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:     March 31, 2012

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 [ ]	Smaller reporting company [ X]
(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 October 29, 2012, 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 October 29, 2012.

EXPLANATORY NOTE

The sole purpose of this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, originally filed with the Securities and Exchange Commission on May 15, 2012, 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 with the original filing.

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)
October 31, 2012	/s/ Evelyn F. Smalls
Date	Evelyn F. Smalls
	President and Chief Executive Officer
October 31, 2012	/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.

XML

Investment Securities

3 Months Ended

Mar. 31, 2012

Investment Securities:

Investment Securities

4.  Investment Securities

The following is a summary of the Company's investment portfolio as of March 31, 2012: 

(In 000’s)	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,036	$	58	$	-		$	1,094
Investments in money market funds		129		-		-			129
	$	1,165	$	58		-		$	1,223
Held-to-maturity:
U.S. government agencies	$	6,532	$	131	$	(22	)	$	6,641
Government Sponsored Enterprises residential mortgage-backed securities		10,084		376		(4	)		10,456
	$	16,616	$	507	$	( 26	)	$	17,097

The following is a summary of the Company's investment portfolio as of December 31, 2011: 

(In 000’s)	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$	1,094	$	58	$	-		$	1,152
Investments in money market funds		129		-		-			129
	$	1,223	$	58	$	-		$	1,281
Held-to-maturity:
U.S. government agencies	$	7,531	$	158	$	-		$	7,689
Government Sponsored Enterprises residential mortgage-backed securities		9,678		373		(2	)		10,049
	$	17,209	$	531	$	(2	)	$	17,738

The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of March 31, 2012, are as follows:

(In 000’s)	Amortized Cost		Fair Value
Available-for-Sale
Due in one year	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		-		-
Government Sponsored Enterprises residential mortgage-backed securities		1,036		1,094
Total debt securities	$	1,036	$	1,094
Investments in money market funds	$	129	$	129
	$	1,154	$	1,223
Held-to-maturity
Due in one year	$	-		-
Due after one year through five years		6,332		6,442
Due after five years through ten years		200		199
Government Sponsored Enterprises residential mortgage-backed securities		10,084		10,456
	$	16,616	$	17,097

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 March 31, 2012:

(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	$	2,926	$	(22	)	$	-	$	-	$	2,926	$	(22	)
Government Sponsored Enterprises residential mortgage-backed securities		780	$	(4	)	$	-	$	-	$	780	$	(4	)
Total	$	3,706	$	(26	)	$	-	$	-	$	3,706	$	(26	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 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	$	1,018	$	(2	)	$	-	$	-	$	1,018	$	(2	)
Total	$	1,018	$	(2	)	$	-	$	-	$	1,018	$	(2	)

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 basis 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 at March 31, 2012.

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 basis 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2012.

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.

XML

New Authoritative Accounting Guidance

3 Months Ended

Mar. 31, 2012

New Authoritative Accounting Guidance:

New Authoritative Accounting Guidance

3.New Authoritative Accounting Guidance

 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 adopted ASU No. 2011-04 as of March 31, 2012 and included the new requirements in Note 7.

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 adopted ASU 2011-05 during the quarter ended March 31, 2012 and presented comprehensive loss in a separate statement.

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)	Mar. 31, 2012	Dec. 31, 2011
CURRENT ASSETS
Cash and due from banks	$ 2,131,797	$ 2,778,924
Interest-bearing deposits with banks	305,576	305,405
Federal funds sold	4,982,000	11,413,000
Cash and cash equivalents	7,419,373	14,497,329
Investment securities:
Available-for-sale, at fair value	1,223,420	1,280,874
Held-to-maturity, at amortized cost (fair value of $17,096,544 and $17,738,368 at March 31, 2012 and December 31 2011, respectively)	16,615,631	17,209,295
Loans, net of unearned discount	41,469,081	41,502,204
Less allowance for loan losses	(864,117)	(867,019)
Net loans	40,604,964	40,635,186
Bank premises and equipment, net	941,033	988,170
Accrued interest receivable	325,540	342,029
Other real estate owned	1,344,042	1,284,390
Intangible assets	269,292	313,811
Prepaid expenses and other assets	536,625	465,838
Total assets	69,279,920	77,016,922
CURRENT LIABILITIES
Demand deposits, noninterest-bearing	14,173,913	14,373,040
Demand deposits, interest-bearing	16,107,663	16,886,633
Savings deposits	14,496,088	14,688,985
Time deposits, under $100,000	7,616,251	7,768,057
Time deposits, $100,000 and over	11,533,939	17,583,743
Total deposits	63,927,854	71,300,458
Accrued interest payable	48,101	58,361
Accrued expenses and other liabilities	280,499	397,187
Total liabilities	64,256,454	71,756,006
SHAREHOLDERS' EQUITY
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 136,842 issued and outstanding	1,368	1,368
Common stock, $0.01 par value; 2,000,000 shares authorized; 876,921 issued and outstanding	8,769	8,769
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value; 191,667 issued and outstanding	1,917	1,917
Additional paid-in-capital	14,749,852	14,749,852
Accumulated deficit	(9,777,640)	(9,539,831)
Accumulated other comprehensive income	39,200	38,841
Total shareholders' equity	5,023,466	5,260,916
Total liabilities and shareholders' equity	$ 69,279,920	$ 77,016,922

XML

Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Significant Accounting Policies:

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, 2011 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 March 31, 2012 and December 31, 2011 and the consolidated results of its operations and its cash flows for the three months ended March 31, 2012 and 2011.

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.

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 LTV ratio

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

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

Non-accrual and Past Due Loans.

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

Income Taxes

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-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.

XML

Net Loss Per Share

3 Months Ended

Mar. 31, 2012

Net Loss Per Share:

Net Loss Per Share

2. Net Loss Per Share

The calculation of net loss income per share follows:

	Three Months Ended March 31, 2012	Three Months Ended March 31, 2011
Basic:
Net loss available to common shareholders	($237,809)	($306,958)
Average common shares outstanding-basic	1,068,588	1,068,588
Net loss per share-basic	($0.22)	($0.29)
Diluted:
Average common shares-diluted	1,068,588	1,068,588
Net loss per share-diluted	($0.22)	($0.29)

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.

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Common Stock, par or stated value	$ 0.01	$ 0.01
Common Stock, shares authorized	2,000,000	2,000,000
Common Stock, shares issued	876,921	876,921
Common Stock, shares outstanding	876,921	876,921
Class B Non-voting common stock, par or stated value	$ 0.01	$ 0.01
Class B Non-voting common stock, shares authorized	250,000	250,000
Class B Non-voting common stock, shares issued	191,667	191,667
Class B Non-voting common stock, shares outstanding	191,667	191,667
Series A Preferred Stock, par or stated value	$ 0.01	$ 0.01
Series A Preferred Stock, shares authorized	500,000	500,000
Series A Preferred Stock, shares issued	136,842	136,842
Series A Preferred Stock, shares outstanding	136,842	136,842
Series A Preferred Stock, noncumulative	6.00%	6.00%
Fair Value Held to Maturity Investment Securities	$ 17,096,544	$ 17,738,368

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 07, 2012
Document and Entity Information:
Entity Registrant Name	UNITED BANCSHARES INC /PA
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Entity Central Index Key	0000944792
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Entity Common Stock, Shares Outstanding		1,068,588

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Interest income:
Interest and fees on loans	$ 659,691	$ 668,281
Interest on investment securities	137,189	153,231
Interest on federal funds sold	5,592	3,244
Interest on time deposits with other banks	174	174
Total interest income	802,646	824,930
Interest expense:
Interest on time deposits	28,233	39,793
Interest on demand deposits	13,053	17,710
Interest on savings deposits	1,802	3,420
Total interest expense	43,088	60,923
Net interest income	759,558	764,007
Provision for loan losses	30,000	30,000
Net interest income after provision for loan losses	729,558	734,007
Noninterest income:
Customer service fees	97,146	97,285
ATM fee income	79,779	86,174
Other income	17,314	30,218
Total noninterest income	194,239	213,677
Noninterest expense:
Salaries, wages and employee benefits	413,537	429,738
Occupancy and equipment	274,777	270,145
Office operations and supplies	74,405	77,356
Marketing and public relations	4,649	22,792
Professional services	73,238	70,731
Data processing	126,806	126,017
Loan and collection cost	19,266	47,572
Deposit insurance assessments	1,215	42,138
Other operating	173,713	168,153
Total noninterest expense	1,161,606	1,254,642
Net loss before income taxes	(237,809)	(306,958)
Net loss	(237,809)	(306,958)
Net loss per common share-basic and diluted	$ (0.22)	$ (0.29)
Weighted average number of common shares	1,068,588	1,068,588
Comprehensive Loss
Net loss	(237,809)	(306,958)
Unrealized gains (losses) on available for sale securities	359	(2,290)
Total comprehensive loss	$ (237,450)	$ (309,248)

XML

Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value:

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 March 31, 2012	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	$1,094	$ -	$1,094	$    -
Money Market Funds	129	129	-	-
Total	$1,223	$129	$1,094	$    -

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value at December 31, 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	$1,152	$-	$1,152	-
Money Market Funds	129	129	-	-
Total	$1,281	$129	$1,152

The fair value of the Bank’s AFS securities portfolio was approximately $1,223,000 and $1,281,000 at March 31, 2012 and December 31, 2011, respectively.  Over 90% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,094,000 at March 31, 2012.  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 March 31, 2012.  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 March 31, 2012 and year ended December 31, 2011.

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 March 31, 2012 and December 31, 2011, for which a nonrecurring change in fair value has been recorded during the three months ended March 31, 2012 and year ended December 31, 2011.

 Carrying Value at March 31, 2012:

(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 3 months ended March 31, 2012
Impaired loans	$817	-	-	$817	$ 4
Other real estate owned (“OREO”)	$75	-	-	$75	-

Carrying Value at December 31, 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 12 months ended December 31, 2010
Impaired Loans	$ 206	-	-	$ 206	$(308)
Other real estate owned (“OREO”)	1,284	-	-	1,284	-

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 up to 10% based upon management’s review and the estimated cost of liquidation. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made on the appraisal process by the appraisers for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. 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 March 31, 2012 was approximately $304,000.  The valuation allowance for impaired loans at December 31, 2011 was approximately $308,000.

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:

		March 31, 2012		December 31, 2011
(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	$7,419	$7,419	$14,497	$14,497
Available for sale securities	Level 2	1,223	1,223	1,281	1,281
Held to maturity securities	Level 2	16,616	17,097	17,209	17,738
Loans, net of allowance for loan losses	Level 2(1)	40,605	41,873	40,635	40,552
Accrued interest receivable	Level 2	326	326	342	342
Liabilities:
Demand deposits	Level 2	30,282	30,282	31,260	31,260
Savings deposits	Level 2	14,496	14,496	14,689	14,689
Time deposits	Level 2	19,150	19,149	25,352	25,401
Accrued interest payable	Level 2	48	48	58	58

(1) For non-impaired loans Level 2; for impaired loans Level 1

XML

Other Real Estate Owned

3 Months Ended

Mar. 31, 2012

Other Real Estate Owned:

Other Real Estate Owned

6.  Other Real Estate Owned

Period-end other real estate owned was as follows:

(in 000’s)	Three Months Ended  March 31, 2012	Year Ended December 31, 2011	Three Months Ended March 31, 2011
Beginning balance	$1,284	$ 1,417	$ 1,417
Additions, transfers from loans	75	602	602
Proceeds from sales	-	(730)	-
	1,359	1,289	2,019
Less: write-downs	(15)	(5)	(4)
Ending Balance	1,344	1,284	$2,015

XML

Regulatory

3 Months Ended

Mar. 31, 2012

Regulatory:

Regulatory

8. Regulatory

On January 31, 2012, the Bank entered into stipulations consenting to the issuance of Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”).  The material terms of the Consent Orders are identical.  The requirements and status of items included in the Consent Orders are as follows:

Requirement	Status
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;	Board participation has been increased will full attendance at board and committee meetings.
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;	There have been no changes in management; however, a management assessment will be performed in conjunction with the required management review and written management plan.
Retain a bank consultant acceptable to the FDIC and the Department to develop a written analysis and assessment of the Bank’s management needs and thereafter formulate a written management plan;	An engagement letter from a qualified consultant has been received and approved by the Bank’s regulators.  The review will commence in May 2012.
Formulate and implement written profit and budget plans for each year during which the orders are in effect;	A three year profit and budget plans were prepared and submitted to regulators for review together with the Bank’s Strategic Plan in April 2012.
Develop and implement a strategic plan for each year during which the orders are in effect, to be revised annually;	A comprehensive strategic plan was prepared and submitted to regulators for review in April 2012.
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%, within a reasonable but unspecified time period;	A capital plan with quarterly benchmarks was prepared and submitted to regulators for review together with the Bank’s Strategic Plan in April 2012.

Formulate a written plan to reduce the Bank’s risk positions in each asset or loan in excess of $100,000 classified as “Doubtful” or “Substandard” at its regulatory examination;	A classified asset reduction plan with quarterly benchmarks measured against capital was prepared and submitted in April 2012.
Requirement	Status
Eliminate all assets classified as “Loss” at its current regulatory examination;	All assets classified as “Loss” have been eliminated.
Revise the Bank’s loan policy to establish and monitor procedures for adherence to the loan policy and to eliminate credit administration and underwriting deficiencies identified at its current regulatory examination;	The Bank’s loan policy has been revised to include enhanced monitoring procedures.  Revisions were submitted to regulators for review in April 2012.
Develop a comprehensive policy and methodology for determining the allowance for loan and lease losses;	The ALLL policy and methodology for determining the allowance for loan and lease losses were submitted to regulators for review in April 2012.
Develop an interest rate risk policy and procedures to identify, measure, monitor and control the nature and amount of interest rate risk the Bank takes;	The Bank’s interest rate risk policy and procedures were submitted to regulators for review in April 2012.
Revise its liquidity and funds management policy and update and review the policy annually;	The Bank’s liquidity policy and contingency plan were submitted to regulators for review in April 2012.
Refrain from accepting any brokered deposits;	The Bank did not accept brokered deposits.
Refrain from paying cash dividends without prior approval of the FDIC and the Department;	The Bank did not pay cash dividends.
Establish an oversight committee of the board of directors of the Bank with the responsibility to ensure the Bank’s compliance with the orders, and	An oversight committee consisting of three outside directors was established and meets periodically to ensure compliance with the orders.
Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the orders.	The first quarterly report will be prepared and submitted in May 2012.

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.

 As of March 31, 2012 and December 31, 2011, the Bank’s tier one leverage capital ratio was 6.24% and 6.27%, respectively, and its total risk based capital ratio was 12.12% and 12.41%, respectively. These ratios are below the levels required by the Orders.  Management believes that the Bank has and will continue to comply with the terms and conditions of the Orders and will continue to operate as a going concern and an independent financial institution for the foreseeable future.

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net loss	$ (237,809)	$ (306,958)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loan losses	30,000	30,000
Amortization of premiums on investments	32,666	8,878
Amortization of core deposit intangible	44,520	44,520
Depreciation on fixed assets	58,606	63,018
Write-down of other real estate owned	15,148	3,879
(Increase) decrease in accrued interest receivable and other assets	(54,298)	41,948
Decrease in accrued interest payable and other liabilities	(126,948)	(86,374)
Net cash used in operating activities	(238,115)	(201,089)
Cash flows from investing activities:
Purchase of held-to-maturity investment securities	(3,249,311)	(1,767,805)
Proceeds from maturity and principal reductions of available-for-sale investment securities	56,275	80,000
Proceeds from maturity and principal reductions of held-to-maturity investment securities	3,811,848	1,555,911
Net (increase) decrease in loans	(74,579)	2,860,144
Purchase of bank premises and equipment	(11,469)	(25,190)
Net cash provided by investing activities	532,764	2,703,060
Cash flows from financing activities:
Net (decrease) increase in deposits	(7,372,605)	534,333
Net cash (used in) provided by financing activities	(7,372,605)	534,333
Net (decrease) increase in cash and cash equivalents	(7,077,956)	3,036,304
Cash and cash equivalents at beginning of year	14,497,329	8,696,111
Cash and cash equivalents at end of year	7,419,373	11,732,415
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	53,348	57,381
Noncash transfer of loans to other real estate owned	$ 74,800	$ 602,100

XML

Allowance For Loan Losses

3 Months Ended

Mar. 31, 2012

Allowance For Loan Losses:

Allowance For Loan Losses

5. 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 twelve-quarter historical charge-off rate to all pools of non-classified loans.

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

All of these factors may be susceptible to significant change.   There were no changes in qualitative factors during the three months ended March 31, 2012.  During the period, the average 3-year net loss factors declined in each category with the exception of consumer loans for which the level of net charge-offs increased. 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)	As of March 31, 2012
	Commercial and industrial		Commercial real estate		Consumer real estate			Consumer loans other			Total
Beginning balance	$	387	$	412	$	68		$	-		$	867
Provision for possible loan losses		30									$	30
Charge-offs		-		-		(38	)		(3	)		(41	)
Recoveries		-		-		5			3			8
Net charge-offs		-		-		(33	)		-			(33	)
Ending balance	$	417	$	412	$	35		$	-		$	864

	For the three months ended March 31, 2011
(in 000's)
	Commercial and industrial			Commercial real estate			Residential mortgages		Consumer real estate		Consumer loans other			Total
Beginning balance	$	301		$	553		$	36	$	36	$	-		$	926
Provision for possible loan losses		-			23			-		-		7			30
Charge-offs		(62	)		(148	)		-		-		(13	)		(223	)
Recoveries		-			2			-		3		6			11
Net charge-offs		(62	)		(146	)		-		3		(7	)		(212	)
Ending balance	$	239		$	430		$	36	$	39	$	-		$	744

(in 000's)	As of March 31, 2012
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:
Loans indivdually evaluated for impairment	$	304	$	-	$	-	$	-	$	304
Loans collectively  evaluated for impairment		113		412		35		-		560
	$	417	$	412	$	35	$	-	$	864
Loans, ending balance:
Loans indivdually evaluated for impairment	$	586	$	1,080	$	-	$	-	$	1,666
Loans collectively  evaluated for impairment		3,370		29,354		5,118		1,961		39,803
Total	$	3,956	$	30,434	$	5,118	$	1,961	$	41,469

	As of December 31, 2011
Period-end amount allocated to:
Loans indivdually evaluated for impairment	$	308	$	-	$	-	$	-	$	308
Loans collectively  evaluated for impairment		79		412		68		-		559
	$	387	$	412	$	68	$	-	$	867
Loans, ending balance:
Loans indivdually evaluated for impairment	$	586	$	1,080	$	-	$	-	$	1,666
Loans collectively  evaluated for impairment		3,144		29,117		5,586		1,989		39,836
Total	$	3,730	$	30,197	$	5,586	$	1,989	$	41,502

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of March 31, 2012 is as follows:

(In 000's)			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	89	$	-	$	485		574	$	1,277	$	1,851
SBA loans		50		-		-		50		86		136
Asset-based		56		-		101		157		1,812		1,969
Total Commercial and industrial		195		-		586		781		3,175		3,956
Commercial real estate:
Commercial mortgages		128		-		673		801		14,520		15,321
SBA loans		-		-		-		-		472		472
Construction		-		-		-		-		1,173		1,173
Religious organizations		-		-		407		407		13,061		13,468
Total Commercial real estate		128		-		1,080		1,208		29,226		30,434
Consumer real estate:
Home equity loans		69		189		112		370		1,641		2,011
Home equity lines of credit		-		-		-		-		46		46
1-4 family residential mortgages		-		-		228		228		2,833		3,061
Total consumer real estate		69		189		340		598		4,520		5,118
Total real estate		197		189		1,420		1,806		33,746		35,552
Consumer and other:
Consumer installment		-		-		-		-		52		52
Student loans		57		70		-		127		1,612		1,739
Other		4		-		-		4		166		170
Total consumer and other		61		70		-		131		1,830		1,961
Total loans	$	453	$	259	$	2,006	$	2,718	$	38,751	$	41,469

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 is as follows:

(In 000's)	Loans 30-89 Days Past Due		Accruing Loans 90 or More Days Past Due		Nonaccrual		Total Past Due Loans		Current Loans		Total Loans
Commercial and industrial:
Commercial	$	32	$	-	$	491		523	$	963	$	1,486
SBA loans		-		-		-		-		235		235
Asset-based		-		-		101		101		1,908		2,009
Total Commercial and industrial		32		-		592		624		3,106		3,730
Commercial real estate:
Commercial mortgages		99		-		677		776		13,900		14,676
SBA loans		-		-		-		-		477		477
Construction		-		-		-		-		1,391		1,391
Religious organizations		559		173		418		1,150		12,503		13,653
Total Commercial real estate		658		173		1,095		1,926		28,271		30,197
Consumer real estate:
Home equity loans		173		152		106		431		1,714		2,145
Home equity lines of credit		-		-		38		38		47		85
1-4 family residential mortgages		-		-		301		301		3,055		3,356
Total consumer real estate		173		152		445		770		4,816		5,586
Total real estate		831		325		1,540		2,696		33,087		35,783
Consumer and other:
Consumer installment		-		-		-		-		58		58
Student loans		112		146		-		258		1,503		1,761
Other		3		-		-		3		167		170
Total consumer and other		115		146		-		261		1,728		1,989
Total loans	$	978	$	471	$	2,132	$	3,581	$	37,921	$	41,502

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.

· 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.

(In 000's)	March 31, 2012
	Good/Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial:
Commercial	$	379	$	686	$	273	$	27	$	260	$	226	$	1,851
SBA loans		-		33		-		53		50		-		136
Asset-based		-		1,628		125		115		101		-		1,969
		379		2,347		398		195		411		226		3,956
Commercial real estate:
Commercial mortgages		-		13,173		779		-		1,369		-		15,321
SBA Loans		-		468		-		-		4		-		472
Construction		-		1,173		-		-		-		-		1,173
Religious organizations		-		8,984		3,328		170		986		-		13,468
		-		23,798		4,107		170		2,359		-		30,434
Total commercial loans	$	379	$	26,145	$	4,505	$	365	$	2,770	$	226	$	34,390

	March 31, 2012
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing		Nonperforming		Total
Consumer Real Estate:
Home equity	$	1,899	$	112	$	2,011
Home equity line of credit		46		-		46
1-4 family residential mortgages		2,833	$	228		3,061
		4,778		340		5,118
Consumer Other:
Consumer Installment		52		-		52
Student loans		1,739		-		1,739
Other		170		-		170
		1,961		-		1,961
Total  consumer loans	$	6,739	$	340	$	7,079
Total loans							$41,469

(In 000's)			December 31, 2011
	Good/Excellent		Satisfactory		Pass		Special Mention		Subtandard		Doubtful		Total
Commercial and industrial:
Commercial	$	379	$	586	$	-	$	31	$	264	$	226	$	1,486
SBA loans		-		130		56		-		49		-		235
Asset-based		-		1,847		61		-		101		-		2,009
		379		2,563		117		31		414		226		3,730
Commercial real estate:
Commercial mortgages		-		13,118		151		-		1,408		-		14,677
SBA Loans		-		471		-		-		5		-		476
Construction		-		1,391		-		-		-		-		1,391
Religious organizations		-		9,751		2,925		-		977		-		13,653
		-		24,731		3,076		-		2,390				30,197
Total commercial loans	$	379	$	27,294	$	3,193	$	31	$	2,804	$	226	$	33,927
				December 31, 2011
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing				Nonperforming				Total
Consumer Real Estate:
Home equity	$	2,039			$	106			$	2,145
Home equity line of credit		47				38				85
1-4 family residential mortgages		3,055				301				3,356
		5,141				445				5,586
Consumer Other:
Consumer Installment		58				-				58
Student loans		1,761				-				1,761
Other		170				-				170
		1,989				-				1,989
Total  consumer loans	$	7,130			$	445			$	7,575
Total loans													$	41,502

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 quarters ended March 31, 2012 and 2011, there were no partial charge-offs of impaired loans.

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 March 31, 2012 are set forth in the following table.

(In 000's)	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Commercial	$	485	$	76	$	409	$	485	$	242
SBA  loans		-		-		-		-		-
Asset-based		-		-		-		-		-
Asset-based		101		-		101		101		62
Total Commercial and industrial		586		76		510		586		304
Commercial real estate:
Commercial mortgages		673		673		-		673		-
SBA  Loans		-		-		-		-		-
Construction		-		-		-		-		-
Religious Organizations		407		407		-		407		-
Total Commercial real estate		1,080		1,080		-		1,080		-
Total Loans	$	1,666	$	1,156	$	510	$	1,666	$	304

Impaired loans as of December 31, 2011 are set forth in the following table.

(In 000's)	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Commercial	$	491	$	78	$	413	$	491	$	246
SBA  loans		-		-		-		-		-
Asset-based		101		-		101		101		62
Total Commercial and industrial		592		78		514		592		308
Commercial real estate:
Commercial mortgages		677		677		-		677		-
SBA  Loans		-		-		-		-		-
Religious Organizations		418		418		-		418		-
Total Commercial real estate		1,095		1,095		-		1,095		-
Total Loans	$	1,687	$	1,173	$	514	$	1,687	$	308

	Three Months Ended						Three Months Ended
(In 000's)	March 31, 2012						March 31, 2011
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		loans		Investment		loans
Commercial and industrial:
Commercial	$	481	$	-	$	483	$	-
SBA  loans		-		-		-		-
Asset-based		101		-		18		-
Total Commercial and industrial		582		-		501		-
Commercial real estate:
Commercial mortgages		675		-		1,243		-
SBA  Loans		-		-		58		-
Religious Organizations		410		-		441		3
Total Commercial real estate		1,085		-		1,742		3
Total Loans	$	1,667		-	$	2,243	$	3

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 March 31, 2012 and December 31, 2011.