-----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, HtN0f9J0iOfK1n1pxSOuYsjtyDma9dwoYsPvowgfjdpd3kQwIW5V6Kj+fKSkrf8E bnTDstXpALc5QTZWZW4sYQ== 0001010410-01-500030.txt : 20010816 0001010410-01-500030.hdr.sgml : 20010816 ACCESSION NUMBER: 0001010410-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1714390 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 e2001_june10q.txt UNITED BANK 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 JUNE 30, 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 August 10, 2001, 1,099,588 (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 August 10, 2001. Item 1. Financial Statements Balance Sheet (unaudited) June 30, December 31, 2001 2000 ---------- ----------- Assets Cash and due from banks 6,074,009 5,328,384 Interest bearing deposits with banks 251,131 245,496 Federal funds sold 8,006,000 720,000 ----------- ----------- Cash & cash equivalents 14,331,140 6,293,880 Investment securities: Held-to-maturity, at amortized cost 11,961,824 23,587,092 Available-for-sale, at market value 13,687,777 11,426,544 Loans, net of unearned discount 44,658,405 45,305,468 Less: allowance for loan losses (573,960) (562,174) ----------- ----------- Net loans 44,084,445 44,743,294 Bank premises & equipment, net 3,196,868 3,457,518 Accrued interest receivable 1,019,636 1,158,485 Other real estate owned 47,500 50,000 Core deposit intangible 2,207,000 2,297,674 Prepaid expenses and other assets 799,375 518,721 ------------ ----------- Total Assets 91,335,565 93,533,208 ============ =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 18,351,806 20,386,652 Demand deposits, interest bearing 13,111,300 15,942,933 Savings deposits 24,571,097 25,355,811 Time deposits, $100,000 and over 12,978,388 9,063,433 Time deposits 12,091,570 12,489,281 ------------ ----------- 81,104,161 83,238,110 Obligations under capital lease 0 0 Accrued interest payable 252,595 230,357 Accrued expenses and other liabilities 643,323 715,231 ------------ ----------- Total Liabilities 82,000,079 84,183,699 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 500,000 shrs auth., 143,150 issued and outstanding 1,432 1,432 Common stock, $.01 par value; 2,000,000 shares authorized; 1,099,588 shares issued and outstanding at June 30, 2001 and 1,099,421 at December 31, 2000, respectively 10,996 10,994 Additional-paid-in-capital 14,719,482 14,717,484 Accumulated deficit (5,526,232) (5,413,111) Net unrealized gain on available-for-sale securities 129,808 32,710 ------------ ----------- Total Shareholders' equity 9,335,486 9,349,509 ------------ ----------- 91,335,565 93,533,208 ============ =========== Statement of Operations (unaudited) Quarter ended Quarter ended Six months ended Six months ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ------------- ------------- ---------------- ----------------- Interest Income: Interest and fees on loans 1,021,302 $ 1,240,569 1,973,095 $ 2,480,651 Interest on investment securities 403,952 928,351 909,960 $ 1,836,975 Interest on Federal Funds sold 86,673 135,334 150,553 $ 272,222 Interest on time deposits with other banks 2,514 7,297 4,108 $ 11,350 ----------- ----------- ----------- ----------- Total interest income 1,514,441 2,311,551 3,037,716 4,601,198 Interest Expense: Interest on time deposits 277,297 417,358 564,444 $ 852,120 Interest on demand deposits 45,643 183,924 108,415 $ 384,276 Interest on savings deposits 89,399 133,137 184,098 $ 269,413 Interest on borrowed funds 0 71,720 0 $ 143,825 ----------- ----------- ----------- ----------- Total interest expense 412,339 806,139 856,957 1,649,634 Net interest income 1,102,102 1,505,412 2,180,759 2,951,564 Provision for loan losses 20,000 90,000 30,000 180,000 ----------- ----------- ----------- ----------- Net interest income less provision for loan losses 1,082,102 1,415,412 2,150,759 2,771,564 ----------- ----------- ----------- ----------- Noninterest income: Gain on sale of loans 0 17,783 0 $ 17,783 Customer service fees 555,058 776,257 1,109,926 $ 1,339,847 Realized gain (loss) on investments 0 (127,463) 0 ($ 127,463) Other income 96,692 275,241 126,878 $ 365,733 ----------- ----------- ----------- ----------- Total noninterest income 651,750 941,818 1,236,804 1,595,900 Non-interest expense Salaries, wages, and employee benefits 619,852 793,443 1,269,011 $ 1,711,235 Occupancy and equipment 411,896 458,687 812,413 $ 899,733 Office operations and supplies 110,204 232,574 245,909 $ 458,123 Marketing and public relations 20,344 3,419 41,470 $ 60,907 Professional services 63,556 196,595 124,749 $ 364,733 Data processing 207,062 240,889 417,257 $ 494,657 Deposit insurance assessments 37,634 15,237 77,485 $ 32,347 Other noninterest expense 308,037 402,877 512,390 $ 703,970 ----------- ----------- ----------- ----------- Total non-interest expense 1,778,585 2,343,721 3,500,684 4,725,705 ----------- ----------- ----------- ----------- Net income (loss) ($ 44,733) $ 13,509 ($ 113,121) ($ 358,241) =========== =========== =========== =========== Earnings per share-basic ($ 0.04) $ 0.01 ($ 0.10) ($ 0.36) Earnings per share-diluted ($ 0.04) $ 0.01 ($ 0.10) ($ 0.36) =========== =========== =========== =========== Weighted average number of shares 1,099,450 1,028,753 1,099,450 995,699 =========== =========== =========== ===========
Statement of Cash Flows (unaudited)
Six months ended Six months ended June 30, June 30, 2001 2000 ---------------- ---------------- Cash flows from operating activities Net income (loss) ($ 113,121) (358,242) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 30,000 180,000 Gain on sale of fixed assets (84,090) -- Loss on sale of loans -- (17,783) Depreciation and amortization 387,500 505,860 Realized investment securities losses -- 127,463 Decrease (increase) in accrued interest receivable and other assets (141,994) 1,159,290 Decrease in accrued interest payable and other liabilities (49,670) (1,427,893) ------------ ----------- Net cash provided by operating activities 28,625 168,695 Cash flows from investing activities Purchase of investments-Available-for-Sale (7,262,797) (1,484,473) Purchase of investments-Held-to-Maturity -- (2,636,746) Proceeds from maturity & principal reductions of investments-Available-for-sale 4,882,964 490,899 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 11,625,268 594,779 Proceeds from sale of investments-Available-for-Sale 118,600 9,595,928 Sale of deposits to other financial institutions -- (6,544,666) Proceeds from sale of student loans -- 2,421,636 Net (increase) decrease in loans 628,849 5,026,574 Purchase of premises and equipment -- (233,586) Sale of premises and equipment 147,701 -- ------------ ----------- Net cash provided by (used in) investing activities 10,140,585 7,230,345 Cash flows from financing activities Net increase (decrease) in deposits (2,133,949) (20,886,113) Net proceeds from issuance of common stock 2,000 411,810 ------------ ----------- Net cash provided by (used in) financing activities (2,131,949) (20,474,303) Increase (decrease) in cash and cash equivalents 8,037,260 (13,075,263) Cash and cash equivalents at beginning of period 6,293,880 16,920,216 Cash and cash equivalents at end of period 14,331,140 3,844,953 ------------ ----------- Supplemental disclosures of cash flow information Cash paid during the period for interest 880,010 1,307,900 ============ ===========
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 quarterly 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) June 30, 2001 June 30, 2000 ------------- ------------- Net interest income $ 1,102 $ 1,505 Provision for loan losses 20 90 Noninterest income 652 942 Noninterest expense 1,779 2,344 Net income (loss) (45) $ 13 Earnings per share-basic ($ .04) $ .01 and diluted Balance sheet totals: June 30, 2001 December 31, 2000 ------------- ----------------- Total assets $ 91,336 $ 93,533 Loans, net $ 44,084 $ 44,743 Investment securities $ 25,650 $ 35,014 Deposits $ 82,233 $ 83,238 Shareholders' equity $ 9,335 $ 9,350 Ratios Return on assets (.12)% (0.63)% Return on equity (1.23)% (8.08)% Equity to assets ratio 10.03% 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 $363 thousand, or .44%, during the quarter ending June 30, 2001. Average funding uses decreased $3.7 million, or 4.53%, 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 $44,896 ($1,438) (3.10)% $46,334 Investment securities Held-to-maturity 17,468 (3,704) (17.49) 21,172 Available-for-sale 10,124 (170) (1.65) 10,294 Federal funds sold 6,470 1,569 32.01 4,901 ------- ------- ------- Total uses $78,958 ($3,743) $82,701 ======= ======= ======= Funding sources: Demand deposits Noninterest-bearing $19,819 ($95) (0.48)% $19,914 Interest-bearing 7,339 (214) (2.83) 7,553 Savings deposits 31,448 (253) (0.80) 31,701 Time deposits 23,265 201 (0.87) 23,064 Other borrowed funds 2 (2) (50.00)% 4 ------- ------- ------- Total sources $81,873 ($363) $82,236 ======= ======= ======= Loans Average loans decreased approximately $1.4 million, or 3.10%, during the quarter ended June 30, 2001. The Bank purchased a $22 million portfolio of seasoned automobile loans from NationsBank in February 1999. Approximately 86% of this portfolio has paid down. Paydowns in this portfolio are averaging approximately $400 thousand per month. In addition, prepayments in the mortgage loan portfolio continue as consumers refinance existing loans or sell existing homes to purchase new homes to take advantage of the current low interest rate environment. New initiatives to increase loan balances have been implemented including the purchase of seasoned commercial loan participations from other financial institutions and targeted consumer loan marketing activities. The following table shows the composition of the loan portfolio of the Bank by type of loan. (Thousands of Dollars) June 30, December 31, 2001 2000 ------- ------- Commercial and industrial $14,360 $11,429 Commercial real estate 530 652 Consumer loans 9,092 10,908 Residential mortgages 20,676 22,316 ------- ------- Total Loans $44,658 $45,305 ======= ======= 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, 2001 $562 Charge-offs: Commercial and industrial (21) Commercial real estate 0 Residential mortgages 0 Consumer loans (52) ---- Total charge-offs (73) Recoveries 55 Net(charge-offs) recoveries 18 Additions charged to operations 30 ---- Balance at March 31, 2000 $574 ==== The allowance for loan losses as a percentage of total loans was 1.29% at June 30, 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 are underway 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 June 30, 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 June 30, 2001, non-accrual loans were $341 thousand--approximately $185 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 June 30, 2001, approximately 32% 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 June 30, 2001, none of these loans was nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, decreased on average by $2.3 million, or 6.3%, during the quarter ended June 30, 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, 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 2.65 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 38.2% at June 30, 2001. Approximately $2.5 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 continues to take 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 $361 thousand, or .44%, during the quarter ended June 30, 2001. A business development plan has been initiated to increase deposit levels. The focus of these efforts will begin with the identification of existing customers with single account relationships for the purpose of cross-selling them additional bank products. Other Borrowed Funds The average balance for other borrowed funds decreased $2 thousand, or .50%, during the quarter ended June 30, 2001. 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 June 30, 2001 are summarized below: Commitments to extend credit $6,342 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 June 30, 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 $6.9 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 continues to avoid 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 June 30, 2001: (Thousands of dollars) -------- 3 months or less $ 7,093 Over 3 through 12 months 5,085 Over 1 through three years 800 Over three years -- ------- Total $12,978 ======= Capital Resources Total shareholders' equity decreased approximately $85 thousand during the quarter ended June 30, 2001 primarily because of the decrease in the market value of its available-for-sale investment securities(FAS 115--Other comprehensive income) and a $45 thousand reduction in retained earnings because of a loss during the quarter. The Federal Reserve Bank's ("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 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 increasing capital by offering additional stock (preferred and common) for sale to knowledgeable investors on a limited offering basis. However, the focus continues to be 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. June 30, December 31, 2001 2000 ------- ------- Total Capital $9,205 $9,317 Less: Intangible Assets (2,207) (2,298) ------- ------- Tier 1 Capital 6,998 7,019 ------- ------- Tier 2 Capital 501 537 ------- ------- Total Qualifying Capital $7,499 $7,556 ======= ======= Risk Adjusted Total Assets (including off-balance sheet exposures) $40,034 $42,949 Tier 1 Risk-Based Capital Ratio 17.48% 16.34% Tier 2 Risk-Based Capital Ratio 18.73% 17.59% Leverage Ratio 7.93% 7.39% Results of Operations Summary The Bank had a net loss of approximately $45 thousand ($.04 per common share) for the quarter ended June 30, 2001 compared to net income of $13 thousand ($.01 per common share) for the quarter ended June 30, 2000. The financial results for the quarter ended June 30, 2000 included an extraordinary gain of $253 thousand on the sale of certificates of deposits to other financial institutions as part of the Bank's asset reduction/capital improvement plan. During the same quarter in 2001, the Bank's financial results included an extraordinary gain of $75 thousand on the sale of real estate. Excluding these extraordinary items, the Bank's financial results continue to be favorably impacted by the implementation of many expense control measures including the closure of 3 branches in September 2000 as well as a reduction in the level of loan loss provisions. 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 $403 thousand, or 26.79%, for the quarter ended June 30, 2001 compared to 2000. The decrease was primarily attributable to a significant reduction in average earning assets--$79 million at June 30, 2001 compared to $121 million at June 30, 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. Also contributing to the decrease in net interest income was a reduction in interest rates. During the 6 months ended June 30, 2001, there was a 175 basis point reduction in the prime rate and other short-term investment rates including Federal Funds Sold. 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 June 30, 2001 was $20 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. Total noninterest income for the quarter ended June 30, 2001 declined $290 thousand, or 30.8%, compared to the same quarter in 2000. Customer service fees made up the largest part of this decline. These fees decreased $221 thousand, or 28.5%, for the quarter ended June 2001 compared to 2000 primarily because of a reduction in activity fees on deposits. The Bank has a lower level of deposit accounts in 2001 compared to 2000 that results in less overdraft fees, activity service charges and low balance fees. Noninterest income for the quarter ended June 30, 2001, includes a $75 thousand gain on the sale of the Bank's former West Girard branch office. The quarter ended June 30, 2000 included a $253 thousand gain on the sale of certificates of deposit to other financial institutions as part of the Bank's asset reduction/capital improvement plan. Noninterest Expense Salaries and benefits decreased $174 thousand, or 21.88%, during the quarter ended June 30, 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. Management continues its review to ensure the Bank is operating with the most efficient organizational structure. 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 $34 thousand, or 14.04%, during the quarter ended June 30, 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 $47 thousand, or 10.20%, during the quarter ended June 30, 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 former West Girard branch was sold in June 2001. The Bank's former Frankford branch has been listed with a realtor and is expected to be sold during 2001. The sale of these branches will result in additional occupancy expense savings. Professional services expense decreased approximately $133 thousand, or 67.67%, for the quarter ended June 30, 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 2001, the Bank implemented an earnings enhancement plan that eliminated all non-essential uses of professional services. Office operations and supplies expense decreased by $122 thousand, or 52.62%, for the quarter-ended June 30, 2001 compared to 2000. In September 2000, the Bank closed/consolidated three branches that resulted in reductions in branch operating cost (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 required 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 June 30, 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 July 18, 2001, indicates that it is "substantially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements are expected to result in significant modifications relative to Company's accounting for goodwill and other intangible assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method of accounting. SFAS No. 141 was effective upon issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and intangible assets. SFAS No. 142 includes requirements to test goodwill and indefinite lived intangibles assets for impairment rather than amortize them. SFAS No. 142 will be effective for fiscal years beginning after December 31, 2001 and early adoption is not permitted except for business combinations entered into after June 30, 2001. The Company is currently evaluating the provisions of SFAS No. 142, but its preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations. On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining the allowance for loans and leases in accordance with US GAAP. The adoption of SAB No. 102 is not expected to have a material impact on the Company's financial position or results of operations. 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 June 30, 2001, a asset sensitive position is maintained on a cumulative basis through 1 year of 4.16% that is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is primarily due to high level of funds in short-term investments (i.e. Federal Funds Sold) and the level of callable agency securities which are subject to be called in the current declining rate environment. This position is somewhat mitigated by the high concentration of fixed rate mortgage loans the Bank has in its loan portfolio and the Bank's significant level of core deposits which have been placed in longer repricing intervals. Generally, because of the Bank's positive gap position 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, 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 equity at June 30, 2001 are as follows: Market value of Changes in rate portfolio equity --------------------- -------------------- (Dollars in thousands) +400 basis points $ 2,770 +300 basis points 4,263 +200 basis points 6,506 +100 basis points 7,737 Flat rate 9,017 -100 basis points 10,084 -200 basis points 10,582 -300 basis points 11,739 -400 basis points 12,613 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 June 30, 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 disbursed funds without authorization from the Monument Financial deposit account maintained with the Bank, due to its failure to require the necessary signatures needed to authorize disbursements and withdrawals from the account. The Court has 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 Court has dismissed claims by one of the principals of Monument Financial, based on alleged interference with other transactions but the principal has a right to appeal this dismissal at the end of the case. The Bank has been advised by its counsel that 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. 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. At this time the Common Pleas Court deferred resolution of this case pending resolution of the Federal case. The Bank intends to vigorously defend the claims which have been made against it. The Bank has significant defenses but is unable to predict the outcome of the case. Rococo LLC v. United Bank of Philadelphia - ----------------------------------------- On May 15, 2000, Rococo LLC, the contractor of W. T. Development, Inc., the Bank's borrower , filed a complaint in the Court of Common Pleas of Delaware County. The complaint seeks damages from W. T. Development, Inc.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 W. T. Development, Inc. 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, Inc. 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, Inc. 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 cross-claim and will vigorously contest those claims. On May 23, 2001, Fincourt B. Shelton and Vivian B. Shelton H/W and W.T. Development, Inc. filed a summons which may lead to filing an additional complaint concerning the foregoing claims. Item 2. 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. (Refer to Regulatory Matters) 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: August 14, 2001 /s/ Evelyn Smalls -------------------------- Evelyn Smalls President & CEO /s/ Brenda Hudson-Nelson -------------------------- Brenda Hudson-Nelson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----