10-Q 1 uboh10q09302013.htm 10-Q uboh10q09302013.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
 
(Mark One)
 
 
  X  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013 OR
 
 
___
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________
 
UNITED BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
 
0-25976
 
Commission File Number
     Pennsylvania
23-2802415
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)

30 S. 15th Street, Suite 1200, Philadelphia, PA
19102
(Address of principal executive office)
(Zip Code)
 
(215) 351-4600
 
(Registrant's telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes  X  No____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes  X   No____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer___
Accelerated filer___
Non-accelerated filer__
Smaller Reporting Company X
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes____ No X


 
 
 
1

 

 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No _____  Not Applicable.
 
Applicable only to corporate issuers:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
 
United Bancshares, Inc. (sometimes herein also referred to as the “Company” or “UBS”) has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and 500,000 shares of $0.01 par value Series A Preferred Stock.
 
The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998.  This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights.  Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock.  There is no market for the Common Stock.  As of November 1, 2013, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).
 
The Series A Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of November 1, 2013.



 
 
 
2

 

 
 
Index
 


 
 
 
3


 
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
Assets:
 
September 30, 2013
   
December 31, 2012
 
Cash and due from banks
  $ 2,260,991     $ 2,363,166  
Interest-bearing deposits with banks
    306,603       306,033  
Federal funds sold
    6,610,000       7,567,000  
   Cash and cash equivalents
    9,177,594       10,236,199  
                 
Investment securities:
               
Available-for-sale, at fair value
    9,878,535       1,027,293  
Held-to-maturity, at amortized cost (fair value of $12,485,687
               
   at December 31, 2012)
    -       11,895,037  
                 
 Loans, net of unearned discounts and deferred fees
    42,317,856       41,501,555  
Less allowance for loan losses
    (811,605 )     (1,203,942 )
   Net loans
    41,506,251       40,297,613  
 
Bank premises and equipment, net
    662,446       562,729  
Accrued interest receivable
    285,877       309,971  
Other real estate owned
    481,737       775,407  
Intangible assets
    2,175       135,733  
Prepaid expenses and other assets
    350,866       375,524  
   Total assets
  $ 62,345,481     $ 65,615,506  
 
Liabilities and Shareholders’ Equity
               
 
Liabilities:
               
Demand deposits, noninterest-bearing
  $ 14,862,249     $ 14,324,970  
Demand deposits, interest-bearing
    15,200,433       15,526,344  
Savings deposits
    13,121,855       14,239,216  
Time deposits, under $100,000
    6,781,296       7,243,593  
Time deposits, $100,000 and over
    8,738,400       9,642,620  
   Total deposits
    58,704,233       60,976,743  
 
Accrued interest payable
    14,892       30,500  
Accrued expenses and other liabilities
    216,211       368,278  
   Total liabilities
    58,935,336       61,375,521  
                 
Shareholders’ equity:
               
Series A preferred stock, noncumulative, 6%, $0.01 par value,
   500,000 shares authorized; 136,842 issued and outstanding
    1,368       1,368  
Common stock, $0.01 par value; 2,000,000 shares authorized;
               
   876,921 issued and outstanding
    8,769       8,769  
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
               
   191,667 issued and outstanding
    1,917       1,917  
Additional paid-in-capital
    14,749,852       14,749,852  
Accumulated deficit
    (11,132,283 )     (10,556,078 )
Accumulated other comprehensive (loss) income
    (219,478 )     34,157  
   Total shareholders’ equity
    3,410,145       4,239,985  
   Total liabilities and shareholders’ equity
  $ 62,345,481     $ 65,615,506  

The accompanying notes are an integral part of these statements.


 
 
 
4


UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Unaudited)
   
Three Months ended
September 30,
 2013
   
Three Months ended
September 30,
 2012
   
Nine Months ended
September 30,
 2013
   
Nine Months ended
September 30,
 2012
 
Interest income:
                       
   Interest and fees on loans
  $ 673,937     $ 666,685     $ 1,932,350     $ 1,986,527  
   Interest on investment securities
    59,822       97,097       213,161       349,568  
   Interest on federal funds sold
    3,621       3,847       11,228       12,777  
   Interest on time deposits with other banks
    174       176       578       524  
      Total interest income
    737,554       767,805       2,157,317       2,349,396  
                                 
Interest expense:
                               
   Interest on time deposits
    10,478       18,110       38,012       66,242  
   Interest on demand deposits
    6,507       11,611       21,396       36,738  
   Interest on savings deposits
    1,651       1,760       5,063       5,317  
      Total interest expense
    18,636       31,481       64,471       108,297  
      Net interest income
    718,918       736,323       2,092,846       2,241,099  
      Provision for loan losses
    30,000       61,000       45,137       121,000  
                                 
     Net interest income after provision for loan losses
    688,918       675,323       2,047,709       2,120,099  
                                 
Noninterest income:
                               
   Customer service fees
    101,370       103,435       303,281       296,326  
   ATM fee income
    56,144       77,545       216,301       238,316  
   Gain on sale of investment securities
    -       -       378,248       -  
   Loan syndication fees
    -       -       88,300       80,000  
   Gain (loss) on sale of other real estate owned
    2,712       (5,968 )     (11,168 )     (5,968 )
   Gain on sale of loans
    -       69,163       -       69,163  
   Other income
    15,569       15,610       50,375       55,167  
      Total noninterest income
    175,795       259,785       1,025,337       733,004  
                                 
Noninterest expense:
                               
   Salaries, wages and employee benefits
    395,598       385,971       1,144,594       1,192,480  
   Occupancy and equipment
    242,853       261,700       750,897       802,297  
   Office operations and supplies
    69,673       81,453       224,481       231,576  
   Marketing and public relations
    22,281       5,186       56,983       28,675  
   Professional services
    115,528       104,666       263,708       256,198  
   Data processing
    114,664       114,602       339,243       352,603  
   Other real estate expense
    17,210       147,051       184,754       204,585  
   Loan and collection costs
    20,083       29,449       78,891       91,142  
   Deposit insurance assessments
    32,000       43,085       106,652       70,509  
   Other operating
    168,182       169,180       499,048       504,979  
      Total noninterest expense
    1,198,072       1,342,344       3,649,251       3,735,044  
      Net loss before income taxes
    (333,359 )     (407,236 )   $ (576,205 )     (881,941 )
Provision for income taxes
    -       -       -       -  
      Net loss
  $ (333,359 )   $ (407,236 )   $ (576,205 )   $ (881,941 )
Net loss per common share—basic and diluted
  $ (0.31 )   $ (0.38 )   $ (0.54 )   $ (0.83 )
Weighted average number of common shares
    1,068,588       1,068,588       1,068,588       1,068,588  
Comprehensive loss:
                               
 Net loss
  $ (333,359 )   $ (407,235 )   $ (576,205 )   $ (881,941 )
 Unrealized losses on available for sale securities
    (37,549 )     (884 )     (253,634 )     (1,248 )
  Total comprehensive loss
  $ (370,908 )   $ (408,119 )   $ (829,839 )   $ (883,189 )
 
The accompanying notes are an integral part of these statements.


 
 
 
5


UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
   
2013
   
2012
 
             
Cash flows from operating activities:
           
Net loss
  $ (576,205 )   $ (881,941 )
   Adjustments to reconcile net loss to net cash
               
       used in operating activities:
               
        Provision for loan losses
    45,137       121,000  
        Loss on sale of other real estate
    11,168       5,968  
        Amortization of premiums on investments
    51,985       90,818  
        Amortization of core deposit intangible
    133,558       133,559  
        Depreciation on fixed assets
    118,089       167,930  
        Gain on sale of loans
    -       (69,163 )
        Gain on sale of investment securities
    (378,248 )     -  
        Write-down of other real estate owned
    142,506       153,298  
        Increase in accrued interest receivable  and
               
          other assets
    48,752       80,745  
        Decrease in accrued interest payable and
               
          other liabilities
    (167,675 )     (124,481 )
          Net cash used in operating activities
    (570,933 )     (322,267 )
                 
Cash flows from investing activities:
               
        Purchase of held-to-maturity investment securities
    -       (4,860,337 )
        Purchase of available-for-sale investment securities
    (7,699,797 )     -  
        Proceeds from sale of available-for-sale investment securities
    7,731,845       -  
        Proceeds from maturity and principal reductions of
               
          available-for-sale investment securities
    3,084,375       188,107  
        Proceeds from maturity and principal reductions of
               
          held-to-maturity investment securities
    -       9,583,837  
        Proceeds from the sale of other real estate owned
    139,996       22,832  
        Proceeds from sale of loans
    -       637,621  
        Net (increase) decrease in loans
    (1,253,775 )     66,285  
        Purchase of bank premises and equipment
    (217,806 )     (32,190 )
Net cash provided by investing activities
    1,784,838       5,606,155  
 
               
Cash flows from financing activities:
               
        Net decrease in deposits
    (2,272,510 )     (8,078,056 )
        Net cash used in financing activities
    (2,272,510 )     (8,078,510 )
 
       Net decrease in cash and cash equivalents
    (1,058,605 )     (2,794,168 )
 
Cash and cash equivalents at beginning of period
    10,236,199       14,497,329  
 
Cash and cash equivalents at end of period
  $ 9,177,594     $ 11,703,161  
 
Supplemental disclosure of cash flow information:
               
        Cash paid during the period for interest
  $ 80,079     $ 140,121  
        Noncash transfer of investment securities from held-to-maturity to available-for sale
  $ 11,895,037     $ -  
        Noncash transfer of loans to other real estate owned
  $ -     $ 74,800  
        Noncash transfer of bank premises to assets held for sale
  $ -     $ 356,758  

The accompanying notes are an integral part of these statements.



 
 
 
6


 
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, 2012 when reviewing this Form 10-Q.  Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's consolidated financial position as of September 30, 2013 and December 31, 2012 and the consolidated results of its operations and its cash flows for the three and nine months ended September 30, 2013 and 2012.

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

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

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

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


 
 
 
7


 
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 LTV ratio
 
Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Large groups of smaller, homogeneous loans, including consumer installment and home equity loans, 1-4 family residential mortgages, and student loans are evaluated collectively for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
 
Non-accrual and Past Due Loans.
Loans are considered past due if the required principal and interest payments have not been received 30 days as of the date such payments were due.  The Bank generally places a loan on non-accrual status when interest or principal is past due 90 days or more.  If it otherwise appears doubtful that the loan will be repaid, management may place the loan on nonaccrual status before the lapse of 90 days. Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection.  When a loan is placed on nonaccrual status, previously accrued and unpaid interest is reversed out of income.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Income Taxes
Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities.  Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not.   For financial reporting purposes, a valuation allowance of 100% of the net deferred tax asset has been recognized to offset the net deferred tax assets related to cumulative temporary differences and tax loss carryforwards.  If management determines that the Company may be able to realize all or part of the deferred tax asset in the future, an income tax benefit may be required to increase the recorded value of the net deferred tax asset to the expected realizable amount.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more


 
 
 
8


 
likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
 
Interest and penalties associated with unrecognized tax benefits, if any, would be recognized in income tax expense in the consolidated statements of operations.
 
2. Net Loss Per Share
The calculation of net loss per share follows:
   
Three Months Ended 
September 30,
 2013
   
Three Months Ended
September 30,
 2012
   
Nine Months Ended 
September 30,
 2013
   
Nine Months Ended
September 30,
 2012
 
Basic:
                       
Net loss available to common shareholders
  $ (333,359 )   $ (407,236 )   $ (576,205 )   $ (881,941 )
Average common shares outstanding-basic
    1,068,588       1,068,588       1,068,588       1,068,588  
Net loss per share-basic
  $ (0.31 )   $ (0.38 )   $ (0.54 )   $ (0.83 )
Diluted:
                               
Average common shares-diluted
    1,068,588       1,068,588       1,068,588       1,068,588  
Net loss per share-diluted
  $ (0.31 )   $ (0.38 )   $ (0.54 )   $ (0.83 )

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 (Loss)

The following table presents the changes in other comprehensive income(loss):
 
(in 000’s)
 
Three Months ended
September 30,
 2013
   
Three Months ended
September 30,
 2012
   
Nine Months Ended
September 30,
 2013
   
Nine Months Ended
September 30,
 2012
 
Beginning Balance
  $ (188 )   $ 39     $ 34     $ 39  
Other comprehensive loss before reclassifications-- Unrealized losses on available for sale securities
    (31 )     (1 )     (287 )     (1 )
Amounts reclassified from accumulated other comprehensive income to net income—Gain on sale of investment securities
         -            -           34            -  
 
Ending balance
  $ (219 )   $ 38     $ (219 )   $ 38  



 
 
 
9



4. New Authoritative Accounting Guidance

In February 2013, the FASB issued an update (ASU 2013-02 – Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income) which requires entities to disclose, for items reclassified out of accumulated other comprehensive income (“AOCI”) and into net income in their entirety, the effect of the reclassification on each affected net income line item and, for AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. The guidance is effective for annual and interim reporting periods beginning after December 15, 2012; early adoption is allowed. The disclosures required by the adoption of this guidance in 2013 are included in Note 3 of the financial statements.
 
ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in ASU 2013-11 include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The amendments in this Update are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist.  The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  The Company is currently evaluating the impact of these amendments.
 
5.  Investment Securities

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

(In 000’s)
 
September 30, 2013
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
unrealized
   
Fair
 
   
Cost
   
Gains
   
losses
   
value
 
Available-for-sale:
                       
U.S. Government agency securities
  $ 4,097     $ -     $ (216 )   $ 3,881  
Government Sponsored Enterprises  residential mortgage-backed securities
    5,980       38       (149 )     5,869  
Investments in money market funds
    129       -       -       129  
      10,206     $ 38     $ (365 )   $ 9,879  
       
   
December 31, 2012
 
           
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Available-for-sale:
                               
Government Sponsored Enterprises         residential mortgage-backed securities
  $ 847     $ 51     $ -     $ 898  
Investments in money market funds
    129       -       -       129  
    $ 976     $ 51     $ -     $ 1,027  
                                 
Held-to-maturity:
                               
U.S. Government agency securities
  $ 3,605     $ 159     $ (4 )   $ 3,760  
Government Sponsored Enterprises residential mortgage-backed securities
    8,290       437       (1 )     8,726  
    $ 11,895     $ 596     $ (5 )   $ 12,486  



 
 
 
10



The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of September 30, 2013, are as follows:
 
(In 000’s)
 
Amortized Cost
   
Fair Value
 
Available-for-Sale
     
Due in one year
  $ -     $ -  
Due after one year through five years
    -       -  
Due after five years through ten years
    4,097       3,881  
Government Sponsored Enterprises residential mortgage-backed securities
    5,980       5,869  
 Total debt securities
    10,077       9,750  
 Investments in money market funds
    129       129  
    $ 10,206     $ 9,879  
 
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.
 
In May 2013, the Bank transferred its entire held to maturity portfolio to available for sale. This transfer was made to improve capital ratios and liquidity by allowing for the disposition of securities, if necessary. In May and June 2013, the Bank sold securities with a book value totaling approximately $7.4 million and recognized a gain of approximately $378,000.  Proceeds from the sale were reinvested in replacement securities.
 
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2013:
   
Number
   
Less than 12 months
   
12 months or longer
   
Total
 
Description of
 
of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Securities
 
securities
   
Value
   
Losses
   
value
   
losses
   
value
   
losses
 
                                           
U.S. Government
                                         
    agency securities
    15     $ 3,881     $ (216 )   $ -     $ -     $ 3,881     $ ( 216 )
                                                         
Government Sponsored Enterprises residential mortgage-backed securities
    20       4,479       (149 )     -       -       4,479       (149 )
Total temporarily
                                                       
Impaired investment
                                                       
     securities
    35     $ 8,359     $ ( 365 )   $ -     $ -     $ 8,360     $ (365 )
 
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2012:
   
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
    3     $ 746     $ (4 )   $ -     $ -     $ 746     $ (4 )
                                                         
Government Sponsored Enterprises residential mortgage-backed securities
    2     $ 253     $ (1 )   $ -     $ -     $ 253     $ (1 )
Total temporarily
                                                       
Impaired investment
                                                       
     securities
    5     $ 999     $ (5 )   $ -     $ -     $ 999     $ (5 )
 
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.


 
 
 
11


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

The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary.  This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.  On a quarterly basis, the Company reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. The Company considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the Company’s ability and intent to hold the security for a period of time that allows for the recovery in value.
 
6. Loans and Allowance for Loan Losses
 
The composition of the Bank’s loan portfolio is as follows:
(Dollars in thousands)
 
September 30,
2013
   
December 31,
2012
 
Commercial and industrial
  $ 3,077     $ 3,734  
Commercial real estate
    33,672       31,381  
Consumer real estate
    3,978       4,619  
Consumer loans other
    1,591       1,768  
           Total loans
  $ 42,318     $ 41,502  

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.  There were no changes in qualitative factors during the nine months ended September 30, 2012.  In addition, the average historical loss factor for commercial and industrial loans increased as a result of a $340,000 charge-off during the first quarter of 2013. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.


 
 
 
12


 
The following table presents an analysis of the allowance for loan losses.
(in 000's)
  For the Three months ended September 30, 2013  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans
other
   
Total
 
Beginning balance
  $ 446     $ 288     $ 44     $ -     $ 778  
Provision (credit) for loan losses
    (40 )     65       5       -       30  
                                         
Charge-offs
    -       -       -       (1 )     (1 )
Recoveries
    1       -       3       1       5  
Net recoveries
    1       -       3       -       4  
                                         
Ending balance
  $ 407     $ 353     $ 52     $ -     $ 812  
 

(in 000's)
  For the Three months ended September 30, 2012
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 496     $ 367     $ 43     $ -     $ 906  
Provision for loan losses
    63       (6 )     1       3       61  
                                         
Charge-offs
    (56 )     -       (43 )     (7 )     (106 )
Recoveries
    -       3       1       4       8  
Net (charge-offs) recoveries
    (56 )     3       (42 )     (3 )     (98 )
                                         
Ending balance
  $ 503     $ 364     $ 2     $ -     $ 869  
 

(in 000’s)
  For the Nine months ended September 30, 2013
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 891     $ 308     $ 5     $ -     $ 1,204  
Provision for loan losses
    37       (33 )     40       1       45  
                                         
Charge-offs
    (524 )     -       -       (5 )     (529 )
Recoveries
    3       78       7       4       92  
Net (charge-offs) recoveries
    (521 )     78       7       (1 )     (437 )
                                         
Ending balance
  $ 407     $ 353     $ 52     $ -     $ 812  
 

(in 000's)
  For the Nine months ended September 30, 2012
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
Beginning balance
  $ 387     $ 412     $ 68     $ -     $ 867  
Provision for loan losses
    172       (56 )     -       5       121  
                                         
Charge-offs
    (56 )     -       (80 )     (16 )     (152 )
Recoveries
    -       8       14       11       33  
Net (charge-offs) recoveries
    (56 )     8       (66 )     (5 )     (119 )
                                         
Ending balance
  $ 503     $ 364     $ 2     $ -     $ 869  
 


 
 
 
13

 

 (in 000's)
  September 30, 2013  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
                               
Period-end amount allocated to:
 
 
                         
   
 
                         
 Loans indivdually evaluated for impairment
  $ 347     $ -     $ -     $ -     $ 347  
 Loans collectively  evaluated for impairment
    60       353        52       -       465  
    $ 407     $ 353     $ 52     $ -     $ 812  
                                         
Loans, ending balance:
                                       
 Loans individually evaluated for impairment
  $ 500     $ 1,435     $ -     $ -     $ 1,935  
 Loans collectively  evaluated for impairment
    2,577       32,237       3,978       1,591       40,383  
Total
  $ 3,077     $ 33,672     $ 3,978     $ 1,591     $ 42,318  
 

(in 000's)
  December 31, 2012  
   
Commercial and industrial
   
Commercial real estate
   
Consumer real estate
   
Consumer loans other
   
Total
 
                               
Period-end amount allocated to:
 
 
                         
   
 
                         
 Loans indivdually evaluated for impairment
  $ 843     $ -     $ -     $ -     $ 843  
 Loans collectively  evaluated for impairment
    48       308       5        -        361  
    $ 891     $ 308     $ 5     $ -     $ 1,204  
                                         
Loans, ending balance:
                                       
 Loans indivdually evaluated for impairment
  $ 1,021     $ 1,323     $ -     $ -     $ 2,344  
 Loans collectively  evaluated for impairment
    2,713       30,058       4,619       1,768       39,158  
Total
  $ 3,734     $ 31,381     $ 4,619     $ 1,768     $ 41,502  


 
 
 
14


Nonperforming and Nonaccrual and Past Due Loans
An age analysis of past due loans, segregated by class of loans, as of September 30, 2013 is as follows:
         
Accruing
                         
   
Loans
   
Loans 90 or
                         
(In 000's)
 
30-89 Days
   
More Days
         
Total Past
   
Current
       
   
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
   
Loans
   
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ 3     $ -     $ 451     $ 454     $ 602     $ 1,056  
     SBA loans
    -       -       -       -       115       115  
     Asset-based
    -       -       -       -       1,906       1,906  
        Total Commercial and industrial
    3       -       451       454       2,623       3,077  
                                                 
Commercial real estate:
                                               
     Commercial mortgages
    705       -       632       1,337       16,315       17,652  
     SBA loans
    171       -       160       331       270       601  
     Construction
    -       -       -       -       2,550       2,550  
     Religious organizations
    -       -       642       642       12,227       12,869  
         Total Commercial real estate
    876       -       1,434       2,310       31,362       33,672  
                                                 
Consumer real estate:
                                               
     Home equity loans
    331       -       122       453       892       1,345  
     Home equity lines of credit
    -       -       -       -       25       25  
     1-4 family residential mortgages
    54       -       242       296       2,312       2,608  
         Total consumer real estate
    385       -       364       749       3,229       3,978  
                                                 
Total real estate
    1,261       -       1,798       3,059       34,591       37,650  
                                                 
Consumer and other:
                                               
     Consumer installment
    -       -       -       -       19       19  
     Student loans
    83       118       -       201       1,215       1,416  
     Other
    5       -       -       5       151       156  
         Total consumer and other
    88       118       -       206       1,385       1,591  
                                                 
         Total loans
  $ 1,352     $ 118     $ 2,249     $ 3,719     $ 38,599     $ 42,318  
                                                 
An age analysis of past due loans, segregated by class of loans, as of December 31, 2012 is as follows:
         
Accruing
                         
   
Loans
   
Loans 90 or
                         
   
30-89 Days
   
More Days
         
Total Past
   
Current
       
(In 000's)
 
Past Due
   
Past Due
   
Nonaccrual
   
Due Loans
   
Loans
   
Total Loans
 
Commercial and industrial:
                                   
     Commercial
  $ 15     $ -     $ 873       888     $ 574     $ 1,462  
     SBA loans
    -       -       -       -       125       125  
     Asset-based
    83       -       99       182       1,965       2,147  
        Total Commercial and industrial
    98       -       972       1,070       2,664       3,734  
                                                 
Commercial real estate:
                                               
      Commercial mortgages
    306       -       649       955       13,765       14,720  
      SBA loans
    -       -       -       -       621       621  
     Construction
    -       -       -       -       3,398       3,398  
     Religious organizations
    -       -       674       674       11,968       12,642  
         Total Commercial real estate
    306       -       1,323       1,629       29,752       31,381  
                                                 
Consumer real estate:
                                               
     Home equity loans
    274       44       63       381       1,072       1,453  
     Home equity lines of credit
    -       26       -       26       -       26  
     1-4 family residential mortgages
    69       -       226       295       2,845       3,140  
         Total consumer real estate
    343       70       289       702       3,917       4,619  
                                                 
Total real estate
    649       70       1,612       2,331       33,669       36,000  
                                                 
Consumer and other:
                                               
     Consumer installment
    -       -       -       -       30       30  
     Student loans
    87       141       -       228       1,360       1,588  
     Other
    5       -       -       5       145       150  
         Total consumer and other
    92       141       -       233       1,535       1,768  
                                                 
         Total loans