’ equity		3,040,748			3,209,884
Total liabilities and shareholders’ equity	$	59,635,690		$	60,751,055

The accompanying notes are an integral part of these statements.

Index

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three Months ended June 30, 2014			Three Months ended June 30, 2013			Six Months ended June 30, 2014			Six Months ended June 30, 2013
Interest income:
Interest and fees on loans	$	638,877		$	630,275		$	1,286,163		$	1,258,451
Interest on investment securities		58,857			66,721			119,792			153,339
Interest on federal funds sold		2,236			3,214			4,573			7,607
Interest on time deposits with other banks		164			173			2,987			404
Total interest income		700,134			700,383			1,413,515			1,419,801

Interest expense:
Interest on time deposits		9,728			12,326			19,503			27,534
Interest on demand deposits		6,750			6,145			13,351			14,889
Interest on savings deposits		1,571			1,678			3,146			3,412
Total interest expense		18,049			20,149			36,000			45,835
Net interest income		682,085			680,234			1,377,515			1,373,966
Provision (credit) for loan losses		30,000			(55,000	)		70,000			15,137

Net interest income after provision (credit) for loan losses		652,085			735,234			1,307,515			1,358,829

Noninterest income:
Customer service fees		102,163			101,304			197,975			201,912
ATM fee income		45,292			80,508			87,247			160,157
Gain on sale of investment securities		-			378,248			-			378,248
Loan syndication fees		87,550			88,300			87,550			88,300
Loss on sale of other real estate owned		-			(13,484	)		-			(13,880	)
Other income		17,065			19,187			50,307			34,805
Total noninterest income		252,070			654,063			423,079			849,542

Noninterest expense:
Salaries, wages and employee benefits		396,901			371,532			813,990			748,996
Occupancy and equipment		241,978			264,145			496,503			508,044
Office operations and supplies		69,854			76,454			133,977			154,808
Marketing and public relations		18,846			18,722			37,270			34,702
Professional services		74,534			77,346			146,140			148,180
Data processing		107,029			103,714			219,871			224,579
Other real estate expense		24,573			124,039			37,156			167,544
Loan and collection costs		20,272			38,906			38,928			58,808
Deposit insurance assessments		38,000			37,654			72,000			74,652
Other operating		115,114			180,808			158,958			330,868
Total noninterest expense		1,107,101			1,293,320			2,154,793			2,451,181
Net loss before income taxes		(202,946	)		95,977			(424,199	)		(242,810	)
Provision for income taxes		-			-			-			-
Net (loss) income	$	(202,946	)	$	95,977		$	(424,199	)	$	(242,810	)
Net (loss) income per common share—basic and diluted	$	(0.19	)	$	0.09		$	(0.40	)	$	(0.23	)
Weighted average number of common shares		1,068,588			1,068,588			1,068,588			1,068,588
Comprehensive loss:
Net (loss) income	$	(202,946	)	$	95,977		$	(424,199	)	$	(242,810	)
Unrealized gains (losses) on available for sale securities		131,690			(216,085	)		255,063			(222,226	)
Total comprehensive loss	$	(71,256	)	$	(120,108	)	$	(169,136	)	$	(465,036	)

The accompanying notes are an integral part of these statements.

Index

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

	2014			2013

Cash flows from operating activities:
Net loss	$	(424,199	)	$	(242,810	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses		70,000			15,137
Loss on sale of other real estate		-			13,880
Amortization of premiums on investments		11,724			44,346
Amortization of core deposit intangible		-			89,039
Depreciation on fixed assets		86,615			73,650
Gain on sale of investment securities		-			(378,248	)
Write-down of other real estate owned		13,052			142,506
Net change in fair value of financial instruments		2,579			-
Increase in accrued interest receivable and
other assets		71,913			34,488
Decrease in accrued interest payable and
other liabilities		(64,096	)		(141,943	)
Net cash used in operating activities		(232,412	)		(348,955	)

Cash flows from investing activities:
Purchase of held-to-maturity investment securities		-			(6,972,202	)
Proceeds from sale of available-for-sale investment
securities		-			7,731,841
Proceeds from maturity and principal reductions of
available-for-sale investment securities		156,613			2,904,044
Proceeds from the sale of other real estate owned		-			92,484
Proceeds from sale of loans		1,645,832			-
Net increase in loans		(643,154	)		(792,325	)
Purchase of bank premises and equipment		(24,965	)		(164,652	)
Net cash provided by investing activities		1,134,326			2,799,190

Cash flows from financing activities:
Net decrease in deposits		(882,133	)		(3,409,638	)
Net cash used in financing activities		(882,133	)		(3,409,638	)
Net increase (decrease) in cash and cash equivalents		19,781			(959,403	)
Cash and cash equivalents at beginning of period		5,789,778			10,236,199
Cash and cash equivalents at end of period	$	5,809,559		$	9,276,796
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	35,320		$	60,761
Noncash transfer of investment securities from held-to-maturity to available-for sale	$	-		$	11,895,037

The accompanying notes are an integral part of these statements.

Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)

1. Significant Accounting Policies

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

During interim periods, the Company follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers are encouraged to refer to the Company's Form 10-K for the fiscal year ended December 31, 2013 when reviewing this Form 10-Q. Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of June 30, 2014 and December 31, 2013 and the consolidated results of its operations and its cash flows for the three and six months ended June 30, 2014 and 2013.

Management’s Use of Estimates

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

Commitments

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

Contingencies

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

Loans Held for Sale

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

Loans

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

Loans Held at Fair Value

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

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

Allowance for Loan Losses

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

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

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

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

During regularly scheduled meetings of the Asset Quality Committee

During regular reviews of the delinquency report

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

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

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

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

Non-accrual and Past Due Loans.

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

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accrued and unpaid interest is reversed out of income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Income Taxes

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

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

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

2. Net Loss Per Share

The calculation of net loss per share follows:

	Three Months Ended June 30, 2014			Three Months Ended June 30, 2013		Six Months Ended June 30, 2014			Six Months Ended June 30, 2013
Basic:
Net (loss) income available to common shareholders	$	(202,946	)	$	95,977	$	(424,199	)	$	(242,810	)
Average common shares outstanding-basic		1,068,588			1,068,588		1,068,588			1,068,588
Net loss per share-basic	$	(0.19	)	$	0.09	$	(0.40	)	$	(0.23	)
Diluted:
Average common shares-diluted		1,068,588			1,068,588		1,068,588			1,068,588
Net loss per share-diluted	$	(0.19	)	$	0.09	$	(0.40	)	$	(0.23	)

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

Index

3.Changes in Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in other comprehensive income(loss):

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

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

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

	Six Months Ended June 30, 2013
	Before tax			Tax		Net of tax
(in (000’s)	Amount			benefit		Amount
Unrealized loss on securities:
Unrealized holding gain arising during period	$	(332	)	$	110	$	(222	)
Less: reclassification adjustment for gains (losses)
realized in net loss		-			-		-
Other comprehensive gain, net	$	(332	)	$	110	$	(222	)

4. New Authoritative Accounting Guidance

ASU 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to residential real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan though completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments require interim and annual disclosure of both the amount of the foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of this amendment.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to

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

5. Investment Securities

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

(In 000’s)	June 30, 2014
			Gross		Gross
	Amortized		Unrealized		unrealized			Fair
	Cost		Gains		losses			value
Available-for-sale:
U.S. Government agency securities	$	4,097	$	-	$	(98	)	$	3,999
Government Sponsored Enterprises residential mortgage-backed securities		5,548		54		(63	)		5,539
Investments in money market funds		129		-		-			129
	$	9,774	$	54	$	(161	)	$	9,667

	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale:
U.S. Government agency securities	$	4,097	$	-	$	(295	)	$	3,802
Government Sponsored Enterprises residential mortgage-backed securities		5,841		36		(228	)		5,649
Investments in money market funds		129		-		-			129
	$	10,067	$	36	$	(523	)	$	9,580

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

(In 000’s)	Amortized Cost		Fair Value
Due in one year	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		4,097		3,999
Government Sponsored Enterprises residential mortgage-backed securities		5,548		5,539
Total debt securities		9,645		9,538
Investments in money market funds		129		129
	$	9,774	$	9,667

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

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2014:

	Number		Less than 12 months				12 months or longer					Total
Description of	Of		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized
Securities	Securities		Value		Losses		Value		losses			value		Losses

U.S. Government
agency securities		13	$	-	$	-	$	3,499	$	(98	)	$	3,499	$	(98	)

Government Sponsored Enterprises residential
mortgage-backed securities		13		-		-		3,371		(63	)		3,371		(63	)
Total temporarily
impaired investment
securities		26	$	-	$	-	$	6,870	$	(161	)	$	6,870	$	(161	)

Index

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2013:

	Number		Less than 12 months					12 months or longer					Total
Description of	of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	securities		Value		Losses			Value		losses			value		Losses

U.S. Government
agency securities		15	$	3,576	$	(270	)	$	225	$	(25	)	$	3,801	$	(295	)

Government Sponsored Enterprises residential
mortgage-backed securities		21	$	4,777	$	(228	)	$	-	$	-		$	4,777	$	(228	)
Total temporarily
impaired investment
securities		36	$	8,353	$	(498	)	$	225	$	(25	)	$	8,578	$	(523	)

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

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

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

Index

6. Loans and Allowance for Loan Losses

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

(Dollars in thousands)	June 30, 2014		December 31, 2013
Commercial and industrial	$	4,703	$	4,310
Commercial real estate		33,266		32,962
Consumer real estate		3,726		3,909
Consumer loans other		1,404		1,530
Total loans	$	43,099	$	42,711

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

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

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

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

All of these factors may be susceptible to significant change. During the quarter ended June 30, 2014, the Bank did not change any of its qualitative factors in any segment of the loan portfolio. In addition, the average historical loss factors were relatively unchanged as there were no significant charge-offs during the quarter. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

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

	For the Three months ended June 30, 2014
	Commercial and industrial		Commercial real estate			Consumer real estate		Consumer loans other			Total
Beginning balance	$	296	$	297		$	20	$	13		$	626
Provision for loan losses		1		(2	)		31		-			30

Charge-offs		-		-			-		(11	)		(11	)
Recoveries		-		-			1		11			12
Net recoveries		-		-			1		-			1

Ending balance	$	297	$	295		$	52	$	13		$	657

(in 000's)	For the Three months ended June 30, 2013
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans other			Total
Beginning balance	$	614		$	275		$	48		$	-		$	937
Provision (credit) for loan losses		15			(65	)		(6	)		1			(55	)

Charge-offs		(184	)		-			-			(4	)		(188	)
Recoveries		1			78			2			3			84
Net (charge-offs) recoveries		(183	)		78			2			(1	)		(104	)

Ending balance	$	446		$	288		$	44		$	-		$	778

Index

(in 000's)	For the Six months ended June 30, 2014
	Commercial and industrial			Commercial real estate		Consumer real estate			Consumer loans Other			Total
Beginning balance	$	483		$	280	$	59		$	17		$	839
Provision for loan losses		65			15		(10	)		-			70

Charge-offs		(253	)		-		-			(18	)		(271	)
Recoveries		2			-		3			14			19
Net recoveries		(251	)		-		3			(4	)		(252	)

Ending balance	$	297		$	295	$	52		$	13		$	657

(in 000's)	For the Six months ended June 30, 2013
	Commercial and industrial			Commercial real estate			Consumer real estate		Consumer loans other			Total
Beginning balance	$	891		$	308		$	5	$	-		$	1,204
Provision for loan losses		77			(98	)		35		1			15

Charge-offs		(524	)		-			-		(4	)		(528	)
Recoveries		2			78			4		3			87
Net (charge-offs) recoveries		(522	)		78			4		(1	)		(441	)

Ending balance	$	446		$	288		$	44		-		$	778

(in 000's)	June 30, 2014
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	121	$	27	$	-	$	-	$	148
Loans collectively evaluated for impairment		176		268		52		13		509
	$	297	$	295	$	52	$	13	$	657

Loans, ending balance:
Loans individually evaluated for impairment	$	229	$	1,737	$	-	$	-	$	1,966
Loans collectively evaluated for impairment		4,474		31,529		3,726		1,404		41,133
Total	$	4,703	$	33,266	$	3,726	$	1,404	$	43,099

	December 31, 2013
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total

Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	378	$	-	$	-	$	-	$	378
Loans collectively evaluated for impairment		105		280		59		17		461
	$	483	$	280	$	59	$	17	$	839

Loans, ending balance:
Loans indivdually evaluated for impairment	$	492	$	1,390	$	-	$	-	$	1,882
Loans collectively evaluated for impairment		3,818		31,572		3,909		1,530		40,829
Total	$	4,310	$	32,962	$	3,909	$	1,530	$	42,711

Index

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of June 30, 2014 is as follows:

			Accruing
	Loans		Loans 90 or
(In 000's)	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	75	$	-	$	181	$	256	$	1,827	$	2,083
SBA loans		-		-		48		48		604		652
Asset-based		-		-		-		-		1,968		1,968
Total Commercial and industrial		75		-		229		304		4,399		4,703

Commercial real estate:
Commercial mortgages		20		-		997		1,017		15,532		16,549
SBA loans		-		-		124		124		427		551
Construction		-		-		-		-		4,191		4,191
Religious organizations		-		-		616		616		11,359		11,975
Total Commercial real estate		20		-		1,737		1,757		31,509		33,266

Consumer real estate:
Home equity loans		-		-		413		413		712		1,125
Home equity lines of credit		-		-		-		-		23		23
1-4 family residential mortgages		-		-		309		309		2,269		2,578
Total consumer real estate		-		-		722		722		3,004		3,726

Total real estate		20		-		2,459		2,479		34,513		36,992

Consumer and other:
Consumer installment		-		-		-		-		9		9
Student loans		113		122		-		235		1,023		1,258
Other		3		-		-		3		134		137
Total consumer and other		116		122		-		238		1,166		1,404

Total loans	$	211	$	122	$	2,688	$	3,021	$	40,078	$	43,099

An age analysis of past due loans, segregated by class of loans, as of December 31, 2013 is as follows:

			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
(In 000's)	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	-	$	-	$	444	$	444	$	1,214	$	1,658
SBA loans		-		-		130		130		455		585
Asset-based		-		-		-		-		2,067		2,067
Total Commercial and industrial		-		-		574		574		3,736		4,310

Commercial real estate:
Commercial mortgages		2		442		630		1,094		16,249		17,343
SBA loans		184		-		-		184		382		566
Construction		-		-		-		-		2,456		2,456
Religious organizations		-		-		629		629		11,968		12,597
Total Commercial real estate		206		442		1,259

UNITED BANCSHARES INC /PA - FORM 10-Q - August 14, 2014

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