10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended:     September 30, 2011

OR

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                    to

Commission file number: 0-25976

UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2802415
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

30 S. 15th Street
Philadelphia, PA	19102
(Address of principal	(Zip code)
executive offices)

Registrant's telephone number, including area code:  (215)351-4600

Indicate by check mark whether the 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [ ]

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

Yes [X]  No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):
Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [X ]	Smaller reporting company [ ]
(Do not check if a smaller
reporting company)

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

Yes [ ]  No [X]

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

As of September 14, 2011, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).

The Series Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued as of September 14, 2011.

EXPLANATORY NOTE

The sole purpose of this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, originally filed with the Securities and Exchange Commission on November 14, 2011, is to furnish Exhibit 101 to the Form 10-Q which contains the XBRL (eXtensible Business Reporting Language) Interactive Data File for the financial statements and notes included in Part 1, Item 1 of the Form 10-Q. As permitted by Rule 405(a)(2)(ii) of Regulation S-T, Exhibit 101 was required to be furnished by amendment within 30 days of the original filing date of the Form 10-Q.

No changes have been made to the Form 10-Q other than the furnishing of Exhibit 101 described above. This amendment does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data File on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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
	(Registrant)
November 14, 2011	/s/ Evelyn F. Smalls
Date	Evelyn F. Smalls
	President and Chief Executive Officer
November 14, 2011	/s/ Brenda Hudson-Nelson
Date	Executive Vice President,
	Chief Financial Officer

Exhibit No.	Description
3.1	Certificate of Incorporation (1)
3.2	Bylaws (1)
31.1	Rule 13a-14(a)/15d-14(a) Certifications (1)
31.2	Rule 13a-14(a)/15d-14(a) Certifications (1)
32.1	Section 1350 Certifications (1)
32.2 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE	Section 1350 Certifications (1) XBRL Instance Document (2) XBRL Taxonomy Extension Schema Document(2) XBRL Taxonomy Extension Calculation Linkbase Document(2) XBRL Taxonomy Extension Definition Linkbase Document(2) XBRL Taxonomy Extension Label Linkbase Document(2) XBRL Taxonomy Extension Presentation Linkbase Document(2)

(1)	Filed previously.
(2)	Furnished herewith.

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CONSOLIDATED BALANCE SHEET PARENTHETICAL (USD $)	Sep. 30, 2011	Dec. 31, 2010
Shareholders’ equity:
Preferred stock series A par value	$ 0.01	$ 0.01
Preferred Stock Series A shares authorized	500,000	500,000
Preferred Stock Series A shares issued	136,842	136,842
Common stock par value	$ 0.01	$ 0.01
Common stock shares authorized	2,000,000	2,000,000
Common stock shares outstanding	876,921	876,921
Common stock non-voting Class B par value	$ 0.01	$ 0.01
Common stock non-voting Class B shares authorized	250,000	250,000
Common stock non-voting Class B shares issued	191,667	191,667
Common stock non-voting Class B shares outstanding	$ 191,667	$ 191,667

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Consolidated Statements of Operation (unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Interest income:
Interest and fees on loans	$ 654,573	$ 723,383	$ 1,974,564	$ 2,105,123
Interest on investment securities	157,717	151,636	467,805	423,794
Interest on federal funds sold	6,164	3,380	13,479	8,369
Interest on time deposits with other banks	175	179	521	1,081
Total interest income	818,629	878,578	2,456,369	2,538,367
Interest expense:
Interest on time deposits	37,208	53,102	115,751	158,740
Interest on demand deposits	20,184	17,673	57,641	57,178
Interest on savings deposits	2,680	3,595	9,571	10,914
Total interest expense	60,072	74,370	182,963	226,832
Net interest income	758,557	804,208	2,273,406	2,311,535
Provision for loan losses	30,000	377,000	100,000	477,000
Net interest income less provision for
Net interest income less provision for loan losses	728,557	734,208	2,173,406	1,834,535
Noninterest income:
Customer service fees	93,319	107,859	286,654	326,025
ATM activity fees	88,535	92,767	265,314	278,440
Loan syndication fees	0	0	80,000	80,000
Net gain on sale of other real estate	0	0	111,291	0
Grant income	0	394,400	0	394,400
Other income	16,930	19,808	68,556	104,517
Total noninterest income	198,784	614,834	811,815	1,183,382
Non-interest expense
Salaries, wages, and employee benefits	417,229	428,273	1,262,393	1,298,635
Occupancy and equipment	273,563	249,502	821,232	758,742
Office operations and supplies	76,585	76,496	229,167	218,432
Marketing and public relations	14,323	6,059	72,748	18,808
Professional services	56,405	70,312	199,187	237,365
Data processing	117,934	119,912	368,394	352,805
Deposit insurance assessments	40,892	36,186	125,122	107,339
Loan and collection expense	34,642	141,610	141,364	235,340
Other noninterest expense	176,792	174,667	523,421	496,270
Total non-interest expense	1,208,395	1,303,027	3,743,028	3,723,736
Net (loss) income	$ (281,054)	$ 46,015	$ (757,807)	$ (705,819)
(Loss) income per share-basic	$ (0.26)	$ 0.04	$ (0.71)	$ (0.66)
(Loss) income per share-diluted	$ (0.26)	$ 0.04	$ (0.71)	$ (0.66)
Weighted average number of shares	1,065,588	1,065,588	1,065,588	1,065,588

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Document and Entity Information	9 Months Ended
	Sep. 30, 2011
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	UNITED BANCSHARES INC /PA
Entity Central Index Key	0000944792
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding	876,921

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Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value

7.  Fair Value 

Fair Value Measurement

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

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

Level 1    

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

Level 2

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

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

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

Level 3

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

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

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

Fair Value on a Recurring Basis

Securities Available for Sale (“AFS”):  Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow models. Level 2 securities include U.S. agency securities and mortgage backed agency securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Assets on the consolidated statements of condition measured at fair value on a recurring basis are summarized below.

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets Measured at              Fair Value at                      September 30, 2011	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: Government Sponsored Enterprises residential mortgage-backed securities Mutual Funds      Total	$1,215 129 $1,344	$ - 129 $129	$1,215          - $1,215	$    -  __- $    -

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets Measured at             Fair Value at              December 31, 2010	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: Government Sponsored Enterprises residential mortgage-backed securities Mutual Funds      Total	$1,210 129 $1,339	$- 129 $129	$1,210         -  $1,210	$    -  __- $    -

As of September 30, 2011, the fair value of the Bank’s AFS securities portfolio was approximately $1,344,000.  Over 90% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,215,000 at September 30, 2011.  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 majority of the AFS securities were classified as level 2 assets at September 30, 2011.  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 period ended September 30, 2011 and year ended December 31, 2010.

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are not measured at fair value on an ongoing 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 statements of condition by level within the hierarchy as of September 30, 2011 and December 31, 2010, for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2011 and year ended December 31, 2010.

Carrying Value at September 30, 2011:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total fair value gain (loss) during 9 months ended September 30, 2011
Impaired Loans Other real estate owned (“OREO”)	$167 -	- -	- -	$- -	$(223) -

Carrying Value at December 31, 2010:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs  (Level 3)	Total fair value gain (loss) during 12 months ended December 31, 2010
Impaired Loans Other real estate owned (“OREO”)	$679 1,417	- -	- -	$679 1,417	$(238) -

The measured impairment for collateral dependent of impaired loans is determined by the fair value of the collateral less estimated liquidation costs.  Collateral values for loans and OREO are determined by annual or more frequent appraisals if warranted by volatile market conditions, which may be discounted based upon management’s review.  No appraisals were discounted or adjusted during the quarter ended September 30, 2011.  The valuation allowance for impaired loans is adjusted as necessary based on changes in the value of collateral as well as the cost of liquidation.  It is included in the allowance for loan losses in the consolidated statements of condition. The valuation allowance for impaired loans at September 30, 2011 was approximately $250,000.  The valuation allowance for impaired loans at December 31, 2010 was approximately $238,000.   

Fair Value of Financial Instruments

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

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

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

      Investment securities: Fair values for investment securities available-for-sale are as described above.  Investment securities held-to-maturity are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  The carrying amount of accrued interest receivable approximates fair value.

Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated pre­payments, amortizations, and non performance risk.  Prepayments and discount rates were based on current marketplace estimates and pricing.  Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve.  The carrying amount of accrued interest receivable approximates fair value.The fair value for nonperforming/impaired loans is determined by using discounted cashflow analysis or underlying collateral values, where applicable.

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

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

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

The fair value of assets and liabilities are depicted below:

            September 30, 2011                                  December 31, 2010 ___           

(in 000’s)	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
(Dollars in thousands)
Assets:
Cash and cash equivalents	$14,868	$14,868	$8,696	$8,696
Investment securities	18,709	19,262	16,477	16,582
Loans, net of allowance for loan losses	40,844	40,644	44,686	44,698
Accrued interest receivable	357	357	363	363
Liabilities:
Demand deposits	31,569	31,569	27,331	27,331
Savings deposits	14,590	14,590	13,856	13,856
Time deposits	25,959	25,959	26,023	26,023
Accrued interest payable	47	47	57	57

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Net (Loss) Income Per Share

9 Months Ended

Sep. 30, 2011

Net (Loss) Income Per Share

3. Net (Loss) Per Share

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

	Three Months Ended     September 30, 2011	Three Months Ended September 30, 2010	Nine Months Ended   September 30, 2011	Nine Months Ended   September 30, 2010
Basic:
Net (loss) income available to common shareholders	($281,054)	$46,015	($757,807)	($705,819)
Average common shares outstanding-basic	1,065,588	1,065,588	1,065,588	1,065,588
Net (loss) income per share-basic	($0.26)	$0.04	($0.71)	($0.66)
Diluted:
Average common shares-diluted	1,065,588	1,065,588	1,065,588	1,065,588
Net (loss) income per share-diluted	($0.26)	$0.04	($0.71)	($0.66)

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

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Significant Accounting Policies

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, 2010 when reviewing this Form 10-Q.  Quarterly results reported herein are not necessarily indicative of results to be expected for other quarters.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company’s consolidated financial position as of September 30, 2011 and December 31, 2010 and the consolidated results of its operations for the three and nine month periods ended September 30, 2011 and 2010, and its consolidated cash flows for the three and nine month periods ended September 30, 2011 and 2010.

Management’s Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, the determination of the allowance for loan losses, valuation allowance for deferred tax assets and consideration of impairment of other intangible assets.

Commitments

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

Contingencies

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

Non-accrual and Past Due Loans.

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

Income Taxes

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

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

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

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New Authoritative Accounting Guidance

9 Months Ended

Sep. 30, 2011

New Authoritative Accounting Guidance

4.New Authoritative Accounting Guidance

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings.  The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB ASC Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties.  For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  The Company’s adoption of this ASU on July 1, 2011 did not have a material impact on the Company’s consolidated financial position or results of operations.

ASU No. 2011-03, in May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments to the Codification in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  The Company is evaluating the impact of ASU 2011-04 on its consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU 2011-05 on the presentation of its consolidated financial statements.

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Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities

5.  Investment Securities

The following is a summary of the Company’s investment portfolio as of September 30, 2011:

(In 000’s)	Amortized Cost	Gross unrealized gains	Gross unrealized losses	Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$1,157	$58	$        -	$1,215
Investments in mutual funds	129	-	-	129
	$1,286	$58	-	$1,344
Held-to-maturity:
U.S. government agencies	$7,527	$170	$  -	$7,697
Government Sponsored Enterprises residential mortgage-backed securities	9,839	387	(4)	10,222
	$17,366	$557	($ 4)	$17,919

The following is a summary of the Company’s investment portfolio as of December 31, 2010:

(In 000’s)
	Amortized Cost	Gross unrealized gains	Gross unrealized losses	Fair Value
Available-for-sale:
Government Sponsored Enterprises     residential mortgage-backed securities	$1,144	$66	$         -	$1,210
Investments in mutual funds	129	-	-	129
	$1,273	$66	$        -	$1,339
Held-to-maturity:
U.S. government agencies	$10,402	$90	($145)	$10,347
Government Sponsored Enterprises residential mortgage-backed securities	4,736	166	(6)	4,896
	$15,138	$256	($151)	$15,243

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of September 30, 2011, are as follows:

(In 000’s)	Amortized Cost				Fair Value
Available-for-Sale
Due within one year	$	-	$	-
Due after one year through three years		-		-
Due after three years through five years		-		-
Due five years through ten years		-		-
Due  after 10 years		-		-
Government Sponsored Enterprises residential mortgage-backed securities		1,157		1,215
Total debt securities	$	1,157	$	1,215
Held-to-maturity
Due within one year	$	-	$	-
Due after one year through three years		-		-
Due after three years through five years		250		253
Due five years through ten years		6,499		$6,662
Due  after 10 years		778		783
Government Sponsored Enterprises residential mortgage-backed securities		9,839		10,222
	$	17,366	$	17,919

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

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2011:

(in 000’s)	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-maturity:
Government Sponsored Enterprises residential mortgage-backed securities	$	517	$	(4)	$	-	$	-	$	517		$            (4)
Total	$	517	$	(4)	$	-	$	-	$	517		$            (4)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position               at December 31, 2010:

(in 000’s)	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-maturity:
U.S. government agencies	$	5,398	$	(145)	$	-	$	-	$	5,398	$	(145)
Government Sponsored Enterprises residential mortgage-backed securities		536		(6)		-		-		536		(6)
Total	$	5,934	$	(151)	$	-	$	-	$	5,934	$	(151)

U.S. government agencies. Unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by 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 bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

Government Sponsored Enterprises residential mortgage-backed securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities were caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

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. 

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Allowance for Loan Losses

6. Allowance for Loan Losses

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

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

·Historical Charge-Off Component – Applies a rolling, twelve-quarter historical charge-off rate to all pools of non-classified loans.

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

All of these factors may be susceptible to significant change.   There has been no change in qualitative factors during the nine months ended September 30, 2011.  However, the average 3-year net loss factors have declined during the period in each portfolio segment as a result of a lower level of net charge-offs in 2011.  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.

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2011 follows:

An age analysis of past due loans, segregated by class of loans, as of December 31, 2010 follows:

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 7 loan grading system that follows regulatory accepted definitions as follows:

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

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

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

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

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

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

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality.  Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt.  These credit quality indicators are updated on an ongoing basis.  A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan, but no later than 90 days past due.

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

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.  To date, these charge-offs have only included the unguaranteed portion of Small Business Administration (“SBA”) loans.  Specific reserves are allocated to cover “other-than-permanent”impairment for which the underlying collateral value may fluctuate with market conditions. During the nine months ended September 30, 2011, there were no partial charge-offs of impaired loans.  During the nine months ended September 30, 2010, the Company charged-off approximately $13,000 related to the unguaranteed portion on one impaired SBA loan that had no significant impact on credit loss ratios and/or asset quality trends.

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

Impaired loans as of September 30, 2011 are set forth in the following table.

Impaired loans as of December 31, 2010 are set forth in the following table.

Troubled debt restructurings (“TDRs”).  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal.  The terms of these loans do not include any financial concessions and are consistent with the current market.  Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties).  Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring.  Therefore, the Company had no troubled debt restructurings at September 30, 2011 and December 31, 2010.

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Consolidated Statements of Cash Flows (unaudited) (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities
Net loss	$ (757,807)	$ (705,820)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Provision for loan losses	100,000	477,000
Gain on sale of other real estate	111,291	0
Depreciation expense	188,113	204,971
Amortization expense	176,809	168,706
Decrease (increase) in accrued interest receivable and other assets	146,762	(199,181)
Decrease in accrued interest payable and other liabilites	(94,262)	(59,298)
Net cash used in operating activities	(129,094)	(113,622)
Cash flows from investing activities
Purchase of investments-Held-to-Maturity	(9,912,036)	(14,596,763)
Purchase of investments-Available-for-Sale	(262.041)	0
Proceeds from maturity & principal reductions of investments-Available-for-Sale	251,656	437,726
Proceeds from maturity & principal reductions of investments-Held-to-Maturity	7,662,121	9,809,082
Net decrease (increase) in loans	3,742,454	(457,889)
Purchase of premises and equipment	(88,161)	(57,927)
Net cash provided by (used in) investing activities	1,393,993	(4,865,771)
Cash flows from financing activities
Net increase in deposits	4,907,474	8,170,625
Net cash provided by financing activities	4,907,474	8,170,625
Increase in cash and cash equivalents	6,172,373	3,191,232
Cash and cash equivalents at beginning of period	8,696,111	6,289,844
Cash and cash equivalents at end of period	14,868,484	9,481,076
Supplemental disclosures of cash flow information
Cash paid during the period for interest	193,266	218,391
Noncash transfer of loans to other real estate owned	$ 602,100	$ 1,633,947

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Comprehensive (Loss) Income

9 Months Ended

Sep. 30, 2011

Comprehensive (Loss) Income

2.  Comprehensive (Loss) Income

Total comprehensive (loss) income includes net (loss) income and other comprehensive income or loss that is comprised of unrealized gains and losses on investment securities available for sale, net of taxes.  The Company’s total comprehensive (loss) income for the three months ended September 30, 2011 and 2010 was $(285,106) and $44,324, respectively. The Company’s total comprehensive loss for the nine months ended September 30, 2011 and 2010 was $(763,335) and $(709,200), respectively.  The difference between the Company’s net loss and total comprehensive loss for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.

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CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 2,108,251	$ 2,144,390
Interest bearing deposits with banks	305,253	304,721
Federal funds sold	12,455,000	6,247,000
Cash and cash equivalents	14,868,484	8,696,111
Investment securities:
Held-to-maturity, at amortized cost (fair value of $17,917,930 and $15,242,856 at September 30, 2011 and December 31, 2010, respectively)	17,365,854	15,138,389
Available-for-sale, at fair value	1,343,816	1,338,898
Loans	41,642,955	45,612,217
Less: allowance for loan losses	(799,097)	(925,905)
Net loans	40,843,858	44,686,312
Bank premises & equipment, net	1,043,395	1,143,347
Accrued interest receivable	357,430	363,348
Other real estate owned	1,284,390	1,416,543
Core deposit intangible	358,331	491,889
Prepaid expenses and other assets	550,034	690,878
Total Assets	78,015,592	73,965,715
Liabilities & Shareholders’ Equity
Demand deposits, non-interest bearing	13,675,378	13,528,781
Demand deposits, interest bearing	17,893,654	13,802,602
Savings deposits	14,590,335	13,856,033
Time deposits, $100,000 and over	18,179,695	17,975,595
Other time deposits	7,779,102	8,047,679
Total Deposits	72,118,164	67,210,690
Accrued interest payable	46,604	56,907
Accrued expenses and other liabilities	316,743	400,702
Total Liabilities	72,481,511	67,668,299
Shareholders’ equity:
Preferred Stock, Series A, non-cumulative, 6%, $.01 par value, 500,000 shares authorized, 136,842 issued	1,368	1,368
Common stock, $.01 par value; 2,000,000 shares authorized; 876,921 shares issued and outstanding	8,769	8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value; 191,667 shares issued and outstanding	1,917	1,917
Additional-paid-in-capital	14,749,852	14,749,852
Accumulated deficit	(9,266,398)	(8,508,591)
Net unrealized gain on available-for-sale securities	38,573	44,101
Total Shareholders’ equity	5,534,081	6,297,416
Total Liabilities and Shareholders Equity	$ 78,015,592	$ 73,965,715