SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Mark One)

☒

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

FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, 2019

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

~~FOR THE TRANSITION PERIOD FROM ______________ TO _____________~~

☐	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 /PA

(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 ☐ ~~No☒~~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~~. Yes ☒ No ☐

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller Reporting Company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

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 $0.01 par value Common Stock and 500,000 shares of $0.01 par value Series Preferred Stock. The Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A, 7,000 as Series B, and 1,100 as Series C for which there were 99,442, 1,850, ~~and~~ 1,100 shares are issued, respectively as of October 24, 2022.

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 October 24, 2022, the aggregate number of the shares of the Registrant’s Common Stock issued was 843,050.

FORM 10-Q

Index

Item No.		Page

PART I - OTHER INFORMATION		3

Item 1.	Financial Statements (unaudited)		3

Item 2.	2. Management Discussion and Analysis of Financial Condition and Results of Operations		29	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		41	40

Item 4.	Controls and Procedures		41	40

PART II - OTHER INFORMATION		42	41

Item 1.	Legal Proceedings.		42	41

Item 1A.	Risk Factors.		42	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		42	41

Item 3.	Defaults Upon Senior Securities.		42	41

Item 4.	Mine Safety Disclosures.		42	41

Item 5.	Other Information.		42	41

Item 6.	Exhibits.		43	42

Table of Contents

PART I - OTHER INFORMATION

Item 1. Financial Statements (unaudited)

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2019			December 31, 2018
Assets:							June 30, 2019			December 31, 2018
Cash and due from banks	$	1,569,933		$	2,003,085		$	1,370,241		$	2,003,085
Interest-bearing deposits with banks		5,449,578			3,360,937			3,414,513			3,360,937
Federal funds sold and other cash equivalents		5,468,524			3,074,021
Federal funds sold								4,632,747			3,074,021
Cash and cash equivalents		12,488,035			8,438,043			9,417,501			8,438,043

Investment securities available-for-sale, at fair value		4,431,700			4,580,610			4,516,551			4,580,610

Loans held for sale		8,426,558			10,072,777			7,512,219			10,072,777

Loans held at fair value		5,886,789			5,420,004			6,115,603			5,420,004

Loans, net of unearned discounts and deferred fees		17,365,120			20,542,863			18,394,364			20,542,863
Less allowance for loan losses		(218,910	)		(278,095	)		(236,415	)		(278,095	)
Net loans		17,146,210			20,264,768			18,157,949			20,264,768

Operating lease right of use asset		1,644,806			-			1,735,163			-
Bank premises and equipment, net		106,172			163,124			124,848			163,124
Accrued interest receivable		167,303			152,953			162,170			152,953
Other real estate owned		235,571			391,571			235,571			391,571
Servicing asset		253,738			313,489			297,140			313,489
Prepaid expenses and other assets		448,561			397,284			411,172			397,284
Total assets	$	51,235,442		$	50,194,623		$	48,685,884		$	50,194,623

Liabilities and Shareholders’ Equity

Liabilities:
Demand deposits, noninterest-bearing	$	16,788,603		$	16,216,607		$	15,620,626		$	16,216,607
Demand deposits, interest-bearing		14,170,026			13,599,641			12,116,366			13,599,641
Savings deposits		10,555,548			10,589,054			10,490,588			10,589,054
Time deposits, under $250,000		3,372,630			3,467,732			3,198,312			3,467,732
Time deposits, $250,000 and over		1,504,397			4,399,159			2,148,411			4,399,159
Total deposits		46,391,204			48,272,193			43,574,303			48,272,193

Operating lease liability		1,750,369			-			1,841,199			-
Accrued interest payable		6,100			17,376			7,599			17,376
Accrued expenses and other liabilities		164,429			145,308			93,762			145,308
Total liabilities		48,277,091			48,434,877			45,516,863			48,434,877

Shareholders’ equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 99,342 issued and outstanding		993			993			993			993
Series B preferred stock, noncumulative, 7%, $0.01 par value, 7,000 shares authorized; 1,850 issued and outstanding		18			18			18			18
Common stock, $0.01 par value; 2,000,000 shares authorized; 826,921 issued and outstanding		8,269			8,269			8,269			8,269
Additional paid-in-capital		15,677,626			15,677,626			15,677,626			15,677,626
Accumulated deficit		(12,748,217	)		(13,834,625	)		(12,524,145	)		(13,834,625	)
Accumulated other comprehensive income (loss)		19,662			(92,535	)		6,260			(92,535	)
Total shareholders’ equity		2,958,351			1,759,746			3,169,021			1,759,746
Total liabilities and shareholders’ equity	$	51,235,442		$	50,194,623		$	48,685,884		$	50,194,623

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, 2019			Three Months ended September 30, 2018			Nine Months ended September 30, 2019			Nine Months ended September 30, 2018			Three Months ended June 30, 2019			Three Months ended June 30, 2018			Six Months ended June 30, 2019			Six Months ended June 30, 2018
Interest income:
Interest and fees on loans	$	451,587		$	600,438		$	1,489,830		$	1,745,278		$	552,152		$	598,378		$	1,038,243		$	1,144,840
Interest on investment securities		26,407			28,394			82,322			86,743			27,155			28,815			55,915			58,349
Interest on federal funds sold		30,459			27,531			92,545			115,980			34,494			47,139			62,086			88,449
Interest on interest bearing deposits with other banks		35,291			21,950			89,315			22,690			27,276			284			54,024			740
Total interest income		543,744			678,313			1,754,012			1,970,691			641,077			674,616			1,210,268			1,292,378

Interest expense:
Interest on time deposits		3,189			10,787			21,289			35,064			7,233			12,356			18,100			24,277
Interest on demand deposits		5,855			6,675			17,432			19,708			5,727			6,531			11,577			13,033
Interest on savings deposits		1,320			1,395			3,906			4,234			1,292			1,427			2,586			2,839
Total interest expense		10,364			18,857			42,627			59,006			14,252			20,314			32,263			40,149
Net interest income		533,380			659,456			1,711,385			1,911,685			626,825			654,302			1,178,005			1,252,229
(Credit) provision for loan losses		(10,000	)		20,000			(32,000	)		45,000
Provision (credit) for loan losses														30,000			5,000			(22,000	)		25,000

Net interest income after (credit) provision for loan losses		543,380			639,456			1,743,385			1,866,685
Net interest income after provision (credit) for loan losses														596,825			649,302			1,200,005			1,227,229

Noninterest income:
Customer service fees		104,134			106,909			290,042			309,849			92,834			102,851			185,908			202,940
ATM fee income		24,628			24,777			73,288			76,134			24,888			26,635			48,660			51,357
Gain on sale of loans		-			41,204			81,475			265,022			-			67,271			81,475			223,818
Net change in fair value of financial instruments		(6,196	)		83,278			(715,621	)		103,794			(656,516	)		11,423			(709,425	)		20,516
Gain (loss) on sale of other real estate		-			16			(18,723	)		(11,588	)		1,488			(9,522	)		(18,723	)		(11,604	)
Loan syndication fees		65,000			100,000			65,000			100,000
Grant income		-			-			2,500,000			-			2,500,000			-			2,500,000			-
Service fees on loans		38,180			27,345			106,303			55,515
Servicing fees on loans														35,964			15,495			68,123			28,170
Other income		9,689			8,902			32,364			28,828			10,524			7,305			22,675			19,926
Total noninterest income		235,435			392,431			2,414,128			927,554			2,009,182			221,458			2,178,693			535,123

Noninterest expense:
Salaries, wages and employee benefits		315,293			372,642			979,050			1,154,522			334,935			381,826			663,757			781,880
Occupancy and equipment		247,143			244,865			707,993			746,000			244,374			246,093			460,850			501,135
Office operations and supplies		51,060			62,202			150,663			200,825			48,984			61,713			99,603			138,623
Marketing and public relations		5,490			1,742			9,809			27,069			1,987			6,765			4,319			25,327
Professional services		50,089			65,481			160,717			137,753			34,460			35,293			110,628			72,272
Data processing		111,014			98,878			324,908			307,735			107,113			107,422			213,894			208,857
Other real estate expense														5,578			10,944			15,408			24,779
Loan and collection costs														104,504			36,414			180,080			64,994
Deposit insurance assessments		24,000			24,000			56,353			73,000			23,000			24,000			32,353			49,000
Other real estate expense		6,581			13,850			21,989			38,629
Loan and collection expense		73,543			50,974			253,623			115,968
Other operating		118,675			154,132			356,540			399,689			113,624			112,336			237,865			245,557
Total noninterest expense		1,002,887			1,088,766			3,021,644			3,201,190			1,018,559			1,022,806			2,018,757			2,112,424
Net (loss) income before income taxes		(224,072	)		(56,879	)		1,135,869			(406,951	)
Net income (loss) before income taxes														1,587,448			(152,046	)		1,243,737			(350,072	)
Provision for income taxes		-			-			-			-			-			-			-			-
Net (loss) income	$	(224,072	)	$	(56,879	)	$	1,135,869		$	(406,951	)
Net (loss) income per common share—basic and diluted	$	(0.27	)	$	(0.07	)	$	1.37		$	(0.49	)
Net income (loss)													$	1,587,448		$	(152,046	)	$	1,359,941		$	(350,072	)
Net income (loss) per common share—basic and diluted													$	1.92		$	(0.18	)	$	1.64		$	(0.42	)
Weighted average number of common shares outstanding		826,921			826,921			826,921			826,921			826,921			826,921			826,921			826,921
Comprehensive (loss) income:
Net (loss) income	$	(224,072	)	$	(56,879	)	$	1,135,869		$	(406,951	)
Comprehensive income (loss):
Net income (loss)													$	1,587,448		$	(152,046	)	$	1,359,941		$	(350,072	)
Unrealized gains (losses) on available for sale securities, net of taxes		13,401			(26,040	)		112,196			(96,179	)		40,905			(16,259	)		98,795			(70,138	)
Total comprehensive (loss) income	$	(210,671	)	$	(82,919	)	$	1,248,065		$	(503,130	)
Total comprehensive income (loss)													$	1,628,353		$	(168,305	)	$	1,458,736		$	(420,210	)

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

~~Nine~~Six Months Ended ~~September~~June 30, 2019

	Series A Preferred stock				Series B Preferred stock				Common stock				Additional paid-in		Accumulated			Accumulated Other Comprehensive			Total Shareholders’			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			Shares		Amount		Shares		Amount		Shares		Amount		capital		Deficit			Income (Loss)			Equity
Balance at December 31, 2018		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	($13,834,625)			$	(92,535	)	$	1,759,746			99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(13,834,625	)	$	(92,535	)	$	1,759,746
Net loss		-		-		-		-		-		-		-		(227,508	)		-			(227,508	)		-		-		-		-		-		-		-		(227,508	)		-			(227,508	)
Cumulative effect of adoption of ASU 2016-02, Leases (Topic 842)																																							(49,460	)					(49,460	)
Other comprehensive income, net of tax		-		-		-		-		-		-		-		-			57,890			57,890			-		-		-		-		-		-		-		-			57,890			57,890
Cumulative effect of adoption of ASU 2016-02, Leases (Topic 842)																(49,460	)					(49,460	)
Balance at March 31, 2019		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(14,111,593	)	$	(34,645	)	$	1,540,668			99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(14,111,593	)	$	(34,645	)	$	1,540,668
Net income		-		-		-		-		-		-		-		1,587,448			-			1,587,448			-		-		-		-		-		-		-		1,587,448			-			1,587,448
Other comprehensive income, net of tax		-		-		-		-		-		-		-		-			40,905			40,905			-		-		-		-		-		-		-		-			40,905			40,905
Balance at June 30, 2019		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,524,145	)	$	6,260		$	3,169,021			99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,524,145	)	$	6,260		$	3,169,021
Net loss		-		-		-		-		-		-		-		(224,072	)		-			(224,072	)
Other comprehensive income, net of tax		-		-		-		-		-		-		-		-			13,402			13,402
Balance at September 30, 2019		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,748,217	)	$	19,662		$	2,958,351

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

~~Nine~~Six Months Ended ~~September~~June 30, 2018

	Series A Preferred stock				Series B Preferred stock				Common stock				Additional paid-in		Accumulated			Accumulated Other Comprehensive			Total Shareholders’			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			Shares		Amount		Shares		Amount		Shares		Amount		capital		Deficit			Loss			Equity
Balance at December 31, 2017		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,348,988	)	$	(57,396	)	$	3,280,522			99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,348,988	)	$	(57,396	)	$	3,280,522

Net loss		-		-		-		-		-		-		-		(198,026	)		-			(198,026	)		-		-		-		-		-		-		-		(198,026	)		-			(198,026	)
Other comprehensive loss, net of tax		-		-		-		-		-		-		-		-			(53,879	)		(53,879	)		-		-		-		-		-		-		-		-			(53,879	)		(53,879	)
Balance at March 31, 2018		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626		(12,547,014	)		(111,275	)		3,028,617			99,342		993		1,850		18		826,921		8,269		15,677,626		(12,547,014	)		(111,275	)		3,028,617

Net loss				-				-		-		-		-		(152,046	)		-			(152,046	)		-		-		-		-		-		-		-		(152,046	)		-			(152,046	)
Other comprehensive loss, net of tax		-		-		-		-		-		-		-		-			(16,259	)		(16,259	)		-		-		-		-		-		-		-		-			(16,259	)		(16,259	)

Balance at June 31, 2018		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,699,060	)	$	(127,534	)	$	2,860,312

Net loss		-		-		-		-		-		-		-		(56,879	)		-			(56,879	)
Other comprehensive loss, net of tax		-		-		-		-		-		-		-		-			(26,041	)		(26,041	)

Balance at September 31, 2018		99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,755,939	)	$	(153,575	)	$	2,777,392
Balance at June 30, 2018																									99,342	$	993		1,850	$	18		826,921	$	8,269	$	15,677,626	$	(12,699,060	)	$	(127,534	)	$	2,860,312

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

UNITED BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~

	2019			2018			2019			2018

Cash flows from operating activities:
Net income (loss)	$	1,135,869		$	(406,951	)	$	1,359,941		$	(350,072	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash
Provided by(used in) operating activities:
(Credit) provision for loan losses		(32,000	)		45,000			(22,000	)		25,000
Amortization of premiums on investments, net		4,203			5,360
Amortization of premiums on investments								2,858			3,792
Loss on disposition of other real estate		18,723			11,588			18,723			11,604
Write-down of other real estate		-			5,000			-			5,000
Amortization of servicing asset		24,198			91,919			24,198			55,141
Depreciation on fixed assets		60,233			137,032			41,557			96,845
Net change in fair value of financial instruments		715,621			(103,794	)		709,425			(20,516	)
Gain on sale of loans		(81,475	)		(265,022	)		(81,475	)		(223,818	)
Proceeds from the sale of loans held-for-sale		1,144,073			3,098,258			1,144,073			2,412,827
Loans originated for sale		(598,785	)		(5,747,443	)
Loans originated for sale, net of payments								92,938			(3,328,794	)
Increase in accrued interest receivable and other assets		(30,074	)		(115,552	)		(30,952	)		(123,798	)
Increase (decrease) in accrued interest payable and other liabilities		28,937			(100,436	)
Decrease in accrued interest payable and other liabilities								(4,747	)		(45,345	)
Net cash provided by (used in) operating activities		2,389,523			(3,345,041	)		3,254,539			(1,482,134	)

Cash flows from investing activities:
Proceeds from maturity and principal reductions of available-for-sale investment securities		256,903			457,629
Proceeds from maturity and principal reductions of
available-for-sale investment securities								159,994			360,821
Purchase of securities available-for-sale		-			(1,765	)		-			(1,083	)
Net decrease in loans		3,150,558			3,627,344			2,128,819			2,417,898
Proceeds from sale of other real estate		137,277			217,911			137,277			207,096
Purchase of bank premises and equipment		(3,281	)		(20,086	)		(3,281	)		(8,033	)
Net cash provided by investing activities		3,541,457			4,281,031			2,422,809			2,976,599

Cash flows from financing activities:
Net decrease in deposits		(1,880,989	)		(4,385,667	)		(4,697,890	)		(3,080,718	)
Net cash used in financing activities		(1,880,990	)		(4,385,667	)		(4,697,890	)		(3,080,718	)

Net increase (decrease) in cash and cash equivalents	$	4,049,992		$	(3,449,677	)		979,458			(1,586,253	)

Cash and cash equivalents at beginning of period	$	8,438,043		$	11,671,253			8,438,043			11,671,253

Cash and cash equivalents at end of period	$	12,488,035		$	8,221,576		$	9,417,501		$	10,085,000

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	53,903		$	61,390		$	42,040		$	30,315
Transfer of investment to other cash equivalents	$	-		$	133,296
Transfer of loans from held-for-sale to held at fair value	$	1,580,482		$	731,625
Transfer of investments to other cash equivalents							$	-		$	132,614
Transfer of loans from held for sale to held at fair value							$	1,475,873		$	538,309
Non-cash addition of operating lease right of use asset	$	(1,644,806	)	$	-		$	(1,735,163	)	$	-
Non-cash addition of operating lease liability	$	1,750,369		$	-		$	1,841,199		$	-

See accompanying notes to the unaudited consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)

1. Significant Accounting Policies

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

During interim periods, the Company follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers are encouraged to refer to the Company's Form 10-K for the fiscal year ended December 31, 2018 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~~June 30, 2019 and December 31, 2018 and the consolidated results of its operations and its cash flows for the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018.

Management’s Use of Estimates

The preparation of the financial statements has 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 for sale and 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

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 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. SBA loans that are held for sale that fail to meet the criteria for SBA sale in the secondary market are transferred to loans held at fair value.

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 cash flows 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. When a SBA loan held at fair value becomes nonperforming, the fair value estimate is based on the net liquidation value of collateral or the present value of future cashflows.

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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.

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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, other than the asset/liability related to the available for sale investment, 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 isare 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) ~~Income~~ Per Share

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

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018			Three Months Ended June 30, 2019		Three Months Ended June 30, 2018			Six Months Ended June 30, 2019		Six Months Ended June 30, 2018
Basic:
Net (loss) income available to common shareholders	$	(224,072	)	$	(56,879	)	$	1,135,869	$	(406,951	)
Net income (loss) available to common shareholders												$	1,587,448	$	(152,046	)	$	1,359,941	$	(350,072	)
Average common shares outstanding-basic		826,921			826,921			826,921		826,921			826,921		826,921			826,921		826,921
Net (loss) income per share-basic	$	(0.27	)	$	(0.07	)	$	1.37	$	(0.49	)
Net income (loss) per share-basic												$	1.92	$	(0.18	)	$	1.64	$	(0.42	)
Diluted:
Average common shares-diluted		826,921			826,921			826,921		826,921			826,921		826,921			826,921		826,921
Net (loss) income per share-diluted	$	(0.27	)	$	(0.07	)	$	1.37	$	(0.49	)
Net income (loss) per share-diluted												$	1.92	$	(0.18	)	$	1.64	$	(0.42	)

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) income~~loss per share calculations.

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~~3. Changes~~3.Changes in Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss), which is solely comprised of the unrealized gain or loss of available for sale investment securities:

Three Months Ended September 30, 2019

Before tax

Deferred

Net of tax

(in (000’s)

Amount

Taxes

Amount

Beginning balance

$ 8

$ (2 )

$ 6

Unrealized gain on securities:

Unrealized holding gain arising during period

18

(4 )

14

Other comprehensive income, net

18

(4 )

14

Ending balance

$ 26

$ (6 )

$ 20

Three Months Ended September 30, 2018

Before tax

Deferred

Net of tax

(in (000’s)

Amount

Taxes

Amount

Beginning balance

$ (161 )

$ 34

$ (127 )
Unrealized loss on securities:

Unrealized holding loss arising during period

(32 )

6

(26 )
Other comprehensive loss, net

(32 )

6

(26 )
Ending balance

$ (193 )

$ 40

$ (153 )

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Nine Months Ended September 30, 2019

Before tax

Deferred

Net of tax

(in (000’s)

Amount

Taxes

Amount

Beginning balance

$ (117 )

$ 25

$ (92 )
Unrealized gain on securities:

Unrealized holding gain arising during period

143

(31 )

112

Other comprehensive gain, net

143

(31 )

112

Ending balance

$ 26

$ (6 )

$ 20

									Three Months Ended June 30, 2019
									Before tax			Deferred			Net of tax
(in (000’s)									Amount			Taxes			Amount
Beginning balance									$	(44	)	$	10		$	(34	)
Unrealized gain on securities:
Unrealized holding gain arising during period										52			(12	)		40
Other comprehensive income, net										52			(12	)		40
Ending balance									$	8		$	(2	)	$	6

	Nine Months Ended September 30, 2018								Three Months Ended June 30, 2018
	Before tax			Deferred		Net of tax			Before tax			Deferred			Net of tax
(in (000’s)	Amount			Taxes		Amount			Amount			Taxes			Amount
Beginning balance	$	(73	)	$	16	$	(57	)	$	(141	)	$	30		$	(111	)
Unrealized loss on securities:
Unrealized holding loss arising during period		(120	)		24		(96	)		(20	)		4			(16	)
Other comprehensive loss, net		(120			24		(96	)		(20	)		4			(16	)
Ending balance	$	(193	)	$	40	$	(153	)	$	(161	)	$	34		$	(127	)

									Six Months Ended June 30, 2019
									Before tax			Deferred			Net of tax
(in (000’s)									Amount			Taxes			Amount
Beginning balance									$	(117	)	$	25		$	(92	)
Unrealized gain on securities:
Unrealized holding gain arising during period										125			(27	)		98
Other comprehensive income, net										125			(27	)		98
Ending balance									$	8		$	(2	)	$	6

									Six Months Ended June 30, 2018
									Before tax			Deferred			Net of tax
(in (000’s)									Amount			Taxes			Amount
Beginning balance									$	(73	)	$	16		$	(57	)
Unrealized loss on securities:
Unrealized holding loss arising during period										(88	)		18			(70	)
Other comprehensive loss, net										(88	)		18			(70	)
Ending balance									$	(161	)	$	34		$	(127	)

4. New Authoritative Accounting Guidance

Adoption of Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The standard 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 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. Additionally, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) — Targeted Improvements , which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 and its related amendments as of January 1, 2019, which resulted in the recognition of operating right-of-use assets totaling $1,824,729, as well as operating lease liabilities totaling $1,931,239 estimate of credit losses that are expected to occur over the remaining life of a financial asset. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The related policy elections made by the Company and the additional lease disclosures can be found in Note 8. The cumulative effect adjustment to retained earnings was a reduction of $49,460.

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Effect of Upcoming Accounting Standards

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 affected 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.

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.

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In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications to ease the financial reporting burdens of the expected market transition from LIBOR to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company has identified its LIBOR exposure across product categories and is analyzing the risks associated with the LIBOR transition. However, it is too early to predict whether a new rate index replacement and the adoption of this ASU will have a material 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, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Available-for-sale:

U.S. Government agency securities

$ 2,349

$ -

$ (3 )

$ 2,346

Government Sponsored Enterprises residential mortgage-backed securities

2,057

31

(3 )

2,085

$ 4,406

$ 31

$ (6 )

$ 4,431

(in 000’s)										June 30, 2019
												Gross		Gross
										Amortized		Unrealized		Unrealized			Fair
										Cost		Gains		Losses			Value
Available-for-sale:
U.S. Government agency securities										$	2,349	$	-	$	(7	)	$	2,342
Government Sponsored Enterprises residential mortgage-backed securities											2,159		19		(4	)		2,174
										$	4,508	$	19	$	(11	)	$	4,516

	December 31, 2018									December 31, 2018
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-sale:
U.S. Government agency securities	$	2,349	$	-	$	(72	)	$	2,277	$	2,349	$	-	$	(72	)	$	2,277
Government Sponsored Enterprises residential mortgage-backed securities		2,349		9		(54	)		2,304		2,349		9		(54	)		2,304
	$	4,698	$	9	$	(126	)	$	4,581	$	4,698	$	9	$	(126	)	$	4,581

The amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity as of ~~September~~June 30, 2019, are as follows:

(In 000’s)	Amortized Cost		Fair Value
(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		2,346	$	2,349	$	2,342
Government Sponsored Enterprises residential mortgage-backed securities		2,057		2,085	$	2,159	$	2,174
	$	4,406	$	4,431	$	4,508	$	4,516

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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 three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at ~~September~~June 30, 2019:

(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

4

$ 749

$ (1 )

$ 747

$ (2 )

$ 1,496

$ (3 )

Government Sponsored Enterprises residential mortgage-backed securities

3

491

(3 )

-

-

491

(3 )

Total temporarily impaired investment Securities

7

$ 1,240

$ (4 )

$ 747

$ (2 )

$ 1,987

$ (6 )

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(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		4	$	249	$	(1	)	$	1,243	$	(6	)	$	1,492	$	(7	)

Government Sponsored Enterprises residential mortgage-backed securities		4		190		(1	)		315		(3	)		505		(4	)

Total temporarily impaired investment Securities		8	$	439	$	(2	)	$	1,558	$	(9	)	$	1,997	$	(11	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2018:

(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	$	-	$	-		$	2,277	$	(72	)	$	2,277	$	(72	)

Government Sponsored Enterprises residential mortgage-backed securities		14		718		(10	)		1,299		(44	)		2,017		(54	)

Total temporarily impaired investment Securities		21	$	718	$	(10	)	$	3,576	$	(116	)	$	4,294	$	(126	)

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

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

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

As of ~~September~~June 30, 2019, and December 31, 2018, investment securities with a carrying value of ~~$774,000~~$1,184,000 and $3,668,000, respectively, were pledged as collateral to secure public deposits and contingent borrowing at the Federal Reserve 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,
2019

December 31,
2018

Commercial and industrial

$ 1,340

$ 1,545

Commercial real estate

14,293

17,038

Consumer real estate

1,083

1,226

Consumer loans other

649

734

Total loans

$ 17,365

$ 20,543

~~At September 30, 2019 and December 31, 2018, there was no unearned discount.~~

Table of Contents

6. Loans and Allowance for Loan Losses

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

(in 000’s)	June 30, 2019		December 31, 2018
Commercial and industrial	$	1,385	$	1,545
Commercial real estate		15,192		17,038
Consumer real estate		1,120		1,226
Consumer loans other		697		734
Total loans	$	18,394	$	20,543

There was no unearned discount at June 30, 2019 and December 31, 2018.

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 portfolio segments of non-classified loans.

	·	Qualitative Factors Component – The loan portfolio is broken down into portfolio segments, 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~~six months ended ~~September~~June 30, 2019, the Bank did not change any of its qualitative factors in any segment of the loan portfolio; however, the average historical loss factor increased significantly for commercial and industrial loans because of net charge-offs that resulted in an increase in general reserves. Credits to the provision for the ~~nine~~six months ended ~~September~~June 30, 2019 were primarily related to decreases in the balance of ~~commercial real estate~~ loans as well as the origination of SBA loans that are accounted for at fair value and are not included in the calculation of the allowance for loan losses.During the ~~nine~~six months ended ~~September~~June 30, 2019, there was an increase in the commercial real estate reserve allocation because of the modification of an impaired commercial industrial loan to become secured by real estate. Specific reserves allocated to this loan were reclassified to commercial real estate. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. The following table presents an analysis of the allowance for loan losses.

(in 000's)

For the Three months ended September 30, 2019

Commercial and
industrial

Commercial real
estate

Consumer real estate

Consumer loans
Other

Unallocated

Total

Beginning balance

$ 49

$ 185

$ 2

$ -

$ -

$ 236

(Credit) provision for loan losses

(11 )

3

(1 )

-

(1 )

(10 )

Charge-offs

-

(20 )

-

(1 )

-

(21 )
Recoveries

-

12

-

1

1

14

Net charge-offs

-

(8 )

-

-

1

(7 )

Ending balance

$ 38

$ 180

$ 1

$ -

$ -

$ 219

(in 000's)

For the Three months ended September 30, 2018

Commercial and
industrial

Commercial real
Estate

Consumer real
estate

Consumer loans
Other

Unallocated

Total

Beginning balance

$ 3

$ 150

$ 4

$ 8

$ 15

$ 180

Provision (credit) for loan losses

80

(37 )

-

(8 )

(15 )

20

Charge-offs

-

-

-

(1 )

-

(1 )
Recoveries

1

1

-

1

-

3

Net recoveries

1

1

-

-

-

2

Ending balance

$ 84

$ 114

$ 4

$ -

$ -

$ 202

(in 000's)	For the Nine months ended September 30, 2019																		For the Three months ended June 30, 2019
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated			Total			Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	102		$	139		$	4		$	-		$	33		$	278		$	85		$	101		$	4		$	-		$	33		$	223
Provision (credit) for loan losses		(48	)		62			(12	)		(1	)		(33	)		(32	)
(Credit) provision for loan losses																				(32	)		97			(3	)		1			(33	)		30

Charge-offs		(19	)		(41	)		(12	)		(7	)		-			(79	)		(5	)		(21	)		(12	)		(6	)		-			(44	)
Recoveries		3			20			21			8			-			52			1			8			13			5			-			27
Net (charge-offs) recoveries		(16	)		(21	)		9			1			-			(27	)		(4	)		(13	)		1			(1	)		-			(17	)

Ending balance	$	38		$	180		$	1		$	-		$	-		$	219		$	49		$	185		$	2		$	-		$	-		$	236

Table of Contents

(in 000's)	For the Nine months ended September 30, 2018																	For the Three months ended June 30, 2018
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated		Total			Commercial and industrial			Commercial real Estate			Consumer real estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	7		$	155		$	10		$	8		$	-	$	180		$	8		$	158		$	6		$	10		$	20		$	202
Provision (credit) for loan losses		84			(26	)		(6	)		(7	)				45			4			8			(2	)		-			(5	)		5

Charge-offs		(10	)		(18	)		-			(8	)		-		(36	)		(10	)		(18	)		-			(2	)		-			(30	)
Recoveries		3			3			-			7			-		13			1			2			-			-			-			3
Net charge-offs		(7	)		(15	)		-			(1	)		-		(23	)		(9	)		(16	)		-			(2	)		-			(27	)

Ending balance	$	84		$	114		$	4		$	-		$	-	$	202		$	3		$	150		$	4		$	8		$	15		$	180

(in 000's)

September 30, 2019

Commercial and
industrial

Commercial real
Estate

Consumer real
estate

Consumer loans
Other

Unallocated

Total

Period-end amount allocated to:

Loans individually evaluated for impairment

$ -

$ 81

$ -

$ -

$ -

$ 81

Loans collectively evaluated for impairment

38

99

1

-

-

138

$ 38

$ 180

$ 1

$ -

$ -

$ 219

Loans, ending balance:

Loans individually evaluated for impairment

$ 76

$ 1,249

$ -

$ -

$ -

$ 1,325

Loans collectively evaluated for impairment

1,264

13,044

1,083

649

-

16,040

Total

$ 1,340

$ 14,293

$ 1,083

$ 649

$ -

$ 17,365

(in 000's)	For the Six months ended June 30, 2019
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	102		$	139		$	4		$	-		$	33		$	278
(Credit) provision for loan losses		(37	)		59			(10	)		(1	)		(33	)		(22	)

Charge-offs		(19	)		(21	)		(12	)		(6	)		-			(58	)
Recoveries		3			8			20			7			-			38
Net (charge-offs) recoveries		(16	)		(13	)		8			1			-			(20	)

Ending balance	$	49		$	185		$	2		$	-		$	-		$	236

(in 000's)

December 31, 2018

Commercial and
industrial

Commercial real
Estate

Consumer real
estate

Consumer loans
Other

Unallocated

Total

Period-end amount allocated to:

Loans individually evaluated for impairment

$ 95

$ 44

$ -

$ -

$ -

$ 139

Loans collectively evaluated for impairment

7

95

4

-

33

139

$ 102

$ 139

$ 4

$ -

$ 33

$ 278

Loans, ending balance:

Loans individually evaluated for impairment

$ 289

$ 1,148

$ -

$ -

$ -

$ 1,437

Loans collectively evaluated for impairment

1,256

15,890

1,226

734

-

19,106

Total

$ 1,545

$ 17,038

$ 1,226

$ 734

$ -

$ 20,543

(in 000's)	For the Six months ended June 30, 2018
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated		Total
Beginning balance	$	7		$	155		$	10		$	8		$	-	$	180
Provision (credit) for loan losses		4			11			(6	)		1			15		25

Charge-offs		(10	)		(18	)		-			(7	)		-		(35	)
Recoveries		2			2			-			6			-		10
Net charge-offs		(8	)		(16	)		-			(1	)		-		(25	)

Ending balance	$	3		$	150		$	4		$	8		$	15	$	180

(in 000's)			June 30, 2019
	Commercial and industrial		Commercial real Estate		Consumer real estate		Consumer loans Other		Unallocated		Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$	-	$	99	$	-	$	-	$	-	$	99
Loans collectively evaluated for impairment		49		86		2		-		-		137
	$	49	$	185	$	2	$	-	$	-	$	236

Loans, ending balance:
Loans individually evaluated for impairment	$	76	$	1,141	$	-	$	-	$	-	$	1,217
Loans collectively evaluated for impairment		1,309		14,051		1,120		697		-		17,177
Total	$	1,385	$	15,192	$	1,120	$	697	$	-	$	18,394

Table of Contents

(in 000's)	December 31, 2018
	Commercial and industrial		Commercial real Estate		Consumer real estate		Consumer loans Other		Unallocated		Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$	95	$	44	$	-	$	-	$	-	$	139
Loans collectively evaluated for impairment		7		95		4		-		33		139
	$	102	$	139	$	4	$	-	$	33	$	278

Loans, ending balance:
Loans individually evaluated for impairment	$	289	$	1,148	$	-	$	-	$	-	$	1,437
Loans collectively evaluated for impairment		1,256		15,890		1,226		734		-		19,106
Total	$	1,545	$	17,038	$	1,226	$	734	$	-	$	20,543

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of ~~September~~June 30, 2019 is as follows:

			Accruing		Nonaccrual										Accruing		Nonaccrual
	Loans		Loans 90 or		Loans 90 or								Loans		Loans 90 or		Loans 90 or
(In 000's)	30-89 Days		More Days		More Days		Total Past		Current
(in 000's)													30-89 Days		More Days		More Days		Total Past		Current
	Past Due		Past Due		Past Due		Due Loans		Loans		Total Loans		Past Due		Past Due		Past Due		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	-	$	-	$	-	$	-	$	1,039	$	1,039	$	-	$	-	$	-	$	-	$	1,050	$	1,050
SBA loans		-		-		-		-		-		-		-		-		-		-		-		-
Asset-based		-		-		76		76		225		301		-		-		76		76		259		335
Total Commercial and industrial		-		-		76		76		1,264		1,340		-		-		76		76		1,309		1,385

Commercial real estate:
Commercial mortgages		-		-		1,010		1,010		6,358		7,368		212		-		839		1,051		6,920		7,971
SBA loans		-		-		60		60		175		235		-		-		63		-		172		235
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Religious organizations		369		-		179		548		6,142		6,690		289		-		179		468		6,518		6,986
Total Commercial real estate		369		-		1,249		1,618		12,675		14,293		501		-		1,081		1,519		13,610		15,192

Consumer real estate:
Home equity loans		-		148		240		388		151		539		-		149		250		399		160		559
Home equity lines of credit		-		-		-		-		13		13		-		-		-		-		14		14
1-4 family residential mortgages		-		-		-		-		531		531		-		-		-		-		547		547
Total consumer real estate		-		148		240		388		695		1,083		-		149		250		399		721		1,120

Total real estate		369		148		1,489		2,006		13,370		15,376		501		149		1,331		1,918		14,331		16,312

Consumer and other:
Student loans		6		5		-		11		553		564		19		31		-		50		566		616
Other		1		-		-		1		84		85		-		2		-		2		79		81
Total consumer and other		7		5		-		12		637		649		19		33		-		52		645		697

Total loans	$	376	$	153	$	1,565	$	2,094	$	15,271	$	17,365	$	520	$	182	$	1,407	$	2,109	$	16,285	$	18,394

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of December 31, 2018 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

$ -

$ -

$ -

$ -

$ 1,055

$ 1,055

SBA Loans

-

-

18

18

-

18

Asset-based

-

-

76

76

396

472

Total Commercial and industrial

-

-

94

94

1,451

1,545

Commercial real estate:

Commercial mortgages

-

45

902

947

8,585

9,532

SBA loans

-

-

69

69

179

248

Construction

-

-

-

-

-

-

Religious organizations

-

-

179

179

7,078

7,257

Total Commercial real estate

-

45

1,150

1,195

15,843

17,038

Consumer real estate:

Home equity loans

-

150

281

431

197

628

Home equity lines of credit

-

-

-

-

15

15

1-4 family residential mortgages

-

-

85

85

498

583

Total consumer real estate

-

150

366

516

710

1,226

Total real estate

-

195

1,516

1,711

16,553

18,264

Consumer and other:

Student loans

14

57

-

71

551

622

Other

1

-

-

1

111

112

Total consumer and other

15

57

-

72

662

734

Total loans

$ 15

$ 252

$ 1,661

$ 1,928

$ 18,615

$ 20,543

~~Table of Contents~~

			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	$	-	$	-	$	-	$	-	$	1,055	$	1,055
SBA Loans		-		-		18		18		-		18
Asset-based		-		-		76		76		396		472
Total Commercial and industrial		-		-		94		94		1,451		1,545

Commercial real estate:
Commercial mortgages		-		45		902		947		8,585		9,532
SBA loans		-		-		69		69		179		248
Construction		-		-		-		-		-		-
Religious organizations		-		-		179		179		7,078		7,257
Total Commercial real estate		-		45		1,150		1,195		15,843		17,038

Consumer real estate:
Home equity loans		-		150		281		431		197		628
Home equity lines of credit		-		-		-		-		15		15
1-4 family residential mortgages		-		-		85		85		498		583
Total consumer real estate		-		150		366		516		710		1,226

Total real estate		-		195		647		1,711		16,553		18,264

Consumer and other:
Student loans		14		57		-		71		551		622
Other		1		-		-		1		111		112
Total consumer and other		15		57		-		72		662		734

Total loans	$	15	$	252	$	1,661	$	1,928	$	18,615	$	20,543

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

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

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

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

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

Table of Contents

	·	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 as well as loans that are 90 days or more past due and have not been placed on nonaccrual. These credit quality indicators are updated on an ongoing basis. A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan.

~~Table of Contents~~

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

(In 000's)	Commercial Loans September 30, 2019
(in 000's)															Commercial Loans June 30, 2019
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total		Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial:
Commercial	$	250	$	578	$	-	$	-	$	211	$	-	$	1,039	$	250	$	586	$	-	$	2	$	212	$	-	$	1,050
SBA loans		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Asset-based		-		225		-		-		-		76		301		-		259		-		-		-		76		335
																250		845		-		2		212		76		1,385
		250		803		-		-		211		76		1,340
Commercial real estate:
Commercial mortgages		-		4,864		1,705		-		613		186		7,368		-		5,551		1,733		-		489		198		7,971
SBA Loans		-		175		-		-		60		-		235		-		172		-		-		63		-		235
Construction		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Religious organizations		8		4,469		2,034		-		179		-		6,690		13		4,587		2,055		-		331		-		6,986
		8		9,508		3,739		-		852		186		14,293		13		10,310		3,788		-		883		198		15,192

Total commercial loans	$	258	$	10,311	$	3,739	$	-	$	1,063	$	262	$	15,633	$	263	$	11,155	$	3,788	$	2	$	1,095	$	274	$	16,577

	Residential Mortgage and Consumer Loans September 30, 2019						Residential Mortgage and Consumer Loans June 30, 2019
	Performing		Nonperforming		Total		Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$	151	$	388	$	539	$	160	$	399	$	559
Home equity line of credit		13		-		13		14		-		14
1-4 family residential mortgages		291		-		531		547		-		547
		455		388		1,083		721		399		1,120

Consumer Other:
Student loans		559		5		564		585		31		616
Other		85		-		85		81		-		81
		644		5		649		666		31		697

Total consumer loans	$	1,099	$	393	$	1,732	$	1,387	$	430	$	1,817

Table of Contents

(In 000's)

Commercial Loans,
December 31, 2018

Good/
Excellent

Satisfactory

Pass

Special
Mention

Substandard

Doubtful

Total

Commercial and industrial:

Commercial

$ 250

$ 592

$ -

$ -

$ 213

$ -

$ 1,055

SBA loans

-

-

-

-

-

-

18

Asset-based

-

272

124

-

18

76

472

250

864

124

-

231

76

1,545

Commercial real estate:

Commercial mortgages

-

5,814

2,759

52

703

204

9,532

SBA Loans

-

179

-

-

69

-

248

Construction

-

-

-

-

-

-

-

Religious organizations

24

5,041

2,013

-

180

-

7,258

24

11,034

4,772

52

952

204

17,038

Total commercial loans

$ 274

$ 11,898

$ 4,896

$ 52

$ 1,183

$ 280

$ 18,583

Residential Mortgage and Consumer Loans
December 31, 2018

Performing

Nonperforming

Total

Consumer Real Estate:

Home equity

$ 197

$ 431

$ 628

Home equity line of credit

15

-

15

1-4 family residential mortgages

498

85

583

710

516

1,226

Consumer Other:

Student loans

565

57

622

Other

112

-

112

677

57

734

Total consumer loans

$ 1,387

$ 573

$ 1,960

(In 000's)	Commercial Loans, December 31, 2018
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total

Commercial and industrial:
Commercial	$	250	$	592	$	-	$	-	$	213	$	-	$	1,055
SBA loans		-		-		-		-		-		-		18
Asset-based		-		272		124		-		18		76		472
		250		964		124		-		231		76		1,545

Commercial real estate:
Commercial mortgages		-		5,814		2,759		52		703		204		9,532
SBA Loans		-		179		-		-		69		-		248
Construction		-		-		-		-		-		-		-
Religious organizations		24		5,041		2,013		-		180		-		7,258
		24		11,034		4,772		52		952		204		17,038

Total commercial loans	$	274	$	11,898	$	4,896	$	52	$	1,183	$	280	$	18,583

	Residential Mortgage and Consumer Loans December 31, 2018
	Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$	197	$	431	$	628
Home equity line of credit		15		-		15
1-4 family residential mortgages		498		85		583
		710		516		1,226

Consumer Other:
Student loans		565		57		622
Other		112		-		112
		677		57		734

Total consumer loans	$	1,387	$	573	$	1,960

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 for the ~~nine~~six months ended ~~September~~June 30, 2019.

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

Table of Contents

Impaired loans as of ~~September~~June 30, 2019 are set forth in the following table.

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

Commercial and industrial:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
SBA loans		-		-		-		-		-		-		-		-		-		-
Asset-based		76		76		-		76		-		76		-		76		76		-
Total commercial and industrial		76		76		-		76		-		76		-		76		76		-

Commercial real estate:
Commercial mortgages		1,010		799		211		1,010		81		899		533		366		899		99
SBA Loans		60		60		-		60		-		63		63		-		63		-
Religious organizations		179		179		-		179		-		179		179		-		179		-
Total commercial real estate		1,249		1,038		211		1,249		81		1,141		775		366		1,141		99

Total loans	$	1,325	$	1,114	$	211	$	1,325	$	81	$	1,217	$	775	$	442	$	1,217	$	99

Impaired loans as of December 31, 2018 are set forth in the following table.

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

Commercial and industrial:
Commercial	$	213	$	-	$	213	$	213	$	81	$	213	$	-	$	213	$	213	$	81
SBA		-		-		-		-		-		-		-		-		-		-
Asset based		76		-		76		76		14		76		-		76		76		14
Total Commercial and industrial		289		-		289		289		95		289		-		289		289		95

Commercial real estate:
Commercial mortgages		898		739		159		898		13		898		739		159		898		13
SBA Loans		71		71		-		71		-		71		71		-		71		-
Religious Organizations		179		-		179		179		31		179		-		179		179		31
Total Commercial real estate		1,148		810		338		1,148		44		1,148		810		338		1,148		44

Total loans	$	1,437	$	810	$	627	$	1,437	$	139	$	1,437	$	810	$	627	$	1,437	$	139

Table of Contents

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, 2019				Three Months Ended September 30, 2018				Three Months Ended June 30, 2019				Three Months Ended June 30, 2018
	Average		Interest recognized		Average		Interest recognized		Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired		Recorded		on impaired		Recorded		on impaired
	Investment		Loans		Investment		Loans		Investment		Loans		Investment		Loans

Commercial and industrial:
Commercial	$	-	$	-	$	25	$	-	$	-	$	-	$	-	$	-
SBA loans		-		-		-		-		-		-		-		-
Asset-based		76		-		76		-	76			-		76		-
Total commercial and industrial		76		-		101		-		76				76		-

Commercial real estate:
Commercial mortgages		1,104		5		936		1		921		2		958		-
SBA loans		62		-		73		-		64		-		76		-
Religious organizations		179		-		180		-		179		-		182		-
Total commercial real estate		1,345		5		1,189		-		1,164		2		1,216		-

Total loans	$	1,421	$	5	$	1,290	$	1	$	1,240	$	2	$	1,292	$	-

~~Table of Contents~~

(In 000's)	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018				Six Months Ended June 30, 2019				Six Months Ended June 30, 2018
	Average		Interest recognized		Average		Interest recognized		Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired		Recorded		on impaired		Recorded		on impaired
	Investment		Loans		Investment		Loans		Investment		Loans		Investment		Loans

Commercial and industrial:
Commercial	$	183	$	-	$	8	$	2	$	-	$	-	$	-	$	-
SBA loans		-		-		-		-		-		-				-
Asset-based		76		-		76		-		76		-		76		-
Total commercial and industrial		259		-		84		2		76		-		76		-

Commercial real estate:
Commercial mortgages		847		-		946		1		921		5		951		-
SBA loans		65		-		76		-		64		-		77		-
Religious organizations		179		-		182		-		179		-		184		-
Total commercial real estate		1,091		-		1,204		-		1,164		5		1,212		-

Total loans	$	1,350	$	-	$	1,288	$	3	$	1,240	$	5	$	1,288	$	-

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 not 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~~June 30, 2019 and December 31, 2018.

Table of Contents

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			Three Months Ended		Three Months Ended			Six Months Ended			Six Months Ended
	September 30, 2019		September 30, 2018			September 30, 2019			September 30, 2018			June 30, 2019		June 30, 2018			June 30, 2019			June 30, 2018

Beginning balance	$	236	$	402		$	392		$	626		$	236	$	569		$	392		$	626
Additions, transfers from loans		-		-			-			-			-		-			-			-
Sales		-		(10	)		(156	)		(229	)		-		(162	)		(156	)		(219	)
		236		392			236			397			236		407			236			407
Write-ups (downs)		-		-			-			(5	)		-		(5	)		-			(5	)
Ending Balance	$	236	$	392		$	236		$	392		$	236	$	402		$	236		$	402

There were no loans in the process of foreclosure at ~~September~~June 30, 2019 and December 31, 2018.

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

(in 000's)	September 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Commercial real estate	$	161	$	168	$	161	$	168
Residential real estate		75		224		75		224
Total	$	236	$	392	$	236	$	392

8. Lease Commitments

Due to the adoption of ASU 2016-02, Leases (Topic 842) , the Company completed a comprehensive review and analysis of all its property contracts. As a result of this review, it was determined that the Company leases two office locations and office equipment under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and non-lease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

~~Table of Contents~~

The Company has elected to account for the variable non-lease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable non-lease components are reported in net occupancy expense on the Consolidated Statements of Operations when paid. These variable non-lease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in the right-of-use assets and lease liabilities reported on the Consolidated Balance Sheets. The following table presents the lease cost associated with both operating and financing leases for the three-month period ending March 31, 2019 (in thousands). Total operating rent expense recorded during the three-month period ended ~~September~~June 30, 2019 and 2018 was ~~$134,000~~$120,000 and $119,000, respectively. Total operating rent expense recorded during the ~~nine-month~~six-month period ended ~~September~~June 30, 2019 and 2018 was ~~$385,000~~$251,000 and ~~$354,000,~~$236,000, respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of January 1, 2019. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at ~~September~~June 30, 2019.

	Operating
Weighted-average remaining term (years)		~~4.62~~4.87
Weighted-average discount rate		3.50	%

Table of Contents

The following table presents the undiscounted cash flows due related to operating and financing leases as of ~~September~~June 30, 2019, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets.

	Operating			Operating
Undiscounted cash flows due:
Within 1 year	$	433		$	433
After 1 year but within 2 years		438			438
After 2 years but within 3 years		447			447
After 3 years but within 4 years		455			455
After 4 years but within 5 years		92			128
After 5 years		133			155
Total undiscounted cash flows		1,998			2,056
Discount on cash flows		(248	)		(215	)
Total lease liabilities	$	1,750		$	1,841

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of ~~September~~June 30, 2019, the Company had one lease for its Mount Airy branch that had a term of twelve months or less that did not include a purchase option. This lease is excluded from total lease liabilities.

9. 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.

~~Table of Contents~~

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

Level 1

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

Level 2

	·	Quoted prices for similar assets or liabilities in active markets.
	·	Quoted prices for identical or similar assets or liabilities in markets that are not active.
	·	Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

Table of Contents

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. 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.~~Sale. Fair values are estimated by using actual indicative 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 Assets. 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.

~~Table of Contents~~

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:								Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets Measured at Fair Value at June 30, 2019		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	$	2,346	$	-	$	2,346	$	-	$	2,342	$	-	$	2,342	$	-
Government Sponsored Enterprises residential mortgage-backed securities		2,085		-		2,085		-		2,174		-		2,174		-
Total	$	4,431		-	$	4,431		-	$	4,516	$	-	$	4,516	$	-
Loans held for sale	$	8,426	$	-	$	8,426	$	-	$	7,512	$	-	$	7,512	$	-
Loans held at fair value	$	5,887	$	-	$	-	$	5,887	$	6,116	$	-	$	-	$	6,116
Servicing asset	$	254	$	-	$	-	$	254	$	297	$	-	$	-	$	297

(in 000’s)	Fair Value Measurements at Reporting Date Using:								Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets Measured at Fair Value at December 31, 2018		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	$	2,277	$	-	$	2,277	$	-	$	2,277	$	-	$	2,277	$	-
Government Sponsored Enterprises residential mortgage-backed securities		2,304		-		2,304		-		2,304		-		2,304		-
Total	$	4,581	$	-	$	4,581	$	-	$	4,581	$	-	$	4,581	$	-
Loans held for sale	$	10,073	$	-	$	10,073	$	-	$	10,073	$	-	$	10,073	$	-
Loans held at fair value	$	5,420	$	-	$	-	$	5.420	$	5,420	$	-	$	-	$	5,420
Servicing asset	$	313	$	-	$	-	$	313	$	313	$	-	$	-	$	313

Table of Contents

The fair value of the Bank’s AFS securities portfolio was approximately ~~$4,431,000~~$4,516,000 and $4,581,000 at ~~September~~June 30, 2019 and December 31, 2018, 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~~June 30, 2019 and December 31, 2018.

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:

(in 000’s)

Assets measured at fair value

September 30,
2019
Fair value

December 31,
2018
Fair Value

Principal
valuation
techniques

Significant
observable inputs

September 30,
2019
Range of inputs

December 31,
2018
Range of inputs

Loans held at fair value

$ 5,887

$ 5,420

Discounted cash flow

Constant prepayment rate

0% to 23.24%

0% to 16.5%

Discount rate

7.95% to 10.37%

5.49% to 9.76%

Weighted average life

1.69 yrs. to 4.42 yrs.

2.04 yrs. to 6.89 yrs.

Projected default rate

2.22% to 11.59%

1.07% to 10.12%

~~Table of Contents~~

Assets measured at fair value

June 30,

2019

Fair value

December 31,

2018

Fair Value

Principal

valuation

techniques

Significant

observable inputs

June 30,

2019

Range of inputs

December 31,

2018

Range of inputs

Loans held at fair value:

6,116

5,420

Discounted cash flow

Constant prepayment rate

10.92% to 18.09%

0% to 16.5%

Discount rate

8.80% to 12.49%

5.49% to 9.76%

Weighted average life

1.85 yrs to 6.50 yrs

2.04 yrs. to 6.09 yrs.

Projected default rate

1.14% to 11.16%

1.07% to 10.12%

~~(in~~(in 000’s)

Assets measured at fair value

September 30,

2019

Fair value

December 31,

2018

Fair Value

Principal

valuation

techniques

Significant

observable inputs

September 30,

2019

Range of inputs

December 31,

2018

Range of inputs

June 30,

2019

Fair value

December 31,

2018

Fair Value

Principal

valuation

techniques

Significant

observable inputs

June 30,

2019

Range of inputs

December 31,

2018

Range of inputs

Servicing asset

254

313

Discounted cash flow

Constant prepayment rate

7.24% to 21.96%

4.94% to 15.92 %

297

313

Discounted cash flow

Constant prepayment rate

6.94% to 18.59%

4.94% to 15.92 %

Discount rate

8.71% to 26.59%

11.38% to 19.61%

Discount rate

7.96% to 17.37%

11.38% to 19.61%

Weighted average life

1.52 yrs. to 4.42 yrs.

2.04 yrs. to 6.77 yrs.

Weighted average life

1.70 yrs to 6.01 yrs

2.04 yrs. to 6.77 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:~~value for the six months ended June 30, 2019:

(in 000’s)	Loans held at fair value			Servicing Asset			Loans held at fair value			Servicing Asset
Balance at December 31, 2018	$	5,420		$	313		$	5,420		$	313
Origination of loans/transfers		1,822			17			1,618			17
Principal repayments/amortization		(742	)		(24	)		(223	)		(24	)
Change in fair value of financial instruments		(613	)		(52	)		(700	)		(9	)
Balance at September 30, 2019	$	5,887		$	254
Balance at June 30, 2019							$	6,116		$	297

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 for the six months ended June 30, 2018:

(in 000’s)	Loans held at fair value			Servicing Asset
Balance at December 31, 2017	$	4,451		$	319
Origination of loans/additions		538			48
Principal repayments/amortization		(90	)		(56	)
Change in fair value of financial instruments		90			-
Balance at June 30, 2018	$	4,989		$	311

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~~June 30, 2019 and December 31, 2018, for which a nonrecurring change in fair value has been recorded during the ~~nine~~three months ended ~~September~~June 30, 2019 and year ended December 31, 2018.

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Carrying Value at ~~September~~June 30, 2019:

(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

Quoted Prices in

Active markets for

Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

Impaired loans

131

269

Other real estate owned (“OREO”)

236

Carrying Value at December 31, 2018:

(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

Quoted Prices in Active markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Impaired Loans

324

Other real estate owned (“OREO”)

392

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~~June 30, 2019 and December 31, 2018, the fair values shown above exclude estimated selling costs of $28,500 and $15,000, respectively.

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.

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

September 30, 2019

December 31, 2018

(in 000’s)

Level in

Carrying

Fair

Carrying

Fair

Value Hierarchy

Amount

Value

Amount

Value

(Dollars in thousands)

Assets:

Cash and cash equivalents

Level 1

$ 12,488

$ 12,488

$ 8,438

$ 8,438

Loans, net of allowance for loan losses

(1)

17,146

17,196

20,265

21,979

Accrued interest receivable

Level 1

167

167

153

153

Liabilities:

Demand deposits

Level 1

30,959

30,959

29,816

29,816

Savings deposits

Level 1

10,556

10,556

10,589

10,589

Time deposits

(2)

4,877

4,814

7,867

7,757

Accrued interest payable

Level 1

6

6

17

17

			June 30, 2019				December 31, 2018
(in 000’s)	Level in		Carrying		Fair		Carrying		Fair
	Value Hierarchy		Amount		Value		Amount		Value
(Dollars in thousands)
Assets:
Cash and cash equivalents	Level 1		$	9,418	$	9,418	$	8,438	$	8,438
Loans, net of allowance for loan losses		(1)		18,158		18,211		20,265		21,979
Accrued interest receivable	Level 1			162		162		153		153
Liabilities:
Demand deposits	Level 1			27,737		27,737		29,816		29,816
Savings deposits	Level 1			10,491		10,491		10,589		10,589
Time deposits		(2)		5,347		5,283		7,867		7,757
Accrued interest payable	Level 1			8		8		17		17

(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.

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10. Revenue Recognition

Management determined that the primary sources of revenue associated with financial instruments, including interest income on loans and investments, along with certain noninterest revenue sources including gains on the sale of loans, the change in fair value of financial instruments, are not within the scope of Topic 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 83.5% of the total revenue of the Company.

The significant components of noninterest income within the scope of Topic 606 are as follows:

Customer Service Fees and ATM Fees — The Company has contracts with its deposit account customers where fees are charged for certain items or services. Service charges include account analysis fees, monthly service fees, overdraft fees, and other deposit account related fees. Additionally, the Company collects revenue when outside customers utilize the Bank’s ATM machines for transactions. Revenue related to account analysis fees, ATM transactions and service fees is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. Fees attributable to specific performance obligations of the Company (i.e. overdraft fees, etc.) are recognized at a defined point in time based on completion of the requested service or transaction.

Loan Syndication Fees – The Company contracts with certain corporate entities as an arranging institution for loan syndications whereby a fee is earned by the Company for soliciting, assembling, and obtaining commitments from other lenders related to certain facilities of the corporate entity. A portion of the fee is paid as an up-front payment for acting as the arranger, which is earned and recognized on the date the contract is signed without further commitment. Another portion of the fee is earned, and generally paid, upon completion of the loan syndication arrangement which is the performance obligation for that portion of the fee.

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The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018.

	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018		2019			2018		2019			2018
(Dollars in thousands)
Noninterest income:
In-scope of Topic 606
Customer Service Fees	$	104		$	107	$	290		$	310	$	93		$	103	$	186		$	203
ATM Fee Income		24			25		73			76		25			27		49			51
Loan Syndication Fees		65			100		65			100
Other income		48			36		2,638			84		2,556			23		2,591			48
Noninterest income (in-scope of Topic 606)		241			268		3,066			570		2,664			153		2,826			302
Noninterest income (out-of-scope of Topic 606)		(6	)		124		(652	)		358		(655	)		68		(648	)		279
Total noninterest income	$	235		$	392	$	2,414		$	928		2,009		$	221	$	2,178		$	535

11. 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.

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	·	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.
	·	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~~June 30, 2019, and December 31, 2018, the Bank’s tier one leverage capital ratio was ~~5.37%~~5.77% and 3.00%, respectively, and its total risk-based capital ratio was ~~11.96%~~13.25% and 6.34%, respectively. ~~These~~The leverage ratios ~~are~~is below the ~~levels~~level 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:

	·	Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital.
	·	~~External~~Extern equity investments—During 2017, the Company received external investments of $925,000 and from other financial institutions. In May 2021, the Company received a $600,000 capital investment from another financial institution.
	·	Performance grants---Management has developed a performance grant strategy to attract funding based on economic impact and job creation/retention. The goal is to obtain grant funding from local entities that are seeking a “return on impact”. In April 2019, the Bank received a $2.5 million economic stimulus grant from the City of Philadelphia.
	·	Other grants---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 grant revenue 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.
	·	Further, in August 2021, the Bank was awarded a grant totaling $1,286,000 from the US Treasury’s CDFI Rapid Response Program that was geared to strengthen the Bank as the economy recovers from the effects of the COVID-19 pandemic. This grant resulted in further improvement in the Bank’s capital ratios.

As a result of the above actions, management believes that the Bank has and will be able to comply with the terms and conditions of the Orders. At June 30, 2022, the Bank’s Tier 1 leverage ratio was 9.50% and its total risk-based capital ratio was 21.92% which is considered “well capitalized” under the regulatory framework for prompt and corrective action.

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12. 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 ~~a net loss of approximately $224,000 for the quarter ended September 30, 2019 and net loss of approximately $57,000 for the same quarter in 2018. Additionally, the Company reported~~ net income of ~~$1,136,000~~approximately $1,360,000 for the ~~nine~~six months ended ~~September~~June 30, 2019 and a net loss of ~~$407,000~~approximately $350,000 for the ~~nine months~~same period in 2018; additionally, the Company reported a net loss of $1,486,000 for the year ended ~~September 30, 2018.~~2018 and net loss of $319,000 for the year ended 2017. Further, the Company 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 ~~8.50%~~8.00% and its total risk-based capital ratio to 12.50%. As of ~~September~~June 30, 2019, the Bank’s tier one leverage capital ratio was ~~5.37%~~5.77% and its total risk-based capital ratio was ~~11.96%~~13.25%. 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.

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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. During 2018 and in 2019, there were SBA fair value write-downs on defaulted loans that totaled approximately $1.2 million. Management has developed forbearance agreements and implemented other collection strategies including the sale of underlying collateral to mitigate the exposure on these loans that management believes will result in the recovery of some fair value write-downs.

	·	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 have been received in 2020 and 2021. This capital will be used to further strengthen the Bank’s balance sheet. At June 30, 2022, the Bank’s Tier 1 leverage ratio was 9.50% and its total risk-based capital ratio was 21.92% which is considered “well capitalized”.

	·	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. 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.

13. Subsequent Events

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 noninterest income 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.

In May 2021, the Company received an external investment of $600,000 from another financial institution from the issuance of a combination of Common voting and Series C Preferred Stock. Further, in August 2021, the Bank was awarded a grant totaling $1,286,000 from the US Treasury’s CDFI Rapid Response Program that was geared to strengthen the Bank as the economy recovers from the effects of the COVID-19 pandemic.

At June 30, 2022, the Bank’s Tier 1 leverage ratio was 9.50% and its total risk-based capital ratio was 21.92% which is considered “well capitalized” under the regulatory framework for prompt and corrective action.

On October 31, 2022, the Board of Directors unanimously approved an Offer of Settlement with the Securities and Exchange Commission over the Company’s failure to comply with the Exchange Act Section 12(a) and Rules 13a-1 and 13a-13 thereunder because it has not filed periodic reports with the Commission since the period ended December 31, 2018. The Offer of Settlement revokes the registration of each class of the Company’s securities registered pursuant to Section 12 of the Exchange Act as of the effective date of the Offer of Settlement until there are two consecutive timely filings. There is currently no financial impact related to the revocation; however, management is working to remedy the matter to avoid further action.

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

Special Cautionary Notice Regarding Forward-looking Statements

Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (“UBS”) to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include: (a) statements of goals, intentions and expectations; and (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity. UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance 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 a net ~~loss~~income of approximately ~~$224,000~~$1,598,000 ($~~0.27~~1.93 per common share) for the quarter ended ~~September~~June 30, 2019 compared to a net loss of approximately ~~$57,000~~$152,000 ($~~0.07~~0.18 per common share) for the same quarter in 2018. The Company reported net income of approximately ~~$1,136,000~~$1,360,000 ($~~1.37~~1.64 per common share) ~~for~~or the ~~nine~~six months ended ~~September~~June 30, 2019 ~~compared to~~and a net loss of approximately ~~$407,000~~$350,000 ($~~0.49~~0.42 per common share) for the same period in 2018. Management remains committed to improving the Company’s operating performance by continuing to implement its ~~profit~~Restoration Plan and income enhancement strategies that are centered onaround 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 declined as a result of operating losses. A concentrated effort will be made to further 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— Utilizing a CRA platform, instead of seeking one large investor, the Board will continue to solicit a number of smaller investments from institutional and individual investors. During 2017, the Company received external investments of $925,000 from other financial institutions through issuance of Series B Preferred Stock. In May 2021, the Company received an external investment of $600,000 from another financial institution from the issuance of a combination of Common voting and Series C Preferred Stock.

	·	Performance grants---Management has developed a performance grant strategy to attract funding based on economic impact and job creation/retention. The goal is to obtain grant funding from local entities that are seeking a “return on impact”. In April 2019, the Bank received a $2.5 million economic stimulus grant from the City of Philadelphia.

		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 grant revenue 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. In ~~July~~August 2021, the Bank received a Rapid Response grant from the U.S. Department of Treasury totaling approximately $1.3 million to provide support related to the economic impact of the COVID-19 pandemic on the Bank and its small business customers.

Manage asset quality to minimize credit losses and reduce collection costs. There was continued deterioration in asset quality during the ~~nine~~six months ended ~~September~~June 30, 2019 that resulted in significant fair value write-downs related to defaulted SBA loans. Management will seek to improve asset quality by adhering to its underwriting standards as well as good customer relationship management practices. In addition, proactive monitoring of the loan portfolio is essential to the identification of emerging problem credits and is performed during Asset Quality Committee meetings. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary and may result in increased loan and collection expense.

Earnings enhancement plan. Management seeks to increase noninterest income and further reduce noninterest expense to achieve core earnings. The primary strategy ~~will continue~~continues to focus on increasing SBA loan origination activity and selling the guaranteed portion in the secondary market for gains. Management continues to grow the SBA loan pipeline through relationships with feeder organizations to maximize this income.

While some expense reductions were achieved during the quarter in ~~personnel,~~salaries, occupancy, professional services ~~other real estate~~ and office operations, ~~and supplies~~ there was an increase in ~~data processing~~loan collections costs and other operating expenses. Management will seek additional expense reductions, where possible, by performing a line-by-line expense review to identify additional savings.

Another challenge to increased earnings is the restriction on asset growth because of the Bank’s capital levels; however, the Bank’s net interest margin has remained a significant strength. To further increase the Bank’s net interest margin, management will seek to shift excess liquidity into higher yielding loans instead of investments and Federal Funds Sold while managing the cost of funds. In addition, management will continue to balance asset growth with capital adequacy requirements.

~~Table of Contents~~

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 impact 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 2018 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, 2019			Quarter ended September 30, 2018			Nine Months ended September 30, 2019			Nine Months ended September 30, 2018			Quarter ended June 30, 2019			Quarter ended June 30, 2018			Six Months ended June 30, 2019			Six Months ended June 30, 2018
*Statement of operations information*:
Net interest income	$	533		$	659		$	1,711		$	1,912		$	627		$	654		$	1,178		$	1,252
(Credit) provision for loan losses		(10	)		20			(32	)		45
Provision (credit) for loan losses														30			5			(22	)		25
Noninterest income		235			392			2,414			928			2,009			221			2,178			535
Noninterest expense		1,003			1,089			3,022			3,201			1,019			1,023			2,019			2,112
Net income (loss)		(224	)		(57	)		1,136			(407	)		1,587			(152	)		1,360			(350	)
Net loss per share-basic and diluted		(0.27	)		(0.07	)		1.37			(0.49	)
Net income (loss) per share-basic and diluted														1.92			(0.18	)		1.64			(0.42	)

*Balance Sheet information:*													June 30, 2019			December 31, 2018
Total assets													$	48,686		$	50,195
Loans held for sale														7,512			10,073
Loans, net														18,158			20,265
Investment securities														4,516			4,581
Deposits														43,574			48,272
Shareholders' equity														3,169			1,760

*Ratios:**													Quarter ended June 30, 2019			Quarter ended June 30, 2018
Return on assets														13.06	%		(0.42	)%
Return on equity														262.36	%		(7.92	)%

Balance Sheet information:

September 30,
2019

December 31,
2018

Total assets

$ 51,235

$ 50,195

Loans held for sale

8,427

10,073

Loans, net

17,146

20,265

Investment securities

4,432

4,581

Deposits

46,391

48,272

Shareholders' equity

2,958

1,760

Ratios*:

Quarter ended
September 30, 2019

Quarter ended
September 30, 2018

Return on assets

(0.18 )%

(0.32 )%
Return on equity

(36.55 )%

(7.65 )%

*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 decreased approximately ~~$968,000~~$1,215,000 or ~~2.01%~~2.46% during the quarter ended ~~September~~June 30, 2019 compared to the quarter ended ~~June 30,~~March 31, 2019. Average funding sources decreased approximately ~~$654,000,~~$2,257,000, or ~~1.42%~~4.68%, during the ~~same period.~~quarter ended June 30, 2019 compared to the quarter ended March 31, 2019.

Sources and Uses of Funds Trends

( dollars in 000’s)	June 30, 2019					March 31, 2019
	Average		Increase (Decrease)			Increase (Decrease)			Average
	Balance		Amount			%			Balance
Funding uses:
Loans*	$	33,861	$	(2,191	)		(6.08	)%	$	36,052
Investments securities		4,708		(96	)		(2.00	)%		4,804
Federal funds sold		5,804		1,045			21.96	%		4,759
Balances with other banks		3,710		27			0.73	%		3,683
Total uses	$	48,083	$	(1,215	)		(2.46	)%	$	49,298
Funding sources:
Demand deposits
Noninterest-bearing	$	16,594	$	11			0.07	%	$	16,583
Interest-bearing		12,393		(835	)		(6.31	)%		13,228
Savings deposits		10,429		(138	)		(1.31	)%		10,567
Time deposits		6,568		(1,295	)		(16.47	)%		7,863
Total sources	$	45,984	$	(2,257	)		(4.68	)%	$	48,241

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

Table of Contents

~~Sources and Uses of Funds Trends~~

( dollars in 000’s)

September 30,
2019

June 30,
2019

Average

Increase (Decrease)

Increase (Decrease)

Average

Balance

Amount

%

Balance

Funding uses:

Loans*

$ 32,386

$ (1,475 )

(4.36 )%

$ 33,861

Investment Securities

4,609

(99 )

(2.10 )%

4,708

Federal funds sold

5,513

(291 )

(5.01 )%

5,804

Balances with other banks

4,607

897

24.18 %

3,710

Total uses

$ 47,115

$ (968 )

(2.01 )%

$ 48,083

Funding sources:

Demand deposits

Noninterest-bearing

$ 16,159

$ (435 )

(2.62 )%

$ 16,594

Interest-bearing

13,590

1,197

9.66 %

12,393

Savings deposits

10,557

128

1.23 %

10,429

Time deposits

5,024

(1,544 )

(23.51 )%

6,568

Total sources

$ 45,330

$ (654 )

(1.42 )%

$ 45,984

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

Loans

Average loans decreased by approximately ~~$1,475,000~~$2,191,000, or ~~4.36%~~6.08%, during the quarter ended ~~September~~June 30, ~~2019. While there was origination activity, it was offset by loan paydowns and fair value write-downs. The Bank’s commercial loan pipeline continues to grow~~2019 as a result of ~~its~~fair value write-downs and repayment activity. Management continues to focus on the growth of small business ~~banking focus~~loans 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 which 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.

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 repay loans and 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.

~~Table of Contents~~

The Bank’s loan portfolio continues to be concentrated in commercial real estate loans that comprise approximately ~~$14.3~~$15.2 million, or 83%, of total loans at ~~September~~June 30, ~~2019.~~2019 most of which are owner occupied. The Bank continues to have a strong niche in lending to religious organizations for which total loans at ~~September~~June 30, 2019 were approximately $7.0 million, or ~~47%~~46%, of the commercial real estate portfolio. Management closely monitors this concentration to proactively identify and manage credit risk for any conditions that might negatively affect 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,			June 30,			December 31,
(In 000's)	2019			2018			2019			2018

Commercial and industrial:
Commercial	$	1,039		$	1,055		$	1,050		$	1,055
SBA Loans		-			18			-			18
Asset-based		301			472			335			472
Total commercial and industrial		1,340			1,545			1,385			1,545

Commercial real estate:

Commercial mortgages		7,368			9,532			7,971			9,532
SBA loans		235			248			235			248
Construction		-			-			-			-
Religious organizations		6,690			7,257			6,986			7,257
Total commercial real estate		14,293			17,038			15,192			17,038

Consumer real estate:
Home equity loans		539			628			559			628
Home equity lines of credit		13			15			14			15
1-4 family residential mortgages		531			583			547			583
Total consumer real estate		1,083			1,226			1,120			1,226

Total real estate		15,376			18,264			16,312			18,264

Consumer and other:
Student loans		564			622			616			622
Other		85			112			81			112
Total consumer and other		649			734			697			734
Allowance for loan losses		(219	)		(278	)		(236	)		(278	)
Loans, net	$	17,146		$	20,265		$	18,158		$	20,265

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~~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 ~~1.26%~~1.28% at ~~September~~June 30, 2019 compared to 1.35% at December 31, 2018.

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 ~~$1,325,000~~$1,217,000 at ~~September~~June 30, 2019 compared to $1,437,000 at December 31, 2018. ~~There~~As of June 30, 2019, there was ~~an $80,000~~a valuation allowance of $99,000 associated with impaired loans ~~at September 30, 2019~~ compared to a $139,000 allowance at December 31, 2018. 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.

Table of Contents

At ~~September~~June 30, 2019 and December 31, 2018, loans to religious organizations represented approximately $179,000 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 ~~12.75%~~14.51% and ~~14.53%~~14.93% at ~~September~~June 30, 2019 and December 31, 2018 respectively. The percentage of nonperforming loans to total loans ~~increased~~decreased from ~~9.31%~~9.06% at December 31, 2018 to ~~9.89%~~8.85% at ~~September~~June 30, 2019. ~~95.29%~~Approximately 94% of nonperforming loans are secured by real estate which serves to mitigate the risk of loss.

The following table sets forth information concerning nonperforming loans and nonperforming assets.

(In 000's)	June 30, 2019			December 31, 2018
Commercial and industrial:
Commercial	$	-		$	-
SBA		-			18
Asset-based		76			76
Total commercial and industrial		76			94

Commercial real estate:
Commercial mortgages		839			902
SBA loans		63			69
Religious organizations		179			179
Total commercial real estate		1,081			1,150

Consumer real estate:
Home equity loans		250			281
1-4 family residential mortgages		-			85
Total consumer real estate		250			366

Total real estate		1,331			1,516

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

Total nonaccrual		1,407			1,610
Total past due 90 days and still accruing		220			252
OREO		236			392
Total nonperforming assets	$	1,863		$	2,254

	June 30, 2019			December 31, 2018
Nonperforming loans to total loans		8.85	%		9.06	%
Nonperforming assets to total loans and OREO		10.00	%		10.77	%
Nonperforming assets to total assets		3.98	%		4.49	%

Allowance for loan losses as a percentage of:
Total loans		1.28	%		1.35	%
Total nonperforming loans		14.51	%		14.93	%

Table of Contents

The following table sets forth information ~~concerning nonperforming loans and nonperforming assets.~~

(In 000's)

September 30,
2019

December 31,
2018

Commercial and industrial:

Commercial

$ -

$ -

SBA

-

18

Asset-based

76

76

Total commercial and industrial

76

94

Commercial real estate:

Commercial mortgages

1,010

902

SBA loans

60

69

Religious organizations

179

179

Total commercial real estate

1,249

1,150

Consumer real estate:

Home equity loans

240

281

1-4 family residential mortgages

-

85

Total consumer real estate

240

366

Total real estate

1,489

1,516

Consumer and other:

Student loans

-

-

Other

-

-

Total consumer and other

-

-

Total nonaccrual

1,565

1,610

Total past due 90 days and accruing

153

252

OREO

236

392

Total nonperforming assets

$ 1,954

$ 2,254

September 30,
2019

December 31,
2018

Nonperforming loans to total loans

9.89 %

9.06 %
Nonperforming assets to total loans and OREO

11.10 %

10.77 %
Nonperforming assets to total assets

3.95 %

4.49 %
Allowance for loan losses as a percentage of:

Total loans

1.26 %

1.35 %
Total nonperforming loans

12.75 %

14.93 %

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

(In 000's)

September 30,
2019

December 31,
2018

Commercial and industrial:

Asset-based

$ -

$ -

Total commercial and industrial

-

-

Commercial real estate:

Commercial mortgages

-

45

SBA loans

-

-

Total commercial real estate

-

45

Consumer real estate:

Home equity loans

148

150

Total consumer real estate

148

150

Consumer and other:

Student loans

5

57

Other

-

-

Total consumer and other

5

57

Total

$ 153

$ 252

~~Table of Contents~~

(In 000's)	June 30, 2019		December 31, 2018
Commercial and industrial:
Asset-based	$	-	$	-
Total commercial and industrial		-		-

Commercial real estate:
Commercial mortgages		-		45
SBA loans		-		-
Total commercial real estate		-		45

Consumer real estate:
Home equity loans		149		150
Total consumer real estate		149		150

Consumer and other:
Student loans		69		57
Other		2		-
Total consumer and other		71		57
Total	$	220	$	252

Investment Securities and Other Short-term Investments

Average investment securities decreased by approximately ~~$99,000~~$96,000, or ~~2.10%~~2.00%, during the quarter ended ~~September~~June 30, 2019. The decrease was primarily related to ~~payments~~paydowns received on mortgage-backed securities.

The average yield on the investment portfolio ~~increased slightly to~~remained relatively unchanged at 2.32% for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to 2.28% for the ~~nine~~six months ended ~~September~~June 30, 2018. Amortizing GSE mortgage-backed securities comprises approximate ~~47%~~48% of the portfolio. The payments of principal and interest on these pools of GSE loans serve to provide monthly cash flow 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~~con-tractual 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~~June 30, 2019, average deposits decreased approximately ~~$654,000,~~$2,257,000 or ~~1.42%~~4.68%. The decrease was concentrated in time deposit accounts that decreased on average by approximately ~~$1,544,000,~~$1,295,000 or ~~23.51%~~16.47%, primarily related to the maturity and nonrenewal of a $2.5 million certificate of deposit with the City of Philadelphia. This reduction is consistent with the Bank’s strategy to reduce its average assets to improve its capital ratios.

Commitments and Lines of Credit

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

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

(in 000’s)	September 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Commitments to extend credit	$	3,220	$	1,903	$	3,177	$	1,903
Letters of credit		176		45
Standby letters of credit						-		45

Table of Contents

The level of commitments increased during the ~~quarter~~six months ended ~~September~~June 30, 2019 because of a higher level of approved but unfunded SBA loans. Approximately $840,000 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 ~~10%~~10.00% of total assets. At ~~September~~June 30, 2019, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately ~~$12.5~~$9.4 million, or ~~24.37%~~20.11% of total assets, compared to $8.4 million, or 16.81%, at December 31, 2018.

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, the majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank. Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.

~~Table of Contents~~

Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity. Approximately ~~$10.2~~$10.6 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 (“NBA”)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 which are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are critical to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. At ~~September~~June 30, 2019, a positive gap position is maintained on a cumulative basis through 1 year of ~~14.42%~~14.37% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis, ~~down~~up from the December 31, 2018 positive gap position of 5.73%. ~~The Bank’s~~This change is due to less certificates of deposit maturing in the 3-12-month timeframe as a result of the nonrenewal of the $2.5 million City of Philadelphia certificate of deposit. Further, the positive gap position is ~~largely due to~~ a result of the high level of loans maturing and/or repricing in one to three months as well as a significant ~~level of~~ federal funds ~~sold.~~sold balances. This position makes the Bank’s net interest income more favorable in a rising interest rate environment. 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~~June 30, 2019, the change in the market value of equity in a +200-basis point interest rate change is ~~(24.77%~~(6.90%), within the policy limit of (25.00%), and ~~(40.72%~~(11.74%) in a +400-basis point interest rate change, within the policy limit of (50.00%).

Table of Contents

Capital Resources

Total shareholders’ equity increased approximately ~~$1,199,000~~$1,409,000 or ~~68.13%~~80.06%, during the ~~nine~~six months ended ~~September~~June 30, 2019 which is attributable to the net income of approximately ~~$1136,000~~$1,360,000 for the ~~nine~~six months ended ~~September~~June 30, 2019 and unrealized gains on available for sale securities of approximately ~~$112,000 for the same period~~$99,000, partially offset by the $49,000 cumulative effect of adoption of the new lease accounting standard.

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 utilizing investment bankers.

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. At June 30, 2019, capital benchmarks were not been met; however, management continues to execute its capital strategies.

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.

~~Table of Contents~~

Further, in May 2021, the Bank received an equity investment of $600,000 from another financial institution. In August 2021, the Bank received a $1,286,000 grant from the US Treasury CDFI Fund to assist the Bank in its recovery from the effects of the pandemic. These new sources of capital will serve to further improve the Bank’s capital ratios.

At June 30, 2022 the Bank’s tier one leverage capital ratio was 9.50% and its total risk-based capital ratio was 21.92% that is considered “well 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. The Company and the Bank do not anticipate paying dividends in the near future.

The following table presents the capital ratios of the Company and the Bank as of ~~September~~June 30, 2019 and December 31, 2018:

	September 30, 2019										December 31, 2018										June 30, 2019										December 31, 2018
(In 000’s)	Actual					Minimum to be Well Capitalized					Actual					Minimum to be Well Capitalized					Actual					Minimum to be Well Capitalized					Actual					Minimum to be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total (Tier II) capital to risk weighted assets:
Company	$	2,904		11.96	%		N/A				$	1,817		6.48	%		N/A				$	3,102		13.25	%		N/A				$	1,817		6.48	%		N/A
Bank		2,904		11.96	%	$	2,429		10.00	%		1,777		6.34	%	$	2,803		10.00	%		3,102		13.25	%		2,340		10.00	%		1,777		6.34			2,803		10.00	%
Tier I capital to risk weighted assets
Company		2,685		11.06	%		N/A					1,539		5.49	%		N/A					2,866		12.24	%		N/A					1,539		5.49			N/A
Bank		2,685		11.06	%		1,942		8.00	%		1,499		5.35	%		2,242		8.00	%		2,866		12.24	%		1,872		8.00	%		1,499		5.35			2,242		8.00	%
Common equity Tier I capital to risk weighted assets
Company		2,685		11.06	%		N/A					1,539		5.49	%		N/A					2,866		12.24	%		N/A					1,539		5.49			N/A
Bank		2,685		11.06	%		1,579		6.50	%		1,499		5.35	%		1,822		6.50	%		2,866		12.24	%		1,521		6.50	%		1,499		5.35			1,822		6.50	%
Tier I Leverage ratio (Tier I capital to total quarterly average assets)
Company		2,685		5.37	%		N/A					1,539		3.08	%		N/A					2,866		5.77	%		N/A					1,539		3.08			N/A
Bank		2,685		5.37	%		2,431		5.00	%		1,499		3.00	%		2,502		5.00	%		2,866		5.77	%		2,397		5.00	%		1,499		3.00			2,502		5.00	%

Table of Contents

Results of Operations

Summary

The Company reported a net ~~loss~~income of approximately ~~$224,000~~$1,587,000 ($~~0.27~~1.92 per common share) for the quarter ended ~~September~~June 30, 2019 compared to a net loss of approximately ~~$57,000~~$152,000 ($~~0.07~~0.18 per common share) for the same quarter in 2018. The Company reported net income of approximately ~~$1,136,000~~$1,360,000 ($~~1.37~~1.64 per common share) for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to a net loss of approximately ~~$407,000~~$350,000 ($~~0.49~~0.42 per common share) for the same period in 2018. 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.

~~Table of Contents~~

Average Balances, Rates, and Interest Income and Expense Summary

	Three months ended June 30, 2019							Three months ended June 30, 2018
(in 000’s)	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate

Assets:
Interest-earning assets:
Loans*	$	33,861	$	552		6.52	%	$	40,237	$	598		5.95	%
Investment securities		4,708		27		2.29			5,072		29		2.27
Federal funds sold		5,804		35		2.41			10,637		47		1.77
Interest bearing balances with other banks		3,710		27		2.91			312		-		-
Total interest-earning assets		48,083		641		5.33			56,258		674		4.79
Interest-bearing liabilities
Demand deposits		12,393		6		0.19			14,003		12		0.34
Savings deposits		10,429		1		0.04			11,526		1		0.03
Time deposits		6,568		7		0.43			9,566		7		0.29
Total interest-bearing liabilities		29,390		14		0.19			35,095		20		0.23
Net interest income			$	627						$	654
Net yield on interest-earning assets						5.22	%						4.64	%

	Three months ended September 30, 2019							Three months ended September 30, 2018							Six months ended June 30, 2019							Six months ended June 30, 2018
(in 000’s)	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate

Assets:
Interest-earning assets:
Loans*	$	32,386	$	452		5.58	%	$	40,168	$	600		5.98	%	$	34,950	$	1,038		5.94	%	$	40,342	$	1,145		5.68	%
Investment securities		4,609		26		2.26	%		4,971		28		2.28	%		4,818		56		2.32			5,123		88		2.28
Federal funds sold		5,513		30		2.18	%		5,535		28		1.99	%		5,285		62		2.35			10,831		58		1.63
Interest bearing balances with other banks		4,607		35		3.04	%		2,845		22		3.09	%		3,697		54		2.92			312		1		0.47
Total interest-earning assets		47,115		543		4.61	%		53,519		678		5.07	%		48,750		1,210		4.96			56,608		1,292		4.57
Interest-bearing liabilities
Demand deposits		13,590		6		0.18	%		15,704		7		0.17	%		12,808		12		0.19			14,386		13		0.18
Savings deposits		10,557		1		0.04	%		11,164		1		0.05	%		10,497		2		0.04			11,532		3		0.05
Time deposits		5,024		3		0.24	%		8,581		11		0.50	%		7,212		18		0.50			9,398		24		0.52
Total interest-bearing liabilities	$	29,171		10		0.14	%	$	35,095		19		0.21	%		30,517		32		0.21			35,316		40		0.23
Net interest income			$	533						$	659						$	1,178						$	1,252
Net yield on interest-earning assets						4.53	%						4.93	%						4.83	%						4.42	%

Nine months ended
September 30, 2019

Nine months ended
September 30, 2018

(in 000’s)

Average Balance

Interest

Yield/Rate

Average Balance

Interest

Yield/Rate

Assets:

Interest-earning assets:

Loans*

$ 34,086

$ 1,490

5.83 %

$ 40,283

$ 1,745

5.78 %
Investment securities

4,706

82

2.32 %

5,072

87

2.28

Federal funds sold

5,361

93

2.31 %

9,047

116

1.71

Interest bearing balances with other banks

4,004

89

2.96 %

1,165

23

2.60

Total interest-earning assets

48,157

1,754

4.86 %

55,567

1,971

4.73

Interest-bearing liabilities

Demand deposits

13,072

17

0.13 %

14,833

20

0.18

Savings deposits

10,518

4

0.05 %

11,404

4

0.05

Time deposits

6,475

21

0.43 %

9,122

35

0.51

Total interest-bearing liabilities

$ 30,065

42

0.19 %

$ 35,359

59

0.22

Net interest income

$ 1,712

$ 1,912

Net yield on interest-earning assets

4.74 %

4.59 %

*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 decreased approximately $27,000 or 4.13% for the quarter ended June 30, 2019 compared to the same quarter in 2018. The decrease was primarily related to an increase in the level of nonaccrual loans as well as a reduction in average loan balances because of secondary market sales of SBA loans. There was an increase in the net yield for the six months ended June 30, 2019 compared to the same period in 2018 because of an increase in the yield on loans as well as increases in the yields on federal funds sold and balances with other banks related to the rising interest rate environment that began in late 2018. The prime lending rate on which the Bank’s SBA loans are indexed increased approximately 50 bps during this period.

Table of Contents

Rate-Volume Analysis of Changes in Net Interest Income

	Three months ended June 30, 2019 compared to 2018									Three months ended June 30, 2018 compared to 2017
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest earned on:
Loans	$	(101	)	$	55		$	(46	)	$	37		$	33		$	70
Investment securities		(2	)		-			(2	)		(2	)		-			(2	)
Federal funds sold		(21	)		9			(12	)		3			20			23
Interest bearing balances with other banks		24			2			26			-			-			-
Total Interest-earning assets		(100	)		66			(34	)		38			53			91
Interest paid on:
Demand deposits		(1	)		-			(1	)		-			6			6
Savings deposits		-			-			-			-			-			-
Time deposits		(3	)		(2	)		(5	)		-			(2	)		(2	)
Total interest-bearing liabilities		(4	)		(2	)		(6	)		-			4			4
Net interest income	$	(96	)	$	68		$	(28	)	$	38		$	49		$	87

	Six months ended June 30, 2019 compared to 2018									Six months ended June 30, 2018 compared to 2017
	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest earned on:
Loans	$	(157	)	$	50		$	(107	)	$	78		$	(50	)	$	28
Investment securities		(4	)		2			(2	)		(5	)		30			25
Federal funds sold		(46	)		20			(26	)		13			8			21
Interest bearing balances with other banks		40			13			53			-			-			-
Total Interest-earning assets		(167	)		85			(82	)		86			(12	)		74
Interest paid on:
Demand deposits		(1	)		-			(1	)		1			11			12
Savings deposits		-			(1	)		(1	)		-			-			-
Time deposits		(6	)		-			(6	)		-			(5	)		(5	)
Total interest-bearing liabilities		(7	)		(1	)		(8	)		1			6			7
Net interest income	$	(160	)		86			(74	)	$	85		$	(18	)	$	67

For the quarter ended ~~September~~June 30, 2019 compared to the same period in 2018, there was a decrease in net interest income of approximately ~~$126,000.~~$28,000. This change was due to a decrease in the volume of interest earning assets resulting in a reduction net interest income of $96,000 partially offset by an increase in rates of $68,000. For the ~~nine~~six months ended ~~September~~June 30, 2019 compared to the same period in 2018, there was a decrease in net interest income of approximately ~~$200,000. The decrease was primarily related~~$74,000 due to a decrease in ~~average loans~~volume of $7.9 million during the quarter ended September 30, 2019 compared to the same quarter in 2018. There was an increase in the net yield for the nine months ended September 30, 2019 compared to the same period in 2018 because of an increase in the yield on all interest earning assets.

~~Rate-Volume Analysis of Changes in Net Interest Income~~

Three months ended September 30, 2019
compared to 2018

Three months ended September 30, 2018
compared to 2017

Increase (decrease) due to

Increase (decrease) due to

(Dollars in thousands)

Volume

Rate

Net

Volume

Rate

Net

Interest earned on:

Loans

$ (110 )

$ (38 )

$ (148 )

$ 47

$ (59 )

$ (12 )
Investment securities

(2 )

-

(2 )

(2 )

-

(2 )
Federal funds sold

-

2

2

(15 )

11

(4 )
Interest bearing balances with other banks

13

-

13

-

22

22

Total Interest-earning assets

(99 )

(36 )

(135 )

30

(26 )

4

Interest paid on:

Demand deposits

(1 )

-

(1 )

-

-

-

Savings deposits

-

-

-

-

-

-

Time deposits

(5 )

(3 )

(8 )

-

-

-

Total interest-bearing liabilities

(6 )

(3 )

(9 )

-

-

-

Net interest income

$ (93 )

$ (33 )

$ (126 )

$ 30

$ (26 )

$ 4

~~Table of Contents~~

Nine months ended September 30, 2019
compared to 2018

Nine months ended September 30, 2018
compared to 2017

Increase (decrease) due to

Increase (decrease) due to

(Dollars in thousands)

Volume

Rate

Net

Volume

Rate

Net

Interest earned on:

Loans

$ (270 )

$ 15

$ (255 )

$ 125

$ (109 )

$ 16

Investment securities

(6 )

1

(5 )

(7 )

2

(5 )
Federal funds sold

(47 )

24

(23 )

1

46

47

Interest bearing balances with other banks

63

3

66

8

14

22

Total Interest-earning assets

(260 )

43

(217 )

127

(47 )

80

Interest paid on:

Demand deposits

(2 )

(1 )

(3 )

-

1

1

Savings deposits

-

-

-

-

-

-

Time deposits

(11 )

(3 )

(14 )

-

6

6

Total interest-bearing liabilities

(13 )

(4 )

(17 )

-

7

7

Net interest income

$ (247 )

$ 47

$ (200 )

$ 127

$ (54 )

$ 73

For the quarter ended September 30, 2019 compared to the same period in 2018, there was a decrease in net interest income of approximately $93,000 due to changes in volume combined with a decrease of approximately $33,000 due to changes in rate. The decrease in volume is related to the decrease in loans during the period. The decrease in rate is related to the increase in nonaccrual loans. For the nine months ended September 30, 2019 compared to the same period in 2018, there was a decrease in net interest income of approximately $247,000 due to changes in volume$160,000 partially offset by an increase of approximately ~~$47,000~~$86,000 due to changes in ~~rate, again, primarily related to the increase in nonaccrual loans coupled with payoffs/paydowns.~~rate.

Provision for Loan Losses

There was a ~~(credit)~~ provision for loan losses of ~~($10,000)~~$30,000 and ~~$20,000~~$5,000, respectively, for the quarters ended ~~September~~June 30, 2019 and ~~2018, respectively.~~2018. There was a credit for loan losses of ~~$32,000~~$22,000 for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to athe provision of ~~$45,000~~$25,000 for the same period in 2018. The decrease in the provision iswas primarily related to a reduction in outstanding loan balances. 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 ~~decreased~~increased approximately ~~$157,000, or 40.01%~~$1,788,000 for the quarter ended ~~September~~June 30, 2019 compared to the same quarter in 2018 primarily the result of a reduction in the net change in fair value of financial instruments of $6,000 for the quarter ended September 30, 2019 compared to a net increase for the same quarter in 2018 of $83,000. Noninterest income increased approximately $1,370,000, or 147.79%, for the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to the receipt of a $2.5 million economic stimulus grant from the City of ~~Philadelphia, partially~~Philadelphia. This grant income was offset by a net decrease of $657,000 on the fair value ~~decrease~~ of ~~approximately $832,000 fair value as a result of~~financial instruments for the quarter ended June 30, 2019 related to an increased level of defaulted SBA ~~loans held at fair value.~~loans.

~~There were no sales of loans during~~Customer service fees decreased approximately $10,000, or 9.74%, for the quarter ended ~~September~~June 30, 2019 ~~which compares~~compared to ~~gains recognized~~2018. ATM activity fees remained relatively unchanged at approximately $25,000 for the quarter ended June 30, 2019 compared to $27,000 for the same period in 2018. Service fees on SBA loans increased approximately $20,000 for the ~~sale of loans of approximately $41,000 for~~quarter ended June 30, 2019 compared to the same quarter in 2018. ~~The Bank’s origination of~~In 2019, the Bank began servicing its SBA loans ~~has declined as~~without the assistance of the lender service provider for which it paid half of its 2% servicing fee in prior years.

Table of Contents

In conjunction with its SBA loan origination strategy, the Bank ~~focuses its attention on collections~~recognized income of ~~defaulted loans. For~~approximately $81,000 and $224,000, respectively, for the ~~nine~~six months ended ~~September~~June 30, 2019 ~~the gain~~and 2018, on the sale of ~~loans decreased~~the guaranteed portion of SBA loans.During the quarter ended June 30, 2019, there were no SBA loan sales. During the quarter ended June 30, 2018, approximately ~~$184,000, or 69.26%, compared to the same period in 2018.~~$67,000 gains were recognized on sale of loans. There was a loss of approximately ~~$716,000~~$709,000 for the ~~nine~~six months ended ~~September~~June 30, 2019 on SBA loans that were held-for-sale and held-at-fair value and accounted for at fair value under ASC 825, Financial Instruments compared to income of approximately ~~$117,000~~$21,000 for the same period in 2018. The losses in 2019 were the result of an increase in defaults on SBA loans for which management is developing collection plans to mitigate permanent declines in value.

Loan syndication fees decreased $35,000, or 35%, for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018. The Comcast loan syndication engagement was delayed to the fourth quarter of 2019. This engagement began in the third quarter of 2018.

Servicing fees on loans increased approximately $11,000, or 39.62%, for the quarter ended September 30, 2019 compared to the same quarter in 2018. Service fees on loans increased approximately $51,000, or 91.49% for the nine months ended September 30, 2019 compared to the same period in 2018. In 2019, the Bank began servicing its SBA loans without the assistance of a lender service provider for which it paid half of the 2% servicing fee in prior years.

~~Table of Contents~~

Noninterest Expense

Salaries and benefits expense decreased approximately ~~$57,000,~~$47,000, or ~~15.39%~~0.70%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 and decreased approximately ~~$175,000,~~$118,000, or ~~15.20%~~15.11%, for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to 2018 primarily as a result of the Mount Airy branch closure in October 2018 and the related employee attrition.

Occupancy and equipment expense ~~increased~~decreased approximately $2,000, or ~~0.93%~~4.98%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 and decreased approximately ~~$38,000,~~$40,000, or ~~5.09%~~8.04%, for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to ~~the same period in~~ 2018 primarily because of the Mount Airy branch closure and reduction in the related operating ~~expense reduction.~~expense. While the branch was closed in 2018, the lease expired in December 2019; therefore, lease payments continued to be made throughout 2019.

Office operations and supplies expense decreased by approximately ~~$11,000,~~$13,000, or ~~17.91%~~20.63%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 and decreased by approximately ~~$50,000,~~$39,000, or ~~24.98% primarily because~~28.15%, for the six months ended June 30, 2019 compared to 2018 as a result of the ~~Mount Airy~~ branch closure as well as a reduction in the utilization of paper in favor of digital reports and storage.

Marketing and public relations expense ~~was relatively unchanged~~decreased approximately $5,000, or 70.63% for the quarter ended ~~September~~June 30, 2019 compared to 2018 ~~but~~and decreased approximately ~~$12,000,~~$21,000, or ~~55.10%, for the nine months ended September 30, 2019 compared to the same period in 2018~~82.95% because the ~~bank~~Bank did not engage in a formal marketing program during 2019 but instead utilized referral relationships.

Professional services expense ~~decreased~~increased approximately ~~$15,000,~~$38,000, or ~~23.51%~~53.07%, for the ~~quarter~~six months ended ~~September~~June 30, 2019 compared to ~~2018. Professional fees increased approximately $23,000 or 16.67% for the nine months ended September 30, 2019 compared to the same period in~~ 2018 ~~due to~~because of the engagement of a new external ~~audit firm.~~auditors in February 2018.

Federal deposit insurance assessments ~~were unchanged~~decreased approximately $1,000, or 4.17%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 ~~at $24,000~~ and decreased approximately ~~$17,000,~~$16,000, or ~~22.80%~~33.97%, for the ~~nine~~six months ended ~~September~~June 30, 2019 ~~when~~ compared to 2018 which was the result of an assessment credit of approximately $16,000 received in 2019. 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 ~~$7,000,~~$5,000, or ~~52.48%~~49.03%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 and decreased approximately ~~$17,000,~~$9,000, or ~~43.08%~~37.82%, for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to 2018. The decrease was primarily related ~~a reduction~~to sales that reduced in the number of properties owned.

Loan and collection expenses increased approximately ~~$23,000,~~$68,000, or ~~44.28%~~186.99%, for the quarter ended ~~September~~June 30, 2019 compared to 2018 and increased ~~$138,000,~~$115,000, or ~~118.70%~~177.07% for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to 2018. This increase is the result of a deterioration in asset quality late in 2018 that has resulted in increased legal, appraisal and other collection-related expenses.

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~~de,000clared 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.

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Table of Contents

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 June 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, we have 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. 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.

(c) Changes in Internal Control Over Financial ~~Reporting.~~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.

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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 ~~2017~~2018 Annual Report on Form 10-K except as disclosed below. The risk factors disclosed in the Company’s ~~2017~~2018 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 8.50% and its total risk-based capital ratio to 12.50%. As of ~~September~~June 30, ~~2018,~~2019, the Bank’s tier one leverage capital ratio was ~~4.77%~~5.54% and its total risk-based capital ratio was ~~9.20%~~12.76%. 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. 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 Bank’s ability to continue as a going concern.

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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Table of Contents

Item 6. ~~Exhibits.~~Exhibits

a)	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.

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Table of Contents

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 8, 2022		/s/ Evelyn F. Smalls
		Evelyn F. Smalls
		President & Chief Executive Officer

Date: November 8, 2022		/s/ Brenda M. Hudson-Nelson
		Brenda Hudson-Nelson
		Executive Vice President/Chief Financial Officer

4443

(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		4	$	749	$	(1	)	$	747	$	(2	)	$	1,496	$	(3	)

Government Sponsored Enterprises residential mortgage-backed securities		3		491		(3	)		-		-			491		(3	)

Total temporarily impaired investment Securities		7	$	1,240	$	(4	)	$	747	$	(2	)	$	1,987	$	(6	)

(in 000's)	For the Three months ended September 30, 2019
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	49		$	185		$	2		$	-		$	-		$	236
(Credit) provision for loan losses		(11	)		3			(1	)		-			(1	)		(10	)

Charge-offs		-			(20	)		-			(1	)		-			(21	)
Recoveries		-			12			-			1			1			14
Net charge-offs		-			(8	)		-			-			1			(7	)

Ending balance	$	38		$	180		$	1		$	-		$	-		$	219

(In 000's)	Commercial Loans, December 31, 2018
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total

Commercial and industrial:
Commercial	$	250	$	592	$	-	$	-	$	213	$	-	$	1,055
SBA loans		-		-		-		-		-		-		18
Asset-based		-		272		124		-		18		76		472
		250		864		124		-		231		76		1,545

Commercial real estate:
Commercial mortgages		-		5,814		2,759		52		703		204		9,532
SBA Loans		-		179		-		-		69		-		248
Construction		-		-		-		-		-		-		-
Religious organizations		24		5,041		2,013		-		180		-		7,258
		24		11,034		4,772		52		952		204		17,038

Total commercial loans	$	274	$	11,898	$	4,896	$	52	$	1,183	$	280	$	18,583