10-Q 1 e2001_march10q.txt UNITED BANCSHARES, INC. FORM 10-Q 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 MARCH 31, 2001 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 ---------- SEC 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____ 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. Registrant has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common stock and Series Preferred Stock (Series A Preferred Stock). The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment on September 30, 1998. This Class of stock has all of the rights and privileges of Common Stock with the exception of voting. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of May 9, 2001, 1,099,421 (191,667 Class B Non voting) shares were issued and outstanding. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock"), 500,000 authorized of which 143,150 shares were outstanding as of May 9, 2001. Item 1. Financial Statements Balance Sheet (unaudited) March 31, December 31, 2001 2000 ---------- ----------- Assets Cash and due from banks 5,734,745 5,328,384 Interest bearing deposits with banks 248,304 245,496 Federal funds sold 5,530,000 720,000 ----------- ----------- Cash & cash equivalents 11,513,049 6,293,880 Investment securities: Held-to-maturity, at amortized cost 15,803,529 23,587,092 Available-for-sale, at market value 10,019,753 11,426,544 Loans, net of unearned discount 46,537,931 45,305,468 Less: allowance for loan losses (581,232) (562,174) ----------- ----------- Net loans 45,956,699 44,743,294 Bank premises & equipment, net 3,285,130 3,457,518 Accrued interest receivable 1,120,391 1,158,485 Other real estate owned 48,750 50,000 Core deposit intangible 2,251,838 2,297,674 Prepaid expenses and other assets 907,802 518,721 ------------ ----------- Total Assets 90,906,941 93,533,208 ============ =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 19,283,366 20,386,652 Demand deposits, interest bearing 12,688,563 15,942,933 Savings deposits 25,256,525 25,355,811 Time deposits, $100,000 and over 11,165,752 9,063,433 Time deposits 12,133,080 12,489,281 ------------ ----------- 80,527,286 83,238,110 Accrued interest payable 209,517 230,357 Accrued expenses and other liabilities 750,185 715,231 ------------ ----------- Total Liabilities 81,486,989 84,183,699 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, 1,432 1,432 $.01 par value, 500,000 shrs auth., 143,150 issued and outstanding Common stock, $.01 par value; 2,000,000 shares authorized; 1,099,421 shares issued and outstanding at 10,994 10,994 March 31, 2001 and December 31, 2000 Additional-paid-in-capital 14,717,484 14,717,484 Accumulated deficit (5,481,499) (5,413,111) Net unrealized gain on available-for-sale securities 171,540 32,710 ------------ ----------- Total Shareholders' equity 9,419,951 9,349,509 ------------ ----------- 90,906,940 93,533,208 ============ =========== Statement of Operations (unaudited) Quarter Quarter ended ended March 31, March 31, 2001 2000 ---------- ----------- Interest Income: Interest and fees on loans $ 951,793 $1,240,082 Interest on investment securities 506,008 908,624 Interest on Federal Funds sold 63,880 136,888 Interest on time deposits with other banks 1,594 4,053 ---------- ---------- Total interest income 1,523,275 2,289,647 Interest Expense: Interest on time deposits 287,147 434,762 Interest on demand deposits 62,772 200,352 Interest on savings deposits 94,699 136,276 Interest on borrowed funds 0 72,105 ---------- ---------- Total interest expense 444,618 843,495 Net interest income 1,078,657 1,446,152 Provision for loan losses 10,000 90,000 ---------- ---------- Net interest income less provision for loan losses 1,068,657 1,356,152 ---------- ---------- Noninterest income: Customer service fees 554,868 563,590 Other income 30,186 90,492 ---------- ---------- Total noninterest income 585,054 654,082 Non-interest expense Salaries, wages, and employee benefits 649,159 917,792 Occupancy and equipment 400,517 441,046 Office operations and supplies 135,705 225,549 Marketing and public relations 21,126 57,488 Professional services 61,193 168,138 Data processing 210,195 253,768 Deposit insurance assessments 39,851 17,110 Other noninterest expense 204,353 301,093 ---------- ---------- Total non-interest expense 1,722,099 2,381,985 ---------- ---------- Net income (loss) $ (68,388) $ (371,751) ========== ========== Earnings per share-basic ($0.06) ($0.36) Earnings per share-diluted ($0.06) ($0.36) ========== ========== Weighted average number of shares 1,099,421 1,028,753 ========== ========== Statement of Cash Flows (unaudited) Quarter Quarter ended ended March 31, March 31, 2001 2000 ---------- ----------- Cash flows from operating activities Net income (loss) $ (68,388) (371,751) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 10,000 90,000 Depreciation and amortization 190,520 248,213 (Increase) decrease in accrued interest receivable and other assets (350,987) (526,116) (Decrease) increase in accrued interest payable and other liabilities 14,114 (352,963) ---------- ---------- Net cash provided by operating activities (204,741) (912,617) Cash flows from investing activities Purchase of investments--Available-for-Sale (2,349,693) (1,650,445) Purchase of investments--Held-to-Maturity 0 (2,422,143) Proceeds from maturity & principal reductions 3,798,705 230,198 of investments--Available-for-Sale Proceeds from maturity & principal reductions 7,783,563 384,368 of investments--Held-to-Maturity Proceeds from sale of 118,600 --- investments--Available-for-Sale Net (increase) decrease in loans (1,223,405) (1,032,533) Purchase of premises and equipment 6,964 (148,274) ---------- ---------- Net cash provided by (used in) 8,134,734 (4,638,829) investing activities Cash flows from financing activities Net increase (decrease) in deposits (2,710,824) (1,374,189) ---------- ---------- Net cash provided by (used in) financing activities (2,710,824) (1,374,189) Increase (decrease) in cash and cash equivalents 5,219,169 (6,925,635) Cash and cash equivalents at 6,293,880 16,920,216 beginning of period Cash and cash equivalents at end of period 11,513,049 9,994,581 ========== ========== Supplemental disclosures of cash flow information Cash paid during the period for interest $ 874,290 $ 727,260 ========== ========== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted in favor of the formation of a bank holding company, United Bancshares, Inc. (the Company). Accordingly, in October 1994 the Company became a bank holding company in conjunction with the issuance of its common shares in exchange for the common shares of the Bank. The financial statements 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 annual report. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis. 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) March 31, March 31, 2001 2000 ------------- ------------- Net interest income $ 1,069 $ 1,356 Provision for loan losses 10 90 Noninterest income 585 654 Noninterest expense 1,722 2,382 Net income (loss) $ (68) $ (372) Earnings per share--basic and diluted $ (0.06) $ (0.36) Balance sheet totals: March 31, December 31, 2001 2000 ------------- ------------- Total assets $90,907 $93,533 Loans, net $45,957 $44,743 Investment securities $25,823 $35,014 Deposits $80,527 $83,238 Shareholders' equity $ 9,420 $ 9,350 Ratios Return on assets (0.29)% (0.63)% Return on equity (2.96)% (8.08)% Equity to assets ratio 7.86 % 7.74 % 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 sources decreased approximately $4.3 million, or 4.96%, during the quarter ending March 31, 2001. Average funding uses decreased $6.4 million, or 7.18%, for the same quarter. Sources and Uses of Funds Trends March 31, December 31, 2001 2000 ------- Increase ------- Average (Decrease) Average Balance Amount % Balance ------- --------- ----- ------- Funding uses: Loans $46,334 $(5,767) (11.07)% $52,101 Investment securities Held-to-maturity 21,172 (2,651) (11.13) 23,823 Available-for-sale 10,294 (1,644) (13.77) 11,938 Federal funds sold 4,901 3,662 295.56 1,239 ------- ------- ------- Total uses $82,701 $(6,400) $89,101 ======= ======= ======= Funding sources: Demand deposits Noninterest-bearing $19,914 $(4,520) (18.50)% $24,434 Interest-bearing 7,553 2,389 46.26 5,164 Savings deposits 31,701 (1,745) (5.22) 33,446 Time deposits 23,064 96 0.42 22,968 Other borrowed funds 4 (513) (99.23)% 517 ------- ------- ------- Total sources $82,236 $(4,293) $86,529 ======= ======= ======= Loans Average loans decreased approximately $5.8 million, or 11.07%, during the quarter ended March 31, 2001. The Bank purchased a $22 million portfolio of seasoned automobile loans from NationsBank in February 1999 of which approximately 83% have paid down. Paydowns in this portfolio are averaging $400,000 per month. In addition, prepayments in the mortgage loan portfolio continue as consumers rush to refinance existing loans or sell existing homes to purchase new homes to take advantage of the current low interest rate environment. In March 2001, the Bank initiated strategies to increase its loan balances including the purchase seasoned commercial loan participations from other financial institutions and other targeted consumer loan marketing activities. The following table shows the composition of the Bank's loan portfolio by type of loan. (Thousands of Dollars) March 31, December 31, 2001 2000 ------- ------- Commercial and industrial $13,878 $11,429 Commercial real estate 651 652 Consumer loans 10,391 10,908 Residential mortgages 21,618 22,316 ------- ------- Total Loans $46,538 $45,305 ======= ======= Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. 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, 2000 $562 Charge-offs: Commercial and industrial -- Commercial real estate -- Residential mortgages -- Consumer loans (25) ---- Total charge-offs (25) Recoveries 34 Net(charge-offs)recoveries 9 Additions charged to operations 10 ---- Balance at March 31, 2000 $581 ==== The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses. The allowance for loan losses as a percentage of total loans was 1.25% at March 31, 2001. During 2000, management worked to remove all potential problem loans from its loan portfolio by aggressively charging off classified and/or past due loans. Post-charge-off collections will be performed to maximize recovery of these charge-offs. The Bank has engaged a collections company to assist in these efforts. Management believes the level of the allowance for loan losses was adequate as of March 31, 2001. 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. 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 March 31, 2001, non-accrual loans were $727 thousand--approximately $443 thousand were residential mortgage loans. The underlying real estate collateral associated with these loans minimizes the risk of loss. There is no 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 March 31, 2001, approximately 38% 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. At March 31, 2001, none of these loans were nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, decreased on average by $633 thousand, or 1.71%, during the quarter ended March 31, 2001. The decrease is due to the decline in average deposit levels during the quarter as well the funding of loan participations purchased. The Bank's investment portfolio primarily consists of mortgage-backed pass-through agency securities, U.S. Treasury securities, and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. The average duration of the portfolio is 2.8 years. In the current declining rate environment, the duration of the investment portfolio is significantly shortened because of the high level of callable government agency securities - approximately 40% at March 31, 2001. Approximately $6 million of these higher yielding securities were called during the quarter. Calls will likely continue as rates trend downward. The result is additional liquidity and a possible reduction in yield on the portfolio. The Bank is taking steps to combat the impact of the high level of optionality in the portfolio by identifying replacement loans or securities that are fixed rate or perform well in a declining rate environment. Deposits Average deposits declined approximately $3.8 million, or 4.39%, during the quarter ended March 31, 2001. To meet capital requirements mandated in its Written Agreement with regulators (Refer to Regulatory Matters below) the Bank implemented an asset reduction/capital improvement plan in 2000 that included the reduction of deposits -- including the sale of higher yielding certificates of deposit to other financial institutions and the request of some large deposit account holders to remove deposits. In addition, the Bank's branch consolidation from 8 to 5 in September 2000 resulted in some deposit attrition. A business development campaign began on April 1, 2001 to proactively increase deposit levels thereby increasing the profitability of the 5 remaining branches that are strategically located in areas of significant opportunity. Other Borrowed Funds The average balance for other borrowed funds decreased $513 thousand, or 99.23%, during the quarter ended March 31, 2001. This decrease was a result of the reduction in the Bank's short-term borrowing requirements during the quarter. Borrowings had been necessary to temporarily fund the Bank's asset reduction/capital improvement plan in 2000 until other assets were sold. In addition, the level of called agency securities has served to increase the Bank's liquidity. 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. 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 March 31, 2001 are summarized below: Commitments to extend credit $5,243 Outstanding letter of credit $ 139 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. 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 rate. The Bank is required to maintain minimum levels of liquid assets as defined by Federal Reserve Bank 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. As of March 31, 2001, 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 $5.4 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large denomination time deposits as well as brokered deposits. The following is a summary of the remaining maturities of time deposits of $100,000 or more outstanding at March 31, 2001: (Thousands of dollars) -------- 3 months or less $ 3,189 Over 3 through 12 months 7,434 Over 1 through three years 543 Over three years 0 ------- Total $11,166 ======= Capital Resources Total shareholders' equity increased approximately $70 thousand during the quarter ended March 31, 2001 primarily because of the increase in the market value of its available-for-sale investment securities (Other Comprehensive Income) during the quarter due to the declining interest rate environment. The FRB's 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 goodwill. 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. As indicated in the table below, the Company's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) on a limited basis as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. The Company and the Bank do not anticipate paying dividends in the near future. March 31, December 31, 2001 2000 ------- ------- Total Capital $ 9,248 $ 9,317 Less: Intangible Assets (2,252) (2,298) ------- ------- Tier 1 Capital 6,996 7,019 ------- ------- Tier 2 Capital 569 537 ------- ------- Total Qualifying Capital $ 7,565 $ 7,556 ======= ======= Risk Adjusted Total Assets (including off-balance sheet exposures) $45,511 $42,949 Tier 1 Risk-Based Capital Ratio 15.37% 16.34% Tier 2 Risk-Based Capital Ratio 16.62% 17.59% Leverage Ratio 7.77% 7.39% Results of Operations Summary The Bank had a net loss of approximately $68 thousand ($.06 per common share) for the quarter ended March 31, 2001 compared to a loss of $372 thousand ($.36 per common share) for the quarter ended March 31, 2000. During the quarter ended March 31, 2001, the Bank's financial results were favorably impacted by a lower level of loan loss provisions compared to 2000 as well as the implementation of many expense control measures including the closure of 3 branches in September 2000. 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 decreased $367 thousand, or 47.29%, for the quarter ended March 31, 2001 compared to 2000. The decrease was primarily attributable to a significant reduction in average earning assets--$82.2 million at March 31, 2001 compared to $123.2 million at March 31, 2000. To meet capital requirements mandated in its Written Agreement with regulators (Refer to Regulatory Matters) the Bank implemented an asset reduction/capital improvement plan in 2000 that included the reduction of deposits. Beginning in June 2000, the Bank sold higher yielding certificates of deposit to other financial institutions, encouraged some large deposit accountholders to remove deposits, and consolidated three branches in its branch network. 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 provision for loan losses charged against earnings for the quarter ending March 31, 2001 was $10 thousand compared to $90 thousand for the same quarter in 2000. The reduction in provisions is due to the aggressive charge-off of problem loans in 2000 and a smaller loan portfolio in 2001. 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. Customer service fees decreased $29 thousand, or 5.10%, for the quarter primarily due to a reduction in fees on deposits. A lower level of demand deposit accounts results in less overdraft fees, activity service charges and low balance fees. However, the Bank increased its ATM surcharge fees for non-customers from $1.50 to $1.75 in June 2000 which helped to offset the decline in deposit-related fees. Salaries and benefits decreased $269 thousand, or 29.2%, during the quarter ended March 31, 2001 compared to 2000. In May 2000, the Bank began strategic reductions in staff and job consolidations to reduce the level of personnel expense. The closure/consolidation of three branches in September 2000 resulted in further reductions in this expense. Data processing expenses are a result of the management decision of the Bank to out source data processing to third party processors the bulk of its data processing. 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, installment and student loan portfolios. Data processing expenses decreased $44 thousand, or 17.1%, during the quarter ended March 31, 2001 compared to 2000. The decrease is primarily attributable a reduction in deposit levels for which the Bank pays an outside servicer to process transactions and provide statement rendering. The Bank continues to study methods by which it may reduce its data processing costs, including but not limited to a consolidation of servicers and the re-negotiation of existing contracts with servicers. Occupancy expense decreased approximately $41 thousand, or 9.19%, during the quarter ended March 31, 2001 compared to 2000. Until September 2000, the Bank leased its corporate headquarters under a lease accounted for as a capital lease. In October 2000, the Bank purchased this facility for approximately $1.4 million. This transaction is expected to save the Bank $1.6 million over the remaining term of the lease it had in place. In addition, the Bank consolidated two branches it acquired from First Union in 1999 with its existing branch network and closed its Frankford branch in September 2000. The Bank's Frankford and West Girard branches have been listed with realtors and are expected to be sold during 2001. Marketing and public relations expense decreased by $36,000, or 63.3%, for the quarter ended March 31, 2001 compared to 2000. To reduce its cost, the Bank established an internal marketing committee that is charged with developing and implementing marketing initiatives. Outside professionals are only used for specific consultations. Professional Services decreased approximately $107 thousand, or 63.6%, for the quarter ended March 31, 2001 compared to 2000. In 2000, the Bank incurred extraordinary consulting fees and legal fees related to the compliance with the Written Agreement it entered into with its primary regulators (Refer to Regulatory Matters). In addition, in 2001, the Bank implemented an earnings enhancement plan that eliminated all non-essential uses of professional services. Office operations and supplies expense decreased by $89.8 thousand, or 39.83%, for the quarter-ended March 31, 2001 compared to 2000. In September 2000, the Bank closed/consolidated three branches that resulted in reductions in branch operating costs (i.e. security guards, supplies, etc.). In addition, in conjunction with the Bank's earnings enhancement plan, all other operating expenses are being tightly controlled. 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 Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had met the required ratios by implementing strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. At March 31, 2001, the Bank continues to meet the required ratios. Management continues to address all matters outlined in the Agreement. Its most recent notification from its regulators dated January 13, 2001, indicates that it is "partially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. The Bank continues to operate under a Supervisory Letter from its primary regulator. The Supervisory Letter, among other things, prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and the Company from issuing debt. Cautionary Statement Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based upon various assumptions (some of which are beyond the control of the Bank and the Company), may be identified by reference to a future period, or periods, or by the use of forward-looking terminology such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, economic growth; governmental monetary policy, including interest rate policies of the FRB; sources and costs of funds; levels of interest rates; inflation rates; market capital spending; technological change; the state of the securities and capital markets; acquisition; consumer spending and savings; expense levels; tax, securities, and banking laws; and prospective legislation. 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 March 31, 2001, a liability sensitive position is maintained on a cumulative basis through 1 year of 10.39% that is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is primarily due to the high concentration of fixed rate mortgage loans the Bank has in its loan portfolio but is somewhat mitigated by the Bank's high level of core deposits which have been placed in longer repricing intervals. Generally, because of the Bank's negative gap position in shorter time frames, the Bank can anticipate that increases in market rates will have a negative 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, even though the Bank currently has a negative 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 Bank's net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance-sheet instruments. The calculated estimates of changes in market value of portfolio value at March 31, 2001 are as follows: Market value of Changes in rate portfolio equity % Change --------------------- -------------------- ---------- (Dollars in thousands) +200 basis points 10,566 (14.4%) +100 basis points 11,742 (4.9%) Flat rate 12,349 -- -100 basis points 12,638 2.3% -200 basis points 12,559 1.7% 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. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest-rate exposure is not considered to be significant and is within the Bank's policy limits at March 31, 2001. 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 Bank's balance sheet. 3. Restructure the Bank's investment portfolio. 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 Bank's vulnerability to interest-rate cycles. PART II - OTHER INFORMATION Item 1. Legal Proceedings. -------------------------- Monument Financial v. United Bank of Philadelphia -------------------------------------------------- A writ of summons was issued at the request of Monument Financial Group, Inc. and Ronald Hatfield, respectively, an United Bank of Philadelphia ( the "Bank") account holder and its principal (collectively the "Plaintiffs") to commence an action against the Bank in the Court of Common Pleas, Philadelphia County on June 28,1999. The suit involves the processing of account transactions in alleged non-compliance with the deposit contract. This conduct by the Bank allegedly resulted in a loss to the Plaintiffs in an undetermined amount. The Plaintiffs filed a complaint on July 28, 1999. This action was voluntarily dismissed by the Plaintiffs on the February 4, 2000. William Jairett et al. v. First Montauk Securities Corp., et al. ---------------------------------------------------------------- A complaint was filed in the United States District Court for the Eastern District of Pennsylvania by William Jairett and others against Ronald Hatfield and certain related parties (collectively the "Hatfield Defendants"), the Monument Financial Group, Inc ("Monument Financial") as well as United Bank of Philadelphia (the "Bank"). In summary the alleged claims against the Bank are that the Bank failed to properly disbursed funds from the Monument Financial deposit account maintained with the Bank, because the Bank disbursed funds, in noncompliance with the deposit contract due to the failure to require the necessary signatures needed to authorize disbursements and withdrawals from the account. The Court has recently granted, in part, a motion to further amend an amended answer and cross claim by the Hatfield Defendants and Monument Financial to include claims of fraud and misrepresentation and conspiracy against the Bank and other defendants but has denied a motion for leave to amend to include a cross claim for tortious interference against the Bank and others. The Bank believes that certain insurance coverage is available to it to provide partial protection against any loss by the Bank due to these claims and to defray part of the legal fees for defense against the claims and the Bank is in the process of determining the complete extent of its insurance coverage. The Bank intends to vigorously defend the claims which have been made against it. An action, similar to the federal court action, has been filed against the Bank and the others defendants in the Common Pleas Court of Philadelphia making allegations similar to those in the Jairett litigation. That action was filed to toll the statute of limitations in the event the federal litigation was dismissed. At this time the parties are not actively pursuing the Common Pleas Court litigation. Rococo LLC v. United Bank of Philadelphia ----------------------------------------- On May 15, 2000, Rococo LLC, the contractor of W. T. Development Company, the Bank's borrower , filed a complaint in the Court of Common Pleas of Delaware County. The complaint seeks damages from the W. T. Development Company and Bonsall Village , Inc partnership developers of the residential construction project known as Bonsall Village, for alleged nonpayment of construction invoices and also seeks damages from the Bank of $34,474 alleging that the Bank acted in concert with the W. T. Development Company with respect to nonpayment of certain of those invoices. The Bank has responded to an amended complaint and the Bank believes that it has substantial defenses and will vigorously contest the claims in the complaint. While discovery has not begun, based on the preliminary information which has been gathered, the Bank believes that the claims against it are not well founded. In March of 2001, W. T. Development Company and Bonsall Village, Inc., the Bank's codefendants in the litigation, filed a petition to obtain leave of court to file a crossclaim against the Bank seeking damages against the Bank for its alleged failure to honor its commitment to finance the phased construction of the Bonsall Village project, as a result of which W. T. Development Company and Bonsall Village , Inc allegedly were unable to full fill their obligations to the plaintiff, Rococo L.L.C. If the Bank is found liable on such crossclaim the codefendants will seek to hold the Bank liable for any damages due the plaintiff, Rococo L.L.C., from the codefendants. The Bank believes that it has substantial defenses against such crossclaim and will vigorously contest those claims. Item 2. Changes in Securities and Use of Proceeds -------------------------------------------------- SALE OF UNREGISTERED SECURITIES ------------------------------------------------------------------------------- Date of Title of No. Class Consideration Exemption Use of Sales of Security shares of from Proceeds Securities sold Persons Registration to which Registrant Sold Securities ------------------------------------------------------------------------------- 6/30/00 Common 34,317 Directors $411,809 Section 4(2) Working Stock of of Securities Capital Registrant Act 1933, as amended. The transactions did not involve a public offering ------------------------------------------------------------------------------- 12/29/00 Common 36,351 Directors $436,212 (Same as (Same as Stock of above) above) Registrant ------------------------------------------------------------------------------- TOTAL 70,688 $848,021 ------------------------------------------------------------------------------- Working Capital Restrictions on Payment of Dividends. ---------------------------------------------------- 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 therefor 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 Registrant shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of the Registrant 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 Registrant'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 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 a bank, which is in default of any assessment to the Federal Deposit Insurance Corporation. Item 3. Defaults Upon Senior Securities. ----------------------------------------- (a) There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any material default with respect to any indebtedness of the Registrant exceeding five percent of the total assets of the Registrant. (b) There have been no material arrearage or delinquencies as discussed in Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No obligations pursuant to those securities have become due. 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. ---------------------------------------- None 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: May 15, 2001 /s/ Evelyn Smalls -------------------------- Evelyn Smalls President & CEO Date: May 15, 2001 /s/ Brenda Hudson-Nelson -------------------------- Brenda Hudson-Nelson Chief Financial Officer