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EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PAex31-1.htm
EX-32.2 - EXHIBIT 32.2 - UNITED BANCSHARES INC /PAex32-2.htm
EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PAex32-1.htm
EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PAex31-2.htm


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, 2010 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.)

30 S. 15th Street, Suite 1200, Philadelphia, PA
19102
(Address of principal executive office)
(Zip Code)
 
(215) 351-4600
 
(Registrant's telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes _X_ No____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes _X_ No____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer___
Accelerated filer___
Non-accelerated filer_X_
Smaller Reporting Company ___
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes_____ No_X__
 
 
 
1

 
 
 
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 _____  Not Applicable.
 
Applicable only to corporate issuers:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
 
United Bancshares, Inc. (sometimes herein also referred to as the “Company” or “UBS”) has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and a Series Preferred Stock.
 
The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998.  This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights.  Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock.  There is no market for the Common Stock.  As of April 30, 2010, the aggregate number of the shares of the Registrant’s Common Stock issued was 1,068,588 (including 191,667 Class B non-voting).  There are 33,500 shares of Common Stock held in treasury stock at April 30, 2010.
 
The Series Preferred Stock consists of 500,000 authorized shares of stock of which 250,000 have been designated as Series A Preferred stock of which 136,842 shares are issued and 31,308 shares are held in treasury stock as of April 30, 2010.



 
 
 
2

 

 
FORM 10-Q
 
Index

Item No.
 
Page
PART I-FINANCIAL INFORMATION
 
1.
Financial Statements
 
       
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
       
3.
Quantitative and Qualitative Disclosures about Market Risk
 
       
4T.
Controls and Procedures
 
       
PART II-OTHER INFORMATION
       
1.
Legal Proceedings
 
       
1A.
Risk Factors
 
       
2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
       
3.
Defaults upon Senior Securities
 
       
4
Reserved
 
       
5.
Other Information
 
       
6.
Exhibits
 
       

 
3

 


Item1. Consolidated Statements of Condition (unaudited)
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Cash and due from banks
  $ 2,107,738     $ 2,495,359  
Interest bearing deposits with banks
    304,205       303,485  
Federal funds sold
    3,769,000       3,491,000  
Cash & cash equivalents
    6,180,943       6,289,844  
                 
Investment securities:
               
    Held-to-maturity, at amortized cost (fair value of $9,881,966
               
       and $10,019,986 at March 31, 2010 and December 31, 2009, respectively)
    9,751,633       9,970,807  
     Available-for-sale, at fair value
    1,595,578       1,862,993  
                 
Loans , net of unearned discount
    46,667,300       47,587,112  
Less: allowance for loan losses
    (642,295 )     (727,397 )
Net loans
    46,025,005       46,859,715  
                 
Bank premises & equipment, net
    1,319,250       1,358,296  
Accrued interest receivable
    431,523       421,292  
Other real estate owned
    474,697       0  
Core deposit intangible
    625,448       669,967  
Prepaid expenses and other assets
    833,089       884,879  
Total Assets
  $ 67,237,165     $ 68,317,793  
 
               
Liabilities & Shareholders' Equity
               
Liabilities:
               
Demand deposits, non-interest bearing
  $ 13,740,706     $ 14,030,712  
Demand deposits, interest bearing
    10,452,369       10,188,990  
Savings deposits
    14,680,228       15,302,458  
Time deposits, $100,000 and over
    12,341,652       12,367,359  
Time deposits
    8,375,309       8,417,102  
Total deposits
    59,590,265       60,306,621  
                 
Accrued interest payable
    57,125       63,954  
Accrued expenses and other liabilities
    252,393       415,942  
Total Liabilities
    59,899,783       60,786,517  
                 
Shareholders' equity:
               
  Preferred Stock, Series A, non-cumulative, 6%, $.01 par value,
               
   500,000 shares authorized, 136,842 issued
    1,368       1,368  
 Common stock, $.01 par value; 2,000,000 shares authorized;
               
   876,921 shares issued
    8,769       8,769  
Class B Non-voting common stock; 250,000 shares authorized; $0.01 par value;
               
   191,667 shares issued and outstanding
    1,917       1,917  
Treasury Stock, 33,500 common shares and 31,308 preferred shares, at cost
    0       0  
Additional-paid-in-capital
    14,749,852       14,749,852  
Accumulated deficit
    (7,471,259 )     (7,280,793 )
Accumulated other comprehensive income
    46,737       50,163  
Total Shareholders' equity
    7,337,382       7,531,276  
 
  $ 67,237,165     $ 68,317,793  
                 
See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.


 
4

 

Consolidated Statements of Operations—(unaudited)
 
 
 
Quarter ended
   
Quarter ended
 
 
 
March 31,
   
March 31,
 
   
2010
   
2009
 
Interest Income:
           
     Interest and fees on loans
  $ 693,231     $ 768,500  
     Interest on investment securities
    115,982       148,225  
     Interest on Federal Funds sold
    2,079       2,346  
     Interest on time deposits with other banks
    726       1,774  
Total interest income
    812,018       920,845  
                 
Interest Expense:
               
     Interest on time deposits
    52,508       110,169  
     Interest on demand deposits
    19,615       26,820  
     Interest on savings deposits
    3,735       11,795  
Total interest expense
    75,858       148,784  
                 
Net interest income
    736,160       772,061  
                 
Provision for loan losses
    30,000       30,000  
Net interest income after provision for
               
     loan losses
    706,160       742,061  
                 
Noninterest income:
               
    Customer service fees
    105,611       115,521  
    ATM activity fees
    90,829       112,662  
    Loan syndication fees
    30,000       30,000  
    Other income
    40,900       17,721  
Total noninterest income
    267,340       275,904  
                 
Noninterest expense
               
     Salaries, wages, and employee benefits
    428,846       380,129  
    Occupancy and equipment
    254,015       282,864  
    Office operations and supplies
    72,805       70,636  
    Marketing and public relations
    3,264       33,306  
    Professional services
    68,052       59,809  
    Data processing
    115,776       143,934  
    Deposit insurance assessments
    35,324       10,000  
    Other noninterest expense
    185,884       174,444  
Total noninterest expense
    1,163,966       1,155,122  
                 
     Net loss
  $ (190,466 )   $ (137,157 )
                 
     Loss per share-basic and diluted
  $ (0.18 )   $ (0.13 )
                 
     Comprehensive loss
  $ (193,892 )   $ (117,996 )
                 
Weighted average number of shares
    1,065,088       1,065,088  
                 
See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.
 
 
 
5

 

 
Consolidated Statements of Cash Flows--(unaudited)
 
               
 
 
 
Three Months Ended
   
Three Months Ended
 
     
March 31,
   
March 31,
 
     
2010
   
2009
 
Cash flows from operating activities
           
Net loss
    (190,466 )   $ (137,157 )
Adjustments to reconcile net loss to net cash
               
used in operating activities:
               
 
Provision for loan losses
    30,000       30,000  
 
Depreciation and amortization
    126,092       141,870  
 
Decrease in accrued interest receivable and other assets
    41,559       (22,073 )
 
Increase in accrued interest payable and other liabilites
    (170,378 )     (103,540 )
Net cash used in operating activities
    (163,193 )     (90,900 )
                   
Cash flows from investing activities
               
Purchase of investments-Held-to-Maturity
    (1,765,906 )     (3,650,320 )
Proceeds from maturity and principal reductions of investments-Available-for-Sale
    262,533       87,002  
Proceeds from maturity and principal reductions of investments-Held-to-Maturity
    1,976,391       3,414,175  
Net decrease (increase)  in loans
    330,013       (115,057 )
Purchase of premises and equipment
    (32,383 )     (16,796 )
Net cash provided by (used in) investing activities
    770,648       (280,996 )
                   
Cash flows from financing activities
               
Net (decrease) increase in deposits
    (716,356 )     1,065,284  
Net cash (used in) provided by financing activities
    (716,356 )     1,065,284  
                   
(Decrease) increase in cash and cash equivalents
    (108,901 )     693,388  
                   
Cash and cash equivalents at beginning of period
    6,289,844       5,471,471  
                   
Cash and cash equivalents at end of period
  $ 6,180,943     $ 6,164,859  
                   
Supplemental disclosures of cash flow information
               
Cash paid during the period for interest
  $ 82,687     $ 114,740  
Noncash transfer of loans to othe real estate owned
  $ 474,697     $ 0  
                   

See Accompanying Notes to Consolidated Financial Statements which are an integral part of the unaudited consolidated financial statements.
 

 
 
6

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(unaudited)
 
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, 2009 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 March 31, 2010 and December 31, 2009 and the consolidated results of its operations for the three month periods ended March 31, 2010 and 2009, and its consolidated cash flows for the three months ended March 31, 2010 and 2009.

Accounting Standards Codification.
The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) is the FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative.

Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.  An estimate that is particularly susceptible to change in the near term is the allowance for loan losses.

Commitments
In the general course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these commitments.

Contingencies
The Company is from time to time a party to routine litigation in the normal course of its business. Management does not believe that the resolution of this litigation will have a material adverse effect on the financial condition or results of operations of the Company. However, the ultimate outcome of any such litigation, as with litigation generally, is inherently uncertain and it is possible that some litigation matters may be resolved adversely to the Company.
 
2.  Comprehensive Loss
 
Total comprehensive loss includes net loss and other comprehensive income or loss that is comprised of unrealized gains and losses on investment securities available for sale, net of taxes.  The Company’s total comprehensive loss for the three months ended March 31, 2010 and 2009 was $193,892 and $117,996, respectively. The difference between the Company’s net loss and total comprehensive loss for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.
 

 
7

 
 

 
3. Net Loss Per Share
 
The calculation of net loss per share follows:
 
 
Three Months Ended March 31, 2010
Three Months Ended March 31, 2009
Basic:
   
Net loss available to common shareholders
 $190,466
$137,157
Average common shares outstanding-basic
 1,035,088
1,035,088
Net loss per share-basic
$(0.18)
$(0.13)
Fully Diluted:
   
Average common shares-fully diluted
 1,035,088
1,035,088
Net loss per share-fully diluted
$(0.18)
$(0.13)
 
The preferred stock is non cumulative and the Company is restricted from paying dividends.  Therefore, no effect of the preferred stock is included in the loss per share calculations.
 
4.   New Authoritative Accounting Guidance
 
As discussed in Note 1, on July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
 
FASB ASC Topic 820, “Fair Value Measurements and Disclosures”.  New authoritative accounting guidance (Accounting Standards Update No. 2010-6) provides amendments to ASC Topic 820 that require new disclosures as follows: 1) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). The new authoritative guidance also clarifies existing disclosures as follows: 1) A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. These new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. These disclosures did not have a significant impact on the Company’s financial statements, however, refer to Note 6. Fair Value.

FASB ASC Topic 860, “Transfers and Servicing”.  The new authoritative accounting guidance under amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting during the period.  This new authoritative accounting guidance under was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.
 
 
 
8

 
 
 
 5.  Investment Securities
 
The following is a summary of the Company's investment portfolio as of March 31, 2010: 
   
Amortized Cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Other-than-temporary impairments in OCI
   
Fair Value
 
Available-for-sale:
                             
Government Sponsored Enterprises residential mortgage-backed securities
  $ 1,397,014     $ 69,757     $ -     $ -     $ 1,466,771  
Investments in mutual funds
    128,807       -                       128,807  
    $ 1,525,821     $ 69,757     $ -     $ -     $ 1,595,578  
Held-to-maturity:
                                       
U.S. government agencies
  $ 6,083,416     $ 6,993     $ (22,603 )     -     $ 6,067,806  
Government Sponsored Enterprises residential mortgage-backed securities
    3,668,217       157,630       (11,686 )     -       3,814,161  
 
  $ 9,751,633     $ 164,623     $ (34,289 )     -     $ 9,881,966  
 
The following is a summary of the Company's investment portfolio as of December 31, 2009: 
   
 
 
Amortized Cost
   
 
Gross unrealized gains
   
 
Gross unrealized losses
   
Other-than-temporary impairments in OCI
   
 
 
Fair Value
 
Available-for-sale:
                             
Government Sponsored Enterprises residential mortgage-backed securities
  $ 1,659,353     $ 74,870     $ -     $ -     $ 1,734,223  
Investments in mutual funds
    128,770       -                       128,770  
    $ 1,788,123     $ 74,870     $ -     $ -     $ 1,862,993  
Held-to-maturity:
                                       
U.S. government agencies
  $ 6,574,668     $ 8,898     $ (101,293 )     -     $ 6,482,273  
Government Sponsored Enterprises residential mortgage-backed securities
    3,396,139       153,433       (11,859 )     -       3,537,713  
 
  $ 9,970,807     $ 162,331     $ (113,152 )     -     $ 10,019,986  
 
The amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity, by contractual maturity, as of March 31, 2010, are as follows:
 
      Amortized Cost       Fair Value  
Available-for-Sale:
           
Due within one year
  $ -     $ -  
Due after one year through three years
    -       -  
Due after three years
    -       -  
Government Sponsored Enterprises residential mortgage-backed securities
    1,397,014       1,466,771  
     Total debt securities
  $ 1,397,014       1,466,771  
     Investments in mutual funds
    128,807       128,807  
    $ 1,525,821     $ 1,595,578  
 
 
 
 
9

 
 

 
Held to maturity:
           
Due within one year
  $ -     $ -  
Due after one year through three years
    -          
Due after three years
    6,083,416       6,067,806  
Government Sponsored Enterprises residential mortgage-backed securities
    3,668,217       3,814,161  
    $ 9,751,633     $ 9,881,966  
 
Expected maturities will differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalties.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010.

(in 000’s)
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Held-to-maturity:
                                   
U.S. government agencies
  $ 2,606     $ (10 )   $ 579     $ (12 )   $ 3,185     $ (22 )
Government Sponsored Enterprises residential mortgage-backed securities
    1,020       (12 )     -       -       1,020       (12 )
     Total
  $ 3,626     $ (32 )   $ 579     $ (12 )   $ 4,205     $ (34 )
 
The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2009 (in thousands):
(in 000’s)
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Held-to-maturity:
                                   
U.S. government agencies
  $ 5,718     $ (101 )   $ -     $ -     $ 5,718     $ (101 )
Government Sponsored Enterprises residential mortgage-backed securities
    510       (12 )     -       -       510       (12 )
     Total
  $ 6,228     $ (113 )   $ -     $ -     $ 6,228     $ (113 )
 
U.S. Government and Agency Obligations. Unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2010.
 
Residential Federal Agency Mortgage-Backed Securities. Unrealized losses on the Company’s investment in federal agency mortgage-backed securities may be caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2010. As of March 31, 2010, approximately $2.6 million U.S. Agency securities and approximately $1 million Government Sponsored Enterprises residential mortgage-backed securities are included in the continuous loss position for less than 12 months. At March 31, 2010, approximately $579,000 U.S. Agency securities are included in the continuous loss position for more than 12 months.
 
 
 
10

 
 
 
 
The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary.  This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.  On a quarterly basis, we review all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery in value.
 
It is the policy of the Company to purchase AAA rated securities.  Management has evaluated these securities based upon the considerations noted above, and has determined that, as of March 31, 2010, no OTTI losses exist within the Company’s investment securities portfolio.
 
6.  Fair Value
 
Fair Value Measurement
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
 
The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:
 
Level 1
·  
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2
·  
Quoted prices for similar assets or liabilities in active markets.
·  
Quoted prices for identical or similar assets or liabilities in markets that are not active.
·  
Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”
Level 3 Inputs
·  
Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
·  
These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
 
 
11

 
 

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value on a Recurring Basis

Securities Available for Sale:  Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow models. Level 2 securities include U.S. agency securities and mortgage backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
 
Assets and liabilities on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.
 
(in 000’s)
       
Fair Value Measurements at Reporting Date Using:
 
   
Assets/Liabilities Measured at Fair Value at
March 31, 2010
   
Quoted Prices in Active markets for Identical Assets
(Level 1)
   
Significant other observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Investment securities available-for-sale:                        
                         
Government Sponsored Enterprises residential mortgage-backed securities
  $     1,467     $     -     $     1,467           -  
                                 
Mutual Funds
    129       129       -       -  
                                 
 Total   $ 1,596     $ 129     $ 1,467      -  


 
 
 
12

 

 

(in 000’s)
       
Fair Value Measurements at Reporting Date Using:
 
   
Assets/Liabilities Measured at Fair Value at December 31, 2009
   
Quoted Prices in Active markets for Identical Assets (Level 1)
   
Significant other observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Investment securities available-for-sale:
                       
                         
Government Sponsored Enterprises residential mortgage-backed securities
  $       1,734     $       -     $       1,734           -  
                                 
Mutual Funds
  $ 129       129       -       -  
                                 
 Total   $ 1,863     $ 129     $ 1,734      -  
 
As of March 31, 2010, the fair value of the Bank’s AFS securities portfolio was $1,596,000.  Over 92% of the portfolio consisted of residential mortgage-backed securities, which had a fair value of $1,467,000 at March 31, 2010.  All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).  The underlying loans for these securities  are residential mortgages that are geographically dispersed throughout the United States.  All AFS securities were classified as level 2 assets at March 31, 2010.  The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information.
 
The changes in Level 1 assets and liabilities measured at fair value on a recurring basis are summarized below:
 
(in 000’s)
 
Investment securities available-for-sale:
 
Beginning Balance, December 31, 2009
  $ 129  
   Purchases, issuances, sales, and paydowns
    -  
Total gains or losses:
       
   Included in earnings
    -  
   Included in other comprehensive income
    -  
 Ending Balance, March 31, 2010
  129  
 
The changes in Level 2 assets and liabilities measured at fair value on a recurring basis are summarized below:
 
(in 000’s)
 
Investment securities available-for-sale
 
Beginning Balance, December 31, 2009
  $ 1,734  
   Purchases, issuances, sales, and paydowns
    (262 )
Total gains or losses:
       
   Included in earnings
    -  
   Included in other comprehensive income
    (5 )
 Ending Balance, March 31, 2010
  $ 1,467  
 
Fair Value on a Nonrecurring Basis
 
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets and liabilities carried on the consolidated statements of financial condition by level within the hierarchy as of March 31, 2010 and December 31, 2009, for which a nonrecurring change in fair value has been recorded during the three months ended March 31, 2010.
 

 
13

 
 

 Carrying Value at March 31, 2010:
(in 000’s)
 
 
 
Total
   
Quoted Prices in Active markets for Identical Assets
(Level 1)
   
Significant other observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total fair value gain (loss) during 3 months ended
March 31, 2010
 
Impaired Loans
  $ 3,209      -      -     $ 3,209     -  
Other real estate owned (“OREO”)
    475       -       -       475       -  

 
Carrying Value at December 31, 2009:
(in 000’s)
 
 
 
Total
   
Quoted Prices in Active markets for Identical Assets
(Level 1)
   
Significant other observable Inputs
(Level 2)
   
Significant Unobservable Inputs
 (Level 3)
   
Total fair value gain (loss) during 3 months ended
December 31, 2009
 
Impaired Loans
  $ 3,394      -      -     $ 3,394     -  
 
Fair value of impaired loans is determined by the fair value of the collateral if the loan is collateral dependent.  Collateral values for loans and other real estate owned are determined by appraisal, which may be discounted based upon management’s review and changes in market conditions.  The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets.   The valuation allowance for impaired loans at March 31, 2010 was $66,000.  The valuation allowance for impaired loans at December 31, 2009 was $187,000.
 
Fair Value of Financial Instruments
 
FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
 
The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments:
 
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
 
Investment securities: Fair values for investment securities available for sale are as described above.  Investment securities held to maturity are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  The carrying amount of accrued interest receivable approximates fair market value.
 
Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated pre­payments, amortizations, and non performance risk.  Prepayments and discount rates were based on current marketplace estimates and pricing.  Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve.  The carrying amount of accrued interest receivable approximates fair market value.
 
Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts).  The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation.  The Treasury Yield Curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.
 
 

 
14

 


 
Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts.  The carrying amount of accrued interest payable approximates fair market value.
 
The fair value of assets and liabilities are depicted below:
               
    March 31, 2010     December 31, 2009  
(in 000’s)
 
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
(Dollars in thousands)
                       
Assets:
                       
Cash and cash equivalents
  $ 6,181     $ 6,181     $ 6,290     $ 6,290  
Investment securities
    11,347       11,478       11,834       11,883  
Loans, net of allowance for loan losses
    46,025       46,158       46,860       46,707  
Interest receivable
    432       432       421       421  
Liabilities:
                               
Demand deposits
    24,193       24,193       24,219       24,219  
Savings deposits
    14,680       14,680       15,302       15,302  
Time deposits
    20,717       20,717       20,785       20,785  
Interest Payable
    57       57       64       64  
 
 
7. Critical Accounting Policies
 
Allowance for Loan Losses
 
The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies.   The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses.   All of these factors may be susceptible to significant change.   To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. The following table presents an analysis of the allowance for loan losses.
 

(in 000’s)
Three months ended
March 31, 2010
Three months ended
March 31, 2009
Balance at beginning of period
$727
$587
Charge-offs:
   
Commercial loans
(121)
-
Consumer loans
(10)
(14)
Total charge-offs
(131)
(14)
Recoveries
16
9
Net recoveries(charge-offs)
(115)
(5)
Provision for loan losses
30
30
Balance at end of period
$642
$612


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 and interest on the loan appears to be available and the loan is in the process of collection.
 

 
 
15

 


(Dollars in thousands)
March 31, 2010
December 31, 2009
Nonperforming loans:
   
     Commercial
$2,854
$2,791
     Consumer
167
169
     Residential Real Estate
143
175
        Total
$3,164
$3,135
Total impaired loans
$3,275
$3,581
Specific reserve related to impaired loans
$66
$187

 
At March 31, 2010, non-accrual loans totaled approximately $3.2 million, relatively unchanged from December 31, 2009. Non-accrual loans primarily include loans with SBA guarantees or strong loan-to-value ratios that help to mitigate potential losses.  Management is actively working with these borrowers to develop suitable repayment plans.


Income Taxes

 
Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities.  Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not.   For financial reporting purposes, a valuation allowance of 100% of the net deferred tax asset has been recognized to offset the net deferred tax assets related to cumulative temporary differences and tax loss carryforwards.  If management determines that the Company may be able to realize all or part of the deferred tax asset in the future, an income tax benefit may be required to increase the recorded value of the net deferred tax asset to the expected realizable amount.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
 
Interest and penalties associated with unrecognized tax benefits, if any, would be recognized in income tax expense in the statements of income.

 
Subsequent Events
 
In accordance with FASB ASC Topic 855, Subsequent Events, management has evaluated subsequent events through the date the financial statements were issued and has determined that no recognized or non-recognized subsequent events warranted inclusion or disclosure in the interim financial statements as of March 31, 2010.

 
 
16

 
 

 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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").


Special Cautionary Notice Regarding Forward-looking Statements

Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (“UBS”) to be materially different from future results, performance or achievements expressed or implied by such forward looking statements.  The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements.  These forward looking statements include: (a) statements of goals, intentions and expectations; and (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity.  UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company’s, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events) ,the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; and (l) the ability of key third party providers to perform their obligations to UBS and; (m) the Bank and UBS’ success in managing the risks involved in the foregoing.

All written or oral forward-looking statements attributed to UBS are expressly qualified in their entirety by use of the foregoing cautionary statements.  All forward-looking statements included in this Report are based upon information presently available, and UBS assumes no obligation to update any forward-looking statement.
 
 
 
 
17

 

 

Overview

 
The Company had a net loss of approximately $190,000 ($0.18 per common share) for the quarter ended March 31, 2010 compared to a net loss of approximately $137,000 ($0.13 per common share) for the quarter ended March 31, 2009. The increase in the loss in 2010 is primarily the result of a reduction in net interest income due to an increased level of non-accrual loans as well as a lower yield on the investment portfolio.
 
Unfavorable economic conditions continue to adversely affect the financial services industry in general and the Bank specifically, creating margin compression and increased credit quality challenges.  The following core factors directly impact the ability of the Company to achieve and sustain profitability:

 
Proactive management of asset quality to minimize credit losses.  The Bank has a high level of noncurrent, nonaccrual and impaired loans.  At March 31, 2010, nonaccrual loans totaled approximately $3.2 million, or almost 7% of gross loans.  The high level of nonaccrual loans have adversely impacted the Bank’s profitability resulting in a reduction in interest income and significant legal and collection costs. Management convenes regular asset quality meetings to review and proactively manage these credits in an attempt to avoid further deterioration in credit quality.  The Bank is working with a collection attorney to assist with its recovery efforts on its impaired loans including forbearance agreements, foreclosure and other collection strategies. To mitigate risk on new origination, the Bank utilizes programs that provide credit enhancements (i.e. Small Business Administration, Department of Transportation, etc.).
 
The ability to achieve core deposit growth.  Deposit growth continues to be one of management’s primary challenges.  This challenge is compounded by competition from regional and money center banks as well as the current low interest rate environment.  Utilizing its competitive advantage as a community development bank and increased FDIC limits, management has identified and continues to call upon corporations in the region to request core depository relationships to support its small business lending strategies.  Significant corporate relationships generally have long lead times to move beyond the “introduction” phase to a full depository relationship. However, several significant organizations in the region have made commitments to support the Bank’s initiatives with the placement of deposits. In addition, a robust sales, marketing and communications plan for key target markets has been developed to recruit new customers and encourage existing customers to expand their use of banking services.
 
The ability to control and manage noninterest expense.   The Bank’s level of overhead compared to its peers continues to be high as a result of operating costs associated with multiple branch locations.  These branches are located in the Bank’s targeted low to moderate income neighborhoods.  While the ultimate goal is asset growth to achieve economies of scale, management continues its cost control efforts through total employee involvement. Processes and protocols are in place to facilitate discussions that drive reductions in expenses on an ongoing basis. The goal is to ensure that the Bank is doing more with less and paying attention to details. Savings have already been realized in the area of data processing with the implementation of branch capture in late 2009. Management will continue to seek additional savings and efficiencies.

 

 
18

 
 
 
 
Selected Financial Data
 
The following table sets forth selected financial data for each of the following periods:
 
(Thousands of dollars, except per share data)
 
 Quarter ended
March 31, 2010
 
 Quarter ended March 31, 2009
Net interest income
$736
$772
Provision for loan losses
30
30
Noninterest income
267
276
Noninterest expense
1,164
1,155
Net loss
(190)
(137)
Loss per share-basic and diluted
(0.18)
(0.13)
     
Balance sheet totals:
March 31, 2010
December 31, 2009
Total assets
$67,237
$68,318
Loans, net
$46,025
$46,860
Investment securities
$11,347
$11,836
Deposits
$59,590
$60,304
Shareholders' equity
$7,337
$7,531
     
Ratios*:
Quarter ended
March 31, 2010
Quarter ended
March 31, 2010
Loss on assets
(1.12%)
(0.80%)
Loss on equity
(11.12%)
(6.92%)
 
*annualized

Financial Condition

Sources and Uses of Funds
 
The financial condition of the Bank can be evaluated in terms of trends in its sources and uses of funds.  The comparison of average balances in the following table indicates how the Bank has managed these elements. Average funding uses declined approximately $647,000, or 1.02%, during the quarter ended March 31, 2010 compared to the quarter ended December 31, 2009. Average funding sources increased approximately $120,000, or 0.20%, during the quarter ended March 31, 2010 compared to the quarter ended December 31, 2009.  The increase is primarily a result of temporary increases in deposit balances of several customers.

Sources and Uses of Funds Trends

   
March 31,
2010
               
December 31.
2009
 
(Thousands of Dollars, except percentages)
 
Average
   
Increase (Decrease)
         
Average
 
   
Balance
   
Amount
   
%
   
Balance
 
Funding uses:
                       
Loans
  $ 47,661     $ (468 )     (0.97 )%   $ 48,129  
Investment securities
                               
Held-to-maturity
    9,970       139       1.41       9,831  
Available-for-sale
    1,668       (414 )     (19.88 )     2,082  
Federal funds sold
    3,348       95       2.92       3,253  
Balances with other banks
    304       1       0.33       303  
Total  uses
  62,951     (647 )   (1.02 )%   63,598  
Funding sources:
                               
Demand deposits
                               
Noninterest-bearing
  $ 13,784     $ 1,141       9.02 %   $ 12,643  
Interest-bearing
    10,305       (435 )     (4.05 )     10,740  
Savings deposits
    14,777       (659 )     (4.27 )     15,436  
Time deposits
    20,887       73       0.35       20,814  
Total sources
  59,753     $ 120       0.20 %   $ 59,633  


 
19

 



Loans
 
Average loans declined approximately $468,000, or 0.97%, during the quarter ended March 31, 2010.  While commercial loan fundings during the quarter totaled approximately $130,000, they were offset by the transfer of a $474,000 commercial real estate relationship to bank ownership following foreclosure and Sheriff’s sale actions.  Although the economy is slowly growing out of recession, the Bank continues to maintain stringent underwriting standards especially related to non-owner occupied real estate lending.  Management is focused on traditional small business lending for which credit enhancements through the Small Business Administration or other loan guaranty programs are available.
 
The Bank’s loan portfolio is concentrated in commercial loans that comprise $36.2 million, or 77.5%, of total loans at March 31, 2010. Approximately $17.6 million of these loans are secured by owner occupied commercial real estate that may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations for which total loans at March 31, 2010 were $14.3 million, or 39.6%, of the commercial portfolio.   Management has heightened its monitoring of this concentration to proactively identify and manage credit risk in light of the current unemployment rate of 10% that may impact the level of tithes and offerings that provide cash flow for repayment.
 
The composition of the net loans is as follows:
 
 
March 31, 2010
   
December 31, 2009
 
Commercial real estate
  $ 32,086,934     $ 32,581,925  
Commercial and industrial
    4,078,982       4,066,016  
Consumer
    5,372,695       5,625,799  
Residential
    5,128,689       5,313,372  
     Total
    46,667,300       47,587,112  
Less allowance for loan losses
    (642,295 )     (727,397 )
    Net loans
  $ 46,025,005     $ 46,859,715  
 

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. Provisions are made to the allowance for loan losses in accordance with a detailed periodic analysis.  This analysis includes specific reserves allocated to impaired loans based on underlying recovery values as well as a general reserve based on many qualitative factors including charge-off history, delinquency trends, loan terms, regulatory environment, economic conditions, concentrations of credit risk and other relevant data. The allowance for loan losses as a percentage of total loans was 1.38% at March 31, 2010, compared to 1.53% at December 31, 2009.  The decline is the result of the charge-off of one credit totaling $120,000 during the quarter ended March 31, 2010.  This credit had previously been identified as impaired and was fully reserved.

Loans deemed “impaired” are those for which borrowers are no longer able to pay in accordance with the terms of their loan agreements.  The Bank’s source of repayment is generally the net liquidation value of the underlying collateral.  The level of impaired loans declined from approximately $3.6 million at December 31, 2009 to approximately $3.3 million at March 31, 2010.  The decline is related to the charge-off of one credit totaling $120,000 and the foreclosure and transfer to “other real estate owned” of another credit totaling $475,000.  Specific reserves related to impaired loans totaled approximately $66,000 and $187,000, respectively, at March 31, 2010 and December 31, 2009.  Loans to religious organizations represented approximately $128,000 of total impaired loans.  The Bank is working with a collection attorney to assist with its recovery efforts on its impaired loans including forbearance agreements, foreclosure and other collection strategies.  Based on a recent evaluation, the risk related to these credits is mitigated by strong collateral positions in real estate or guarantees of the SBA of approximately $412,000.

Management uses all available information to recognize losses on loans; however, future additions may be necessary based on further deterioration 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. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.
 
 
 
20

 
 

 
The percentage of allowance to nonperforming loans at March 31, 2010 has improved from 19.2% at December 31, 2009 to 20.3% primarily as a result of the charge-off of one fully reserved credit totaling $120,000.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
March 31, 2010
December 31, 2009
Allowance for loan losses
$642
$727
Total Impaired Loans (includes non-accrual loans)
$3,275
$3,581
Total non-accrual loans
$3,164
$3,783
Allowance for loan losses as a percentage of:
   
     Total Loans
1.38%
1.53%
     Total  nonperforming loans
20.3%
19.2%
Net(charge-offs) recoveries as a percentage of average loans *
 
(0.97%)
 
(0.19%)
Annualized
 
There is no other known information about possible credit problems other than those classified as nonaccrual and/or impaired that causes management to be uncertain as to the ability of any borrower to comply with present loan terms.

Investment Securities and Other Short-term Investments
 
Investment securities decreased on average by approximately $275,000, or 2.31%, during the quarter ended March 31, 2010 from the quarter ending December 31, 2009.  The yield on the investment portfolio declined to 4.07% at March 31, 2010 compared to 4.24% at December 31, 2009 as a result of increased prepayment speeds and the call of higher yielding agency securities during the quarter.  The duration of the portfolio remains relatively short at 1.8 years. At March 31, 2010, 55%, or $6 million, of the investment portfolio consisted of callable agency securities for which the duration shortened as a result of a high level of projected call activity in the current low interest rate environment.  The remainder of the portfolio consists of government sponsored agency (GSA) mortgage-backed pass-through securities.  The payments of principal and interest on these pools of GSA loans are guaranteed by these entities that bear the risk of default.  The Bank’s risk is prepayment risk when defaults accelerate the repayment activity.  These loans have longer-term con­tractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. Home foreclosures in the current recessionary economy and lower interest rates have resulted in increased prepayment speeds and shortened duration.  Management’s goal is to maintain a portfolio with a short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.

Deposits

During the quarter ended March 31, 2010, average deposits increased approximately $120,000, or 0.20%, from the quarter ending December 31, 2009.  There was an increase of $1,141,000, or 9.02%, in noninterest checking account balances but this increase was offset by decreases in savings and interest checking balances.  Savings account balances decreased approximately $659,000, or 4.27%. During the current period of high unemployment, deposit attrition has occurred as a result of increased liquidity needs of customers.   There was a sharp decline in the Bank’s average interest bearing checking accounts that decreased approximately $435,000, or 4.05% primarily as the result of the usage of annual grant funds received by one non-profit customer.  Management continues to make a concerted effort to attract and retain core deposits from existing commercial loan customers to stabilize and grow deposit levels.
 
Utilizing its competitive advantage as a community development bank and increased FDIC limits, management has identified and continues to call on corporations in the region to request core depository relationships to support its small business lending strategies. Significant corporate relationships generally have long lead times to move beyond the “introduction” phase to a full depository relationship.  However, several significant organizations in the region have made commitments to support the Bank’s initiatives with the placement of deposits that are projected to be received in the quarter ending June 30, 2010.
 
Certificates of deposit increased on average by $73,000, or 0.35%, from the quarter ended December 31, 2009. While the Bank has approximately $12.3 million in certificates of deposit with balances of $100,000 or more, approximately $8 million, or 65%, of these deposits are with governmental or quasi-governmental entities that have a long history with the Bank and are considered stable. Based on discussions with these entities, no further reduction in certificates held is anticipated.  In March 2010, the Bank was notified that it has been awarded an additional $5 million deposit from the City of Philadelphia for which a certificate of deposit was established in April 2010.  While the new certificate has a maturity of less than one year, it is anticipated that these funds will take on similar characteristics of the existing long-term depository relationship the Bank has with the City.
 
 
 
21

 
 

 
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. Commitments to extend credit fluctuate with the completion and conversion of construction lines of credit to permanent commercial mortgage loans and/or the closing of loans approved but not funded from one period to another.

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. The Bank's financial instrument commitments are summarized below:
 
 
March 31, 2010
December 31, 2009
Commitments to extend credit
$7,453,000
$8,558,100

There are no outstanding letters of credit.

Liquidity and Interest Rate Sensitivity Management

The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities.  Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.  Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

The Bank'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 also sources of liquidity.  Approximately $10.6 million in loans are scheduled to mature within one year.
 
By policy, the Bank’s minimum level of liquidity is 6.00% of total assets.  At March 31, 2010, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $6.2 million, or 9.2% of total assets, which is consistent with December 31, 2009.  The portion of the Bank’s investment portfolio classified as available-for-sale could also provide liquidity. However, the majority of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank.  Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.  To ensure the ongoing adequacy of liquidity, the following strategies will be utilized in order of priority, if necessary:

·  
Seek additional non-public deposits from existing private sector customers
·  
Sell participations of existing commercial credits to other financial institutions in the region

Liquidity levels continue to be adequate.  Therefore, it was not necessary to sell loan participations to other institutions during the quarter ended March 31, 2010.

The Bank’s contingent funding sources  include the Discount Window at the Federal Reserve Bank for which it currently has $1.75 million in securities pledged that result in borrowing capacity of $1.5 million. Liquidity will continue to be closely monitored and managed to minimize risk and ensure that adequate funds are available to meet daily customer requirements and loan demand.
 
 
 
22

 

 
Capital Resources

Total shareholders' equity declined approximately $194,000 compared to December 31, 2009 as a result of a net loss of approximately $190,000 during quarter ended March 31, 2010 coupled with another comprehensive loss of approximately $4,000 from a reduction in unrealized gains on investment securities classified as available-for-sale. As reflected in the table below, the Company’s risk-based capital ratios are above the minimum regulatory requirements.  At March 31, 2010, the Bank is deemed "well capitalized."  The Company and the Bank do not anticipate paying dividends in the near future because of regulatory imposed dividend restrictions. The Company will seek to maintain the requisite minimum regulatory capital levels by internal capital generation (retained earnings) and by monitoring its asset growth.

   
Company
   
Company
 
(thousands of dollars, except percentages)
 
March 31,
2010
   
December 31,
2009
 
Total Capital
  $ 7,338     $ 7,521  
Less: Intangible Assets and accumulated other comprehensive  gain (loss)
    (672 )     (720 )
Tier 1 Capital
    6,666       6,811  
Tier 2 Capital
    590       596  
Total Qualifying Capital
  $ 7,256     $ 7,407  
Risk Adjusted Total Assets (including off-
               
Balance sheet exposures)
  $ 47,114     $ 47,569  
Tier 1 Risk-Based Capital Ratio
    14.15 %     14.32 %
Tier 2 Risk-Based Capital Ratio
    15.40 %     15.57 %
Leverage Ratio
    9.85 %     10.08 %
 
   
Bank
   
Bank
 
Total Capital
  $ 7,226     $ 7,414  
Less: Intangible Assets and accumulated other comprehensive gain (loss)
    (672 )     (720 )
                 
Tier 1 Capital
    6,554       6,694  
Tier 2 Capital
    590       596  
Total Qualifying Capital
  $ 7,144     $ 7,290  
Risk Adjusted Total Assets (including off-
               
Balance sheet exposures)
  $ 47,114     $ 47,569  
Tier 1 Risk-Based Capital Ratio   (Minimum Ratio- 6.00%)
    13.91 %     14.07 %
Tier 2 Risk-Based Capital Ratio   (Minimum Ratio- 10.00%)
    15.16 %     15.33 %
Leverage Ratio                               (Minimum Ratio- 5. 00%)
    9.78 %     9.91 %
 
Results of Operations
Summary

The Company had a net loss of approximately $190,000 ($0.18 per common share) for the quarter ended March 31, 2010 compared to a net loss of approximately $137,000 ($0.13 per common share) for the quarter ended March 31, 2009. The increase in the loss in 2010 is the result of a reduction in net interest income due to an increased level of non-accrual loans as well as a lower yield on the investment portfolio.  A detailed explanation of each component of earnings is included in the sections below.

Net Interest Income
Average Balances, Rates, and Interest Income and Expense Summary
   
Three  months ended
March 31, 2010
   
Three  months ended
March 31, 2009
 
(in 000’s)
Average Balance
 
Interest
 
Yield/Rate
Average Balance
 
Interest
 
Yield/Rate
             
Assets:
           
Interest-earning assets:
           
     Loans
$47,661
$693
5.82%
$48,830
$769
   6.30%
     Investment securities-HTM
9,970
100
4.01
9,971
118
4.73
     Investments securities-AFS
1,668
16
3.84
2,589
30
4.63
     Federal funds sold
3,348
2
0.24
3,067
2
0.26
     Interest bearing balances with other banks
304
1
1.32
297
2
2.69
        Total interest-earning assets
62,951
812
5.16
64,754
921
5.69
Interest-bearing liabilities
           
     Demand deposits
10,305
20
0.78
10,935
27
0.99
     Savings deposits
14,777
4
0.11
16,473
12
0.29
     Time deposits
20,887
52
1.00
20,895
110
2.11
          Total interest-bearing liabilities
45,969
76
0.66
48,303
149
1.23
Net interest earnings
 
$736
   
$772
 
Net yield on interest-earning assets
   
4.68%
   
4.77%
 
For purposes of computing the average balance, loans are not reduced for nonperforming loans.  Loan fee income is included in interest income on loans but is not considered material.
 
 
23

 
 
 
Net interest income declined approximately $36,000, or 4.66%, for the quarter ended March 31, 2010 compared to the quarter ended March 31, 2009. The yield on earning assets for the quarter ended March 31, 2010 declined to 5.16% from 5.69% for the same quarter in 2009. While the yield on earning assets decreased 53 basis points, the cost of interest-bearing liabilities declined 57 basis points as a result of rate reductions made on the Bank’s deposit products to follow market conditions. As a result, margin compression was minimized to 9 basis points. The reduction in the Bank’s net interest income during the quarter ended March 31, 2010 compared to 2009 is primarily related to an increase in the level of non-accrual loans, a lower yield on the investment portfolio because of calls of higher yielding bonds, and a $1.8 million reduction in interest earning assets.  Management continues to focus on reducing the level of nonaccrual loans and growing its core assets to increase net interest income.  In addition, rates on loan and deposit products continue to be reviewed and modified to manage interest rate risk and minimize margin compression.
 
Provision for Loan Losses
Provisions for loan losses were $30,000 for the quarter ended March 31, 2010 and 2009. Provision requirements are based on credit losses inherent in the loan portfolio and the review and analysis of the loan portfolio in accordance with the Bank’s Allowance for Loan Loss policies and procedures. (Refer to Allowance for Loan Losses above for discussion and analysis of credit quality.)

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 fees, overdrafts, account analysis, ATM fees and other customer service fees.  Noninterest income declined approximately $9,000, or 3.10%, for the quarter ended March 31, 2010, compared to the same quarter in 2009 primarily as a result of a reduction in ATM activity fees.

Customer service fees declined by approximately $10,000, or 8.58%, for the quarter ended March 31, 2010, compared to 2009. The decline was primarily a result of a reduction in overdraft and other activity fees on deposit accounts.
 
ATM fees declined approximately $22,000, or 19.38%, for the quarter ended March 31, 2010, compared to 2009.   Consistent with trends in the industry, the Bank has experienced a significant reduction in ATM usage as consumers move to electronic payment methods utilizing debit and credit cards versus cash. Management continues its efforts to identify potentially high volume exclusive locations for the placement of new ATMs including casinos and correctional facilities.  In addition, methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated.

Noninterest Expense

Salaries and benefits increased approximately $49,000, or 12.82%, for the quarter ended March 31, 2010 compared to 2009. The increase in 2010 is related to the hiring of additional staff in business development and commercial lending in 2009 as well as a cost of living increase in awarded to staff during the quarter ended March 31, 2010. Management continues to review the organizational structure to maximize efficiencies and increase business development activity.
 
Occupancy expense decreased approximately $29,000, or 10.20%, for the quarter ended March 31, 2010 compared to 2009. The reduction in 2009 is attributable to lower depreciation expense as a result of computer equipment and furniture becoming fully depreciated and a negotiated reduction in Use and Occupancy Tax the Bank pays to the City of Philadelphia.

Office operations and supplies expense increased approximately $2,000, or 3.07%, for the quarter ended March 31, 2010 compared to 2009. The increase is primarily related to October 2009 conversion to branch capture that resulted in increased supplies expense because of the requirement to purchase new customer forms (i.e. deposit and withdrawal tickets) as well as increased telephone expense as a result of the installation of new lines to complete the electronic transmission of data. Management continues to review all office operations expenses including supplies, storage, security, etc. to determine if additional expense reductions can be made.
 
 
 
24

 
 
 
Marketing and public relations expense decreased approximately $30,000, or 90.20%, for the quarter ended March 31, 2010 compared to 2009. All formal marketing in radio and print was curtailed during 2009 in favor of more direct outreach through office receptions and direct calling by business development staff.

Professional services expense increased approximately $8,000, or 13.78%, for the quarter ended March 31, 2010 compared to 2009. The increase is primarily related to a higher level consulting fees related to the development and review of the Bank’s 2010 strategic plan.

Data processing expenses declined approximately $28,000, or 19.56%, for the quarter ended March 31, 2010 compared to 2009. In September 2009, negotiations for contract extensions were completed that resulted in a reduction in core processing fees.  In addition, in October 2009, the Bank converted to an electronic transmission of its items processing by utilizing “Check 21” and branch capture processing that resulted in a reduction in its items processing fees.
 
Federal deposit insurance assessments increased approximately $25,000, or 253%, for the quarter ended March 31, 2010 compared to 2009.  Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.  In 2006, as part of the Reform Act, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC’s insurance reserves. As a result, the Bank had an assessment credit to offset a portion of its premium. The assessment credit continued to be used to reduce deposit premiums that would otherwise have been due through 2009 when they were completely exhausted.

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.
 
Dividend Restrictions

The Company has never declared or paid any cash or stock dividends.  The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, 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 ten percent (10%) of the net earnings of the bank 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 fifty percent (50%) of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking.
 
Under the Federal Reserve Act, the Federal Reserve Board has the power to prohibit the payment of cash dividends by a bank holding company if it determines that such a payment would be an unsafe or unsound practice or constitutes a serious risk to the financial soundness or stability of the subsidiary bank.  As a result of these laws and regulations, the Bank, and therefore the Company, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists.  The Company does not anticipate that dividends will be paid for the foreseeable future.
 
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 critical 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, 2010, an asset sensitive position is maintained on a cumulative basis through 1 year of 5.39% that is within the Bank’s policy guidelines of +/- 15% on a cumulative 1-year basis. This position makes the Bank’s net interest income more susceptible to declining interest rates.  However, with rates at historical lows, there is not a high probability that rates will decline further.
 
 
 
25

 
 

 
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.  A simulation model is 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 forecasts changes in the market value of portfolio equity under alternative interest rate environments.  The market value of portfolio equity is defined as the present value of the Company’s existing assets, liabilities and off-balance-sheet instruments.  At March 31, 2010, the change in the market value of equity in a +200 basis point interest rate change is -22.1% approaching the Bank’s policy limit of 25%.  Management will continue to work to mitigate this risk by originating more variable rate loans and/or purchasing floating rate mortgage-backed securities. However, based on these models, with the exception of the market value measure, interest-rate exposure is not considered significant and is within the policy limits of the Bank on all measures at March 31, 2010.
 
Item 4T.  Controls and Procedures
 
As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Evelyn F. Smalls, and Chief Financial Officer, Brenda M. Hudson-Nelson, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings.
 
As of the date of this report, there have not been any changes in the Company’s internal controls over financial reporting during the quarterly period covered by this report that have materially affected or are reasonably likely to materially affect its internal controls over financial reporting.
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
None.
 
Item 1A. Risk Factors.
 
There have not been any material changes to the risk factors disclosed in the Company’s 2009 Annual Report on Form 10-K.  The risk factors disclosed in the Company’s 2009 Annual Report on Form 10-K are not the only risks that we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
 None
 
Item 3.  Defaults Upon Senior Securities.
 
None
 
Item 4. Reserved.
 
None
 
 
 
26

 
 
 
 
Item 5.  Other Information.
 
None
 
Item 6. Exhibits.
 
a)           Exhibits.
 
 
 
 
 
 
 
 
27

 
 

 
 
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 17, 2010
/s/ Evelyn F. Smalls
 
Evelyn F. Smalls
 
President & Chief Executive Officer
   
   
Date: May 17, 2010
/s/ Brenda M. Hudson-Nelson
 
Brenda Hudson-Nelson
 
Executive Vice President/Chief Financial Officer
 
 
 
 
 
28

 

 
 

 
Index to Exhibits-FORM 10-Q
 

 
 
 
 28