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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 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
Commission File Number
Pennsylvania 23-2802415
- ---------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North 3rd Street, Philadelphia, PA 19106
- -------------------------------------- -----------
(Address of principal executive office) (Zip Code)
(215) 351-4600
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
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.
The Registrant has two classes of capital stock authorized - 2,000,000 shares of
$.01 par value Common Stock and 500,000 shares of Series Preferred A 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 rights. Of the 2,000,000 shares of Common Stock authorized,
250,000 have been designated Class B Common Stock. As of November 8, 2002,
1,103,788 (191,667 Class B Non voting) shares were issued and outstanding.
The Board of Directors of United Bancshares, Inc. authorized the Series A
Preferred Stock, of which 143,150 shares were issued and outstanding as of
November 8, 2002.
FORM 10-Q
Index
Item No. Page
- -------- ----
PART I
1. Financial Statements........................................... 4
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
3. Quantitative and Qualitative Disclosures about Market Risk..... 20
4. Controls and Procedure......................................... 22
PART II
1. Legal Proceedings........................................... 23
2. Working Capital Restrictions on the Payment of Dividends.... 23
3. Defaults upon Senior Securities............................. 24
4 Submission of Matters to a Vote of Security Holders......... 24
5. Other Information........................................... 24
6. Exhibits and Reports on Form 8K............................. 25
3
Item 1. Financial Statements
Consolidated Balance Sheets
(unaudited)
September 30 December 31,
2002 2001
---------- ----------
Assets
Cash and due from banks 3,994,562 5,747,131
Interest bearing deposits with banks 863,526 256,847
Federal funds sold 10,230,000 7,778,000
---------- ----------
Cash & cash equivalents 15,088,088 13,781,978
Investment securities:
Held-to-maturity, at amortized cost,
market value of $8,867,500 at
September 30, 2002 and $11,735,146 at
December 31, 2001 8,573,766 11,466,372
Available-for-sale, at market value 13,266,482 14,339,643
Loans, net of unearned discount 44,344,619 42,999,877
Less: allowance for loan losses (702,813) (708,156)
========== ==========
Net loans 43,641,806 42,291,721
Bank premises & equipment, net 2,635,892 2,978,265
Accrued interest receivable 744,301 911,470
Other real estate owned 0 45,000
Core deposit intangible 1,983,764 2,118,868
Prepaid expenses and other assets 822,013 734,741
---------- ----------
Total Assets 86,756,112 88,668,058
========== ==========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 19,324,517 19,471,758
Demand deposits, interest bearing 14,778,984 12,613,507
Savings deposits 21,132,450 23,227,604
Time deposits, $100,000 and over 10,720,789 13,795,997
Time deposits 11,654,884 10,313,657
---------- ----------
77,611,623 79,422,523
Accrued interest payable 139,743 263,550
Accrued expenses and other liabilities 375,526 424,274
---------- ----------
Total Liabilities 78,126,893 80,110,347
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value, 1,432 1,432
500,000 shrs auth., 143,150 issued and outstanding
Common stock, $.01 par value; 2,000,000 shares authorized;
1,103,788 shares issued and outstanding
at September 30, 2002 11,021 11,004
and 1,102,088 at December 31, 2001, respectively
Additional-paid-in-capital 14,749,453 14,729,070
Accumulated deficit (6,377,422) (6,282,614)
Net unrealized gain on available-for-sale securities 244,736 98,819
---------- ----------
Total Shareholders' equity 8,629,220 8,557,711
---------- ----------
86,756,112 88,668,058
========== ==========
4
Consolidated Statements of Income
(unaudited)
Three months ended Three months ended Three months ended Three months ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Interest Income:
Interest and fees on loans 757,472 840,761 2,223,101 2,813,856
Interest on investment securities 360,804 422,416 1,139,588 1,332,376
Interest on Federal Funds sold 35,489 86,003 133,080 236,556
Interest on time deposits with other banks 3,851 2,154 7,018 6,262
--------- --------- --------- ---------
Total interest income 1,157,616 1,351,334 3,502,787 4,389,050
Interest Expense:
Interest on time deposits 144,824 274,234 521,661 838,678
Interest on demand deposits 30,642 40,481 85,669 148,896
Interest on savings deposits 32,307 87,374 98,232 271,472
Interest on borrowed funds 0 75 0 75
--------- --------- --------- ---------
Total interest expense 207,773 402,164 705,562 1,259,121
Net interest income 949,843 949,170 2,797,225 3,129,929
Provision for loan losses 37,500 30,000 112,500 60,000
--------- --------- --------- ---------
Net interest income less
provision for loan losses 912,343 919,170 2,684,725 3,069,929
--------- --------- --------- ---------
Noninterest income:
Gain on sale of loans 0 0 0 0
Customer service fees 474,468 556,454 1,448,102 1,666,380
Realized gain (loss) on investments 0 0 25,789 0
Other income 285,178 19,975 361,569 146,853
--------- --------- --------- ---------
Total noninterest income 759,646 576,429 1,835,460 1,813,233
Non-interest expense
Salaries, wages, and employee benefits 582,855 687,037 1,825,677 1,956,048
Occupancy and equipment 308,294 406,675 1,011,439 1,219,088
Office operations and supplies 107,332 110,457 322,579 356,366
Marketing and public relations 18,111 32,886 44,975 74,356
Professional services 73,917 43,159 186,533 167,908
Data processing 157,114 186,069 463,702 603,326
Deposit insurance assessments 8,831 36,297 27,425 113,782
Other noninterest expense 230,758 265,147 732,663 777,537
--------- --------- --------- ---------
Total non-interest expense 1,487,212 1,767,727 4,614,993 5,268,411
--------- --------- --------- ---------
Net income (loss) $ 184,777 ($ 272,128) ($ 94,808) ($ 385,249)
========== ========== ========== ==========
Earnings per share-basic $0.17 ($0.25) ($0.09) ($0.35)
Earnings per share-diluted $0.17 ($0.25) ($0.09) ($0.35)
Weighted average number of shares 1,100,582 1,099,497 1,100,582 1,099,497
========= ========= ========= =========
See Accompanying Note
5
Consolidated Statements of Cash Flows
(unaudited)
Nine Months ended Nine Months ended
September September
2002 2001
----------------- -----------------
Cash flows from operating activities
Net loss ($ 94,808) (385,249)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for loan losses 112,500 60,000
Gain on sale of fixed assets (39,753)
Gain on sale of investments (25,789)
Depreciation and amortization 523,025 579,752
Decrease (increase) in accrued interest
receivable and other assets 124,897 (212,700)
Increase (decrease) in accrued interest
payable and other liabilities (172,555) 125,326
---------- ----------
Net cash provided by operating activities 427,518 167,129
Cash flows from investing activities
Purchase of investments-Available-for-Sale (7,790,823) (9,264,274)
Purchase of investments-Held-to Maturity (500,000)
Proceeds from maturity & principal reductions of
investments -- Available-for-Sale 7,942,140 5,347,078
Proceeds from maturity & principal reductions
of investments -- Held-to-Maturity 3,415,715 12,274,836
Proceeds from sale of investments --
Available-for-Sale 1,116,852 118,600
Net (increase) decrease in loans (1,462,585) (987,697)
Purchase of premises and equipment (162,205) (93,681)
Sale of premises and equipment 110,000
---------- ----------
Net cash provided by investing activities 2,669,092 7,394,862
Cash flows from financing activities
Net increase (decrease) in deposits (1,810,900) (1,298,857)
Net proceeds from issuance of common stock 20,400 2,000
---------- ----------
Net cash used in financing activities (1,790,500) (1,296,857)
Increase in cash and cash equivalents 1,306,110 6,265,134
Cash and cash equivalents at beginning of period 13,781,978 6,293,880
Cash and cash equivalents at end of period 15,088,088 12,559,014
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 611,066 1,271,217
========== ==========
See Accompanying Note
6
NOTES TO FINANCIAL STATEMENTS
NOTE 1. General
United Bancshares, Inc. (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956. The Company's principal activity is
the ownership and management of its wholly owned subsidiary, United Bank of
Philadelphia (the "Bank").
During interim periods, the Company follows the accounting policies set forth in
its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2001 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the Company's consolidated financial
position as of September 30, 2002 and December 31, 2001 and the consolidated
results of its operations for the three and nine month periods ended September
30, 2002 and 2001, and its consolidated stockholders' equity for the nine month
period ended September 30, 2002, and its consolidated cash flows for the nine
month periods ended September 30, 2002 and 2001.
7
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, except per share data) Quarter ended Quarter ended
------------------- ------------------
September 30, 2002 September 30, 2001
------------------- ------------------
Net interest income $ 950 $ 949
Provision for loan losses 37 30
Noninterest income 760 576
Noninterest expense 1,487 1,768
Net income (loss) 185 (272)
Earnings (loss) per share - basic and diluted $ 0.17 ($ 0.25)
September 30, 2002 December 31, 2001
------------------- ------------------
Balance sheet totals:
Total assets $ 86,756 $ 88,668
Loans, net $ 43,641 $ 42,292
Investment securities $ 21,840 $ 25,806
Deposits $ 77,612 $ 79,423
Shareholders' equity $ 8,629 $ 8,558
Ratios
Return on assets 0.21% (0.95)%
Return on equity 2.14% (9.31)%
Equity to assets ratio 7.80% 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
increased approximately $349 thousand, or .44%, during the quarter ending
September 30, 2002. Average funding uses decreased $1 million, or 1.31%, for the
same quarter.
8
Sources and Uses of Funds Trends
September 30, 2002 June 30, 2002
Average Increase (Decrease) Average
Balance Amount % Balance
------- ------ --- -------
Funding uses:
Loans $42,357 $ 1,328 3.24% $41,029
Investment securities
Held-to-maturity 10,623 (200) (1.85) 10,823
Available-for-sale 14,033 (483) (3.33) 14,516
Federal funds sold 10,570 (1,672) (13.66) 12,242
------- ------- -------
Total uses $77,583 ($1,027) $78,610
======= ======= =======
Funding sources:
Demand deposits
Noninterest-bearing $19,995 $ 593 3.06% $19,402
Interest-bearing 12,666 563 4.65 12,103
Savings deposits 22,284 (132) (0.59) 22,416
Time deposits 24,077 (675) (2.73) 24,752
------- ------- -------
Total sources $79,022 $ 349 $78,673
======= ======= =======
Loans
Average loans increased approximately $1.3 million, or 3.24%, during the
quarter ended September 30, 2002. This increase is primarily a result of loan
participations purchased from other financial institutions. The Bank has
developed relationships with other financial institutions in the region with
which it participates in loans as a strategy to stabilize and grow its
commercial loan portfolio. This strategy will continue to be utilized while the
Bank continues to enhance it own business development capacity. Approximately
$1.9 million in commercial loan participations were booked during the quarter
ended September 2002---bringing the total to more than $10 million year-to-date.
Most of these participations were secured by commercial real estate.
Increases in the commercial loan portfolio were partially offset by
significant levels of repayments in the Bank's residential mortgage loan
portfolio as consumers continue to refinance existing loans or sell 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 does not generate sufficient mortgage loan volume to
cover these payoffs.
The Bank's loan-to-deposit ratio at September 30, 2002 was 56.23% up from
52% for the quarter ending June 30, 2002. The target loan-to-deposit ratio is
75%. This level would allow the Bank to optimize interest income on earning
assets while maintaining adequate liquidity. Management will continue to
implement loan growth strategies including the purchase of additional commercial
loan participations and the origination of small business loans and consumer
loans including home equity, automobile, student and credit card loans.
During 2002, because of the purchase of loan participations, commercial
real estate loans increased $7.3 million to 29% of total loans. Conversely, the
rapid repayments in the mortgage loan portfolio resulted in a reduction of $3.8
million, or 20.89%--thereby creating a significant shift in the composition of
the overall loan portfolio. The following table shows the composition of the
loan portfolio of the Bank by type of loan.
9
(Thousands of Dollars)
September 30, December 31,
2002 2001
-------- --------
Commercial and industrial $ 9,279 $11,054
Commercial real estate 12,767 5,504
Consumer loans 7,943 8,294
Residential mortgages 14,356 18,148
------- -------
Total Loans $44,345 $43,000
======= =======
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 (92)
Residential mortgages
Consumer loans (165)
-----
Total charge-offs (257)
Recoveries 139
Net (charge-offs) recoveries (118)
-----
Additions charged to operations 113
-----
Balance at September 30, 2002 703
=====
The allowance for loan losses as a percentage of total loans was 1.59% at
September 30, 2002. During the past year, there was an economic downturn and
economic uncertainty continues. Because the impact on the borrowers may lag the
current economic conditions, the Bank proactively monitors its credit quality
while working with borrowers in an effort to identify and control credit risk.
10
At September 30, 2002, the Bank's classified loans totaled $2.3 million,
or 5.22% of total loans. Specific reserves of $584 thousand have been allocated
to these loans. Approximately $357 thousand was allocated to one loan for which
full collectibility is uncertain. (Refer to Nonperforming and Nonaccrual Loans
below for further discussion on this loan.)
While management uses available information to recognize losses on loans,
future additions may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
Management believes the level of the allowance for loan losses is adequate as of
September 30, 2002.
Nonperforming and Nonaccrual Loans
The Bank generally determines a loan to be "nonperforming" when interest or
principal is past due 90 days or more. If it otherwise appears doubtful that the
loan will be repaid, management may consider the loan to be "nonperforming"
before the lapse of 90 days. The policy of the Bank is to charge-off unsecured
loans after 90 days past due. Interest on "nonperforming" loans ceases to accrue
except for loans that are well collateralized and in the process of collection.
When a loan is placed on non-accrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of and interest on the loan appears to be available. At
September 30, 2002, non-accrual loans were $469 thousand, or 1.06% of the loan
portfolio of which approximately $269 thousand were guaranteed by the Small
Business Administration.
The Bank has one borrower in the telecommunications industry with loans
totaling approximately $1.3 million that is experiencing severe financial
difficulty. Guarantees from the Small Business Administration (SBA) reduce the
Bank's exposure to approximately $714 thousand. A specific reserve of $357
thousand has been allocated to this loan to cover potential losses. Management
continues to work closely with this borrower to develop a work-out plan to
minimize the risk of loss. This loan has been modified to provide for a
moratorium on principal payments until January 2003. The borrower is in
compliance with the modified terms. Management recognizes this loan as an
impaired asset.
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.
11
At September 30, 2002, approximately 25% 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 September 30, 2002, none of these loans was
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, decreased on average
by $2.4 million, or 6.27%, during the quarter ended September 30, 2002. This
decrease is due the use of Federal Funds Sold to fund the purchase of commercial
loan participations from other financial institutions. Although loan
originations are preferred to improve profitability, alternate investment
strategies were developed and continue to be implemented to place liquid funds
into longer-term securities including mortgage-backed securities and other
agency securities to decrease the level of investment in low yielding Federal
Funds Sold.
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 yield on the portfolio is 5.86% at September 30 , 2002
compared with 6.06% June 30, 2002. The average duration of the portfolio is 3.2
years. In the current low interest rate environment, the duration of the
investment portfolio is significantly shortened because of the level of callable
government agency securities - approximately 33.4%% at September 30, 2002.
Approximately $1.5 million in securities were called during the quarter. The
average yield of called securities was 6.00%. 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 investment 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 future rising rate environments. In October 2002, a strategy to invest $4
million in variable rate mortgage-backed securities was implemented. These
securities have average current yields of 4.00% and estimated durations of 4
years with monthly cashflow. These securities will adjust at various intervals
ranging from one to five years.
Deposits
The Bank has a stable core deposit base representing 87% of total deposits.
This base is comprised of over 15,000 accounts with an average balance of $500.
During the quarter ended September 30, 2002, average deposits increased
approximately $349 thousand, or .44%. The average level of demand deposits
increased approximately $1.1 million during the quarter as a result of temporary
deposits received from governmental agencies and religious organizations.
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.
12
Other Borrowed Funds
The Bank did not borrow funds during the quarter ended September 30, 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 September 30, 2002 are
summarized below:
Commitments to extend credit $8,376,000
Outstanding letter of credit $ 25,000
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. Management believes the Bank has adequate
liquidity to support the funding of unused commitments.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rate.
13
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 September 30, 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 $6.9 million loans are scheduled to mature within one year.
By policy, the Bank's minimum level of liquidity is 6.00% of total assets.
At September 30, 2002, the Bank has total short-term liquidity, including cash
and federal funds sold, of $11.2 million, or 12.889% of total assets. Additional
liquidity of approximately $13 million, or 14.96% of total assets, is provided
by the Bank's investment portfolio classified as available-for-sale.
The Bank's overall liquidity continues to be enhanced by a significant
level of core deposits which management has determined are less sensitive to
interest rate movements. The Bank continues to avoid reliance on large
denomination time deposits as well as brokered deposits. The Bank has one $5
million deposit with a government agency that matures in January 2003. While
this is a short-term renewal, this certificate has continuously renewed for more
than 8 years and is not anticipated by management to be removed in the near
future.
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at September 30, 2002:
(Thousands of
dollars)
-------
3 months or less $ 2,397
Over 3 through 12 months 7,080
Over 1 through three years 1,244
Over three years --
-------
Total $10,721
=======
Capital Resources
Total shareholders' equity increased approximately $255 thousand during the
quarter ended September 30, 2002. The increase in equity was primarily due to
net income of $185 thousand during the quarter, a $50 thousand increase in other
comprehensive income (FAS 115 unrealized gains on available-for-sale securities)
because of declining interest rates that enhance the value of the portfolio, and
approximately $20 thousand from the sale of common stock.
14
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 and the Bank's risk-based
capital ratios are above the minimum requirements. (Refer to Regulatory Matters
below for Written Agreement 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.
Company Company
September 30, December 31,
2002 2001
-------- --------
Total Capital $ 8,630 $ 8,459
Less: Intangible Assets/Net unrealized
gains (losses) on available for
sale portfolio (2,229) (2,119)
-------- --------
Tier 1 Capital 6,401 6,340
-------- --------
Tier 2 Capital 529 510
-------- --------
Total Qualifying Capital $ 6,930 $ 6,850
======== ========
Risk Adjusted Total Assets
(including off-Balance sheet exposures) $ 42,346 $ 41,624
Tier 1 Risk-Based Capital Ratio 15.12% 15.23%
Tier 2 Risk-Based Capital Ratio 16.94% 16.46%
Leverage Ratio 7.55% 7.12%
Bank Bank
September 30, December 31,
2002 2001
-------- --------
Total Capital $ 8,341 $ 8,170
Less: Intangible Asset/Net unrealized gains
(losses) on available for sale portfolio (2,229) (2,119)
-------- --------
Tier 1 Capital 6,112 6,051
-------- --------
Tier 2 Capital 529 510
-------- --------
Total Qualifying Capital $ 6,641 $ 6,561
======== ========
Risk Adjusted Total Assets
(including off-Balance sheet exposures) $ 42,346 $ 41,624
Tier 1 Risk-Based Capital Ratio 14.49% 14.90%
Tier 2 Risk-Based Capital Ratio 15.75% 16.15%
Leverage Ratio 7.21% 6.80%
15
Results of Operations
Summary
The Bank had net income of approximately $185 thousand ($0.17 per common
share) for the quarter ended September 30, 2002 compared to a net loss of $272
thousand ($0.25 per common share) for the quarter ended September 30, 2001. In
September 2002, the Bank was awarded a $198,000 grant from the U.S. Treasury
Department's Bank Enterprise Award (BEA) Fund. These funds are awarded to
financial institutions that demonstrate community development through loan and
deposit activity. The financial results for the quarter ended September 30, 2002
were also positively impacted by the continued implementation of the Bank's
profit restoration plan which resulted in reductions in noninterest expenses of
$280 thousand compared to the same quarter in 2001.
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 were employed to include shifting funds out of Federal Funds Sold
into higher yielding investment securities and loans. New opportunities for fee
income include the debit card and wealth management services. 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 are also expected to contribute to increased revenues.
While expense reductions were achieved during the quarter ended September
30, 2002, a greater impact will be realized with increased loan originations
that build the Bank's loan-to-deposit ratio. This will lead to a higher net
interest margin and therefore increased revenues.
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.
16
Net interest income was the same for the quarter ended September 30, 2002
compared to September 30, 2001. While there was a $194,000 decline in interest
income caused by the lower interest rate environment, management achieved
relatively the same net interest income by managing the rates it pays on its
core deposits. The Bank's net interest margin was 4.91% at September 30, 2002
compared to 4.54% at September 30, 2001. The cost of funds was 1.01% to 1.87%
for the same periods.
Strategies have been implemented to shift low yielding earning assets to
higher yielding loan participations and investment securities. (Refer below to
Item 3. Quantitative and Qualitative Disclosures about Market Risk for
discussion on measures 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 September 30, 2002 was $37 thousand compared to $30 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. (Refer to
Allowance for Loan Losses above for discussion on classified loans and specific
reserves.) Management continues to closely monitor the portfolio for signs of
weakness and will proactively make provisions to cover potential losses.
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. While total noninterest income for the quarter
ended September 30, 2002 increased $183 thousand, or 31.78%, compared to the
same quarter in 2001, customer service fees declined $82 thousand, or 14.73%.
The increase in noninterest income is largely due to a $198 thousand grant
the Bank received from the U.S. Treasury Department's Bank Enterprise Award
(BEA) Fund. The Bank received this grant as a result of certificates of deposits
it placed with other Community Development Financial Institutions (CDFI)
throughout the country. (Note: United Bank of Philadelphia also has a CDFI
designation and periodically receives such deposits to support its community
development mission.)
In addition, the Bank syndicated a $60 million back-up line of credit with
other minority banks throughout the region for a major corporation for which it
received an agent fee. This fee will be received annually for the administration
of this line of credit.
17
Customer service fees declined $82 thousand for the quarter ended September
30, 2002 compared to 2001, primarily because of a reduction in activity fees on
deposits and lower surcharge income on the Bank's ATM network. The Bank's lower
deposit levels in 2002 compared to 2001 result in less overdraft fees, activity
service charges and low balance fees.
As a result of the 714 Market Street branch closure in January 2002 and
another ATM location lease expiration, the Bank had two high volume automated
teller machines out of service during the quarter. The result was a lower level
of non-customer ATM surcharge income for the quarter ended September 30, 2002.
Management continues the process of identifying other potentially high volume
locations to re-deploy these machines and others.
Noninterest Expense
Salaries and benefits decreased $104 thousand, or 15.16%, during the
quarter ended September 30, 2002 compared to 2001. In April 2002, as part of its
Profit Restoration Plan, the Bank made strategic reductions in staff, job
consolidations, and reduced salaries for certain employees to lower the level of
personnel 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 $29 thousand, or 15.56%, during the quarter ended September
30, 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. In November 2002, the Bank will convert its core data processing
to a new vendor, FISERV. This conversion will reduce monthly data processing
expense by at least $4,500 and result in other efficiencies that may allow
further reductions in personnel expense.
Occupancy expense decreased approximately $98 thousand, or 24.19%, during
the quarter ended September 30, 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 and the Bank's former Frankford branch office was sold on June 8,
2002. The sale of these branches results in occupancy expense savings. In
addition, many of the fixed assets initially acquired in 1992 when the Bank
first opened for business are now fully depreciated (10 year life). This results
in a reduction in monthly depreciation expense.
18
Professional services expense increased approximately $31 thousand, or
71.27%, for the quarter ended September 2002 compared to 2001. This increase is
primarily related to legal fees associated with the final resolution of the
Bank's legal matters with W.T. Development and Monument Financial. Management
continues to seek methods to further reduce this cost.
Office operations and supplies expense decreased $3 thousand, or 2.83%, for
the quarter-ended September 30, 2002 compared to 2001. Savings should continue
to be realized as a result of the closure/consolidation of the Bank's 714 Market
Street branch because of 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 $27 thousand, or 75.67%,
for the quarter ended September 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 September 30, 2002, the Bank's tier one leverage capital ratio was
7.21%, above the 7% minimum capital ratio required by the Agreement. Management
will continue to seek new capital to ensure it maintains the required capital
ratio and to support its asset growth. The Bank's capital plan is continuously
reviewed and revised to address the development of new equity. Core
profitability will be a key element of the plan.
19
Cautionary Notice Regarding Forward Looking Statements
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; taxes.
The Company's actual results may differ materially from results anticipated
by the forward looking statements due to a variety of factors including, without
limitation, the effect of future economic conditions on the Company and its
customers; government monetary and fiscal policies as well as legislation and
regulatory changes; the risk of changes in interest rates on the level and
composition of deposits, loan demand, and its value of loan collateral and
securities as well as interest-rate risk, the effect of competition from other
commercial banks, thrift institutions, mortgage companies, consumer finance
companies, credit unions, securities brokerage firms, insurance companies, and
mutual funds and other institutions operating in the Company's trading area and
competitors offerings banking products and services by mail, telephone,
computeeer and the internet; and the failure of assumptions underlying the
establishment of reserves for loan losses and estimates in the value of
collateral and various financial assets and liabilities and the technological
changes being more difficult or expensive anticipated. All written and oral
forward looking statements attributed to the Company are qualified in their
entirety by the foregoing cautionary statements.
Critical Accounting Policy
The Company's most critical accounting policy is the allowance for loan
loss, the allowance for loan loss represents management's estimate of the losses
inherent in the loan portfolio. This is consistently monitored to determine its
adequacy. Ongoing review of credit standards, the level of delinquencies on loan
products, and loan segments and the current state of the economy are included in
this review. Actual losses may differ from management's estimates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which rates
change daily and loans which are tied to prime or other short term indices
differ considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap, or excess earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations.
At September 30, 2002, an asset sensitive position is maintained on a
cumulative basis through 1 year of 3.96% 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.
20
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, although the Bank currently has a positive
gap position because of unequal sensitivity of these assets and liabilities,
management believes this position will not materially impact earnings in a
changing rate environment. For example, changes in the prime rate on variable
commercial loans may not result in an equal change in the rate of money market
deposits or short-term certificates of deposit. A simulation model is therefore
used to estimate the impact of various changes, both upward and downward, in
market interest rates and volumes of assets and liabilities on the net income of
the Bank. This model produces an interest rate exposure report that forecast
changes in the market value of portfolio equity under alternative interest rate
environments. The market value of portfolio equity is defined as the present
value of the Company's existing assets, liabilities and off-balance-sheet
instruments. The calculated estimates of changes in market value of equity at
September 30, 2002 are as follows:
Market value of Market value of equity
Changes in rate equity as a % of MV of Assets
----------------- ----------- ----------------------
(Dollars in thousands)
+400 basis points -- (--)%
+300 basis points 3,053 3.8
+200 basis points 4,986 6.0
+100 basis points 6,948 8.2
Flat rate 8,978 10.3
-100 basis points 11,042 12.3
-200 basis points 12,358 13.9
-300 basis points 13,980 14.8
-400 basis points 15,339 15.9
The market value of equity may be impacted by the composition of the Bank's
assets and liabilities. A shift in the level of variable versus fixed rate
assets will create swings in the market value of equity.
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest sensitivity of the Company's assets and
liabilities, as well as the estimated effect of changes in interest rates on the
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
21
The Board of Directors of the Bank and management consider all of the
relevant factors and conditions in the asset/liability planning process.
Interest-rate exposure is not considered significant and is within the policy
limits of the Bank at September 30, 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.
Item 4 Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation under the supervison and with the participation of the Company's
management, including the Company's Chief Executive Officer, Evelyn F. Smalls,
and Chief Financial Officer, Brenda M. Hudson-Nelson, of the effectiveness of
the design and opeation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries)required to be included in the Company's periodic SEC filings.
As of the date of this report, there have not been any significant changes
in the Company's internal controls or in any other factors that could
significantly affect those controls subsequent to the date of the evaluation.
22
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
November 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 therefore
under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania
Banking Code of 1965, funds available for cash dividend payments by a bank are
restricted to accumulated net earnings and if the surplus of a bank is less than
the amount of its capital, the bank shall, until surplus is equal to such
amount, transfer to surplus an amount which is at least 10% of its net earnings
for the period since the end of the last fiscal year or any shorter period since
the declaration of a dividend. If the surplus of a bank is less than 50% of the
amount of its capital, no dividend may be declared or paid by the bank without
prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania.
23
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).
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
24
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 99.1 Cerification Pusuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Cerification Pusuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Certification as adopted pursuant to Section 307 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.4 Certification as adopted pursuant to Section 307 of the
Sarbanes-Oxley Act of 2002.
No form 8-K report was filed during the period.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCSHARES, INC.
Date: November 14, 2002 /s/ Evelyn Smalls
------------------------------
Evelyn Smalls
President & CEO
/s/ Brenda Hudson-Nelson
------------------------------
Brenda Hudson-Nelson
EVP/Chief Financial Officer
25