-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WO6ZDT5IY3ytP85J3T2GgPsrUw2qgm3rhfL0++ghGmkw7ax10iG0qmYIXtR3uRSB 2OQ1irdUCkQHIUEzfokvTQ== 0000950159-04-001004.txt : 20041115 0000950159-04-001004.hdr.sgml : 20041115 20041115155011 ACCESSION NUMBER: 0000950159-04-001004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCSHARES INC /PA CENTRAL INDEX KEY: 0000944792 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232802415 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25976 FILM NUMBER: 041145053 BUSINESS ADDRESS: STREET 1: 300 NORTH THIRD ST CITY: PHILADELPHIA STATE: PA ZIP: 19106 BUSINESS PHONE: 2158292265 MAIL ADDRESS: STREET 1: 2300 PACKARD BLDG STREET 2: 111 S 15TH ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 10-Q 1 ub3rdqtr-10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. -------------- FORM 10-Q -------------- (Mark One) _X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ UNITED BANCSHARES, INC. ----------------------- (Exact name of registrant as specified in its charter) 0-25976 -------------- Commission File Number Pennsylvania 23-2802415 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 North 3rd Street, Philadelphia, PA 19106 - -------------------------------------- ---------------- (Address of principal executive office) (Zip Code) (215) 351-4600 -------------- (Registrant's telephone number, including area code) N/A -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes__X__ No_____ Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes_____ No__X__ Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes_____ No_____ Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. United Bancshares, Inc. (sometimes herein also referred to as the "Company" or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and a Series Preferred Stock (Series A Preferred Stock). The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. As of November 5, 2004 the aggregate number of the shares of the Registrant's Common Stock outstanding was 1,068,588 (including 191,667 Class B non-voting). There are 33,500 shares of Common Stock held in treasury stock at November 5, 2004. The Series A Preferred Stock consists of 500,000 authorized shares of stock of which 136,842 shares are outstanding and 6,308 shares are held in treasury stock as of November 5, 2004. -------------- FORM 10-Q -------------- Index Item No. Page PART I 1. Financial Statements.............................................. 4 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 8 3. Quantitative and Qualitative Disclosures about Market Risk........ 24 4. Controls and Procedures .......................................... 25 PART II 1. Legal Proceedings................................................. 26 2. Changes in Securities and Use of Proceeds......................... 26 3. Defaults upon Senior Securities................................... 26 4 Submission of Matters to a Vote of Security Holders............... 26 5. Other Information................................................. 26 6. Exhibits and Reports on Form 8-K.................................. 26 2 SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc. ("UBS") to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words "expect," "anticipate," "intended," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. UBS' actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates or the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company's, money-market and mutual funds and other financial institutions operating in the UBS' trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events and the war in Iraq) and the U.S. Government's response to those events or the U.S. Government becoming involved in an additional conflict in a foreign country; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS' success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS' timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; and (l) UBS' success in managing the risks involved in the foregoing. All written or oral forward-looking statements attributed to UBS are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Report are based upon information presently available, and UBS assumes no obligation to update any forward-looking statement. 3 Item 1. Financial Statements Consolidated Balance Sheets
(Unaudited) (Audited) September 30, December 31, 2004 2003 ----------- ----------- Assets Cash and due from banks 3,663,135 4,318,584 Interest bearing deposits with banks 886,643 874,362 Federal funds sold 8,917,000 1,500,000 ----------- ----------- Cash & cash equivalents 13,466,778 6,692,946 Investment securities: Held-to-maturity, at amortized cost (fair market value of $7,806,244 and $6,772,762 7,769,541 6,703,476 at September 30, 2004 and December 31, 2003, respectively) Available-for-sale, at market value 4,886,401 8,933,216 Loans , net of unearned discount 46,049,753 47,028,397 Less: allowance for loan losses (570,796) (338,574) ----------- ----------- Net Loans 45,478,957 46,689,823 Bank premises & equipment, net 1,161,241 2,772,153 Accrued interest receivable 295,595 380,583 Core deposit intangible 1,604,877 1,738,436 Prepaid expenses and other assets 679,782 806,734 ----------- ----------- Total Assets 75,343,172 74,717,367 =========== =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 14,853,165 16,112,983 Demand deposits, interest bearing 9,557,086 10,430,349 Savings deposits 18,021,603 19,309,126 Time deposits, $100,000 and over 13,331,824 10,349,830 Time deposits 10,417,689 10,914,535 ----------- ----------- 66,181,367 67,116,823 Accrued interest payable 85,241 77,775 Accrued expenses and other liabilities 142,589 287,875 ----------- ----------- Total Liabilities 66,409,197 67,482,473 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 1,432 1,432 500,000 shares authorized., 136,842 issued and outstanding, 6,308 shares held in treasury at September 30, 2004 and December 31, 2003 Common stock, $.01 par value; 2,000,000 shares authorized; 1,068,588 shares issued and outstanding at September 30, 2004 10,686 10,686 and December 31, 2003 Treasury stock, 33,500 shares at September 30, 2004 and December 31, 2003 0 0 Additional-paid-in-capital 14,749,789 14,749,789 Accumulated deficit (5,866,541) (7,614,662) Net unrealized gain on available-for-sale securities 38,609 87,649 ----------- ----------- Total Shareholders' Equity 8,933,975 7,234,894 ----------- ----------- 75,343,172 74,717,367 =========== ===========
The accompanying notes are an integral part of these statements. 4 Statement of Operations (unaudited)
Quarter ended Quarter ended Nine months ended Nine months ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Interest Income: Interest and fees on loans $ 784,367 $ 737,618 $2,259,986 $2,193,785 Interest on investment securities 123,429 162,815 419,568 628,645 Interest on Federal Funds sold 24,665 19,391 49,851 84,719 Interest on time deposits with other banks 14,605 5,752 23,735 16,707 ---------- ---------- ---------- ---------- Total interest income 947,066 925,576 2,753,140 2,923,856 Interest Expense: Interest on time deposits 67,179 88,185 211,244 291,205 Interest on demand deposits 11,712 21,046 37,296 67,304 Interest on savings deposits 15,492 19,180 47,324 72,512 ---------- ---------- ---------- ---------- Total interest expense 94,383 128,411 295,864 431,021 Net interest income 852,683 797,165 2,457,276 2,492,835 Provision for loan losses 36,000 60,000 6,000 180,000 ---------- ---------- ---------- ---------- Net interest income less provision for loan losses 816,683 737,165 2,451,276 2,312,835 ---------- ---------- ---------- ---------- Noninterest income: Gain on sale of loans 0 0 6,299 0 Customer service fees 357,980 409,851 1,121,201 1,241,320 Realized gain (loss) on investments 0 675 31,115 675 Gain on sale of fixed assets 1,506,644 0 1,874,203 0 Other income 44,222 51,560 219,542 91,962 ---------- ---------- ---------- ---------- Total noninterest income 1,908,846 462,086 3,252,360 1,333,957 Non-interest expense Salaries, wages, and employee benefits 425,043 543,555 1,451,074 1,670,834 Occupancy and equipment 248,628 327,362 863,360 934,865 Office operations and supplies 105,014 116,906 320,589 341,223 Marketing and public relations 21,348 31,875 48,668 75,593 Professional services 54,782 46,784 176,692 150,318 Data processing 145,388 169,532 421,261 486,118 Deposit insurance assessments 29,104 8,187 43,977 25,370 Other noninterest expense 207,514 208,558 629,894 597,243 ---------- ---------- ---------- ---------- Total non-interest expense 1,236,821 1,452,759 3,955,515 4,281,564 ---------- ---------- ---------- ---------- Net income (loss) $1,488,708 $ (253,508) $1,748,121 $ (634,772) ========== ========== ========== ========== Earnings per share-basic $1.39 ($0.23) $1.64 ($0.58) Earnings per share-diluted $1.39 ($0.23) $1.64 ($0.58) Weighted average number of shares 1,068,588 1,090,141 1,068,588 1,090,141 ========== ========== ========== ========== The accompanying notes are an integral part of these statements. 5
Statements of Cash Flow (unaudited)
Nine Months ended Nine Months ended September 30, September 30, 2004 2003 ---------------- ----------------- Cash flows from operating activities Net income (loss) $ 1,748,121 $ (634,772) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for loan losses 6,000 180,000 Gain on sale of investments (31,115) Gain on sale of loans (6,299) Gain on sale of fixed assets (1,874,203) Depreciation and amortization 460,129 504,036 Decrease in accrued interest receivable and other assets 211,940 68,378 Decrease in accrued interest payable and other liabilities (137,821) (29,236) ----------- ----------- Net cash provided by operating activities 376,752 88,406 Cash flows from investing activities Purchase of investments-Available-for-Sale (250,000) (2,032,133) Purchase of investments-Held-to-maturity (2,500,000) (2,012,482) Proceeds from maturity & principal reductions of investments-Available-for-Sale 3,476,593 7,336,661 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 1,426,398 3,481,120 Proceeds from sale of investments-Available-for-Sale 786,526 0 Net decrease(increase) in loans 1,211,165 (3,012,344) Proceeds from sale of fixed assets 3,283,536 0 Purchase of premises and equipment (101,681) (521,582) ----------- ----------- Net cash provided by investing activities 7,332,536 3,239,240 Cash flows from financing activities Net decrease in deposits (935,456) (7,132,146) ----------- ----------- Net cash used in financing activities (935,456) (7,132,146) Increase(decrease) in cash and cash equivalents 6,773,832 (3,804,500) Cash and cash equivalents at beginning of period 6,692,946 15,529,088 Cash and cash equivalents at end of period $13,466,778 $11,724,588 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for interest 314,747 231,074 =========== ===========
The accompanying notes are an integral part of these statements. 6 NOTES TO FINANCIAL STATEMENTS 1. General 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, 2003 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, 2004 and December 31, 2003 and the consolidated results of its operations for the nine month period ended September 30, 2004 and 2003, and its consolidated cash flows for the nine month period ended September 30, 2004 and 2003. 2. Critical Accounting Policies Allowance for Credit Losses The Bank considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. 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 deferred tax asset has been recognized to offset the deferred tax assets related to cumulative temporary differences and tax loss carryforwards. If management determines that the Bank may be able to realize all or part of the deferred tax asset in the future, a credit to income tax expense may be required to increase the recorded value of net deferred tax asset to the expected realizable amount. No current income tax expense is recorded due to the partial utilization of the Bank's net operating loss carryforward. 3. Stock-based Compensation At September 30, 2004, the Bank had one stock-based employee compensation plan. The Bank accounts for that plan under the recognition and measurement principles of APB 25, "Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation costs is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. 7 The following table provides the disclosures required by SFAS No. 148 and illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
(in thousands except per share data) 2004 2003 ------ ------ Net income(loss) As reported $1,489 ($254) Stock-based compensation costs determined under fair value method for all awards $ - $ - ------ ----- Pro forma $1,489 ($254) Earnings(loss) per share (Basic) As reported $1.39 ($0.23) Pro forma $1.39 ($0.23) Earnings(loss) per share (Diluted) As reported $1.39 ($0.23) Pro forma $1.39 ($0.23)
There were no options granted in 2004 and 2003. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Because the Company is a bank holding company for the Bank, the financial statements in this report are prepared on a consolidated basis to include the accounts of the Company and the Bank. The purpose of this discussion is to focus on information about the Bank's financial condition and results of operations, which is not otherwise apparent from the consolidated financial statements included in this quarterly report. This discussion and analysis should be read in conjunction with the financial statements presented elsewhere in this report. Executive Overview United Bancshares, Inc. is an African American controlled and managed bank holding company for United Bank of Philadelphia (the "Bank"), a commercial bank chartered in 1992 by the Commonwealth of Pennsylvania, Department of Banking and a member of the Federal Reserve System. The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank engages in the commercial banking business, serving the banking needs of its customers with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and individual retirement accounts. The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products is offered to the businesses and consumers in the Bank's service area, including commercial loans, mortgage loans, student loans, home improvement loans, auto loans, personal loans, and home equity loans. Without a lot of marketing initiative, the Bank has built a strong reputation as the "lender of choice" for many religious organizations with this sector constituting 19% of the Bank's commercial loan portfolio at September 30, 2004. The Bank's loan portfolio remained relatively flat during the quarter ended September 30, 2004. While $3.6 million in new commercial loans were originated, the Bank experienced $2 million in paydowns on its residential mortgage loan portfolio as a result of high levels of refinancing activity. Strategies are currently being developed to retain residential mortgage loans and cross-sell other Bank products including home equity loans/lines for customers with significant levels of equity in their homes. 8 The Bank's commercial loan pipeline remains strong. At September 30, 2004, the pipeline totaled $2.9 million, all of which is projected to be funded in the fourth quarter of 2004. In addition, other consumer loans including home equity, automobile, student and credit card loans continue to be sought for growth in the portfolio to allow for risk diversification. The Bank uses direct mail campaigns to solicit much of its consumer loan business. In October 2004, the Bank hired two business development consultants to aggressively seek new business. The Bank will continue to focus on its niche business lines to include the basic deposit and loan business, while developing relationships with several corporate entities that have a commitment to community and economic development in the urban sector. Strategic alliances and partnerships are key to the economic strength of inner city neighborhoods. The Bank has begun to develop these strategic alliances/partnerships to help ensure that the communities it serves have full access to financial products and services. At December 31, 2003, the Bank's Tier 1 leverage ratio had fallen below the 7.00% minimum required by its Written Agreement with its regulators (See Regulatory Matters below). However, at March 31, 2004, June 30, 2004, and September 30, 2004 the Bank's Tier 1 leverage ratio was 7.15% ,7.59%, and 9.85% respectively, above the minimum requirement. Management clearly understands that additional capital is essential to achieve the Bank's strategic plan of growth and core profitability. The Board and management continue to aggressively explore strategies for the infusion of new capital into the organization. The most productive way to increase capital is through sustained core earnings. The Bank's plan projects this occurrence in 2004. Management accomplished the first phase of the Bank's re-capitalization plan that included the sale of a remote bank-owned parking lot in April 2004. This sale resulted in a net gain of $368 thousand which was reflected in the quarter ending June 30, 2004. The Bank completed the second phase of the plan in July 2004 with the sale of its corporate headquarters building located at 300 N. Third Street. This sale resulted in a gain of approximately $1.5 million that is reflected in the third quarter ending September 30, 2004. In conjunction with this sale, the Bank entered a six month low cost lease (expires without a renewal option on January 31, 2005) for a portion of the building while management completes its due diligence/analysis on potential new headquarters locations. The gains on asset sales are being used to re-capitalize the Bank and support growth and profitability strategies. With the increase in the Bank's capital from recent gains on asset sales, the Bank is now positioned for deposit growth. Current capital levels allow for approximately $25 million in deposit growth and while remaining compliant with mandatory capital requirements outlined in its Written Agreement with its regulators (See Regulatory Matters below). Simultaneous with the asset sale strategies outlined above to generate capital, management continues its quest of raising external capital through the sale of the Bank's common and/or preferred stock to support further growth. The Bank had net income of approximately $1.5 million ($1.39 per common share) for the quarter ended September 30, 2004 compared to a net loss of $254 thousand ($0.23 per common share) for the quarter ended September 30, 2003. The financial results for the quarter ended September 30, 2004 included the non-recurring income of $1.5 million from the gain on the sale of the Bank's corporate headquarters corporate headquarters discussed above. Without this gain, the Bank would have experienced break-even financial results from its core operations. A profit restoration plan to generate core profitability was developed and continues to be implemented. It includes among other things staff reductions/consolidations, salary reductions, reduction in branch operating hours, continued elimination of director fees, and the reduction of other operating expenses. 9 Revenue enhancement strategies have also been employed to expand opportunities for fee income through the implementation of new services including corporate loan syndications where the Bank serves in the role of arranger and/or administrative agent. The Bank currently has four (4) such arrangements with fee income projected to exceed $175 thousand for 2004. For the nine months ended September 30, 2004, the Bank recorded approximately $125 thousand in fees related to these syndications. In conjunction with its profit restoration plan, the Bank closed its Two Penn Center branch office located in Center City Philadelphia in July 2004. Deposit retention strategies included the implementation of e-banking in May 2004 that allow customers to perform electronic transactions on their accounts via the internet. In addition, the Bank re-emphasized its extensive ATM network of twenty-eight (28) machines and when appropriate increased customers' daily limits on ATM transactions. The Bank experienced some attrition related to its savings passbook customers because of the physical nature of these accounts, however, it was not considered significant. The projected savings from this branch office closure including personnel, occupancy and other operating costs are estimated to be a minimum of $300 thousand annually. In connection with the sale of its corporate headquarters (currently under a short-term lease arrangement that expires on January 31, 2005) and closure of its Two Penn Center branch office, Management is pursuing a new Center City location for its corporate headquarters to maintain its corporate relevance, increase market share and enhance its corporate identity. The final stages of due diligence are underway on the selection of a new location. Management continues the objective of controlling expenses while providing the appropriate image to allow for the implementation of more effective business development strategies. As a result of the actions referred to above, management believes that the Bank is well positioned to be a well capitalized, profitable financial institution that is positioned for growth. 10 Selected Financial Data The following table sets forth selected financial data for the each of the following periods: (Thousands of dollars, Quarter ended Quarter ended except per share data) ------------- ------------- September 30, September 30, 2004 2003 ------------- ------------- Net interest income $ 853 $ 797 Provision for loan losses 36 60 Noninterest income 1,909 462 Noninterest expense 1,237 1,453 Net income (loss) 1,489 (254) Earnings (loss)per share-basic and diluted $1.39 ($0.23) Balance sheet totals: September 30, September 30, 2004 2003 ------------- ------------- Total assets $75,343 $74,717 Loans, net $45,479 $46,690 Investment securities $12,656 $15,636 Deposits $66,181 $67,117 Shareholders' equity $ 8,934 $ 7,235 Ratios Return on assets(1) 3.21% (1.38)% Return on equity 33.11% (13.03)% Tangible Equity to assets ratio 9.85% 6.81% (1) Not annualized for the quarter ended September 30, 2004. 11 Financial Condition Sources and Uses of Funds The financial condition of the Bank can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in the following table indicates how the Bank has managed these elements. Average funding uses increased approximately $862 thousand, or 1.35%, during the quarter ending September 30, 2004 compared to the prior quarter ended June 30, 2004. Average funding sources decreased $2.6 million, or 3.89%, during the quarter. Sources and Uses of Funds Trends September 30, June 30, (Thousands of Dollars, 2004 Increase 2004 except percentages) -------- (Decrease) --------- Average -------- Average Balance Amount % Balance Funding uses: -------- ------- ----- ------- Loans $46,359 $1,054 2.33% $45,305 Investment securities Held-to-maturity 6,724 (336) (4.76) 7,060 Available-for-sale 4,545 (641) (12.36) 5,186 Federal funds sold 6,920 785 12.80 6,135 ------- ------ ------- Total uses $64,548 $ 862 $63,686 ======= ====== ======= Funding sources: Demand deposits Noninterest-bearing $15,443 ($1,555) (9.15%) $16,998 Interest-bearing 9,746 368 3.92 9,378 Savings deposits 18,396 (783) (4.08) 19,179 Time deposits 20,258 (611) (2.93) 20,869 ------- ------ ------- Total sources $63,843 ($2,581) $66,424 ======= ====== ======= Loans Average loans increased approximately $1.1 million, or 2.33%, during the quarter ended September 30, 2004. This increase is primarily a result of commercial loan originations during the quarter. During the quarter, the Bank funded $3.6 million in commercial loans. However, growth in the portfolio was stymied by continued payoffs in the Bank's residential loan portfolio where customers with adjustable rate loans refinanced into fixed rate mortgages to avoid the negative impact of anticipated rate hikes. During the quarter, the Bank experienced paydowns of $2 million in its mortgage loan portfolio. The Bank is developing strategies to retain and cross-sell its existing mortgage loan customers including the offer of home equity loans/lines for customers who have significant equity in their properties. The Bank's commercial loan pipeline remains strong as a result of focused business development efforts. At September 30, 2004, the pipeline totaled $2.9 million, all of which is projected to be funded in the fourth quarter of 2004. In addition, small business loans, mortgage loans and other consumer loans including home equity, automobile, student and credit card loans will be sought for growth in the portfolio to allow for risk diversification. The Bank has cultivated relationships with other financial institutions in the region with which it participates in loans as a strategy to stabilize and grow its commercial loan portfolio. This strategy continues to be utilized as a low cost means to build the Bank's pool of earning assets while it enhances its own business development capacity. Most of these participations are secured by commercial real estate. During the quarter ended September 30, 2004, the Bank recorded approximately $1.7 million in loan participations with other financial institutions. 12 The Bank's loan-to-deposit ratio at September 30, 2004 was 68.72%, down from 70.49% at June 30, 2004 because of an end of quarter increase in deposit levels while loan levels remained relatively flat. The target loan-to-deposit ratio is 75%. This level would allow the Bank to optimize interest income on earning assets while maintaining adequate liquidity. Management will continue to implement loan growth strategies including the purchase of additional consumer loans (primarily home equity loans) and participation in commercial loans with other financial institutions. Because of the purchase of loan participations and a significant level of commercial loan originations during the quarter ended September 30, 2004, the Bank's loan portfolio is heavily concentrated in commercial loans (primarily commercial real estate) that comprises approximately $27 million, or 58.64%, of total loans. Continued payoffs in the residential mortgage loan portfolio resulted in a reduction of this component of the portfolio from $15.1 million at December 31, 2003 to $14.2 million at March 31, 2004, $12.7 million at June 30, 2004, and $11.0 million at September 30, 2004. The following table shows the composition of the loan portfolio of the Bank by type of loan. (Thousands of Dollars) September 30, June 30, March 31, December 31, 2004 2004 2004 2003 ------- ------- ------- ------- Commercial loans $27,003 $24,936 $22,965 $23,223 Consumer loans 8,023 8,120 8,353 8,695 Residential mortgages 11,023 12,747 14,215 15,110 ------- ------- -------- ------- Total Loans $46,050 $45,802 $45,533 $47,028 ======= ======= ======== ======= Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, the diversification and size of the portfolio, and adequacy of collateral. The following factors are considered in determining the adequacy of the allowance for loan losses: levels and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volumes and terms of loans, effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and relevant staff; national and local economic conditions; industry conditions; and effects of changes in credit concentrations. The following Table presents an analysis of the allowance for loan losses. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) Balance at January 1, 2004 $ 339 Charge-offs: Consumer loans (137) ----- Total charge-offs (137) ===== Recoveries 363 Net (charge-offs) recoveries 226 ----- Additions charged to operations 6 ----- Balance at September 30, 2004 $ 571 ===== 13 The allowance for loan losses as a percentage of total loans was 1.24% at September 30, 2004, unchanged from June 30, 2004. During the quarter ended March 31, 2004, the Bank recovered $265 thousand related to one previously charged-off commercial loan. Of this recovery, the Bank credited $165 thousand back to operations and retained $100 thousand in the allowance for loan losses to provide for potential future losses. The Bank made provisions to the allowance totaling $171 thousand for the nine months ended September 30, 2004. The Bank continues to proactively monitor its credit quality while working with borrowers in an effort to identify and control credit risk. At September 30, 2004, the Bank's classified loans totaled $1.8 million , or 3.88% of total loans. Specific reserves of $232 thousand have been allocated to these loans. In addition, at September 30, 2004, approximately $888 thousand of the classified loans are guaranteed by the Small Business Administration (SBA). While management uses available information to recognize losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination. Management believes the level of the allowance for loan losses is adequate as of September 30, 2004. Nonperforming and Nonaccrual Loans The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be "nonperforming" before the lapse of 90 days. The policy of the Bank is to charge-off unsecured loans after 90 days past due. Interest on "nonperforming" loans ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal of and interest on the loan appears to be available. At September 30, 2004, non-accrual loans were approximately $1.1 million, unchanged from June 30, 2004. Approximately $888 thousand of the Bank's non-accrual loans were guaranteed by the SBA. The Bank has one borrower in the telecommunications industry with loans totaling approximately $1.3 million that experienced severe financial difficulty. As a result, in December 2003, the Bank charged-off the non-SBA-guaranteed portion of this credit totaling $710 thousand. The Bank has presented the remaining balance totaling $568 thousand to the SBA for collection on its guarantee. Therefore, no further loss is anticipated relative to this credit. There is no other known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. From time to time, the Bank purchases loans from other financial institutions. These loans are generally located in the Northeast corridor of the United States. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At September 30, 2004, approximately 19% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. From inception, the Bank has received support in the form of investments and deposits and has developed strong relationships with the Philadelphia region's religious community. Loans made to these organizations were primarily for expansion and repair of church facilities. 14 Investment Securities and Other Short-term Investments Federal Funds Sold, increased on average by $785 thousand, or 12.80%, during the quarter ended September 30, 2004. This increase is because of rapid payoffs in the Bank's residential mortgage portfolio as well as paydowns in the Bank's investments in mortgage-backed securities. The Bank's current investment portfolio primarily consists of mortgage-backed pass-through agency securities (61.3%), and other government-sponsored agency securities (38.7%). During the quarter-ended September 30, 2004, there was a shift in the composition of the portfolio to an increased level of government-sponsored agency securities. Additional purchases of agency securities were required to collateralize quasi-governmental deposits the Bank received in September 2004. The Bank purchased $1.7 million agency securities with short maturities (averging 2.5 years) to minimize potential interest rate risk in the projected rising rate environment. The yield on the portfolio was 4.28% at September 30, 2004 compared with 4.54% at June 30, 2004. The reduction in yield is primarily a result of calls of higher yielding agency securities as well as floating rate mortgage-backed securities that have Treasury and LIBOR indices that repriced in the current lower interest rate environment. The average duration of the portfolio at September 30, 2004 is 2.70 years compared to 2.78 years at December 31, 2003. The slightly shorter duration resulted from uncertainty in the economy that drove long-term interest rates down during the quarter. Because a large percentage of the Bank's portfolio includes mortgage-backed securities, the prepayment rate increased as individuals refinanced variable rate mortgages to lock-in before the projected rise in rates. Management will continue to monitor and take appropriate action to control the optionality in the investment portfolio to ensure that the appropriate level of funds are available to meet liquidity needs. There were $250 thousand in securities called during the quarter. The average yield of called securities was 4.80%. Calls will likely diminish as the economy improves and interest rates rise. Deposits The Bank's core deposit base represents 80% of total deposits. During the quarter ended September 30, 2004, average deposits decreased $2.5 million, or 3.89%. The primary area of decline was in noninterest-bearing checking accounts that decreased on average by $1.6 million, or 9.15%, from June 30, 2004. This decrease was primarily related to one significant deposit relationship with a quasi-governmental organization. However, on September 29, 2004, the Bank received deposits in the form of laddered certificates of deposit (matuirities ranging from 3 months to 12 months) totaling $3.6 million from this organization that more than offset the previous decline. The Bank also experienced a decline of $783 thousand, or 4.08%, in its average savings deposits during the quarter. In July 2004, the Bank closed its 2 Penn Center Office located in Center City Philadelphia. The closure of this branch resulted in some savings passbook account attrition. Because passbook customers must physically enter the branch to complete transactions, electronic banking alternatives including ATMs and e-banking could not be used. Average certificates of deposit declined by $611 thousand, or 2.93%, during the quarter. The primary cause for the certificate of deposit decline was that the Bank Enterprise (BEA) certificates of deposit placed at the Bank by other community development financial institutions matured during the quarter. These certificates had a term of three years and were non-renewable. With the increase in the Bank's capital from recent gains on asset sales, the Bank is now positioned for deposit growth. Current capital levels allow for approximately $25 million in deposit growth and remain compliant with mandatory capital requirements outlined in its Written Agreement with its regulators (See Regulatory Matters below). New business development strategies were implemented in the third quarter of 2004 that included the hiring of two business development consultants and the implementation of a bank-wide incentive program. 15 Other Borrowed Funds The Bank did not borrow funds during the quarter ended September 30, 2004. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. The Bank's liquidity has been enhanced by loan paydowns/payoffs and called investment securities--thereby, eliminating the need to borrow. Commitments and Lines of Credit The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans, and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. The Bank's financial instrument commitments at September 30, 2004 are summarized below: Commitments to extend credit $11,930,000 There were no outstanding letters of credit at September 30, 2004. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A significant portion of these commitments are a result of minority bank syndications of credit facilities for large Fortune 500 companies. These credit facilities are generally unused and serve as back-up lines to commercial paper. The Bank serves in the role as lead/arranger for four (4) of these credits and participates in a number of other facilities where it is not the lead. Management believes the Bank has adequate liquidity to support the funding of unused commitments. Liquidity and Interest Rate Sensitivity Management The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The Bank is required to maintain minimum levels of liquid assets as defined by Federal Reserve Board (the "FRB") regulations. This requirement is evaluated in relation to the composition and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. At September 30, 2004, management believes the Bank's liquidity is satisfactory and in compliance with the FRB regulations The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $9.8 million in loans are scheduled to mature within one year. 16 By policy, the Bank's minimum level of liquidity is 6.00% of total assets. At September 30, 2004, the Bank has total short-term liquidity, including cash and federal funds sold, of $10.9 million, or 14.42% of total assets. Additional liquidity of approximately $4.7 million is provided by the Bank's investment portfolio classified as available-for-sale. The Bank's overall liquidity continues to be enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank continues to avoid reliance on large denomination time deposits as well as brokered deposits. The Bank has one $5 million deposit with a government agency that matures in December 2004. Based on discussions with the customer, management does not anticipate the removal of this deposit in the near future. In addition, in September 2004, the Bank received deposits totaling $3.6 million from a quasi-governmental organization. These deposits were placed in four certificates of deposit with laddered maturities ranging from three months to one year. Based on discussions with management of this organization, the intent is that these deposits will continue to rollover and remain with the Bank for the foreseeable future. An additional $400 thousand deposit was received from this organization in October 2004. The following is a summary of the remaining maturities of time deposits of $100,000 or more outstanding at September 30, 2004: (Thousands of dollars) 3 months or less $ 6,637 Over 3 through 12 months 6,543 Over 1 through three years 152 Over three years -- ------- Total $13,332 ======= Capital Resources Total shareholders' equity increased approximately $1.5 million during the quarter ended September 30, 2004. The increase in equity was primarily due to net income of $1.48 million during the quarter and a $42 thousand increase in other comprehensive income (FAS 115 unrealized gains on available-for-sale securities) because of interest rate changes that increased the value of the investment portfolio. The Bank's Capital Planning Committee, consisting of four outside directors and the Bank's two executive officers, is charged to explore all available options for capital infusion. The Board and management have a heightened sensitivity to this area and recognize that the lack of proper capital levels can threaten the viability and growth of the institution. Aggressive steps were taken to address this matter. The first step included the sale of a remote bank-owned parking lot in April 2004. This sale resulted in a net gain of $368 thousand. The second step included the sale of the Bank's Corporate Headquarters Building located at 300 N. Third Street. This sale was completed in July 2004 on which the Bank realized a gain of $1.5 million that is reflected in the quarter ended September 30, 2004. In conjunction with this sale, the Bank entered a six month low cost lease for a portion of the building while management completes its due diligence/analysis on potential new headquarters locations. Gains on asset sales will be used to re-capitalize the Bank and support growth and profitability strategies. The next phase of capital generation will focus on retained earnings--attaining continuous core profitability from loan and deposit growth. FRB standards for measuring capital adequacy for U.S. Banking organizations requires that banks maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher risk will require more capital backing than assets with lower risk. In addition, banks are required to maintain capital to support, on a risk-adjusted basis, certain off-balance-sheet activities such as loan commitments. The FRB standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 consists of common shareholders' equity, non-cumulative and cumulative perpetual preferred stock, and minority interests less core deposit intangible. Tier 2 capital consists of allowance for loan losses, hybrid capital instruments, term-subordinated debt, and intermediate-term preferred stock. Banks are required to meet a minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at least 4% Tier 1 capital and a Tier I Leverage ratio of at least 6%. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital. 17 As indicated in the table below, the Company's and the Bank's risk-based capital ratios were above the minimum requirements at September 30, 2004. However, as of December 31, 2003, the Bank's tier one leverage capital ratio had fallen to 6.81%, below the 7% minimum capital ratio required by the Written Agreement. At March 31, 2004, June 30, 2004, and September 30, 2004, the tier one leverage ratio had improved to 7.15%, 7.59%, and 9.85% respectively, primarily because of a $265 thousand recovery on a previously charged-off loan, a $368 thousand gain on the sale of a remote bank-owned parking lot, and a gain of $1.5 million on the sale of the Bank's corporate headquarters in July 2004. (Refer to Regulatory Matters below for the Written Agreement requirements). With a focus on growth and core profitability, management will work to ensure the capital ratio remains above the minimum requirements of the Written Agreement.
Company Company Company Company ------- ------- ------- ------- September 30, June 30, March 31, December 31, 2004 2004 2003 2004 ------- ------- ------- ------- Total Capital $ 8,933 $ 7,403 $ 7,242 $ 7,235 Less: Intangible Asset/Net unrealized gains (losses) on available for sale portfolio (1,644) (1,646) (1,772) (1,826) ------- ------- ------- ------- Tier 1 Capital 7,289 5,757 5,470 5,409 ------- ------- ------- ------- Tier 2 Capital 534 527 478 339 ------- ------- ------- ------- Total Qualifying Capital $ 7,823 $ 6,284 $ 5,948 $ 5,748 ======= ======= ======= ======= Risk Adjusted Total Assets (including off-Balance sheet exposures) $42,687 $42,093 $43,206 $44,971 Tier 1 Risk-Based Capital Ratio 17.07% 13.67% 12.66% 12.03% Tier 2 Risk-Based Capital Ratio 18.33% 14.93% 13.77% 12.78% Leverage Ratio 10.26% 7.99% 7.54% 7.19%
Bank Bank Bank Bank ------- ------- ------- ------- September 30, June 30, March 31, December 31, 2004 2004 2003 2004 ------- ------- ------- ------- Total Capital $ 8,645 $ 7,115 $ 6,954 $ 6,957 Less: Intangible Asset/Net unrealized gains (losses) on available for sale portfolio (1,644) (1,646) (1,771) (1,826) ------- ------- ------- ------- Tier 1 Capital 7,001 5,469 5,182 5,131 ------- ------- ------- ------- Tier 2 Capital 534 527 478 339 ------- ------- ------- ------- Total Qualifying Capital $ 7,535 $ 5,996 $ 5,660 $ 5,470 ======= ======= ======= ======= Risk Adjusted Total Assets (including off-Balance sheet exposures) $42,687 $42,093 $43,206 $44,971 Tier 1 Risk-Based Capital Ratio 16.40% 12.99% 11.99% 11.39% Tier 2 Risk-Based Capital Ratio 17.65% 14.24% 13.10% 12.14% Leverage Ratio 9.85% 7.59% 7.15% 6.81%
18 Results of Operations Summary The Bank had net income of approximately $1.5 million ($1.39 per common share) for the quarter ended September 30, 2004 compared to a net loss of $254 thousand ($0.23 per common share) for the quarter ended September 30, 2003. The financial results for the quarter ended September 30, 2004 included non-recurring income of $1.5 million from the gain on the sale of the Bank's corporate headquarters building located at 300 North Third Street. Without this gain, the Bank would have experienced break-even financial results from its core operations. A profit restoration plan to generate core profitability was developed and continues to be implemented. It includes among other things staff reductions/consolidations, salary reductions, reduction in branch operating hours, continued elimination of director fees, and the reduction of other operating expenses. Also, as part this plan, upon expiration of the lease in July 2004, the Bank's Two Penn Center branch was closed and consolidated with other branches in the network to further reduce occupancy, personnel, and other operating cost. The projected annual savings from this action is a minimum of $300 thousand. While expense reductions continue to be achieved, a greater impact will be realized with increased asset size (deposit growth) and loan originations that build the Bank's loan-to-deposit ratio. Increased deposit and loan volume will result in a higher net interest margin and therefore increased revenues. Thus, while continuing to control expenses, management has placed more focus on the implementation of business development strategies to increase the level of deposits and loans outstanding to achieve profitability. During the quarter ended September 30, 2004, the Bank hired two business development consultants to aggressively solicit business. In addition, management plans to leverage the Bank's strategic corporate alliances to develop business. Revenue enhancement strategies have been employed to expand opportunities for fee income through the implementation of new services including corporate loan syndications where the Bank serves in the role of arranger and/or administrative agent. A more detailed explanation for each component of earnings is included in the sections below. Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest earning assets and interest paid on interest-bearing liabilities, is a significant component of the earnings of the Bank. Changes in net interest income result primarily from increases or decreases in the average balances of interest earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income increased $56 thousand, or 6.96% for the quarter ending September 30, 2004 compared to the quarter ending September 30, 2003. Much of this improvement was experienced in the loan portfolio. While the average level of loans remained relatively flat, there was a shift in the mix of the portfolio to higher yielding commercial loans versus lower yielding residential loans. In addition, in December 2003, the Bank sold $3 million in lower yielding student loans and purchased $3 million in home equity lines of credit with higher interest rates. Management's goal is to increase the loan portfolio to achieve a 75% loan-to-deposit ratio to further increase the Bank's net interest income. The Bank's cost of funds declined to 0.57% for the quarter ending September 30, 2004 compared to 0.71% for the same quarter in 2003. Consistent with current market conditions, the Bank reduced the rates it pays on many of its interest-bearing products. Because most of the Bank's deposits are considered core, they were not sensitive to declining rates. 19 The net interest margin of the Bank was 5.01% at September 30, 2004 compared to 4.25% at September 30, 2003. Management actively manages its exposure to interest rate changes. The increase in margin is attributed to the reduction in the Bank's cost of funds as well as a shift out of lower yielding mortgages and student loans into higher yielding commercial and home equity loans. Also, the prime rate increased 75 basis points in 2004 resulting in increased interest income compared to 2003. Provision for Loan Losses The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The Bank made provisions totaling $36 thousand for the quarter ending September 30, 2004 compared to a $60 thousand provision for the same quarter in 2003. Provisions are based on management's review and analysis of the Bank's loan portfolio and the level in classified loans. There was no significant change in the level of classified loans during the quarter. (Refer to Allowance for Loan Losses above for discussion on classified loans and specific reserves.) Management continues to closely monitor the portfolio for signs of weakness and will proactively make provisions to cover potential losses. Management believes the level of the allowance for loan losses is adequate as of September 30, 2004. Noninterest Income The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charge, overdrafts, account analysis, and other customer service fees. Noninterest income for the quarter ended September 30, 2004 increased $1.4 million, or 313.09%, compared to the quarter ended September 30, 2003. In July 2004, the Bank recognized a gain of $1.5 million on the sale of its 300 North 3rd Street Corporate headquarters building. There was a decline of $52 thousand, or 12.66%, in customer service fees as a result of a reduction in activity fees on deposits and lower surcharge income on the Bank's ATM network. The Bank's lower deposit levels in 2004 compared to 2003 resulted in less overdraft fees, activity service charges and low balance fees. In addition, some of the Bank's ATMs have experienced a drop in volume as competitors placed machines in close proximity to existing high volume ATMs of the Bank and several of the Bank's high volume ATM's were replaced with those of competitors that paid significantly higher transactional fees to site owners. Management continues the process of identifying potentially high volume locations to place machines. The Bank has further developed a new core line of business--serving as arranger/agent for loan syndications for major corporations throughout the country. The Bank was selected to syndicate four significant back-up lines/letters of credit with other minority banks throughout the country for major corporations for which agent fees for 2004 are projected to exceed $175 thousand compared to $85 thousand received in 2003. These fees will be received annually for the administration of the credit facilities. During the nine months ended September 30, 2004, the Bank completed the syndication process for three credit facilities for which the fees received totaled $125 thousand. Management plans to continue to develop this core line of business to generate fee income to support the Bank's profitability goals. Noninterest Expense Salaries and benefits decreased $119 thousand, or 21.80%, during the quarter ended September 30, 2004 compared to 2003. As part of the Bank's continued implementation of its Profit Restoration Plan, there have been strategic reductions in staff, job consolidations, and a reduction in salaries for certain employees to lower the level of personnel expense. Also, in conjunction with the closure of its Two Penn Center branch office, the Bank there was attrition and layoffs that resulted in staff reductions. Management continues its review to ensure the Bank is operating with the most efficient organizational structure. 20 Data processing expenses are a result of the management decision of the Bank to outsource a majority of its data processing operations to third party processors. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, and student loan portfolios. Data processing expenses decreased approximately $24 thousand, or 14.24%, during the quarter ended September 30, 2004 compared to 2003. In December 2003, the Bank converted/consolidated its consumer loan account processing (previously outsourced to EDS) with its core vendor, FISERV. This conversion resulted in a monthly savings of approximately $6 thousand. The Bank continues to study methods by which it may further reduce its data processing cost. Occupancy expense decreased approximately $79 thousand, or 24.05%, during the quarter ended September 30, 2004 compared to 2003. Management continued the implementation of strategies to reduce its occupancy expense including the closure/consolidation of its Two Penn Center Center City branch office in July 2004. The cost of the lease was scheduled to double at expiration. As part of the Bank's profit restoration plan, upon expiration of the lease, this branch was closed and consolidated with other branches in the network to further reduce operating costs. In addition, there was a reduction in depreciation expense related to the Two Penn Center branch office for which leasehold-related improvements and furniture became fully depreciated. Professional services expense increased approximately $8 thousand, or 17.10%, for the quarter ended September 30, 2004 compared to 2003. This increase is primarily related to increased audit-related cost associated with the implementation of the Sarbanes-Oxley Act and the use of external consultants to assist with the Bank's Disaster Recovery Testing. Office operations and supplies expense declined by $12 thousand, or 10.17%, for the quarter ended September 30, 2004 compared to 2004. In conjunction with the closure/consolidation of the Bank's Two Penn Center financial service center, further reductions were experienced in this category of expense including security guards and other costs associated with branch operations. FDIC insurance premiums increased by $21 thousand, or 255.49%, for the quarter ended September 30, 2004 compared to 2003. FDIC insurance premiums are applied to all financial institutions based on a risk based premium assessment system. Under this system, bank strength is based on three factors: 1) asset quality, 2) capital strength, and 3) management. Premium assessments are then assigned based on the institution's overall rating, with the stronger institutions paying lower rates. The Bank's assessment was based on 1.96 basis points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable deposits. While the Bank is well capitalized, the increase during 2004, is a result of the perceived risk associated with the Bank's operating losses in 2003. All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. Regulatory Matters In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement ("Agreement") with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank maintain a minimum Tier 1 leverage capital ratio of 7.00%. As of December 31, 2002, the Bank had met the required ratios by continuing to implement strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. Failure to comply could result in additional regulatory supervision and/or actions. 21 At December 31, 2003, the Bank's Tier 1 leverage ratio had fallen below the 7.00% minimum required by its Written Agreement with its regulators. However, at March 31, 2004, June 30, 2004, and September 30, 2004, the Bank's Tier 1 leverage ratio was 7.15%, 7.59% and 9.85%, respectively, above the minimum requirement. Management clearly understands that additional capital is essential to achieve the Bank's strategic plan of growth and core profitability. The Board and management continue to explore strategies to ensure continued growth of the Bank's capital to support its growth goals. The most productive way to increase capital is through sustained core earnings. The Bank's plan projects this occurrence in 2004. Management accomplished the first phase of the Bank's re-capitalization plan that included the sale of a remote bank-owned parking lot in April 2004. This sale resulted in a net gain of $368 thousand which was reflected in the quarter ending June 30, 2004. The Bank completed the second phase of the plan in July 2004 with the sale of its corporate headquarters building located at 300 N. Third Street. This sale resulted in a gain of $1.5 million that is reflected in the third quarter ending September 30, 2004. The gains on asset sales are being used to re-capitalize the Bank and support growth and profitability strategies. Simultaneous with these asset sale strategies to generate capital, management continues its quest of raising external capital through the sale of the Company's common and/or preferred stock. A regulatory examination completed in February 2004 determined that the Bank was not in compliance with certain other elements of the Agreement including the implementation of a viable earnings/strategic plan and the timely charge-off/funding of the allowance for loan losses. Not meeting these requirements could expose the Bank to possible further regulatory actions. Management believes that it has implemented corrective action where necessary including the implementation of an achievable strategic plan for 2004. Restrictions on the Payment of Dividends The Bank is the sole source of income with which to pay dividends to the Company's shareholders. The holders of the Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefore under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking Code of 1965, funds available for cash dividend payments by a bank are restricted to accumulated net earnings and if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of its net earnings for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the bank without prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania. Under the Federal Reserve Act, if a bank has sustained losses up to or exceeding its undivided profits, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the bank's net profits for that year plus its retained net profits from the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Federal Reserve Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. The Federal Deposit Insurance Act generally prohibits all payments of dividends by a bank, which is in default of any assessment to the Federal Deposit Insurance Corporation. The Written Agreement prohibits the Company and the Bank from declaring or paying of dividends without the prior written approval of the Philadelphia Federal Reserve Bank and the Directors of the Board of Governors Division of Supervision and Regulation. 22 Recent Accounting Pronouncements In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that the Company will be unable to collect all contractually required payments receivable. SOP 03-3 requires that the Company recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows excepted at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. Management is currently evaluating the provisions of SOP 03-3. The Securities and Exchange Commission (SEC) recently released Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on the Company's consolidated financial statements. On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123 and APB No. 95, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. On October 13, 2004, FASB voted to delay the adoption of this proposed standard by public companies until their first fiscal quarter beginning after June 15, 2005. The Company is currently evaluating this proposed statement and its effects on its results of operations. In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in the Company's 2003 Form 10-K. In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue's three-step approach for determining whether an investment is other-than-temporarily impaired. However, step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Company is in the process of determining the impact that this EITF will have on its financial statements. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to prime or other short term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. At September 30, 2004, an asset sensitive position is maintained on a cumulative basis through 1 year of 11.9% that is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The increase in the Bank's positive gap position is primarily due to high level of funds in short-term investments (i.e. Federal Funds Sold) and the level of variable rate loans and investment securities. Generally, because of the positive gap position of the Bank in shorter time frames, the Bank can anticipate that increases in market rates will have a positive impact on the net interest income, while decreases will have the opposite effect. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, although the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. This model produces an interest rate exposure report that forecast changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance-sheet instruments. The calculated estimates of changes in market value of equity at September 30, 2004 are as follows: Market value Market value of equity Changes in rate of equity as a % of MV of Assets ------------------- ------------ ---------------------- (Dollars in thousands) +300 basis points $4,293 6.2% +200 basis points 5,489 7.7 +100 basis points 6,651 9.1 Flat rate 7,771 10.4 -100 basis points 8,549 11.3 -200 basis points 9,194 12.0 -300 basis points 9,825 12.6 The market value of equity may be impacted by the composition of the Bank's assets and liabilities. A shift in the level of variable versus fixed rate assets will create swings in the market value of equity. The assumptions used in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Company's assets and liabilities, as well as the estimated effect of changes in interest rates on the market value of portfolio equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. 24 The Board of Directors of the Bank and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest-rate exposure is not considered significant and is within the policy limits of the Bank at September 30, 2004. However, if significant interest rate risk arises, the Board of Directors and management may take (but are not limited to) one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit (CDs) and movement into money market deposit accounts and short-term CDs through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the balance sheet of the Bank. 3. Restructure the investment portfolio of the Bank. The Board of Directors has determined that active supervision of the interest-rate spread between yield on earnings assets and cost of funds will decrease the vulnerability of the Bank to interest-rate cycles. Item 4. Controls and Procedures As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer, Evelyn F. Smalls, and Chief Financial Officer, Brenda M. Hudson-Nelson, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. As of the date of this report, there have not been any significant changes in the Company's internal controls or in any other factors that could significantly affect those controls subsequent to the date of the evaluation. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings. No material claims have been instituted or threatened by or against the Company or its affiliates other than in the ordinary course of business. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K a) Exhibits. Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a) Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a) Exhibit 32.1 is the Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 is the Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2004. 26 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANCSHARES, INC. Date: November 12, 2004 /s/ Evelyn Smalls ------------------------------ Evelyn Smalls President & Chief Executive Officer Date: November 12, 2004 /s/ Brenda M. Hudson-Nelson ---------------------------------- Brenda Hudson-Nelson Executive Vice President/Chief Financial Officer 27 Index to Exhibits Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a) Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a) Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 28 EX-31 2 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO Exchange Act RULE 13a-14(a) or RULE 15d-14(a) I, Evelyn F. Smalls, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report are conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter, (Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Evelyn F. Smalls - ----------------------- Evelyn F. Smalls Chief Executive Officer November 12, 2004 29 EX-31 3 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO Exchange Act RULE 13a-14(a) or RULE 15d-14(a) I, Brenda M. Hudson-Nelson, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report are conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter,(registrant's fourth fiscal quarter in the case of an annual report.) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Brenda M. Hudson-Nelson - ---------------------------- Brenda M. Hudson-Nelson Chief Financial Officer November 12, 2004 30 EX-32 4 ex32-1.txt EXHIBIT 32.2 Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of United Bancshares, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Evelyn F. Smalls, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Evelyn F. Smalls - ------------------------ Evelyn F. Smalls Chief Executive Officer November 12, 2004 31 EX-32 5 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of United Bancshares, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brenda M. Hudson-Nelson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Brenda M. Hudson-Nelson - --------------------------- Brenda M. Hudson-Nelson Chief Financial Officer November 12, 2004 32 -----END PRIVACY-ENHANCED MESSAGE-----