-----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, E7hMd/prNWrq0HRtqYNcObZBh3lc1f0m/PG7kTXjrpKdm/PElFqUQR/xaRuOO8dF dQNrqIvShpt81FXwzeZKow== 0001010410-02-000013.txt : 20020515 0001010410-02-000013.hdr.sgml : 20020515 ACCESSION NUMBER: 0001010410-02-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02648717 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 mar_10q.txt UNITED BANCSHARES, INC. MARCH 2002 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, 2002 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 8, 2002, 1,100,388 (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 8, 2002. -------------- FORM 10-Q -------------- Index Item No. Page PART I 1. Financial Statements................................................. 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 6 3. Quantitative and Qualitative Disclosures about Market Risk........... 17 PART II 1. Legal Proceedings.................................................... 19 2. Working Capital Restrictions on the Payment of Dividends............. 19 3. Defaults upon Senior Securities...................................... 20 4 Submission of Matters to a Vote of Security Holders.................. 20 5. Other Information.................................................... 20 6. Exhibits and Reports on Form 8K...................................... 20 2 Item 1. Financial Statements - --------------------------- Balance Sheet (unaudited)
March 31, December 31, 2002 2001 ----------- ----------- Assets Cash and due from banks 3,726,100 5,747,131 Interest bearing deposits with banks 258,773 256,847 Federal funds sold 11,813,000 7,778,000 ----------- ----------- Cash & cash equivalents 15,797,873 13,781,978 Investment securities: Held-to-maturity, at amortized cost, market value of $10,229,399 at March 31, 2002 and $11,735,146 at December 31, 2001 10,081,385 11,466,372 Available-for-sale, at market value 14,328,278 14,339,643 Loans, net of unearned discount 40,883,502 42,999,877 Less: allowance for loan losses (740,059) (708,156) ----------- ----------- Net loans 40,143,443 42,291,721 Bank premises & equipment, net 2,866,690 2,978,265 Accrued interest receivable 898,914 911,470 Other real estate owned 43,750 45,000 Core deposit intangible 2,074,848 2,118,868 Prepaid expenses and other assets 934,059 734,741 ----------- ----------- Total Assets 87,169,240 88,668,058 =========== =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 18,808,054 19,471,758 Demand deposits, interest bearing 11,911,891 12,613,507 Savings deposits 22,245,737 23,227,604 Time deposits, $100,000 and over 13,887,475 13,795,997 Time deposits 11,296,663 10,313,657 ----------- ----------- 78,149,820 79,422,523 Accrued interest payable 221,541 263,550 Accrued expenses and other liabilities 563,020 424,275 ----------- ----------- Total Liabilities 78,934,381 80,110,348 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; 1,100,388 shares issued and outstanding at March 31, 2002 and December 31, 2001 11,004 11,004 Additional-paid-in-capital 14,729,070 14,729,071 Accumulated deficit (6,496,798) (6,282,615) Net unrealized gain on available-for-sale securities (9,849) 98,819 ----------- ----------- Total Shareholders' equity 8,234,859 8,557,710 ----------- ----------- 87,169,240 88,668,058 =========== ===========
3 Statement of Operations (unaudited)
Three months Three months ended ended March 31, December 31, 2002 2001 ---------- ----------- Interest Income: Interest and fees on loans 737,682 $ 951,793 Interest on investment securities 389,361 506,008 Interest on Federal Funds sold 46,874 63,880 Interest on time deposits with other banks 1,690 1,594 ----------- ----------- Total interest income 1,175,607 1,523,275 Interest Expense: Interest on time deposits 205,002 287,147 Interest on demand deposits 27,235 62,772 Interest on savings deposits 33,157 94,699 ----------- ----------- Total interest expense 265,394 444,618 Net interest income 910,213 1,078,657 Provision for loan losses 37,500 10,000 ----------- ----------- Net interest income less provision for loan losses 872,713 1,068,657 ----------- ----------- Noninterest income: Customer service fees 487,986 554,868 Realized gain (loss) on investments 25,788 0 Other income 17,511 30,186 ----------- ----------- Total noninterest income 531,285 585,054 Non-interest expense Salaries, wages, and employee benefits 627,183 649,159 Occupancy and equipment 380,148 400,517 Office operations and supplies 103,965 135,705 Marketing and public relations 12,533 21,126 Professional services 58,158 61,193 Data processing 166,710 210,195 Deposit insurance assessments 9,522 39,851 Other noninterest expense 259,994 204,353 ----------- ----------- Total non-interest expense 1,618,213 1,722,099 ----------- ----------- Net income (loss) ($ 214,215) ($ 68,388) ----------- ----------- Earnings per share-basic ($0.19) ($0.07) Earnings per share-diluted ($0.19) ($0.07) =========== =========== Weighted average number of shares 1,100,388 1,049,166 =========== ===========
4 Statement of Cash Flows (unaudited)
Three months Three months ended ended March 31, December 31, 2002 2001 ---------- ----------- Cash flows from operating activities Net loss ($ 214,184) (68,388) Adjustments to reconcile net loss to net cash used in operating activities: Provision for loan losses 37,500 10,000 Loss on sale of loans Depreciation and amortization 192,467 190,520 Realized investment securities gains (25,788) Increase in accrued interest receivable and other assets (185,512) (350,987) Increase in accrued interest payable and other liabilities 96,736 14,114 ----------- ----------- Net cash used in operating activities (98,781) (204,741) Cash flows from investing activities Purchase of investments-Available-for-Sale (2,655,113) (2,349,693) Proceeds from maturity & principal reductions of investments-Available-for-Sale 1,494,492 3,798,705 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 1,387,261 7,783,563 Proceeds from sale of investments-Available-for-Sale 1,091,063 118,600 Net (increase) decrease in loans 2,110,778 (1,223,405) Purchase of premises and equipment (41,102) 6,964 ----------- ----------- Net cash provided by investing activities 3,387,378 8,134,734 Cash flows from financing activities Net increase (decrease) in deposits (1,272,702) (2,710,824) ----------- ----------- Net cash used in financing activities (1,272,702) (2,710,824) Increase in cash and cash equivalents 2,015,895 5,219,169 Cash and cash equivalents at beginning of period 13,781,978 6,293,880 Cash and cash equivalents at end of period 15,797,873 11,513,049 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for interest 750,485 874,290
5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Because the Company is a bank holding company for the Bank, the financial statements in this report are prepared on a consolidated basis to include the accounts of the Company and the Bank. The purpose of this discussion is to focus on information about the Bank's financial condition and results of operations, which is not otherwise apparent from the consolidated financial statements included in this quarterly report. This discussion and analysis should be read in conjunction with the financial statements presented elsewhere in this report. Selected Financial Data The following table sets forth selected financial data for the each of the following periods: (Thousands of dollars, Three months ended Three months ended except per share data) March 31, 2002 March 31, 2001 ------------------ ------------------- Net interest income $ 910 $1,079 Provision for loan losses 37 10 Noninterest income 531 585 Noninterest expense 1,618 1,722 Net income (loss) (214) (68) Earnings per share-basic and diluted ($0.19) ($0.07) Balance sheet totals: March 31, 2002 March 31, 2001 ------------------ ------------------- Total assets $ 87,169 $88,668 Loans, net $ 40,143 $42,292 Investment securities $ 24,410 $25,806 Deposits $ 78,150 $79,423 Shareholders' equity $ 8,235 $ 8,558 Ratios Return on assets (0.25)% (0.95)% Return on equity (2.60)% (9.31)% Equity to assets ratio 7.10% 7.67% 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 $2.3 million, or 2.85%, during the quarter ending March 31, 2002. Average funding uses decreased $2.4 million, or 2.97%, for the same quarter. 6 Sources and Uses of Funds Trends March 31, December 31, 2002 2001 ------- Increase ------- Average (Decrease) Average Balance Amount % Balance ------- --------- ----- ------- Funding uses: Loans $41,408 ($4,420) (9.64)% $45,828 Investment securities Held-to-maturity 11,245 (3,424) (23.34) 14,669 Available-for-sale 13,377 1,619 13.77 11,758 Federal funds sold 11,575 3,849 49.81 7,726 ------- ------ ------- Total uses $77,605 $2,376 $79,981 ======= ====== ======= Funding sources: Demand deposits Noninterest-bearing $19,781 $ 169 0.86% $19,612 Interest-bearing 11,972 (1,830) (13.26) 13,802 Savings deposits 22,686 (1,794) (7.33) 24,480 Time deposits 25,207 1,118 4.64 24,089 ------- ------ ------- Total sources $79,646 ($2,337) $81,983 ======= ====== ======= Loans Average loans decreased approximately $4.4 million, or 9.64%, during the quarter ended March 31, 2002. The significant decline during the quarter was because of a high volume of mortgage loan payoffs due to consumers refinancing existing loans or selling existing homes to purchase new homes to take advantage of the current low interest rate environment. Because the Bank is not a competitive player in the mortgage loan origination market, it did not generate mortgage loan volume to cover these payoffs. In addition, two large commercial loans totaling approximately $2.0 million were paid-off at the end of December 2001 and the beginning of January 2002 without significant new originations to replace them. The Bank has developed relationships with other financial institutions in the region with which it participates in loans as a strategy to increase its loan portfolio. This strategy is being utilized while the Bank continues to enhance its own business development capacity. In addition, the Bank will focus on originating consumer loans including home equity, automobile, student and credit card loans as a means to increase volume and diversify credit risk. The following table shows the composition of the loan portfolio of the Bank by type of loan. (Thousands of Dollars) March 31, December 31, 2002 2001 --------- ------------ Commercial and industrial $10,014 $11,054 Commercial real estate 5,891 5,504 Consumer loans 8,319 8,294 Residential mortgages 16,659 18,148 ------- ------- Total Loans $40,883 $43,000 7 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, 2002 $708 Charge-offs: Commercial and industrial (7) Residential mortgages -- Consumer loans (47) ---- Total charge-offs (54) Recoveries 49 Net (charge-offs) recoveries (5) Additions charged to operations 37 ---- Balance at March 31, 2002 740 ==== The allowance for loan losses as a percentage of total loans was 1.81% at March 31, 2002. During 2001, there was an economic downturn. Although the economy now shows signs of recovery, the Bank continues to monitor its credit quality very closely while working with borrowers in an effort to identify and control credit risk. Management believes the level of the allowance for loan losses is adequate as of March 31, 2002. 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, 2002, non-accrual loans were $67 thousand or .16% of the loan portfolio. 8 The Bank has one borrower with loans totaling in excess of $1.2 million that is experiencing financial difficulty. Guarantees from the Small Business Administration (SBA) reduce the Bank's exposure to approximately $500 thousand. A specific reserve of $250 thousand has been allocated to this loan for potential losses. Management is working closely with this borrower to minimize the risk of loss. There is no other known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. From time to time, the Bank purchases loans from other financial institutions. These loans are generally located in the Northeast corridor of the United States. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At March 31, 2002, approximately 27% 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, 2002, none of these loans was nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, increased on average by $2 million, or 5.98%, during the quarter ended March 31, 2002. This increase is due to pay-offs in the Bank's loan portfolio without new originations to replace them. Investment strategies have been developed and are now being implemented to place funds in longer term securities including mortgage-backed (MBS) and other agency securities to decrease the level of investment in low yielding Federal Funds Sold. These funds will be invested in a variety of MBS pools to diversify prepayment risk and provide a constant stream of liquidity through monthly paydowns from these securities. The Bank's current 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 2.42 years. In the current low interest rate environment, the duration of the investment portfolio is significantly shortened because of the high level of callable government agency securities - approximately 40.5% at March 31, 2002. Approximately $2 million in securities were called during the quarter. However, the Bank was able to re-invest these funds in securities with similar yields. Calls will likely continue as the rate environment remains at historically low levels. The result is additional liquidity and a reduction in yield on the portfolio. The Bank will continue to take steps to combat the impact of the high level of optionality in the portfolio by identifying replacement loans or securities that diversify risk and provide some level of monthly cashflow to be reinvested in the forecasted rising rate environment. 9 Deposits Average deposits decreased approximately $2.3 million, or 2.85%, during the quarter ended March 31, 2002. Because of mandatory capital requirements outlined in the Bank's Written Agreement with its regulators (See Regulatory Matters below), aggressive deposit retention or new business development strategies have not been implemented. As a result, some deposit attrition was experienced during the quarter. In addition, in January 2002, the Bank closed its branch office located at 714 Market Street, formerly the main office of the Bank. The operations of this branch were re-located approximately eight blocks to the Bank's Two Penn Center Office. Although not significant, the Bank experienced some deposit attrition as a result of this branch closure. Other Borrowed Funds The Bank did not borrow funds during the quarter ended March 31, 2002. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. The Bank's liquidity has been enhanced by loan paydowns/payoffs and called investment securities--thereby, reducing the need to borrow. Commitments and Lines of Credit The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans, and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. The Bank's financial instrument commitments at March 31, 2002 are summarized below: Commitments to extend credit $9,054,000 Outstanding letter of credit $ 57,000 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. 10 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 Board (the "FRB")regulations. This requirement is evaluated in relation to the composition and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. As of March 31, 2002, 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 $6.7 million 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 March 31,2002: (Thousands of dollars) 3 months or less $ 4,539 Over 3 through 12 months 8,448 Over 1 through three years 900 Over three years -- ------- Total $13,887 ======= Capital Resources Total shareholders' equity decreased approximately $323 thousand during the quarter ended March 31, 2002. The decrease was due to an increase in the accumulated deficit as a result of the loss of $214 thousand incurred during the quarter as well as decreases in other comprehensive income (FAS 115 unrealized losses on available-for-sale securities). 11 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 on 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, 2002 2001 -------- ----------- Total Capital $8,234 $8,459 Less: Intangible Assets (2,075) (2,119) Tier 1 Capital 6,159 6,340 ------ ------ Tier 2 Capital 494 510 ------ ------ Total Qualifying Capital $6,653 $6,850 ====== ====== Risk Adjusted Total Assets (including off-Balance sheet exposures) $39,258 $41,624 Tier 1 Risk-Based Capital Ratio 15.69% 15.23% Tier 2 Risk-Based Capital Ratio 16.95% 16.46% Leverage Ratio 7.18% 7.12% Results of Operations Summary The Bank had a net loss of approximately $214 thousand ($0.19 per common share) for the quarter ended March 31, 2002 compared to a net loss of $68 thousand ($0.07 per common share) for the quarter ended March 31, 2001. The financial results for the quarter ended March 31, 2002 were negatively impacted by a lower level of earning assets as well as a lower interest rate environment. The composition of earning assets also had a negative impact on earnings. Loan pay-offs and pay downs created additional liquidity that required investment in a lower interest rate environment--thereby reducing interest income. 12 In April 2002, management implemented a profit restoration plan that included among other things staff reductions/consolidations, salary reductions, reduction in branch operating hours, elimination of director fees, and the reduction of other operating expenses. In addition, revenue enhancement strategies will be employed to include shifting funds out of Federal Funds Sold into higher yielding investment securities and loans; the implementation of products to increase fee income like debit card and mutual fund sales; the marketing of consumer loan products to include home equity, automobile, student, and credit card loans, and; the installation of additional high volume automated teller machines. 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 $168 thousand, or 15.62%, for the quarter ended March 31, 2002 compared to 2001. The decrease was primarily attributable to a reduction in average earning assets to $77.9 million at March 31, 2002 compared to $81.4 million at March 31, 2001. Also contributing to the decline in net interest income was a reduction in interest rates. During 2001, there was an unprecedented 400 basis point reduction in the prime rate and other short-term investment rates including Federal Funds Sold. The lower interest rate environment triggered the call of certain investment securities as well as loan pay-offs as consumers rushed to refinance their loans-- thereby creating additional liquidity for the Bank. Because the Bank did not have a significant level of loan origination activity, funds were invested in lower yielding investment securities and Federal Funds Sold. The result was a reduction in interest income. (Refer below to Item 3. Quantitative and Qualitative Disclosures about Market Risk for discussion on strategies used by the Bank to minimize its interest rate risk.). 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, 2002 was $37 thousand compared to $10 thousand for the same quarter in 2001. The increase in provisions was necessary because of an increase in classified loans for which specific reserves were provided. Management continues to closely monitor the portfolio for signs of weakness and will proactively make provisions to cover potential losses. 13 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 March 31, 2002 declined $54 thousand, or 9.19%, compared to the same quarter in 2001. Customer service fees made up the largest part of this decline. These fees decreased $67 thousand for the quarter ended March 31, 2002 compared to 2001, primarily because of a reduction in activity fees on deposits. The Bank's lower deposit levels in 2002 compared to 2001 result in less overdraft fees, activity service charges and low balance fees. In addition, as result of the 714 Market Street branch closure as well as another ATM location lease expiration, the Bank took two of its high volume automated teller machines out of service. The result was a lower level of non-customer ATM surcharge income for the quarter ended March 31, 2002. Management is currently in the process of identifying other potentially high volume locations to re-deploy these machines and others. Noninterest Expense Salaries and benefits decreased $22 thousand, or 3.39%, during the quarter ended March 31, 2002 compared to 2001. Beginning in 2000, the Bank began strategic reductions in staff and job consolidations to reduce the level of personnel expense. Branch closures and consolidations also contributed to the reduction in 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 $43 thousand, or 20.69%, during the quarter ended March 31, 2002 compared to 2001. The decrease is primarily attributable to 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, in-house loan servicing options and the re-negotiation of existing contracts with servicers. Occupancy expense decreased approximately $20 thousand, or 5.09%, during the quarter ended March 31, 2002 compared to 2001. The decrease is primarily attributable to the closure/consolidation of the Bank's 714 Market Street branch in January 2002. In addition, the Bank's former West Girard branch was sold in June 2001. An Agreement of Sale has been executed for the Bank's former Frankford branch office. This facility is expected to be sold no later than June 30, 2002. The sale of this branch will result in additional occupancy expense savings. 14 Professional services expense decreased approximately $3 thousand, or 4.96%, for the quarter ended March 31, 2002 compared to 2001. In 2000, the Bank implemented an earnings enhancement plan that eliminated all non-essential uses of professional services. Management continues to seek methods to further reduce this cost. Office operations and supplies expense decreased by $32 thousand, or 23.39%, for the quarter-ended March 31, 2002 compared to 2001. The closure/consolidation of the Bank's 714 Market Street branch resulted in reductions in branch operating cost (i.e. security guards, supplies, etc.). In addition, in conjunction with the Bank's earnings enhancement / profit restoration plan, all other operating expenses are being tightly controlled. Federal deposit insurance premiums decreased by $30 thousand, or 76.11%, for the quarter ended March 2002 compared to 2001. FDIC insurance premiums are applied to all financial institutions based on a risk based premium assessment system. Under this system, bank strength is based on three factors: 1) asset quality, 2) capital strength, and 3) management. Premium assessments are then assigned based on the institution's overall rating, with the stronger institutions paying lower rates. The Bank's assessment was based on 1.96 basis points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable deposits. The decrease during 2002, is a result of a reduction in the Bank's level of deposits as well as improvement in the Bank's risk rating. 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 (herein sometimes referred to as the 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: reducing expenses, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. Management believes that the Bank is "substantially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. As of March 31, 2002, the Bank's tier one leverage capital ratio is 6.86%, below the 7% minimum capital ratio required by the Agreement. The failure of the Bank to maintain a minimum capital ratio of at least 7% at all times while the Agreement is in force is a violation of the Agreement. The Federal Reserve authorities could take regulatory and supervisory actions against the Bank for violation of the Agreement. As of May 8, 2002, no such actions have been taken. 15 Management is reviewing and revising its capital plan to address the development of new equity. In addition, a profit restoration plan has been developed to include numerous expense reduction and profit enhancement strategies. Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this statement is not expected to have a significant impact on the financial condition or results of operations of the Company. 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 did not have an impact on the Company's consolidated 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. 16 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, 2002, an asset sensitive position is maintained on a cumulative basis through 1 year of 4.58% 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 significant level of core deposits which have been placed in longer repricing intervals. Generally, because of the positive gap position of the Bank in shorter time frames, the Bank can anticipate that increases in market rates will have a positive impact on the net interest income, while decreases will have the opposite effect. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, although the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. This model produces an interest rate exposure report that forecast changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance-sheet instruments. 17 The calculated estimates of changes in market value of equity at March 31, 2002 are as follows: Market value Market value of equity Changes in rate of equity as a % of MV of Assets ----------------- -------------- ---------------------- (Dollars in thousands) +400 basis points $ 12,922 13.7% +300 basis points 11,615 12.5 +200 basis points 10,363 11.4 +100 basis points 6,626 9.8 Flat rate 6,727 -7.8 -100 basis points 4,880 5.8 -200 basis points 3,045 3.8 -300 basis points 9 0 -400 basis points (2,117) (2.8) 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 Board of Directors of the Bank and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest-rate exposure is not considered significant and is within the policy limits of the Bank at March 31, 2002. However, if significant interest rate risk arises, the Board of Directors and management may take (but are not limited to) one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit (CDs) and movement into money market deposit accounts and short-term CDs through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the balance sheet of the Bank. 3. Restructure the investment portfolio of the Bank. The Board of Directors has determined that active supervision of the interest-rate spread between yield on earnings assets and cost of funds will decrease the vulnerability of the Bank to interest-rate cycles. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. The Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company. The Bank had a One Million Dollar ($1,000,000) unsecured loan participation in a $40.4 Million ($40,400,000) line of credit to KMART Corporation. The Bank was repaid the One Million Dollar ($ 1,000,000) loan participation in full on January 8, 2002. KMART Corporation filed for protection under Chapter 11 of the federal bankruptcy laws on January 22, 2002 and such a filing by KMART Corporation could expose the Bank to a future claim that the repayment to the Bank of its loan participation was a preference payment. If the preference claim is made and is successful, the Bank may be required to return the One Million Dollar ($1,000,000) loan repayment and incur a loss in that amount to the extent that the Bank can not obtain repayment of the loan participation from KMART Corporation or as an unsecured creditor in the bankruptcy proceeding. As of May 8, 2002, the Bank has not received any notification in regard to this matter. 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 Bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of it for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the bank without prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania. Under the Federal Reserve Act, if a bank has sustained losses up to or exceeding its undivided profits, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Bank's net profits for that year plus its retained net profits from the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the 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 above) 19 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 20 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 14, 2002 /s/ Evelyn Smalls ------------------------------ Evelyn Smalls President & CEO /s/ Brenda Hudson-Nelson ------------------------------ Brenda Hudson-Nelson SVP/Chief Financial Officer 21 -----END PRIVACY-ENHANCED MESSAGE-----