UNITED BANCSHARES INC /PA - FORM 10-Q

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EX-32.2 - CERTIFICATION - UNITED BANCSHARES INC /PA	usbi_ex32z2.htm
EX-32.1 - CERTIFICATION - UNITED BANCSHARES INC /PA	usbi_ex32z1.htm
EX-31.2 - CERTIFICATION - UNITED BANCSHARES INC /PA	usbi_ex31z2.htm
EX-31.1 - CERTIFICATION - UNITED BANCSHARES INC /PA	usbi_ex31z1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

_X_QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

___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. 15^th 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 __No_X_

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 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 September 30, 2020, the aggregate number of the shares of the Registrant’s Common Stock issued was 826,921.

The Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A and 7,000 as Series B for which there were 99,342 and 1,850 shares are issued, respectively as of September 30, 2020.

FORM 10-Q

Index

Item No.

Page

PART I - OTHER INFORMATION4

Item 1. Financial Statements (unaudited)4

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.33

Item 3. Quantitative and Qualitative Disclosures about Market Risk45

Item 4. Controls and Procedures45

Item 3. Quantitative and Qualitative Disclosures about Market Risk46

Item 4. Controls and Procedures46

PART II - OTHER INFORMATION47

Item 1. Legal Proceedings.47

Item 1A. Risk Factors.47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.47

Item 3. Defaults Upon Senior Securities.47

Item 4. Mine Safety Disclosures.47

Item 5. Other Information.47

Item 6. Exhibits.48

PART I - OTHER INFORMATION

Item 1. Financial Statements (unaudited)

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Assets:	September 30, 2017	December 31, 2016
Cash and due from banks	$ 3,034,186	$ 2,262,491
Interest-bearing deposits with banks	311,829	311,340
Federal funds sold	11,456,000	5,229,000
Cash and cash equivalents	14,802,015	7,802,831

Investment securities available-for-sale, at fair value	5,286,772	5,578,159

Loans held for sale	9,827,203	7,793,785

Loans held at fair value	4,644,549	4,207,338

Loans, net of unearned discounts and deferred fees	25,530,066	26,835,035
Less allowance for loan losses	(239,455)	(300,428)
Net loans	25,290,611	26,534,607
Bank premises and equipment, net	263,825	380,471
Accrued interest receivable	157,260	141,453
Other real estate owned	447,371	447,371
Servicing asset	329,753	312,814
Prepaid expenses and other assets	541,143	413,542
Total assets	$ 61,590,502	$ 53,612,371
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits, noninterest-bearing	$ 22,129,209	$ 14,797,174
Demand deposits, interest-bearing	15,500,255	13,699,578
Savings deposits	11,704,051	11,734,512
Time deposits, under $250,000	4,622,674	6,407,391
Time deposits, $250,000 and over	4,002,384	4,003,511
Total deposits	57,958,573	50,642,166
Accrued interest payable	11,624	10,997
Accrued expenses and other liabilities	284,885	299,293
Total liabilities	57,255,082	50,952,455

Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 99,342 issued and outstanding at September 30, 2017 and December 31, 2016	993	993
Series B preferred stock, noncumulative, 7%, $0.01 par value, 7,000 shares authorized; 1,850 issued and outstanding at September 30, 2017	18	-
Common stock, $0.01 par value; 2,000,000 shares authorized;
826,921 issued and outstanding at September 30, 2017 and December 31, 2016	8,269	8,269
Additional paid-in-capital	15,677,626	14,752,644
Accumulated deficit	(12,327,576)	(12,038,281)
Accumulated other comprehensive loss	(23,910)	(63,710)
Total shareholders’ equity	3,335,420	2,659,915
Total liabilities and shareholders’ equity	$ 61,590,502	$ 53,612,371

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months ended September 30, 2017	Three Months ended September 30, 2016	Nine Months ended September 30, 2017	Nine Months ended September 30, 2016
Interest income:

Interest and fees on loans	$ 612,112	$601,002	$ 1,729,095	$1,829,942
Interest on investment securities	29,985	35,236	92,550	120,188
Interest on federal funds sold	32,074	6,059	68,863	23,286
Interest on time deposits with other banks	202	173	574	463
Total interest income	674,373	642,470	1,891,082	1,973,879

Interest expense:
Interest on time deposits	11,021	9,173	28,775	26,529
Interest on demand deposits	6,515	6,175	18,953	18,274
Interest on savings deposits	1,470	1,475	4,399	4,291
Total interest expense	19,006	16,823	52,127	49,094
Net interest income	655,367	625,647	1,838,955	1,924,785
Credit to provision for loan losses	(15,000)	(45,000)	(91,000)	(50,000)

Net interest income after credit to provision for loan losses	670,367	670,647	1,929,955	1,974,785

Noninterest income:
Customer service fees	101,476	86,376	298,786	262,643
ATM fee income	30,644	28,141	93,791	84,155
Gain on sale of loans	54,459	188,385	206,319	500,358
Loss on sale of other real estate	-	-	-	(3,239)
Net change in fair value of financial instruments	197,665	(17,958)	271,182	270,322
Loan syndication fees	90,400	85,000	90,400	85,000
Other income	14,875	22,325	76,753	185,075
Total noninterest income	489,519	392,269	1,037,231	1,384,314

Noninterest expense:
Salaries, wages and employee benefits	395,915	391,000	1,175,163	1,155,616
Occupancy and equipment	253,981	241,950	755,115	720,587
Office operations and supplies	84,643	86,700	247,362	253,114
Marketing and public relations	3,056	9,016	11,865	36,736
Professional services	76,182	74,723	177,622	223,854
Data processing	95,509	93,025	290,861	302,320
Other real estate expense	28,440	65,955	58,326	103,516
Loan and collection costs	43,979	39,816	124,603	98,392
Deposit insurance assessments	27,000	30,000	72,000	87,000
Other operating	122,558	130,372	343,564	361,570
Total noninterest expense	1,131,263	1,162,557	3,256,481	3,342,705
Net income (loss) before income taxes	28,623	(99,641)	(289,295)	16,394
Provision for income taxes	-	-	-	-
Net income (loss)	$ 28,623	$ (99,641)	$ (289,295)	$ 16,394
Net income (loss) per common share—basic and diluted	$ 0.03	$ (0.12)	$ (0.35)	$ 0.02
Weighted average number of common shares	826,921	826,921	826,921	826,921
Comprehensive loss:
Net income (loss)	$ 28,623	$ (99,641)	$ (289,295)	$ 16,394
Unrealized gains on available for sale securities, net of taxes	4,835	(4,744)	39,800	85,841
Total comprehensive income (loss)	$ 33,458	$ (104,385)	$ (249,495)	$ 102,235

See accompanying notes to the unaudited consolidated financial statements.

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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2017

	Series A Preferred stock		Series B Preferred Stock		Common stock		Additional paid-in	Accumulated	Accumulated Other Comprehensive	Total Shareholders’
	Shares	Amount	Shares	Amount	Shares	Amount	capital	Deficit	Loss	Equity
Balance at December 31, 2016	99,342	$ 993	-	-	826,921	$ 8,269	$14,752,644	$(12,038,281)	$(63,710)	$2,659,915
Net loss	-	-	-	-	-	-	-	(202,621)	-	(202,621)
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	9,767	9,767
Issuance of Series B Preferred Stock	-	-	1,350	13	-	-	674,987	-	-	675,000
Balance at March 31, 2017	99,342	993	1,350	13	826,921	8,269	15,427,631	(12,240,902)	(53,943)	3,142,061
Net loss	-	-	-	-	-	-	-	(115,297)	-	(115,297)
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	25,198	25,198
Balance at June 30, 2017	99,342	993	1,350	13	826,921	8,269	15,427,631	(12,356,199)	(28,745)	3,051,962
Net income	-	-	-	-	-	-	-	28,623	-	28,623
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	4,835	4,835
Issuance of Series B Preferred Stock	-	-	500	5	-	-	249,995	-	-	250,000
Balance at September 30, 2017	99,342	$ 993	1,850	$ 18	826,921	$ 8,269	$ 15,677,626	$ (12,327,576)	$ (23,910)	$ 3,335,420

See accompanying notes to the consolidated financial statements.

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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2016

	Series A Preferred stock		Series B Preferred Stock		Common stock		Additional paid-in	Accumulated	Accumulated Other Comprehensive	Total Shareholders’
	Shares	Amount	Shares	Amount	Shares	Amount	capital	Deficit	Income (Loss)	Equity
Balance at December 31, 2015	99,342	$ 993	-	$-	826,921	$ 8,269	$ 14,752,644	$ (12,062,818)	$ (19,326)	$ 2,679,762
Net loss	-	-	-	-	-	-	-	(198,981)	-	(198,981)
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	63,947	63,947
Balance at March 31, 2016	99,342	993	-	-	826,921	8,269	14,752,644	(12,261,799)	44,621	2,544,728
Net income	-	-	-	-	-	-	-	315,016	-	315,016
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	26,639	26,639
Balance at June 30, 2016	99,342	993	-	-	826,921	8,269	14,752,644	(11,946,783)	71,260	2,886,383
Net income	-	-	-	-	-	-	-	(99,641)	-	(99,641)
Other comprehensive loss, net of tax	-	-	-	-	-	-	-	-	(4,744)	(4,744)
Balance at September 30, 2016	99,342	$ 993	-	$ -	826,921	$ 8,269	$ 14,752,644	$ (12,046,424)	$ 66,516	$ 2,781,998

See accompanying notes to the consolidated financial statements.

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UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30,

	2017	2016

Cash flows from operating activities:
Net (loss) income	$ (289,295)	$ 16,394
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Credit to provision for loan losses	(91,000)	(50,000)
Amortization of premiums on investments, net	7,442	10,689
Depreciation on fixed assets	138,767	141,771
Net change in fair value of financial instruments	(271,182)	(270,322)
Gain on sale of loans	(206,319)	(500,358)
Loss on sale of other real estate owned	-	3,239
Proceeds from the sale of loans held-for-sale	2,174,935	5,070,979
Amortization of servicing asset	26,706	25,892
Loans originated for sale	(4,337,673)	(8,926,882)
Increase in accrued interest receivable and
other assets	(187,053)	(65,147)
(Decrease) increase in accrued interest payable and
other liabilities	(13,781)	17,714
Net cash used in operating activities	(3,048,452)	(4,526,031)

Cash flows from investing activities:
Proceeds from maturity and principal reductions of
available-for-sale investment securities	324,771	5,213,099
Purchase of securities available-for-sale	(1,026)	(3,849,600)
Net decrease in loans	1,504,606	5,162,874
Purchase of bank premises and equipment	(22,121)	(76,584)
Proceeds from sale of other real estate	-	29,017
Net cash provided by investing activities	1,806,230	6,478,536

Cash flows from financing activities:
Net increase (decrease) in deposits	7,316,406	(3,134,799)
Net cash provided by (used) in financing activities	7,316,406	(3,134,799)
Net increase (decrease) in cash and cash equivalents	6,999,184	(1,182,294)
Cash and cash equivalents at beginning of period	7,802,831	10,782,098
Cash and cash equivalents at end of period	$ 14,802,015	$ 9,599,804
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$ 32,493	$ 47,763
Transfer of loans from held-for-sale to held as fair value	$ 437,211	$ 1,285,309

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

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, 2016 when reviewing this Form 10-Q. Because this report is based on an interim period, certain information and footnote disclosures normally included in the Annual Report on Form 10-K have been condensed or omitted. Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of September 30, 2017 and December 31, 2016 and the consolidated results of its operations and its cash flows for the three and nine months ended September 30, 2017 and 2016.

Management’s Use of Estimates

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

Commitments

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

Contingencies

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

Loans Held for Sale

From time to time, the Bank originates SBA loans for which the guaranteed portion is intended to be sold within a short period of time in the secondary market. These loans are carried at estimated fair value based on a loan-by-loan valuation using actual market bids. Any change in the balance of the loan and its fair value is recorded as income or expense in each reporting period. When the guaranteed portion of the loan is sold, the gain on the sale is reduced by the income previously recognized as part of the fair value adjustment.

Loans Held at Fair Value

The Bank originates SBA loans for which the un-guaranteed portion is retained after the guaranteed portion is sold in the secondary market. Management has elected to carry these loans at fair value in accordance with the irrevocable option permitted under Accounting Standards Codification (“ASC”) 825-10-25 Financial Instruments. Fair value of these loans is estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

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Loans

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

Allowance for Loan Losses

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

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

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

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

·During regularly scheduled meetings of the Asset Quality Committee

·During regular reviews of the delinquency report

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

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

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

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

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Non-accrual and Past Due Loans.

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

Income Taxes

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

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

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

2. Net Income (Loss) Per Share

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

	Three Months Ended September 30, 2017	Three Months Ended September 30, 2016	Nine Months Ended September 30, 2017	Nine Months Ended September 30, 2016
Basic:
Net income (loss) available to common shareholders	$ 28,623	$ (99,641)	$ (289,295)	$ 16,394
Average common shares outstanding-basic	826,921	826,921	826,921	826,921
Net income (loss) per share-basic	$ 0.03	$ (0.12)	$ (0.35)	$ 0.02
Diluted:
Average common shares-diluted	826,921	826,921	826,921	826,921
Net income (loss) per share-diluted	$ 0.03	$ (0.12)	$ (0.35)	$ 0.02

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

3.Changes in Accumulated Other Comprehensive Income

The following table presents the changes in accumulated other comprehensive income:

	Three Months Ended September 30, 2017
	Before tax		Net of tax
(in (000’s)	Amount	Taxes	Amount
Beginning balance	$ (43)	$ 14	$ (29)
Unrealized gain on securities:
Unrealized holding gain arising during period	8	(3)	5
Less: reclassification adjustment for gains (losses)
realized in net income
Other comprehensive income, net	$ (35)	$ (11)	$ (24)
Ending balance

	Three Months Ended September 30, 2016
	Before tax		Net of tax
(in (000’s)	Amount	Taxes	Amount
Beginning balance	$ 106	$ (35)	$ 71
Unrealized gain on securities:
Unrealized holding gain arising during period	(5)	1	(4)
Less: reclassification adjustment for gains (losses)
realized in net income	-	-	-
Other comprehensive income, net	(5)	1	(4)
Ending balance	$ 101	$ (34)	$ 67

	Nine Months Ended September 30, 2017
	Before tax		Net of tax
(in (000’s)	Amount	Taxes	Amount
Beginning balance	$ (97)	$ 33	$ (64)
Unrealized gain on securities:
Unrealized holding gain arising during period	62	(22)	40
Less: reclassification adjustment for gains (losses)
realized in net income
Other comprehensive income, net
Ending balance	$ (35)	$ 11	$ (24)

	Nine Months Ended September 30, 2016
	Before tax		Net of tax
(in (000’s)	Amount	Taxes	Amount
Beginning balance	$ (29)	$ 10	$ (19)
Unrealized gain on securities:
Unrealized holding gain arising during period	$ 130	(44)	86
Less: reclassification adjustment for gains (losses)
realized in net income	-	-	-
Other comprehensive income, net	130	(44)	86
Ending balance	$ 101	$ (34)	$ 67

4. New Authoritative Accounting Guidance

Effect of the Adoption of Accounting Standards

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Bank has adopted this accounting standard and provided additional disclosures in Note 10.

Effect of Upcoming Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard ((along with subsequent amendments and clarifications in ASUs; 2018-01, 2018-11 and 2018-20) requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease

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payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The Update’s (along with subsequent amendments and clarifications in ASUs; 2015-14, 2016-08, 2016-10, 2016-11, and 2016-12) core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. ASU 2015-14 delayed the effective date of this standard to reporting periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. This Update is not expected to have a significant impact on the Company’s financial statements.

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect

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adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate non-lease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the non-lease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the non-lease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

5. Investment Securities

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

(In 000’s)	September 30, 2017
		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Available-for-sale:
U.S. Government agency securities	$ 2,349	$ -	$ ( 51)	$ 2,298
Government Sponsored Enterprises residential mortgage-backed securities	2,843	29	(14)	2,858
Investments in money market funds	131	-	-	131
	$ 5,323	$ 29	$ (65)	$ 5,287
	December 31, 2016
		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Available-for-sale:
U.S. Government agency securities	$ 2,350	-	$ (82)	$ 2,268
Government Sponsored Enterprises residential mortgage-backed securities	3,193	25	(38)	3,180
Investments in money market funds	130	-	-	130
	$ 5,673	$ 25	$ (120)	$ 5,578

The amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity as of September 30, 2017, are as follows:

(In 000’s)	Amortized Cost				Fair Value
Due in one year	$	-	$	-
Due after one year through five years
Due after five years through ten years		2,349		2,298
Government Sponsored Enterprises residential mortgage-backed securities		2,843		2,858
Total debt securities		5,192		5,156
Investments in money market funds		131		131
	$	5,323	$	5,287

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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.

There were no sales of securities during the nine months ended September 30, 2017 and 2016.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2017:

(in 000’s)	Number	Less than 12 months		12 months or longer		Total
Description of	Of	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Securities	Securities	Value	Losses	Value	losses	value	Losses

U.S. Government
agency securities	7	$ 1,330	$ (31)	$ 968	$ (20)	$ 2,298	$ (51)

Government Sponsored Enterprises residential
mortgage-backed securities	4	571	(5)	217	(9)	788	(14)
Total temporarily
impaired investment
Securities	11	$ 1,901	$ (36)	$ 1,185	$ (29)	$ 3,086	$ (65)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2016:

(in 000’s)	Number	Less than 12 months		12 months or longer		Total
Description of	Of	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Securities	Securities	Value	Losses	Value	Losses	value	Losses
U.S. Government
agency securities	7	$ 2,268	$ (82)	-	-	$ 2,268	$ (82)

Government Sponsored Enterprises residential
mortgage-backed securities	10	2,026	(38)	-	-	2,026	(38)
Total temporarily
impaired investment
Securities	17	$ 4,294	$ (120)	-	-	$ 4,294	$ (120)

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

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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.

As of September 30, 2017 and December 31, 2016, investment securities with a carrying value of $4,363,000 and $4,432,000, respectively, were pledged as collateral to secure public deposits and contingent borrowing at the Discount Window.

6. Loans and Allowance for Loan Losses

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

(in 000’s)	September 30, 2017	December 31, 2016
Commercial and industrial	$2,291	$ 2,149
Commercial real estate	20,591	21,488
Consumer real estate	1,841	2,232
Consumer loans other	807	966
Total loans	$25,530	$ 26,835

At December 31, 2016, the unearned discount totaled $11,000 and is included in the related loan accounts. There were no unearned discounts at September 30, 2017.

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 nine months ended September 30, 2017, the Bank did not change any of its qualitative factors in any segment of the loan portfolio. In addition, the average historical loss factors were relatively unchanged as there were no charge-offs during the quarter. Credits to the provision for the nine months ended September 30, 2017 and 2016 were primarily related to the decreases in the balance of commercial real estate loans as the origination of SBA loans that are accounted for at fair value are not included in the calculation of the allowance for loan losses. In addition, there was improvement in the eight-quarter rolling historical charge-offs related to commercial and industrial loans that resulted in a reduction in the required general allowance. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely affect 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 Three months ended September 30, 2017
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 74	$ 170	$ 8	$ 10	$ (10)	$ 252
Provision (credit) for loan losses	(65)	18	-	-	32	(15)

Charge-offs	-	-	-	(1)	-	(1)
Recoveries	1	2	-	-	-	3
Net (charge-offs) recoveries	1	2	-	(1)	-	2

Ending balance	$ 10	$ 190	$ 8	$ 9	$ 22	$239

(in 000's)		For the Three months ended September 30, 2016
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 87	$ 245	$ 13	$ 10	$ -	$ 355
Provision (credit) for loan losses	41	(75)	(11)	-	-	(45)

Charge-offs	-	(1)	-	-	-	(1)
Recoveries	1	-	6	1	-	8
Net (charge-off) recoveries	1	(1)	6	1	-	7

Ending balance	$ 129	$ 169	$ 8	$ 11	$ -	$ 317

(in 000's)		For the Nine months ended September 30, 2017
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 68	$ 179	$ 10	$ 11	$ 32	$ 300
Provision (credit) for loan losses	(61)	(16)	(3)	(1)	(10)	(91)

Charge-offs	-	-	-	(4)	-	(4)
Recoveries	3	27	1	3	-	34
Net (charge-offs) recoveries	3	27	1	(1)	-	30

Ending balance	$ 10	$ 190	$ 8	$ 9	$ 22	$ 239

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(in 000's)		For the Nine months ended September 30, 2016
	Commercial and industrial		Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$ 151		$ 250	$ 8	$ 9	$ 418
Provision (credit) for loan losses	(25)		(39)	14	-	(50)

Charge-offs	-		(42)	(22)	(3)	(67)
Recoveries	3		-	8	5	16
Net (charge-offs)recoveries	3		(42)	(14)	2	(51)

Ending balance	$ 129		$ 169	$ 8	$ 11	$ 317

(in 000's)			September 30, 2017
	Commercial and industrial	Commercial real estate		Consumer real estate	Consumer loans Other	Unallocated	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -	$ 70		$ -	$ -	$ -	$ 70
Loans collectively evaluated for impairment	10	120		8	9	22	169
	$ 10	$ 197		$ 8	$ 9	$ 22	$ 239

Loans, ending balance:
Loans individually evaluated for impairment	$ 319	$ 1,719		$ -	$ -	$ -	$ 2,038
Loans collectively evaluated for impairment	1,972	18,872		1,841	807	-	21,322
Total	$ 2,291	$ 20,591		$ 1,841	$ 807	$ -	$ 25,530

(in 000’s)			December 31, 2016
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -	$ 54	$ -	$ -	$ -	$ 54
Loans collectively evaluated for impairment	68	125	10	11	32	246
	$ 68	$ 179	$ 10	$ 11	$ 32	$ 300

Loans, ending balance:
Loans individually evaluated for impairment	$ 352	$ 1,731	$ -	$ -	$ -	$ 2,083
Loans collectively evaluated for impairment	1,797	19,757	2,232	966	-	24,752
Total	$ 2,149	$ 21,488	$ 2,232	$ 966	$ -	$ 26,835

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Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2017 is as follows:

		Accruing	Nonaccrual
	Loans	Loans 90 or	Loans 90 or
(In 000's)	30-89 Days	More Days	More Days	Total Past	Current
	Past Due	Past Due	Past Due	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$ 26	$ -	$ -	$ 26	$ 823	$ 849
SBA loans	-	-	-	-	41	41
Asset-based	-	-	319	319	1,082	1,401
Total Commercial and industrial	26	-	319	345	1,946	2,291

Commercial real estate:
Commercial mortgages	661	-	1,280	1,941	9,105	11,046
SBA loans	-	-	244	244	210	454
Construction	-	-	-	-	406	406
Religious organizations	41	-	189	230	8,455	8,685
Total Commercial real estate	702	-	1,713	2,415	18,176	20,591

Consumer real estate:
Home equity loans	-	123	308	341	321	752
Home equity lines of credit	-	-	-	-	17	17
1-4 family residential mortgages	32	-	-	32	1,040	1,072
Total consumer real estate	32	123	308	463	1,378	1,841

Total real estate	734	123	2,021	2,878	19,554	22,432

Consumer and other:
Student loans	89	69	-	158	551	709
Other	-	2	-	2	96	98
Total consumer and other	89	71	-	160	647	807

Total loans	$ 849	$ 194	$ 2,340	$ 3,383	$ 22,147	$ 25,530

An age analysis of past due loans, segregated by class of loans, as of December 31, 2016 is as follows:

		Accruing	Nonaccrual
	Loans	Loans 90 or	Loans 90 or
	30-89 Days	More Days	More Days	Total Past	Current
(In 000's)	Past Due	Past Due	Past Due	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$ -	$ -	$ 33	$ 33	$ 857	$ 890
Asset-based	27	243	75	345	914	1,259
Total Commercial and industrial	27	243	108	378	1.771	2,149

Commercial real estate:
Commercial mortgages	-	11	1,270	1,281	10,104	11,385
SBA loans	-	162	93	255	-	255
Construction	-	-	-	-	542	542
Religious organizations	-	-	196	306	9,000	9,306
Total Commercial real estate	110	173	1,559	1,842	19,646	21,488

Consumer real estate:
Home equity loans	-	153	345	498	301	799
Home equity lines of credit	-	-	-	-	19	19
1-4 family residential mortgages	59	-	75	134	1,280	1,414
Total consumer real estate	59	153	420	632	1,600	2,232

Total real estate	169	326	1,979	2,474	21,246	23,720

Consumer and other:
Student loans	38	61	-	99	756	855
Other	-	1	-	1	110	111
Total consumer and other	38	62	-	100	866	966

Total loans	$ 234	$ 631	$ 2,087	$ 2,952	$ 23,883	$ 26,835

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

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system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans. Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

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

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

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

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

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

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

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

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest 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

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a loan, but no later than 90 days past due. Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection.

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


(In 000's)				Commercial Loans September 30, 2017
	Good/ Excellent	Satisfactory		Pass	Special Mention	Substandard		Doubtful	Total



Commercial and industrial:
Commercial	$ 260	$ 341		$ 4	$ 26	$ 218		$ -	$ 849
SBA loans	-	-		41	-	-		-	41
Asset-based	-	839		243	-	243		76	1,401
	$ 260	$ 1,180		$ 288	$ 26	$ 461		$ 76	$ 2,291
Commercial real estate:
Commercial mortgages	$ -	$ 6,983		$ 2,253	$ 489	$ 1,092		$ 219	$ 11,046
SBA Loans	-	209		1	-	244		-	454
Construction	-	406		-	-	-		-	406
Religious organizations	53	7,602		736	105	189		-	8,685
	53	$ 15,200		$ 2,990	$ 594	$1,525		$ 219	$ 20,591

Total commercial loans	$ 313	$ 16,380		$ 3,278	$ 620	$ 1,986		$ 295	$ 22,882


(In 000's)			Residential Mortgage and Consumer Loans September 30, 2017
	Performing			Nonperforming			Total

Consumer Real Estate:
Home equity	$ 444			$ 308			$ 752
Home equity line of credit	17			-			17
1-4 family residential mortgages	1,072			-			1,072
	$ 1,533			$ 308			$ 1,841

Consumer Other:
Student loans	$ 709			$ -			$ 709
Other	98			-			98
	$ 807			-			$ 807

Total consumer loans	$ 2,340			$ 308			$ 2,648

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(In 000's)			Commercial Loans December 31, 2016
	Good/ Excellent	Satisfactory	Pass	Special Mention		Substandard	Doubtful	Total

Commercial and industrial:
Commercial	$ 260	$ 331	$ 9	$ 38		$ 252	$ -	$ 890
Asset-based	-	742	198	-		243	76	1,259
	260	1,073	207	38		495	76	2,149
Commercial real estate:
Commercial mortgages	-	8,193	1,375	537		1,059	221	11,385
SBA Loans	-	2	-	160		93	-	255
Construction	-	542	-	-		-	-	542
Religious organizations	49	8,201	751	109		196	-	9,306
	49	16,938	2,126	806		1,348	221	21,488

Total commercial loans	$ 312	$ 18,011	$ 2,333	$ 844		$ 1,843	$ 297	$ 23,637

			Residential Mortgage and Consumer Loans December 31, 2016

	Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$ 494		$ 345		$ 799
Home equity line of credit	19		-		19
1-4 family residential mortgages	1,339		75		1,414
	1,812		420		2,232

Consumer Other:
Consumer Installment	-		-		-
Student loans	855		-		855
Other	111		-		111
	966		-		966

Total consumer loans	$ 2,778		$ 420		$ 3,198

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

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

The Company makes partial charge-offs of impaired loans when the impairment is deemed permanent and is considered a loss. Specific reserves are allocated to cover “other-than-permanent” impairment for which the underlying collateral value may fluctuate with market conditions. There were no partial charge-offs during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, there was a partial charge-off of $41,000 related to one commercial real estate loan for which there was a decline in the value of the underlying collateral.

Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.

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Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.

Impaired loans as of September 30, 2017 are set forth in the following table.

(In 000's)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total
	Principal	With No	With	Recorded	Related
	Balance	Allowance	Allowance	Investment	Allowance

Commercial and industrial:
Asset-based	$ 319	$ 319	$ -	$ 319	$ -
Total commercial and industrial	319	319	-	319	-

Commercial real estate:
Commercial mortgages	1,279	806	473	1,279	70
SBA Loans	248	248	-	248	-
Religious organizations	192	192	-	192	-
Total commercial real estate	1,719	1, 246	473	1,795	70

Total loans	$ 2,038	$ 1,565	$ 473	$ 2,038	$ 70

Impaired loans as of December 31, 2016 set forth in the following table.

(In 000's)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total
	Principal	With No	With	Recorded	Related
	Balance	Allowance	Allowance	Investment	Allowance

Commercial and industrial:
Commercial	$ 33	$ 33	$ -	$ 33	$ -
Asset-based	319	319	-	319	-
Total commercial and industrial	352	352	-	352	-

Commercial real estate:
Commercial mortgages	1,321	807	473	1,281	54
SBA Loans	255	255	-	255	-
Religious organizations	195	195	-	195	-
Total commercial real estate	1,771	1,258	473	1,731	54

Total loans	$ 2,123	$ 1,610	$ 473	$ 2,083	$ 54

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The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis. The following tables present additional information about impaired loans.

(In 000's)	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
SBA loans	$ -	$ -	$ 39	$ -
Asset-based	243	-	398	-
Total commercial and industrial	243	-	437	-

Commercial real estate:
Commercial mortgages	1,355	-	1,280	1
SBA loans	245	-	162	-
Religious organizations	189	-	200	-
Total commercial real estate	1,789	-	1,642	1

Total loans	$ 2,032	$ -	$ 2,079	$ 1

(In 000's)	Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
SBA loans	$ -	$ -	$ 39	$ -
Asset-based	261	-	398	-
Total commercial and industrial	261	-	437	-

Commercial real estate:
Commercial mortgages	1,355	-	1,422	5
SBA loans	249	-	304	3
Religious organizations	192	-	299	-
Total commercial real estate	1,796	-	2,025	8

Total loans	$2,057	$ -	$ 2,462	$ 8

Troubled debt restructurings (“TDRs”). TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal. The terms of these loans do not include any financial concessions and are consistent with the current market. Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties). Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring. Therefore, the Company had no troubled debt restructurings at September 30, 2017 and December 31, 2016.

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7. Other Real Estate Owned

Other real estate owned (“OREO”) consists of properties acquired as a result of deed in-lieu-of foreclosure and foreclosures. Properties or other assets are classified as OREO and are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. Activity in other real estate owned for the periods was as follows:

(in 000's)	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016

Beginning balance	$ 447	$ 447	$ 447	$ 480
Additions, transfers from loans	-	-	-	-
Sales	-	-	-	(33)
	447	447	447	447
Write-ups	-	-	-	-
Ending Balance	$447	$ 447	$ 447	$ 447

There were no loans in the process of foreclosure at September 30, 2017 and December 31, 2016.

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

(in 000's)	September 30, 2017	December 31, 2016
Commercial real estate	$ 298	$ 298
Residential real estate	149	149
Total	$ 447	$ 447

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

	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
(in 000's)	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016
Insurance	$ -	$ 3	$ 7	$ 9
Legal fees	-	-		16
Foreclosure expense	-	56		56
Professional fees		-	5	4
Real estate taxes	14	6	21	16
Utilities	1	1	2	2
Maintenance	13	-	22	-
Other	-	-	-	1
Total	$ 28	$ 66	$ 57	$ 104

8. Fair Value

Fair Value Measurement

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

The fair value guidance in FASB ASC 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is

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a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

Level 1

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

Level 2

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

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

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

Level 3

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

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

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

Fair Value on a Recurring Basis

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

Loans Held for Sale. Fair values are estimated by using actual quoted market bids on a loan-by-loan basis.

Loans Held at Fair Value. Fair values for loans for which the guaranteed portion is intended to be sold are estimated by using actual quoted market bids on a loan by loan basis. Fair values for the un-guaranteed portion of SBA loans are estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

Servicing Asset. Fair values for servicing assets related to SBA loans are estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

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Assets on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.

(in 000’s)

Fair Value Measurements at Reporting Date Using:

Assets Measured at

Fair Value at

September 30, 2017

Quoted Prices in Active

Markets for Identical

Assets (Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant Unobservable

Inputs

(Level 3)

Investment securities

available-for-sale:

U.S. Government agency securities

$ 2,298

$ -

$ 2,298

$ -

Government Sponsored

Enterprises residential

mortgage-backed securities

2,858

Money market funds

131

Total

$ 5,287

$ 131

$ 5,156

$ -

Loans held for sale

$ 9,827

$ -

$ 9,827

$ -

Loans held at fair value

$ 4,645

$ -

$ 4,645

Servicing asset

$ 330

$ -

$ 330

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at December 31, 2016	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. Government Agency securities	$ 2,268	$ -	$2,268	$ -
Government Sponsored Enterprises residential mortgage-backed securities	3,180	-	3,180	-
Money market funds	130	130	-	-
Total	$5,578	$130	$ 5,548	$ -
Loans held for sale	$7,794	$ -	$7,794	$ -
Loans held at fair value	$4,207	$ -	$ -	$ 4,207
Servicing asset	$ 313	$ -	$ -	$ 313

The fair value of the Bank’s AFS securities portfolio was approximately $5,287,000 and $5,578,000 at September 30, 2017 and December 31, 2016, respectively. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information. There were no transfers between Level 1 and Level 2 assets during the periods ended September 30, 2017 and 2016.

When estimating the fair value of Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include estimated cashflows, prepayment speeds, average projected default rate and discount rates as follows:

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(in 000’s)

Assets measured at fair value	September 30, 2017 Fair value	December 31, 2016 Fair Value	Principal valuation techniques	Significant observable inputs	September 30, 2017 Range of inputs	December 31, 2016 Range of inputs
Loans held at fair value:	$4,645	$ 4,207	Discounted cash flow	Constant prepayment rate	7.73% to 9.76%	7.53% to 9.62%
				Weighted average discount rate	8.68% to 10.80%	8.11% to 10.58%
				Weighted average life	3.13 yrs to 9.77 yrs	3.05yrs to 9.95 yrs
				Projected default rate	0.72% to 5.17%	0.77% to 6.64%

(in 000’s)

Assets measured at fair value	September 30, 2017 Fair value	December 31, 2016 Fair Value	Principal valuation techniques	Significant observable inputs	September 30, 2017 Range of inputs	December 31, 2016 Range of inputs
Servicing asset	$330	$ 313	Discounted cash flow	Constant prepayment rate	5.38% to 9.79%	4.89% to 9.96%
				Weighted average discount rate	12.38% to 17.25%	10.50% to 15.31%
				Weighted average life	3.13 yrs to 9.56 yrs	3.05yrs to 9.70 yrs

Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, fair value as determined by management may fluctuate from period to period.

The following table summarizes additional information about assets measured at fair value on a recurring basis for which level 3 inputs were utilized to determine fair value:

(in 000’s)	Loans held at fair value	Servicing Asset
Balance at December 31, 2016	$ 4,207	$ 313
Origination of loans/additions	437	39
Principal repayments/Amortization	(126)	(27)
Change in fair value of financial instruments	127	5
Balance at September 30, 2017	$ 4,645	$ 330

Fair Value on a Nonrecurring Basis

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated balance sheet by level within the hierarchy as of September 30, 2017 and December 31, 2016, for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2017 and year ended December 31, 2016.

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Carrying Value at September 30, 2017:

(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 9 months ended

Impaired Loans

$ 472

$ -

$ 472

$ -

Other real estate owned (“OREO”)

$ 447

$ -

$ 447

$ -

Carrying Value at December 31, 2016:

(in 000’s)

Total

Quoted Prices in Active markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total fair value gain (loss) during 12 months ended

Impaired Loans

$ 418

$ -

$ 418

$ -

Other real estate owned (“OREO”)

$ 447

$ -

$ 447

$ -

The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level 3 measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. At September 30, 2017 and December 31, 2016, the fair values shown above exclude estimated selling costs of $48,000.

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

Fair Value of Financial Instruments

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

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not carried at fair value:

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

Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments, amortizations, and non-performance risk. Prepayments and discount rates were based on current marketplace estimates and rates.

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Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value.

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

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

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

The fair value of assets and liabilities not previously disclosed are depicted below:

		September 30, 2017		December 31, 2016
	Level in	Carrying	Fair	Carrying	Fair
	Value Hierarchy	Amount	Value	Amount	Value
(Dollars in thousands)
Assets:
Cash and cash equivalents	Level 1	$14,802	$14,802	$ 7,803	$ 7,803
Loans, net of allowance for loan losses	(1)	25,291	25,499	26,534	26,617
Servicing asset	Level 3	330	330	313	313
Accrued interest receivable	Level 2	157	157	141	141
Liabilities:
Demand deposits	Level 2	37,629	37629	28,497	28,497
Savings deposits	Level 2	11,704	11,704	11,735	11,735
Time deposits	(2)	8,625	8,586	10,411	10,,395
Accrued interest payable	Level 2	12	12	11	11

(1)Level 2 for non-impaired loans; Level 3 for impaired loans.

(2)Level 1 for variable rate instruments, level 3 for fixed rate instruments

9. Regulatory

On April 25, 2018, the Bank entered into stipulations consenting to the issuance of amended and restated Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”) which serve as a prescriptive Restoration Plan providing benchmarks for capital, earnings and asset quality. The material terms of the Consent Orders are identical. The requirements and status of items included in the Orders are as follows:

The Orders will remain in effect until modified or terminated by the FDIC and the Department and do not restrict the Bank from transacting its normal banking business. The Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Consent Orders. The Board of Directors is optimistic about the Bank’s ability to achieve the requirements as stated. These Orders represent a more tailored approach by regulators to strengthen and preserve minority-owned financial institutions like United Bank of Philadelphia. The priority for the Board of Directors and management is to comply with the Order promptly. The requirements of the Orders are as follows:

·Increase participation of the Bank’s board of directors in the Bank’s affairs by having the board assume full responsibility for approving the Bank’s policies and objectives and for supervising the Bank’s management;

·Have and retain qualified management, and notify the FDIC and the Department of any changes in the Bank’s board of directors or senior executive officers. Add two additional board members with banking experience.

·Complete audited financial statements for 2016, 2017, and 2018.

·Formulate and implement a Restoration/Strategic Plan to increase profitability reduce expenses and improve operating performance and related ratios.

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·Develop and implement a Strategic Plan for each year during which the orders are in effect, to be revised Develop a written capital plan detailing the manner in which the Bank will meet and maintain a ratio of Tier 1 capital to total assets (“leverage ratio”) of at least 8.5% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) of at least 12.5%, by September 2019;

·Formulate a written plan to improve asset quality and reduce the Bank’s risk positions in assets classified as “Doubtful” or “Substandard” at its regulatory examination;

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

·Refrain from accepting any brokered deposits; Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders.

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

As of September 30, 2017 and December 31, 2016, the Bank’s tier one leverage capital ratio was 5.74% and 4.82%, respectively, and its total risk based capital ratio was 10.11% and 9.08%, respectively. These ratios are below the levels required by the Consent Orders. Management is in the process of addressing all matters outlined in the Consent Orders. The net loss during the quarter resulted in a decrease in the capital ratios. Management has developed and submitted a Capital Plan that focuses on the following:

1.Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital.

2.External equity investments--In March 2017 and September 2017, the Company received external investments of $675,000 and $250,000, respectively, from other financial institutions. External capital investments will continue to be sought.

As a result of the above actions, management believes that the Bank has and will continue to attempt to comply with the terms and conditions of the Orders and will continue to operate as a going concern and an independent financial institution for the foreseeable future.

10. Going Concern

The Company’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in its consolidated financial statements, the Company reported net income of approximately $29,000 for the quarter ended September 30, 2017 and a net loss of approximately $118,000 for the same quarter in 2016. Additionally, the Company reported a net loss of approximately $289,000 for the nine months ended September 30, 2017 and a net loss of approximately $2,000 for the nine months ended September 30, 2016. Further, the Company has entered into Consent Orders with the FDIC and the Department that, among other provisions, require the Bank to increase its tier one leverage capital ratio to 8.00% and its total risk based capital ratio to 12.50%. As of September 30, 2017, the Bank’s tier one leverage capital ratio was 5.74% and its total risk based capital ratio was 10.11%. Assuming no change in average assets, the Bank’s capital would need to decline by $1,011,000 to be less than adequately capitalized. The Bank’s failure to comply with the terms of the Consent Orders could result in additional regulatory supervision and/or actions. The ability of the Bank to continue as a going concern is dependent on many factors, including achieving required capital levels, earnings and fully complying with the Consent Orders. The Consent Orders raise substantial doubt about the Company’s ability to continue as a going concern.

Management has developed a plan to alleviate the substantial doubt about the Company’s ability to continue as a going concern. This plan is primarily based on the following:

·Increase earnings: Core profitability is essential to stop the erosion of capital. Noninterest income will continue to be an important element of the Bank’s earnings enhancement plan, specifically noninterest income from SBA loans will continue to be an important income strategy for the Bank. In addition, management will seek to reduce noninterest expense by reducing targeted areas of overhead including the closure of the Mount Airy branch in 2018 as well as the projected recovery of SBA loan fair value write-downs and other cost reduction strategies.

·Strengthen Capital: A concentrated effort will continue to be made to stabilize and strengthen the Bank’s capital. Management has identified potential sources of external capital that is projected to be received in 2020. This capital will be used to further strengthen the Bank’s balance sheet.

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·Comply with the Consent Orders: Management has developed a Restoration Plan to address matters outlined in the Consent Orders including strengthening management, asset quality, profitability and capital. This plan received a “non-objection” from the Bank’s primary regulators in February 2020. Management plans to implement the Restoration Plan in an attempt to comply with the terms and conditions of the Orders.

Based on management’s assessment of the Company’s ability to alleviate the substantial doubt about the its ability to continue as a going concern, these consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

11. Subsequent Events

In April 2019, the Bank received an economic stimulus grant from the City of Philadelphia of $2,500,000 that served to improve its Tier I leverage capital ratio. At December 31, 2019, the Bank’s tier one leverage capital ratio was 5.66% and its total risk based capital ratio was 11.91% that is considered “adequately capitalized” under the regulatory framework for prompt and corrective action. The Bank’s growth and other operating factors such as the need for additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios.

Beginning in March 2020, the onset of the COVID-19 pandemic has had an adverse economic effect on a global, national, and local level. Following the outbreak, market interest rates have declined significantly, as the 10-year Treasury bond fell below 1.00% in early March 2020 that could lead to a reduction in the Bank’s net interest margin. In addition, this event may adversely affect asset quality related to the Company’s small business loan customers that have been affected by a reduction in their business operations because of government-imposed restrictions. As a result, the Company has deferred loan payments as necessary for those customers that have been impacted by the pandemic. The pandemic has also affected the way that the Company is conducting business. Since notice of the pandemic, the Company has temporarily closed its Center City branch office and consolidated all customer service activity at its Progress Plaza branch. In addition, the Company has maintained limited on site presence of four employees or less in the Lending Department while all other employees work remotely in an effort to slow the spread of the pandemic. The full extent of the effect of the pandemic is not yet known.

In September 2020, the Bank received a grant totaling $3.4 million from the Pennsylvania CDFI Network to provide financial assistance related to potential losses related to the COVID-19 pandemic. Approximately $2.8 million of this grant was recorded as contributed capital and $617,000 was recorded as deferred revenue. The deferred revenue portion of the grant was allocated to be used to make principal and interest payments for up to six months for struggling small businesses in the Bank’s loan portfolio. At September 30, 2020, the Bank’s tier one leverage capital ratio was 10.46% and its total risk based capital ratio was 23.45% which is considered “well capitalized” under the regulatory framework for prompt and corrective action.

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.

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UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance companies, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; (l) any downgrades, in the credit rating of the United States Government and federal agencies; (m) changes in technology being more expensive or difficult than expected; (n) the ability of key third party providers to perform their obligations to UBS and; (o) the Bank and UBS’ success in managing the risks involved in the foregoing, and (p) failure to comply with the Consent Orders with the FDIC and the Pennsylvania Department of Banking.

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

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Overview

The Company reported net income of approximately $ 29,000 ($ 0.03 per common share) for the quarter ended September 30, 2017 compared to a net loss of approximately $100,000 ($0.12 per common share) for the same quarter in 2016. The Company reported a net loss of approximately $289,000 ($0.35 per common share) for the nine months ended September 30, 2017 compared to net income of approximately $16,000 ($0.02 per common share) for the same period in 2016. The decline in financial performance from 2016 is primarily related to a reduction in SBA loan-related income as there were fewer originations in 2017. Management remains committed to further improving the Company’s operating performance by continuing to implement its profit enhancement strategies that are centered on small business lending products and services. The following actions are critical to ensure continued improvement in the Company’s financial performance:

Increase Capital. The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood; however, capital has been adversely affected by operating losses. A concentrated effort will be made to stabilize and strengthen the Bank’s capital by the following:

·Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital. Refer to the Earnings Enhancement discussion below.

·External equity investments—Potential investors will continue to be sought.

Earnings enhancement plan. Management seeks to increase noninterest income and further reduce noninterest expense to achieve core earnings. The primary strategy continues to be to increase SBA loan originations and sell the guaranteed portion in the secondary market for a gain. During the nine months ended September 30, 2017, noninterest income totaling approximately $198,000 (including fair value adjustments) was recognized utilizing this strategy. Management continues its business development efforts to identify feeder organizations to grow its SBA loan pipeline.

General improvement has been made in reducing and controlling noninterest expense; however, there was an increase in legal fees and loan and collection related costs because of foreclosure activity during the year. Also, the Bank continues to incur a higher level of professional service fees (audit and legal) because of its SEC filing requirements as a result of having in excess of 1,200 shareholders. While there has been some improvement in noninterest expense, management will continue to seek further savings and efficiencies, where possible.

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

Manage asset quality to minimize credit losses and reduce collection costs. Asset quality trends have shown improvement during the quarter with a decline in nonperforming loans and delinquencies. Forbearance, foreclosure and/or other appropriate collection methods will continue to be used as necessary to reduce the level of classified assets; however, these actions could result in significant loan and collection expense.

Significant Accounting Policies

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

The Company considers that the determinations of the allowance for loan losses and the fair value of loans involve 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. The fair value of loans depends on a variety of factors including estimates of prepayment speed, discount rates, and credit quality of the receivables. 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 affect earnings in future periods.

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

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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 September 30, 2017	Quarter ended September 30, 2016	Nine Months ended September 30, 2017	Nine Months ended September 30, 2016
*Statement of operations information*:
Net interest income	$655	$626	$1,839	$1,925
Provision (credit) for loan losses	(15)	(45)	(91)	(50)
Noninterest income	490	392	1,037	1,384
Noninterest expense	1,131	1,163	3,256	3,343
Net income (loss)	29	(100)	(289)	16
Net income (loss) per share-basic and diluted	0.03	(0.12)	(0.35)	0.02

*Balance Sheet information:*	September 30, 2017	December 31, 2016
Total assets	$61,591	$ 53,612
Loans, net	25,121	26,535
Investment securities	5,287	5,578
Deposits	57,959	50,642
Shareholders' equity	3,335	2,660

*Ratios:**	Quarter ended September 30, 2017	Quarter ended September 30, 2016
Return on assets	0.20%	(0.21)%
Return on equity	4.40%	(16.93)%

*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 $777,000, or 1.47% during the quarter ended September 30, 2017 compared to the quarter ended June 30, 2017. Average funding sources increased approximately $1,121,000, or 2.10%, during the same quarter.

Sources and Uses of Funds Trends

(dollars in 000’s)	September 30, 2017			June 30, 2017
	Average	Increase (Decrease)	Increase (Decrease)	Average
	Balance	Amount	%	Balance
Funding uses:
Loans	$ 37,408	$ (88)	(0.23%)	$ 37,496
Investment Securities	5,401	(102)	(1.85%)	5,503
Federal funds sold	10,503	966	10.13%	9,537
Balances with other banks	312	$ 1	0.32%	311
Total uses	$ 53,624	$ 777	1.47%	$ 52,847
Funding sources:
Demand deposits
Noninterest-bearing	$ 18,782	$ 489	2.67%	$ 18,293
Interest-bearing	15,117	1,196	8.59%	13,921
Savings deposits	11,745	(198)	(1.66%)	11,943
Time deposits	8,780	(366)	(4.00%)	9,146
Total sources	$ 54,424	$ 1,121	2.10%	$ 53,303

*Total includes loans held for sale, loans held at fair value, and net loans.

Loans

Average loans decreased by approximately $88,000, or 0.23%, during the quarter ended September 30, 2017 because of a reduction in SBA loan origination and funding coupled with SBA loan sales. The Bank’s commercial loan pipeline continues to grow as a result of its small business banking focus specifically targeting SBA loans. This strategy is designed to generate fee income from sales of the guaranteed portion as well as build loan volume. There are a significant number of small businesses in the region that may fall below minimum business loan levels of the money center banks in the region. This gap provides an opportunity for the Bank to continue to grow its SBA lending as a niche business. Management will continue to work in alliance with its third party SBA loan origination group, commercial real estate brokers, accountants, lawyers, SBA brokers, and other centers of influence to build loan volume.

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The Bank’s consumer and residential mortgage loan portfolios continue to decline as a result of residential mortgages and home equity repayment activity as consumers refinance to take advantage of the continued low interest rate environment. The Bank does not originate residential mortgage loans and made a strategic shift in its lending program in 2012 to phase out consumer lending, including home equity loans and lines of credit.

The Bank’s loan portfolio continues to be concentrated in commercial real estate loans that comprise approximately $20 million, or 80%, of total loans at September 30, 2017 of which approximately $18.6 million are owner occupied. The Bank continues to have a strong niche in lending to religious organizations for which total loans at September 30, 2017 were approximately $8.7 million, or 43%, of the commercial real estate portfolio. Management closely monitors this concentration to proactively identify and manage credit risk for any conditions might negatively impact the level of tithes and offerings that provide cash flow for repayment. The composition of the net loans is as follows:

	September 30,	December 31,
(In 000's)	2017	2016


Commercial and industrial:
Commercial	$ 849	$ 890
SBA loans	41	-
Asset-based	1,401	1,259
Total commercial and industrial	2,291	2,149

Commercial real estate:

Commercial mortgages	11,046	11,385
SBA loans	454	255
Construction	406	542
Religious organizations	8,685	9,306
Total commercial real estate	20,591	21,488

Consumer real estate:
Home equity loans	752	799
Home equity lines of credit	17	19
1-4 family residential mortgages	1,072	1,414
Total consumer real estate	1,841	2,232

Total real estate	22,432	23,720

Consumer and other:
Student loans	709	855
Other	98	111
Total consumer and other	807	966
	(239)	(300)
Loans, net	$ 25,291	$ 26,535

Allowance for Loan Losses

The allowance for loan losses reflects management’s continuing evaluation of the loan portfolio, the diversification and size of the portfolio, and adequacy of collateral. Provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis. This analysis includes specific reserves allocated to impaired loans based on underlying recovery values as well as a general reserve based on charge-off history and various qualitative factors including delinquency trends, loan terms, regulatory environment, economic conditions, concentrations of credit risk and other relevant data. The Bank utilizes an eight rolling quarter historical loss factor, as management believes this best represents the current trends and market conditions. The allowance for loan losses as a percentage of total loans was 0.94% at September 30, 2017 compared to 1.12% at December 31, 2016 because of a decrease in the historical loss factor for commercial and industrial loans related to net collection activity over the rolling eight quarter period.

Loans deemed “impaired” are those for which borrowers are no longer able to pay in accordance with the terms of their loan agreements. The Bank’s source of repayment is generally the net liquidation value of the underlying collateral. Impaired loans totaled approximately $2,038,000 at September 30, 2017 compared to $2,083,000 at December 31, 2016. The valuation allowance associated with impaired loans was approximately $70,000 and $54,000 at September 30, 2017 and December 31, 2016, respectively. The decrease in impaired loans is attributable to repayment activity associated with

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several loans. Management continues to work to reduce the level of classified and impaired loans. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary.

At September 30, 2017 and December 31, 2016, loans to religious organizations represented approximately $192,000 and $195,000, respectively, of total impaired loans. Management continues to work closely with its attorneys and the leadership of these organizations in an attempt to develop suitable repayment plans to avoid foreclosure. In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.

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

The percentage of allowance to nonperforming loans was 10.21% down from 11.04% at December 31, 2016. The level of nonperforming loans to total loans decreased from 10.13% at December 31, 2016 to 9.91% at September 30, 2017 as a result of collection activity related to loans greater than 90 days and still accruing. Approximately 86% of nonperforming loans are secured by real estate that serves to mitigate the risk of loss.

Loans more than 90 days past due that are still in the process of collection for which the full payment of principal and interest can reasonably be expected are not considered nonperforming. The following table sets forth information concerning nonperforming loans and nonperforming assets.

(In 000's)	September 30, 2017	December 31, 2016
Commercial and industrial:
Commercial	$ -	$ 33
Asset-based	319	75
Total commercial and industrial	319	108

Commercial real estate:
Commercial mortgages	1,280	1,270
SBA loans	244	93
Religious organizations	189	196
Total commercial real estate	1,713	1,559

Consumer real estate:
Home equity loans	308	345
1-4 family residential mortgages	-	75
Total consumer real estate	308	420

Total real estate	2,021	1,979

Total nonaccrual	2,340	2,087
Total past due 90 days and accruing	194	631
OREO	447	447
Total nonperforming assets	$ 2,981	$ 3,165

Nonperforming loans to total loans	9.91%	10.13%
Nonperforming assets to total loans and OREO	11.46%	11.60%
Nonperforming assets to total assets	4.84%	5.90%

Allowance for loan losses as a percentage of:
Total loans	0.94%	1.12%
Total nonperforming loans	10.21%	11.04%

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

(In 000's)	September 30, 2017	December 31, 2016
Commercial and industrial
Asset-based	$ -	$ 243
Total commercial and industrial	-	243

Commercial real estate:
SBA loans	-	162
Commercial mortgages	-	11
Total commercial real estate	-	173

Consumer real estate:
Home equity loans	123	153
Total consumer real estate	123	153

Consumer and other:
Student loans	69	61
Other	2	1
Total consumer and other	71	62
Total	$194	$ 631

Investment Securities and Other Short-term Investments

Average investment securities decreased by approximately $102,000, or 1.85%, during the quarter ended September 30, 2017. The decline was primarily related to mortgage-backed security paydowns during the quarter.

The average yield on the investment portfolio declined to 2.23% for the nine months ended September 30, 2017 compared to 2.12% for the nine months ended September 30, 2016. The increase is related to market rate shifts during the year that affect the prepayment rates of mortgage-backed securities. Amortizing GSE mortgage-backed securities approximate 55% of the portfolio. The payments of principal and interest on these pools of GSE loans serve to provide monthly cashflow and are guaranteed by these entities that bear the risk of default. The Bank’s risk is prepayment risk when defaults accelerate the repayment activity. These loans have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. Management’s goal is to maintain a portfolio with a relatively short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.

Deposits

During the quarter ended September 30, 2017, average deposits increased approximately $1,121,000, or 2.10%. At quarter-end, September 30, 2017, there was increase of $4.5 million in demand deposits related to one small business customer who is a general contractor as well as a $2.3 million deposit from another nonprofit entity related the receipt of its annual grant.

Average interest bearing demand deposit increased by $1,196,000, or 8.59% primarily related to one customer that receives grant funds that are generally utilized within a 6-month period.

Noninterest bearing checking account balances increased on average by $489,000, or 2.67%, during the quarter ended September 30, 2017. As small business loans are originated, primary operating accounts are required to be maintained at the Bank which serves to grow core deposits; however, balances fluctuate with normal business activity.

Average savings deposits decreased by approximately $198,000, or 1.66%, because of normal attrition.

Time deposit accounts decreased on average by approximately $366,000, or 4.00%, during the quarter primarily because of the discontinuance of a Minority Deposit Program the Bank participated in with the US Department of Energy.

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

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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:

September 30,

2017

December 31,

2016

Commitments to extend credit

$7,393,000

$3,784,000

Standby letters of credit

317,000

The level of commitments increased during the six months ended September 30, 2017 primarily as a result of SBA loans that were approved but not funded. Approximately $1 million of the Bank’s outstanding commitments consist of unused lines of credit with Fortune 500 corporations for which the Bank leads and/or participates in syndications that are not expected to be drawn upon.

Liquidity

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

By policy, the Bank’s minimum level of liquidity is 6.00% of total assets. At September 30, 2017, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $14.8 million, or 24.03% of total assets, compared to $7.8 million, or 14.5%, at December 31, 2016. The increase is related to a $4.5 million short-term increase in demand deposits related to one small business customer who is a general contractor as well as a $2.3 million deposit from another nonprofit entity related the receipt of its annual grant.

The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. In addition, the Bank’s investment portfolio is classified as available-for-sale; however, majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank. Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.

Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity. Approximately $9 million in loans are scheduled to mature within one year. To ensure the ongoing adequacy of liquidity, the following contingency strategies will be utilized in order of priority, if necessary:

·Seek non-public deposits from existing private sector customers; specifically, additional deposits from members of the National Bankers Association will be considered a potential source.

·Sell participations of existing commercial credits to other financial institutions in the region and/or NBA member banks based on participation agreements.

The Bank’s contingent funding sources include the Discount Window at the Federal Reserve Bank for which it currently has $750,000 in securities pledged that result in borrowing capacity of approximately $700,000. In light of the Bank’s regulatory Orders and “Troubled Bank” designation, liquidity will continue to be closely monitored and managed to minimize risk and ensure that adequate funds are available to meet daily customer requirements and loan demand.

Interest rate sensitivity

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably

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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 September 30, 2017, a positive gap position is maintained on a cumulative basis through 1 year of 11.87% that is excess the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis and an increase from the December 31, 2016 positive gap position of 9.14%. This position is caused by an increasing level of loans maturing and/or repricing in one to three months due to the Banks’ growing variable rate SBA loan portfolio and a high level of federal funds sold. This position makes the Bank’s net interest income more favorable in a rising interest rate environment. The most recent economic forecast suggests no further decline in rates in the near future. Therefore, management does not believe the interest rate risk associated with the Bank’s current position to be significant. Management will continue review and monitor the structure and rates on investment purchases, new loan originations and renewals to manage the interest rate risk profile within acceptable limits.

While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. A simulation model is used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company’s existing assets, liabilities and off-balance-sheet instruments. At September 30, 2017, the change in the market value of equity in a +200 basis point interest rate change is -12.6%, below the policy limit of 25%, and -22.2% in a +400 basis point interest rate change, below the policy limit of -50%. Interest-rate exposure is considered reasonable and manageable at September 30, 2017.

Capital Resources

Total shareholders’ equity increased approximately $675,000, or 25.40%, during the nine months ended September 30, 2017. The increase is attributable to a preferred stock investments totaling $925,000 offset by the net loss of approximately $289,000. In March 2017, the Bank received a $675,000 equity investment from a financial institution in the region. In September 2017, the Bank received an equity investment of $250,000 from another financial institution in the region.

The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood. A concentrated effort will be made to stabilize and strengthen the Bank’s capital through the generation of core profitability from Bank operations and external investment. As referenced in Note 11, Subsequent Events, in April 2019, the Bank received a grant of $2.5 million from the City of Philadelphia that flowed into retained earnings. Further, in September 2020, the Bank received a $3.4 million grant from the PA CDFI Network of which $2.8 million was recorded as contributed capital.

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

The Bank’s Consent Order with its primary regulators that requires the development of a written capital plan ("Capital Plan") that details the manner in which the Bank will meet and maintain a Leverage Ratio of at least 8.50% and a Total Risk-Based Capital Ratio of at least 12.50%. At a minimum, the Capital Plan must include specific benchmark Leverage Ratios and Total Risk-Based Capital Ratios to be met at each calendar quarter-end, until the required capital levels are achieved.

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At September 30, 2017, capital benchmarks as required by the Consent Order were not met; however, as referenced in the table below, ratios exceed the Prompt Corrective Action minimums to be considered “Adequately Capitalized”. Management will continue to execute its capital strategies. The Company and the Bank do not anticipate paying dividends in the near future.

	Actual September 30, 2017		Actual December 31, 2016		Minimum to be “Well Capitalized”
	Amount	Ratio			Amount	Ratio
Total (Tier II) capital to risk weighted assets:
Company	$3,492	10.23%	$2,897	9.08%	$ N/A
Bank	3,454	10.11	2,897	9.08	3,415	10.00%
Tier I capital to risk weighted assets
Company	3,253	9.53	2,597	8.14	N/A
Bank	3,215	9.41	2,597	8.14	2,732	8.00%
Common equity Tier I capital to risk weighted assets
Company	3,253	9.53	2,597	8.14	N/A
Bank	3,215	9.41	2,597	8.14	2,220	6.50%
Tier I Leverage ratio (Tier I capital to total quarterly average assets)
Company	3,253	5.80	2,597	4.82	N/A
Bank	3,215	5.74	2,597	4.82	2,803	5.00%
Tangible common equity to tangible assets
Company	3,253	5.80	2,597	4.82	N/A	N/A
Bank	3,215	5.74	2,597	4.82	N/A	N/A

Results of Operations

Summary

The Company reported net income of approximately $ 29,000 ($ 0.03 per common share) for the quarter ended September 30, 2017 compared to a net loss of approximately $100,000 ($0.12 per common share) for the same quarter in 2016. The Company reported a net loss of approximately $289,000 ($0.35 per common share) for the nine months ended September 30, 2017 compared to a net income of approximately $16,000 ($0.02 per common share) for the same period in 2016. The decline in financial performance from 2016 is primarily related to a reduction in SBA loan-related income as there were fewer originations in 2017. A detailed explanation of each component of operations is included in the sections below.

Net Interest Income

Net interest income is an effective measure of how well management has balanced the Bank’s interest rate-sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest-earning assets and (b) interest paid on interest-bearing liabilities, is a significant component of the Bank’s earnings. Changes in net interest income result primarily from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates.

Average Balances, Rates, and Interest Income and Expense Summary

		Three months ended September 30, 2017			Three months ended September 30, 2016
(in 000’s)	Average Balance	Interest	Yield/Rate	Average Balance	Interest	Yield/Rate

Assets:
Interest-earning assets:
Loans	$37,408	$612	6.54%	$41,494	$601	5.79%
Investment securities	5,401	30	2.22	6,653	35	2.12
Federal funds sold	10,503	32	1.22	5,118	6	0.47
Interest bearing balances with other banks	312	-	-	311	-	-
Total interest-earning assets	53,624	674	5.03	53,576	642	4.80
Interest-bearing liabilities
Demand deposits	15,117	7	0.19	13,860	6	0.18
Savings deposits	11,745	1	0.03	11,787	1	0.03
Time deposits	8,780	11	0.50	11,582	9	0.32
Total interest-bearing liabilities	35,642	19	0.21	37,229	16	0.17
Net interest income		$655			$626
Net yield on interest-earning assets			4.89%			4.67%

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		Nine months ended September 30, 2017			Nine months ended September 30, 2016
(in 000’s)	Average Balance	Interest	Yield/Rate	Average Balance	Interest	Yield/Rate

Assets:
Interest-earning assets:
Loans	37,648	$1,729	6.12%	$39,159	$1,830	6.23%
Investment securities	5,507	92	2.23	7,136	120	2.25
Federal funds sold	8,878	69	1.04	6,556	23	0.47
Interest bearing balances with other banks	311	1	0.43	311	1	0.43
Total interest-earning assets	52,344	1,891	4.82	53,162	1,974	4.95
Interest-bearing liabilities
Demand deposits	14,194	19	0.18	13,102	18	0.19
Savings deposits	11,848	4	0.05	11,545	4	0.05
Time deposits	9,327	29	0.41	11,872	27	0.30
Total interest-bearing liabilities	35,279	52	0.20	36,519	49	0.18
Net interest income		$1,839			$1,925
Net yield on interest-earning assets			4.68%			4.83%

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

Net interest income increased approximately $30,000, or 4.75%, for the quarter ended September 30, 2017 compared to 2016. Net interest income declined approximately $86,000, or 4.46%, for the nine months ended September 30, 2017 compared to 2016. The increase for the quarter is primarily related to an increase in the yield on loans and Fed Funds Sold compared to 2016. The decrease for the nine months is due to the decline in yield on loans is because of an increase in nonaccrual loans.

Rate-Volume Analysis of Changes in Net Interest Income


	Three months ended September 30, 2017 compared to 2016			Three months ended September 30, 2016 compared to 2015
	Increase (decrease) due to			Increase (decrease) due to
(Dollars in thousands)	Volume	Rate	Net	Volume	Rate	Net
Interest earned on:
Loans	$ (62)	$73	$ 11	$ 8	$ 4	$ 12
Investment securities	(6)	1	(5)	(5)	(3)	(8)
Federal funds sold	6	20	26	(2)	3	1
Interest bearing balances with other banks			-	-	-	-
Total Interest-earning assets	(62)	94	32	1	4	5
Interest paid on:
Demand deposits	1	-	1	-	-	-
Savings deposits	-	-	-	-	2	2
Time deposits	(2)	4	2	(1)	1	-
Total interest-bearing liabilities	(1)	4	3	(1)	3	2
Net interest income	$ (61)	$ 90	$ 29	$ -	$ 7	$ 7

	Nine months ended September 30, 2017 compared to 2016			Nine months ended September 30, 2016 compared to 2015
	Increase (decrease) due to			Increase (decrease) due to
(Dollars in thousands)	Volume	Rate	Net	Volume	Rate	Net
Interest earned on:
Loans	$ (16)	$ (85)	$(101)	$ (191)	$ 187	$ (4)
Investment securities	(30)	2	(28)	(12)	(3)	(15)
Federal funds sold	5	41	46	1	13	14
Interest bearing balances with other banks	-	-	-	-	-	-
Total Interest-earning assets	(41)	(42)	(83)	(202)	197	(5)
Interest paid on:
Demand deposits	-	-	-	(1)	-	(1)
Savings deposits	-	-	-	-	-	-
Time deposits	(6)	9	3	(2)	-	(2)
Total interest-bearing liabilities	(6)	9	3	(3)	-	(3)
Net interest income	(35)	(51)	(86)	$ (199)	$ 197	$ (2)

For the quarter ended September 30, 2017 compared to the same period in 2016, there was a decrease of approximately $61,000 due to changes in volume offset by an increase of approximately $90,000 due to changes in rate. The increase in rate is related to the increase in the prime rate from 3.75% at December 2016 to 4.25% at September 2017. For the nine months ended September 30, 2017 compared to the same period in 2016, there was a decrease in net interest income of

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approximately $35,000 due to changes in volume and a decrease of approximately $51,000 due to changes in rate. The rate decline was a result of several higher yielding rate commercial loans re-setting at lower rates as well as an increase in nonaccrual loans. Also, in 2016, the payoff of principal and interest on nonaccrual loans served to increase the yield on loans.

Provision for Loan Losses

There was a credit to the provision for loan losses of $15,000 for the quarter ended September 30, 2017 compared to a credit to the provision of $45,000 for the same quarter in 2016. There was a credit to the provision for loan losses of $91,000 for the nine months ended September 30, 2017 compared to a credit to the provision of $50,000 for the same period in 2016. The decrease in provisions is primarily related to lower loan originations, loan payoff activity as well as a reduction net charge-offs and related historical loss factors. In general, provision requirements are based on credit losses inherent in the loan portfolio and the review and analysis of the loan portfolio in accordance with the Bank’s Allowance for Loan Loss policies and procedures. (Refer to Allowance for Loan Losses above for discussion and analysis of credit quality.)

Noninterest Income

The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account fees, overdrafts, account analysis, ATM fees, SBA loan related income and other customer service fees. Noninterest income increased approximately $115,000, or 30.88%, for the quarter ended September 30, 2017 compared to the same quarter in 2016. Noninterest income decreased approximately $329,000, or 24.07%, for the nine months ended September 30, 2017 compared to the same period in 2016. The decline is primarily related to a reduction in SBA loan origination volume.

Customer service fees increased approximately $15,000, or 17.48% for the quarter ended September 30, 2017 compared to 2016. ATM activity fees increased by approximately $3,000, or 8.89%, for the quarter ended September 30, 2017 compared to the same period in 2016. Customer service fees increased approximately $36,000, or 13.76% for the nine months ended September 30, 2017 compared to 2016. ATM activity fees increased by approximately $10,000, or 11.45%, for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in customer service fees is the result of a higher level of overdraft fees related to several business customers. The increase in ATM fees is related to higher volume at several of the Bank’s ATM locations where welfare benefits are retrieved using debit cards. However, in general, ATM usage has declined as consumers continue to move to electronic payment methods utilizing debit and credit cards versus cash.

In conjunction with its SBA loan origination strategy, the Bank recognized income of approximately $252,000 and $152,000, respectively, for the three months ended September 30, 2017 and 2016, on the sale of the guaranteed portion of SBA loans and on SBA loans that were held-for-sale and accounted for at fair value under ASC 825, Financial Instruments. The Bank recognized income of approximately $477,000 and $752,000, respectively, for the nine months ended September 30, 2017 and 2016. The decline is related to lower SBA loan origination volume in 2017 compared to 2016. Management seeks to increase its SBA loan volume and related gains on sales as its primary strategy to enhance and stabilize earnings.

Noninterest Expense

Salaries and benefits increased approximately $5,000, or 1.26%, for the quarter ended September 30, 2017 compared to 2016 because of an increase in medical insurance costs during the policy renewal period in March. Salaries and benefits increased approximately $20,000, or 1.69%, for the nine months ended September 30, 2017 compared to 2016. The increase is primarily related to a cost of living increase for Bank employees.

Occupancy and equipment expense increased approximately $12,000, or 4.97%, for the quarter ended September 30, 2017 compared to 2016. Occupancy and equipment expense increased approximately $35,000, or 4.79%, for the nine months ended September 30, 2017 compared to 2016. The increase is primarily related to higher common area maintenance expenses for the Bank’s leased branches as well as maintenance fees related to its loan analysis and monitoring platform.

Office operations and supplies expense decreased by approximately $2,000, or 2.37%, for the quarter ended September 30, 2017 compared to 2016. Office operations and supplies expense decreased approximately $6,000, or 2.27%, for the nine months ended September 30, 2017 compared to 2016. In 2017, the Bank converted to a new teller platform that resulted in the use of fewer forms.

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Professional services expense increased by approximately $1,000, or 1.95%, for the quarter ended September 30, 2017 compared to 2016. Professional services expense decreased approximately $46,000, or 20.65%, for the nine months ended September 30, 2016 compared to the same period in 2016 as a result of decreased audit cost as the Bank is in the process of transitioning to a new external audit firm.

Data processing expense increased approximately $2,000, or 2.67%, for the quarter ended September 30, 2017 compared to 2016. Data processing expense decreased approximately $11,000, or 3.79%, for the nine months ended September 30, 2017 compared to 2016. The decrease is primarily related to negotiated contract price reductions in conjunction with an extension of the Bank’s core servicing contract.

Federal deposit insurance assessments decreased $3,000, or 10.00%, for the quarter ended September 30, 2017 compared to 2016. Federal deposit insurance assessments decreased $15,000, or 17.24%, for the nine months ended September 30, 2017 compared to 2016. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.

Net other real estate expenses decreased approximately $38,000, or 56.88%, for the quarter ended September 30, 2017 compared to 2016. Net other real estate expenses decreased approximately $45,000, or 43.66%, for the nine months ended September 30, 2017 compared to 2016. The reduction is related to the stabilization of property values that required no further write-downs compared to 2016.

Loan and collection expenses increased approximately $4,000, or 10.46%, for the quarter ended September 30, 2017 compared to 2016. Loan and collection expenses increased approximately $26,000, or 26.64%, for the nine months ended September 30, 2017 compared to 2016. The increase is related to expenses associated with appraisals, sheriff sale and legal fees related to collection activity.

Other operating expenses decreased approximately $8,000, or 5.99%, for the quarter ended September 30, 2017 compared to 2016. Other operating expenses decreased approximately $18,000, or 4.98%, for the nine months ended September 30, 2017 compared to 2016. The decrease is a result of a reduction in the Bank’s Pennsylvania Bank Shares Tax because of a change in the tax computation methodology.

Dividend Restrictions

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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

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

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework, management has concluded that our internal control over financial reporting was not effective as of June 30, 2017 due to the material weakness described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis by the company’s internal controls. Based on our evaluation under the framework, management has concluded that material weaknesses existed in the internal controls as of September 30, 2017 in connection with credit administration matters and the timeliness of financial reporting related to the identification and support for asset quality matters that could have a material effect on the consolidated financial statements.

In June 2017, to address the material weaknesses, the Bank established the following procedures: (1) Implement a new credit administration monitoring system for items requiring follow-up/annual reviews; (2) Implement an appraisal monitoring procedure for all impaired loans; and (3) Together with credit administration in conjunction with monthly Asset Quality Committee Meetings, identify and provide appropriate supporting documentation for material asset quality-related matters that could affect the consolidated financial statements of the Company. Management believes that this change will address material weaknesses in the financial controls that were in existence as of September 30, 2017. Additional changes will be implemented as determined necessary.

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

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(c) Changes in Internal Control Over Financial Reporting.

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors disclosed in the Company’s 2016 Annual Report on Form 10-K except as disclosed below. The risk factors disclosed in the Company’s 2016 Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Failure to Comply with the FDIC and Pennsylvania Department of Banking Consent Orders

The Bank has entered into Consent Orders with the FDIC and the Department which, among other provisions, require the Bank to increase its tier one leverage capital ratio to 8.5% and its total risk based capital ratio to 12.5%. As of September 30, 2017, the Bank’s tier one leverage capital ratio was 5.74% and its total risk based capital ratio was 10.11%. Refer to the Regulatory Orders section. The Bank’s failure to comply with the terms of the Consent Orders could result in additional regulatory supervision and/or actions.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information.

None

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Item 6. Exhibits.

a)Exhibits.

Exhibit 31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

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

UNITED BANCSHARES, INC.

Date: November 4, 2020	/s/ Evelyn F. Smalls
	Evelyn F. Smalls
	President & Chief Executive Officer


Date: November 4, 2020	/s/ Brenda M. Hudson-Nelson
	Brenda Hudson-Nelson
	Executive Vice President/Chief Financial Officer

UNITED BANCSHARES INC /PA - FORM 10-Q - November 4, 2020

Attached files

UNITED BANCSHARES INC /PA Reports