SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1999. UNITED BANCSHARES, INC. ----------------------- (Exact name of registrant as specified in its charter) 0-25976 (Registrant's file number) PENNSYLVANIA 23-2802415 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 300 NORTH THIRD STREET, PHILADELPHIA, PA 19106 ---------------------------------------------- (Address of principal executive offices, including zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 829-2265 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE ---------------------------- (Title of Class) Indicate by check mark whether the 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 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] There is no market for the Common Stock. None of the shares of the Registrant's stock were sold within 60 days of the filing of this Form 10-K. As of March 30, 2000 the aggregate number of the shares of the Registrant's Common Stock outstanding was 1,028,793. 1 Registrant also has 500,000 authorized shares of Series Preferred Stock. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock") of which 143,150 shares were outstanding as of March 31, 2000. The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment with the Commonwealth of Pennsylvania on September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of March 31, 2000, 191,667 shares of Class B Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference as filed with the Registrant's 1998 Form 10-K: 1. Consolidated Balance Sheets at December 31, 1998 and 1997. 2. Consolidated Statements of Operations for the years ended December 31, 1998 and 1997. 3. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998 and 1997. 4. Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997. 5. Articles of Incorporation of the Bank and UBS 6. Bylaws of the Bank and UBS 7. Voting Trust Agreements 8. Long Term Incentive Compensation Plan 9. Lease Agreements for the Bank's premises. 10. Employment Agreement among Registrant, the Bank and Dr. Emma C. Chappell 2 PART I ITEM 1 BUSINESS UNITED BANCSHARES, INC. United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of 1956, as amended, on October 14, 1994. The Bank commenced operations on March 23, 1992. UBS provides banking services through the Bank. The principal executive offices of UBS and the Bank are located at 300 North Third Street, Philadelphia, Pennsylvania 19106. The Registrant's telephone number is (215) 829-2265. As of March 31, 2000, UBS and the Bank had a total of 100 employees. UNITED BANK OF PHILADELPHIA The Bank, an African-American-controlled, state-chartered member bank of the Federal Reserve System is regulated by both the Federal Reserve Board and the Commonwealth of Pennsylvania Department of Banking (the "Department"). The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts all its banking activities through its eight offices located as follows: (i) MARKET STREET BRANCH 714 Market Street, Philadelphia, PA; (ii) CENTER CITY BRANCH Two Penn Center, Philadelphia, PA; (iii) WEST PHILADELPHIA BRANCH 37th & Lancaster Avenues, Philadelphia, PA; (iv) UNIVERSITY CITY BRANCH 40th and Chestnut Streets, Philadelphia, PA; (v) MOUNT AIRY BRANCH 1620 Wadsworth Avenue, Philadelphia, PA; (vi) FRANKFORD BRANCH 4806 Frankford Avenue, Philadelphia, PA; (vii) WEST GIRARD BRANCH 2836 West Girard Avenue, Philadelphia, PA; and (viii) PROGRESS PLAZA BRANCH 1015 North Broad Street, Philadelphia, PA. Through these locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 1999, the Bank had total deposits aggregating approximately $124.8 million and had total net loans outstanding of approximately $59.4 million. Although the Bank's primary service area for Community Reinvestment Act purposes is Philadelphia County, it also services, generally, the Delaware Valley, which consists of 3 portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties in New Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on 1990 census data, 204 or 58% of these are designated as low to moderate-income tracts while 105 or 30% are characterized both as low to moderate-income and minority tracts. The Bank's primary service area consists of a population of 1,577,815, which includes a minority population of 752,309. The Bank engages in the commercial banking business, serving the banking needs of its customers with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts. The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products are offered to the businesses and consumers in the Bank's service area, including commercial loans, mortgage loans, student loans, home improvement loans, auto loans, personal loans, home equity loans and home equity lines of credit. At March 31, 2000 the Bank's maximum legal lending limit was approximately $1.2 million per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the loan portfolio. The Bank has established relationships with correspondent banks to participate in loans that exceed the Bank's internal policies or legal lending limits. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions. However, the Bank maintains no credit that exceeds its legal lending limit. The Bank also offers commercial and retail products. In the area of commercial loans, the Bank has flexibility to develop loan arrangements targeted at a customer's objectives. Typically, these loans are term loans or revolving credit arrangements with interest rate, collateral and repayments terms, varying based upon the type of credit, and various factors used to evaluate risk. The Bank participates in the government-sponsored Small Business Administration ("SBA") lending program and when the Bank deems it appropriate, obtains SBA guarantees for up to 90% of the loan amount. This guaranty effectively reduces the Bank's exposure to loss in its commercial loan portfolio. Commercial loans are typically made of the basis of cash flow to support repayment with secondary reliance placed on the underlying collateral. 4 The Bank's consumer loan program includes installment loans for home improvement and the purchase of consumer goods and automobiles, student loans, home equity and VISA secured and unsecured revolving lines of credit, and checking overdraft protection. The Bank also offers residential mortgage loans to its customers. The Bank's concentration in the retail area is in the category of student loans where it can minimize its risk of non-payment with government guaranties. In addition, the Bank offers safe deposit boxes, travelers' checks, money orders, direct deposit of payroll and Social Security checks, wire transfers and access to regional and national automated teller networks as well as international and trust services through correspondent institutions. COMPETITION There is substantial competition among financial institutions in the Bank's service area. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers. To date, the Bank has attracted, and believes it will continue to attract its customers from the deposit base of such existing banks and financial institutions largely due to the Bank's mission to service groups of people who have traditionally been under-served and by its devotion to personalized customer service. The Bank's strategy has been, and will continue to be, to emphasize personalized services with special sensitivity to the needs of Blacks, Hispanics and women and to offer competitive rates to borrowers and depositors. In order to compete, the Bank relies upon personal contacts by the officers, directors, advisory board and employees of the Bank to establish and maintain relationships with Bank customers. The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses. In the event there are customers whose loan demands exceed the Bank's lending limit, the Bank will seek to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Bank will also assist those customers requiring other services not offered by the Bank to obtain such services from its correspondent banks. 5 Registrant believes that a portion of the Bank's customer base is derived from customers who were dissatisfied with the level of service provided at larger financial institutions. While some of such customers have followed officers of those institutions who were hired by the Bank, others were attracted to the Bank by calling programs of its officers and referrals from other customers. The Bank has sought, in the past, and intends to continue in the future, to hire customer contact officers who have good relationships with desirable customers. These personal relationships, provision of a high level of customer services, and referrals from satisfied customers, form the basis of the Bank's competitive approach, as opposed to advertising, rate competition or the development of proprietary banking products, services or programs. In the past, the principal competition for deposits and loans have been other depository institutions. However, now the Bank also competes with other financial intermediaries such as brokerage houses offering investment vehicles to the general public. Other entities, both public and private, seeking to raise capital through the issuance and sale of debt or equity securities are also competitors with banks and savings and loan associations in the acquisition of deposits. In order to address the risk of deposit reduction due to investment in non-bank alternatives, the Bank has established a relationship with American Express Financial Advisors ("AEFA"). The Bank receives compensation from AEFA for each securities purchase made through AEFA, thus yielding additional fee income. SUPERVISION AND REGULATION Holding Company. UBS, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if UBS wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, UBS will have to comply with the registration requirements of the Securities Act of 1933 as amended, or find an applicable exemption from registration. UBS is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires UBS to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits UBS from acquiring more than 5% of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by laws of the state in which such bank is located. 6 A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. As a bank holding company, UBS is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. Under Pennsylvania law, UBS is permitted to control an unlimited number of banks. However, UBS would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other than the Bank, if, after such acquisition, would control more than 5% of the voting shares of such bank. The Bank. The deposits of Royal Bank of Pennsylvania are insured by the FDIC. The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. 7 Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), the Registrant has been permitted to control an unlimited number of banks. However, the Registrant would be required under the Bank Holding Company Act to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any bank other than the Bank, if, after such acquisition, the registrant would own or control more than 5 percent of the voting shares of such bank. The Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994 which authorizes bank holding companies subject to certain limitations and restrictions to acquire banks located in any state. In 1995, the Code was amended to harmonize Pennsylvania law with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the choice by banks from other states engaged in interstate banking to select Pennsylvania as a head office location. Some of the more salient features of the amendment are described below. A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States may control one or more banks, bank and trust companies, national banks, interstate banks and, with the prior written approval of the Pennsylvania Department of Banking, may acquire control of a bank and trust company or a national bank located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Pennsylvania Department of Banking. Finally, a banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania if the laws of the jurisdiction in which it is located permit a Pennsylvania-chartered institution or a national bank located in Pennsylvania to establish and maintain a branch in such jurisdiction on substantially the same terms and conditions. 8 In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental resources or to any other person by virtue of the fact that the lender engages in such commercial lending practices. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property, or knowingly and willfully compelled the borrower to commit an action which caused such release or violation of an environmental act. The Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances. A subsidiary bank of a holding company is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act, as amended, and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Federal law also prohibits the acquisition of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. 9 Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers the FDIC to issue cease-and-desist or civil money penalty orders against the Bank or its executive officers, directors and/or principal shareholders based on violations of law or unsafe and unsound banking practices; (ii) authorizes the FDIC to remove executive officers who have participated in such violations or unsound practices; (iii) restricts lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the FDIC Act provides that no person may acquire control of the Bank unless the FDIC has been given 60-days prior written notice and within that time has not disapproved the acquisition or extended the period for disapproval. In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an emphasis on performance over process and documentation. Under the revised rules, the five-point rating scale is still utilized by examiners to assign a numerical score for a bank's performance in each of three areas: lending, service and investment. Under the CRA, the FDIC is required to: (i) assess the records of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low-and moderate-income neighborhoods) which they serve, and (ii) take this record into account in its evaluation of any application made by any such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The CRA also requires the federal banking agencies to make public disclosures of their evaluation of each bank's record of meeting the credit needs of its entire community, including low-and moderate-income neighborhoods. This evaluation will include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. After its most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of satisfactory. Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions in any one day of which the Bank is aware that exceed $10,000 in the aggregate or other lesser amounts. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. 10 RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. The Bank believes that further merger activity within Pennsylvania is likely to occur in the future, resulting in increased concentration levels in banking markets within Pennsylvania and other significant changes in the competitive environment. The Riegle-Neal allows adequately capitalized and managed bank holding companies to acquire banks in any state starting one year after enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows interstate merger transactions beginning June 1, 1997. States are permitted, however, to pass legislation providing for either earlier approval of mergers with out-of-state banks, or "opting-out" of interstate mergers entirely. Through interstate merger transactions, banks will be able to acquire branches of out-of-state banks by converting their offices into branches of the resulting bank. The Riegle-Neal Act provides that it will be the exclusive means for bank holding companies to obtain interstate branches. Under the Riegle-Neal Act, banks may establish and operate a "de novo branch" in any State that "opts-in" to de novo branching. Foreign banks are allowed to operate branches, either de novo or by merger. These branches can operate to the same extent that the establishment and operation of such branches would be permitted if the foreign bank were a national bank or state bank. All these changes are expected to intensify competition in local, regional and national banking markets. The Pennsylvania Banking Code has been amended to enable Pennsylvania institutions to participate fully in interstate banking (see discussion above). FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDIC Improvement Act") includes several provisions that have a direct impact on the Bank. The most significant of these provisions are discussed below. The FDIC is required to conduct periodic full-scope, on-site examinations of the Bank. In order to minimize losses to the deposit insurance funds, the FDIC Improvement Act establishes a format to more monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate federal supervisory agency if an institution begins to experience any difficulty. The FDIC Improvement Act establishes five "capital" categories. They are: (1) well capitalized, (2) adequately capitalized, (3)undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. The overall goal of these new capital measures is to impose more scrutiny and operational restrictions on banks as they descend the capital categories from well capitalized to critically undercapitalized. 11 Under Current regulations, a "well-capitalized" institution would be one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any written order or final directive by the FDIC to meet and maintain a specific capital level. The Bank is presently categorized as a "well-capitalized" institution. An "adequately capitalized" institution would be one that meets the required minimum capital levels, but does not meet the definition of a "well-capitalized" institution. The existing capital rules generally require banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based capital ratio. Since the risk-based capital requirement to be in the form of Tier 1 capital, this also will mean that a bank would need to maintain at least 4% Tier 1 risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized." The most recent notification dated February 10, 2000, from the Federal Reserve Bank categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Improvement Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed. A "critically undercapitalized" institution is one that has a tangible equity (Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions; amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames. Management cannot anticipate what changes Congress may enact, or, if enacted, their impact on UBS's financial position and reported results of operation. As a consequence of the extensive regulation of commercial banking activities in the United States, UBS's business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the costs of doing business. 12 Regulatory Actions. In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written 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. See, Item 7., MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Beginning in 1996, the Bank has operated under a Supervisory Letter from its primary regulator. The Supervisory Letter prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and Company from issuing long-term debt. 13 ITEM 2 - PROPERTIES CORPORATE HEADQUARTERS In August, 1999 the Bank moved its corporate headquarters from the branch facility at 714 Market Street to 300 North Third Street, Philadelphia, Pennsylvania. It occupies this location pursuant to the terms of a 10 year lease from ECC Properties, LLC ("ECC Properties"). ECC Properties is a single member limited liability company owned by Emma C. Chappell, Chairman, President and CEO of the Bank. The facility consists of 25,000 square feet including executive offices, operations, finance, human resource, security and loss prevention functions. The entire facility is leased by the Bank. The Bank sublets approximately 2500 square feet to Philadelphia United Community Development Corporation and approximately 1400 square feet to Tucci & Tannenbaum, P.C. The aggregate rental for the facility is $26,927 per month. MARKET STREET BRANCH The Bank's Market Street Branch is located on the first floor of a multi-tenant retail and commercial office building at 714 Market Street, Philadelphia, PA 19106. The Bank occupies approximately 5,700 square feet of space pursuant to a lease which expires on February 28, 2002. The lease has renewal options for two five-year periods and is subject to escalation clauses. The first floor contains a banking lobby, the vault and customer service area, as well as the Bank's loan department. The aggregate monthly rent for this location is $9,069. MT. AIRY BRANCH The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased at a monthly rental of $3,375. CENTER CITY BRANCH The Bank operates a branch location at Two Penn Center, 15th Street and JFK Boulevard, Philadelphia, PA. The Bank leases approximately 4,769 square feet at its Two Penn Center location. The space includes lobby, teller area, customer service area, primary lending area and administrative offices, as well as a vault. The aggregate monthly rent for this location is $13,115. 14 FRANKFORD BRANCH In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. The main floor of the facility houses teller and customer service areas. The remainder of the facility is utilized as storage. WEST GIRARD BRANCH The Bank leases a facility located at 2836 West Girard Avenue. The facility is comprised of a teller area, customer service area, lobby, vault and administrative offices. The aggregate monthly rental for the facility is $1,375. A copy of this lease is submitted as an exhibit hereto. WEST PHILADELPHIA BRANCH On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster Avenue from PNC Bank. The facility is comprised of approximately 3,000 square feet. The main floor houses teller and customer service areas, a drive-up teller facility and automated teller machine. The basement provides storage for the facility. The aggregate monthly rental is approximately $2,625 exclusive of taxes, insurance, utilities and janitorial service. UNIVERSITY CITY BRANCH The Bank leases a branch facility located at 40th and Chestnut Streets, in the University City Section of West Philadelphia from First Union National Bank ("First Union"). This facility was acquired from First Union in September, 1999. According t the terms of the approval of the acquisition of this facility by the Federal Reserve Board and Pennsylvania Department of Banking, the facility could remain open no longer than 6 months after the acquisition, and would then be merged with the Bank's West Philadelphia Branch. This branch comprises a banking lobby, teller and customer service areas, a vault and basement. The aggregate monthly rental for this facility is $4,570. A copy of this lease is submitted as an exhibit hereto. PROGRESS PLAZA BRANCH The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, PA. The facility comprises a teller and customer service area, lobby and vault. The aggregate monthly rental for this facility is $3,656 per month. A copy of this lease is submitted as an exhibit hereto. 15 ITEM 3 - LEGAL PROCEEDINGS Other than the following, no material claims have been instituted or threatened by or against UBS or its affiliates other than in the normal course of business. MONUMENT FINANCIAL GROUP. A writ of summons was filed by Monument Financial Group, Inc. and Ronald Hatfield, respectively, an accountholder and its principal (collectively, the "Plaintiffs") to commence an action against the Bank in the Court of Common Pleas, Philadelphia County on June 29,1999. Subsequently, a complaint was filed by the Plaintiffs. The suit involves the processing of transactions in alleged non-compliance with the deposit contract by permitting the processing of transactions with only one signature (the "Primary Claim"). This action by the Bank allegedly resulted in a loss to the Plaintiffs. The Bank has conducted in depth investigation into the circumstances arising in the Primary Claim. As a result of this investigation, the Bank has determined that the deposit contract was modified by the depositor. The depositor repeatedly affirmed, both by telephone, and in person, that transactions should be permitted with a single signature. This modification creates a firm defense to the Primary Claim. Even if the deposit contract was not modified, the amount of the Primary Claim must be reduced by the aggregate amount of the transactions utilized for valid business purposes of the Plaintiff. The Bank's investigations indicate that the proceeds of a substantial number of the transactions processed with one signature were utilized to pay expenses of Monument Financial Group, thus reducing any damage amount. Based upon the forgoing, the Bank believes that it will not be liable for the Primary Claim. In addition, the Bank has insurance which, it has been informed by the carrier representative, will cover any loss resulting from the Primary Claim, including costs of defense, in excess of a $50,000 deductible. The complaint also seeks damages for lost business opportunity, punitive damages for alleged consequential losses to potential business ventures of the Plaintiffs, and related claims (collectively, the "Ancillary Claims"). Based on general legal principles and the foregoing facts, the Bank and its counsel believe the Ancillary Claims are frivolous and without merit. The Bank and its counsel have reviewed the Bank's comprehensive general liability coverage and have indicated that any damages resulting from the Ancillary Claims will be wholly-covered by this insurance. The complaint was withdrawn without prejudice, ending the suit. However, there is no guaranty that the suit, or some form of the Primary Claim or Ancillary Claim, will not be re-filed by the Plaintiffs at a later date. NEXGEN SOLUTIONS, INC. In 1999 the Bank entered into a four year contract with Nexgen Solutions, Inc. ("Nexgen"). Pursuant to the terms of the contract, Nexgen agreed to provide all information technology services that the Bank would require at a pre-determined discount to Nexgen's regular fees. In 2000, for lack of performance and other reasons, the Bank terminated the contract. Nexgen has threatened legal action for the termination. In lieu of legal action, Nexgen has requested a payment of approximately $75 thousand. The Registrant believes that substantial defenses exist, including the failure to provide adequate support and service, justifying the termination of the contract. Therefore, the Registrant believes that the Bank may not be liable for the $75 thousand requested. 16 ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not Applicable. No matters were submitted to a vote of Registrant's security holders since the Registrant's last periodic filing. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK. COMMON STOCK As of March 31, 2000 there were 3,182 shareholders of record of UBS's Common Stock. The Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. Prior to December 31, 1993, the Bank conducted a limited offering (the "Offering") pursuant to a registration exemption provided in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Act"). The price-per-share during the Offering was $12.00. Prior to the Offering, the Bank conducted an initial offering of the Common Stock (the "Initial Offering") at $10.00 per share pursuant to the same registration exemption. Beginning April 24, 1995, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock and 750,000 warrants to purchase a share of the common stock. 18,465 shares and 55,395 warrants have been sold pursuant to this offering. Each unit, consisting of one share of common stock and three warrants to purchase one share of common stock in each of three subsequent years (total 3 shares), were issued at $12.00 per unit. The warrant exercise price was $8.00 per share for the 1996 Warrant was $9.00 per share for the 1997 Warrant, and was $10.00 per share for the 1998 Warrant. The units were offered pursuant to an exemption from registration contained in section 4(2) and 3(a)(5) of the Act. No underwriters were used and no commissions were paid as a result of this offering. The offering closed on December 31, 1995. In December 1995, the Registrant sold 41,666 shares of Registrant's common stock in an offering exempt from registration pursuant to section 4(2) of the Act at a purchase price of $12.00 per share. This sale was accomplished pursuant to a commitment to purchase these securities issued in December 1994. Beginning May 10, 1996, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock. 6,934 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption from registration contained in 4(2) and 17 3(a)(5) of the Act. During 1996, the Registrant received, $55,536 and issued 6,942 shares as a result of warrant exercises by shareholders to purchase common stock at a price of $8.00 per share. Beginning May 19, 1997, Registrant commenced an offering solely to existing stockholders of 250,000 shares of its common stock, initially on a pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act. During 1997, the Registrant received $34,710 and issued 3,856 shares as a result of exercise of the 1997 warrants at $9.00 per share. During 1998, Registrant received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per share and sold 6,492 shares of common stock as a result to its offering solely to stockholders of record. This offering was exempt pursuant to an exemption from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March 31, 1999, there were no warrants outstanding to purchase common stock of the Bank. CLASS B COMMON STOCK On September 30, 1998, the Registrant filed Articles of Amendment to its Articles of Incorporation with the Secretary of State of the Commonwealth of Pennsylvania. The filing amended the Articles of Incorporation of the Registrant to designate a sub-class of ist Common Stock as Class B Common Stock. Pursuant to the terms of the amendment, holders of the Class B Common Stock have all rights of Common Stockholders, with the exception of voting rights. Effective October 9, 1998, the Registrant sold 83,333 shares of its Class B Common Stock to First Union Corporation ("First Union") for a purchase price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Act. Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B Common Stock to First Union for a purchase price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Act. Effective September 23, 1999, Registrant sold 25, 000 shares of its Class B Common Stock to First Union Corporation at a purchase price of $12 per share. The sale was exempt from registration pursuant to section 4(2) of the Act. Effective December, 1999, the Registrant sold 5,000 shares of its Class B Common Stock to an individual for a purchase price of $12 per share. The sale was exempt from registration pursuant to section 4(2) of the Act. SERIES A PREFERRED STOCK Registrant has engaged in the sale of Series A Preferred Stock which has the characteristics identified in the UBS Articles of Incorporation incorporated by reference as an Exhibit hereto pursuant to an exemption from registration contained in Section 4(2) of the Securities Act. 18 DIVIDENDS Registrant has not, during the three most recent fiscal periods 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 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 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, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, 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 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. As a result of this regulation, the Bank, and therefore the Registrant, will most likely be unable to pay any dividends while an accumulated deficit exists. The Registrant does not anticipate that dividends will be paid for the forseeable future. The Federal Deposit Insurance Act generally prohibits all payments of dividends by a bank which is in default of any assessment to the FDIC. 19 ITEM 6 - SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------------- (Dollars in thousands, except per share data) Net interest income $ 5,264 $ 5,241 $ 4,744 $ 4,259 $ 4,012 Provision for loan losses 1,007 351 97 85 78 Noninterest income 2,226 1,816 1,517 1,118 741 Noninterest expense 7,714 6,696 5,983 6,123 5,454 Net income (loss) (1,230) 10 181 (832) (779) Net income (loss) per share - basic (1.24) 0.01 0.22 (1.03) (1.04) Balance sheet totals: Total assets $137,249 $121,983 $108,914 $ 96,769 $ 92,635 Net loans 59,444 57,271 73,694 69,097 61,696 Investment securities 51,433 43,196 18,253 14,460 16,739 Deposits 124,766 109,063 99,427 88,761 84,228 Shareholders' equity 9,027 8,904 7,059 6,759 7,470 Ratios: Equity to assets 8.08% 6.40% 6.61% 7.45 % 7.36 % Return on assets (1.03)% 0.01% 0.18% (0.89)% (0.87)% Return on equity (12.71)% 0.14% 2.69% (12.02)% (11.83)% 20 ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted in favor of the formation of a bank holding company, United Bancshares, Inc. (the Company). Accordingly, in October 1994 the Company became a bank holding company in conjunction with the issuance of its common shares in exchange for the common shares of the Bank. The financial statements are prepared on a consolidated basis to include the accounts of the Company and the Bank. The purpose of this discussion is to focus on information about the Bank's financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included in this annual report. This discussion and analysis should be read in conjunction with the financial statements presented elsewhere in this report. RESULTS OF OPERATIONS SUMMARY The Company recorded a net loss of $1,230,000 for 1999 ($1.24 per share) compared to net income of $10,000 ($0.01 per share) for 1998 and net income of $181,000 ($0.22 per share) in 1997. The decline in earnings during 1999 is primarily attributable to a significant increase in the provision for loan losses. A more detailed explanation for each component of earnings is included in the sections below. Management continues to face the challenge of increasing the level of earning assets to generate additional income to cover the high operating costs associated with the Bank's mission of serving the under-served communities in the Philadelphia region. During 1999, the Bank acquired branches in close proximity to its existing branches in an effort to increase its earning assets without significantly increasing its operating costs. Consequently, average-earning assets increased approximately $9.1 million, or 8.76%, The result was an increase of $23,000 in net interest income from 1998 to 1999. 21 The allowance for loan losses as a percentage of total loans increased from 1.17% in 1998 to 2.57% in 1999. This increase is primarily attributable to a specific provision of approximately $668,000 for one commercial loan. TABLE 1 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY DECEMBER 31, ----------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------ --------------------------- -------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------ --------------------------- -------------------------- (Dollars in thousands) Assets: Interest-earning assets: Loans 68,526 5,589 8.16% 71,338 6,270 8.79% $ 68,887 $ 5,913 8.58% Investment securities held-to-maturity 21,692 1,226 5.65 11,436 746 6.52 10,222 659 6.45 Investment securities available-for-sale 9,275 612 6.60 8,392 557 6.63 6,252 434 6.94 Federal funds sold 13,753 681 4.95 12,959 688 5.31 9,187 483 5.26 ------ --- ---- ------ --- ---- ------- ------ ------ Total interest-earning assets 113,246 8,108 7.16 104,125 8,261 7.93 94,548 7,489 7.92 Noninterest-earning assets: Cash and due from banks 2,835 4,646 4,271 Premises and equipment, net 1,880 1,760 1,846 Other assets 3,366 3,576 1,564 Less allowance for loan losses (1,567) (565) (468) ------- ------- -------- Total 119,760 113,542 $101,761 ======= ======= ======== Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits 19,892 569 2.86% 22,622 620 2.74% $ 14,812 379 2.56% Savings deposits 26,744 440 1.65 23,283 428 1.84 23,277 459 1.97 Time deposits 35,020 1,695 4.84 37,365 1899 5.08 37,627 1,852 4.92 Other borrowed funds 1,246 140 11.24 1,521 73 4.85 1,262 55 4.36 ------- ----- ----- ------- -------- ------ ----- Total interest-bearing liabilities 82,902 2,844 3.43 84,791 3,020 3.56 76,978 2,745 3.57 Noninterest-bearing liabilities: Demand deposits 24,019 19,740 15,905 Other 3,177 1,747 2,153 Shareholders' equity 9,662 7,264 6,725 ------- ------- -------- Total 119,760 113,542 $101,761 ======= ======= ======== Net interest earnings $ 5,264 $5,241 $ 4,744 Net yield on interest-earning assets 4.65% 5.03% 5.01% For purposes of computing the average balance, loans are not reduced for nonperforming loans. 22 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED 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 (b) interest paid on interest-bearing liabilities, is a significant component of the Bank's earnings. Changes in net interest income result primarily from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income for 1999 totaled $5.3 million, an increase of $23,000, or .45%, compared to 1998. Net interest income in 1998 totaled $5.2 million, an increase of $497,000, or 10.5%, compared to 1997. TABLE 2 - RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME 1999 COMPARED TO 1998 1998 COMPARED TO 1997 ------------------------------------- ------------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ------------------------------------- ------------------------------------- VOLUME RATE NET VOLUME RATE NET ------------------------------------- ------------------------------------- (Dollars in thousands) Interest earned on: Loans $(245) $(436) $(681) $ 221 $ 136 $ 357 Investment securities held-to-maturity 569 (89) 480 81 6 87 Investment securities available-for-sale 37 18 55 175 (52) 123 Federal funds sold 26 (33) (7) 203 2 205 ----- ----- ----- ----- ----- ----- Total interest-earning assets 387 (540) (153) 680 92 772 ----- ----- ----- ----- ----- ----- Interest paid on: Demand deposits (67) 16 (51) 218 23 241 Savings deposits 58 (46) 12 2 (33) (31) Time deposits (120) (84) (204) (9) 56 47 Other borrowed funds 56 11 65 9 9 18 ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities (73) (103) (176) 220 55 275 ----- ----- ----- ----- ----- ----- Net interest income $460 $(437) $23 $ 460 $ 37 $ 497 ==== ===== === ===== ==== ===== Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of consolidated assets and liabilities. In 1999, there was an increase in net interest income of $460,000 due to changes in volume but a decrease of $437,000 due to changes in rate. In 1998, there was an increase in net interest income of $460,000 due to changes in volume and an increase of $37,000 due to changes in rate. 23 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED Average earning assets increased from $104.1 million in 1998 to $113.2 million in 1999 and from $94.5 million in 1997 to $104.1 million in 1998. This growth in earning assets is primarily attributed to an increase in average noninterest-bearing demand deposit balances and savings deposits. On September 24, 1999, the Bank acquired $31.5 million in deposits from First Union Corporation. The acquired deposits primarily consisted of core noninterest checking deposits and savings deposits. In addition, in December 1997, the Bank implemented a new deposit transfer ("sweep") product for its nonprofit and municipal customers which provides for the overnight transfer of available funds from a noninterest-bearing account to an interest-bearing account. In April 1998, new "Prestige" checking products were developed. These products offer premiums such as life insurance, discount shopping, premium certificate of deposit rates, etc. While benefiting customers, these products also serve as a means of generating low cost funds for the Bank as well as a source of service charge income from monthly membership, low balance and overdraft fees. The net interest margin of the Bank was 5.03% in 1998 and 5.01% 1997 but declined to 4.65% in 1999. While the prime rate increased 75 basis points during 1999, the Bank did not experience a similar increase in yield on its loan portfolio. This is because much of the Bank's loan portfolio is fixed rate in nature and not related to prime. In addition, during 1999, the average loan balance declined from $71.3 million to $68.5 million. This decline was related to significant paydowns/payoffs in the purchased automobile loan portfolio of the Bank. Funds were placed in alternative investment products that have lower yields. During 1999, the average federal funds yield was 4.95% compared to 5.31% in 1998 and 5.26% in 1997. During 1999, the average investment in federal funds increased by $794,000 because of an increased level of deposits in the "sweep" checking account product of the Bank which represent high balance short-term deposits. In addition, during 1999, the Bank continued to experience high levels of payoffs/paydowns in its loan portfolio. Funds were temporarily placed in federal funds sold until other loans were originated or investments purchased. The yield on the investment portfolio decreased 63 basis points to 5.94% in 1999 compared to 6.57% in 1998 and 6.63% in 1997. The declining yield is due to call options in certain higher yielding Government Agency securities that were exercised during 1998. The Bank was not able to place the proceeds from these premature maturities into securities with comparable yields due to a lower rate environment. The cost of interest-bearing liabilities declined to 3.43% in 1999 compared to 3.56% in 1998 and 3.57% in 1997. Consistent with market conditions, during the last quarter of 1998 and the first quarter of 1999, the Bank reduced the rates it pays on many of its interest bearing products by as much as 25 basis points. 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 and allowance for loan losses charged against earnings in 1999 was $1,007,003 compared to $350,500 in 1998 and $97,500 in 1997. The increase in 1999 was primarily related to one community development construction project for which there was a specific provision allocated of $668,000. There was an increase of $100,000 in specific provisions in the consumer loan portfolio as a result of increased levels of delinquencies. Although a number of these loans are home equity loans and secured by real estate, the extent of collectibility is not known. In addition, during 1999, the Bank revised its policy to increase its allowance for uncertainties in loans classified as "Satisfactory". Management believes the level of the allowance for loan losses was adequate as of December 31, 1999. 24 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED NONINTEREST INCOME Noninterest income increased $410,000 in 1999 compared to 1998. The increase was primarily related to a $217,000 increase in ATM fees as a result of an increase in the surcharge on non-customer use of ATMs from $1.00 to $1.50 and growth in the ATM network from 28 to 31. In addition, continued growth in the number of demand deposit accounts to which activity charges apply resulted in a $323,000 increase in demand deposit-related fee income--including overdraft fees, low balance fees, and activity charges. Noninterest income increased $300,000 in 1998 compared to 1997. The increase was primarily related to an increased level of fees on deposits as a result of the elimination of the Bank's "free checking" product and the introduction of a new premium checking product--"Prestige checking". This new product offers premiums such as discount shopping, bonus certificate of deposit rates, insurance, etc. to customers but also has a minimum balance and monthly membership fee requirements. In addition, the Bank's ATM fees increased $142,000 during 1998 as a result of increased volume at its machines as well as growth in the ATM network from 26 to 28 machines. Finally, the Bank sold approximately $13.2 million in loans during 1998 for a gain of $202,000. NONINTEREST EXPENSE Noninterest expense increased $1 million, or 15.2%, in 1999 to $7.7 million compared to $6.7 million in 1998 and $6 million in 1997. Salaries and benefits increased $407,000, or 15.9%, in 1999 compared to an increase of $158,000, or 7%, in 1998. In addition to normal salary adjustments, the increase during 1999 was the result of an increase in the number of branches from 6 to 8 after the First Union acquisition, as there was an increase in staffing levels to fill open positions to handle increased work volumes due to growth in the Bank's deposit levels during the year. In addition, during 1997 the chief executive officer's employment contract was amended to provide her with a defined contribution retirement plan, which resulted in a $48,000 expense for both 1998 and 1997 and $52,000 in 1999. During 1998, the chief executive officer received incentive compensation totaling approximately $28,000. Occupancy and equipment expense increased approximately $162,000, or 12.7%, during 1999 compared to an increase of $260,000, or 26%, during 1998. The increase during 1999 was attributable to annual escalations in lease payments, new and increased maintenance cost to service the Bank's growing ATM network, and new branches acquired from First Union in September 1999. In conjunction with its acquisition of deposits from First Union, the Bank assumed the leases of 4 branches, 2 of which were in close proximity to its existing branches. Due to more favorable characteristics of these branches (i.e. visibility, drive-through, ATM's, etc.), the Bank relocated its branch operations to the acquired facilities. These facilities have higher rental rates. In addition, in July 1999, the Bank leased a 25,000 square foot building to house its corporate headquarters. Office operations and supplies expense increased by $189,000, or 36%, in 1999. This increase was primarily a result of the acquisition of branches from First Union and the relocation of the corporate headquarters. In addition, the growth in the ATM network resulted in an increase in ATM-related supplies (i.e. ribbons, paper receipts, etc.). Data processing expenses decreased by $5,000, or .6%, during 1999 compared to an increase of $25,000, or 3%, in 1998. The bulk of the Bank's data processing is outsourced to third-party processors. These expenses are reflective of the high level of low-balance accounts being serviced for which the Bank is charged a per-account charge by processors. Although there has been some progress, 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 processing versus outsourcing, and the possible re-negotiation of existing contracts with servicers. Marketing and public relations expense increased by $83,000, or 37.5%, in 1999 compared to an increase of $49,000, or 28%, in 1998. The increase in 1999 was primarily related to additional media advertising the Bank incurred relative to its Year 2000 Preparedness as well as other product-specific advertisements. In addition, the Bank had in place for the entire year (versus 8 months in 1998), its new "Prestige checking" product for which the Bank pays an outside vendor to provide premiums (i.e. life insurance, discount shopping, etc.). 25 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED Professional Services increased $161,000, or 69%, in 1999. This increase is primarily related to fees the Bank paid to consultants to assist in preparing contingency plans for the Year 2000. In addition, during 1999, the Bank contracted with consultants to assist with computer and management information sytstems projects as well as the preparation of its strategic plan. Federal deposit insurance premiums were $105,000 in 1999 compared to $82,000 in 1998 and $66,000 in 1997. 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 Banks assessment was based on 1.29 basis points for BIF(Bank Insurance Fund)-assessable deposits and 6.28 basis points for SAIF(Savings Insurance Fund)-assessable deposits. The increase during 1999, is a result of increased deposit levels. 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. 26 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED FINANCIAL CONDITION SOURCES AND USES OF FUNDS The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 indicates how the Bank has managed these elements. Average funding uses increased approximately $9.1 million, or 8.76%, in 1999 compared to $9.6 million, or 10.1%, in 1998. TABLE 3 - SOURCES AND USES OF FUNDS TRENDS 1999 1998 1997 --------------------------------- ---------------------------------- ------- INCREASE INCREASE AVERAGE (DECREASE) AVERAGE (DECREASE) AVERAGE BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE ------- ------ ------- ------- ------ ------- ------- (Dollars in thousands) Funding uses: Loans $ 68,526 $(2,812) (3.94)% $ 71,338 $ 2,451 3.56% $68,887 Investment securities: Held-to-maturity 21,692 10,256 89.68 11,436 1,214 11.88 10,222 Available-for-sale 9,275 883 10.52 8,392 2,140 34.23 6,252 Federal funds sold 13,753 794 6.13 12,959 3,772 41.06 9,187 -------- ------ -------- ------- ------- Total uses $113,246 9,121 $104,125 $ 9,577 $94,548 ======== ====== ======== ======= ======= Funding sources: Demand deposits: Noninterest-bearing 24,019 $4,279 21.68% $ 19,740 $ 3,835 24.11% $15,905 Interest-bearing 19,892 (2,730) (12.07) 22,622 7,810 52.73 14,812 Savings deposits 26,744 3,461 14.86 23,283 6 0.03 23,277 Time deposits 35,020 (2,345) (6.28) 37,365 (262) (0.70) 37,627 Other borrowed funds 1,246 (275) (18.08) 1,521 259 20.52 1,262 -------- ------ -------- ------- ------- Total sources $106,921 $2,390 $104,531 $11,648 $92,883 ======== ====== ======== ======= ======= INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS The Bank's investment portfolio is classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are carried at amortized cost and are those securities the Bank has both the intent and ability to hold to maturity. Investments classified as available-for-sale are those investments the Bank intends to hold for an indefinite amount of time, but not necessarily to maturity, and are carried at fair value, with the unrealized holding gains and losses reported as a component of shareholders' equity on the balance sheet. Average investment securities and federal funds sold, in the aggregate, increased by $11.9 million, or 36.2%, in 1999 compared to an increase of $7.1 million, or 27.8%, in 1998. The increase during 1999 is a result of the acquisition of deposits from First Union in September 1999. These deposits were acquired without corresponding loans and were therefore placed in US Government Agency and mortgage-backed securities to maximize the yield. In addition, the Bank invested the funds from paydowns/payoffs in the loan portfolios in similar securities. The Bank's strategy is to use the paydowns from its mortgage-backed securities to fund new loan originations. 27 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED The Bank's investment portfolio primarily consists of mortgage-backed pass-through agency securities, U.S. Treasury securities, and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. As reflected in Table 4, the assumed average maturity of the investment portfolio was 5.08 years at year-end 1999. Approximately 43.4% of the portfolio consist of mortgage-backed pass-through securities that have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. The Bank has attempted to minimize the repayment risk (risk of very fast or very slow repayment) associated with these types of securities by investing primarily in a number of seasoned mortgage pools for which there is a repayment history. This history better enables the Bank to project the repayment speeds of these pools. In addition, the Bank has minimized the interest rate risk associated with these mortgage-backed securities by investing in a variety of pools, many of which have variable rates with indices that track closely with the current interest rate environment. TABLE 4 - ANALYSIS OF INVESTMENT SECURITIES WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS ------------------ ------------------ ----------------- ---------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL ------ ----- ------ ----- ------ ----- ------ ----- ----- (Dollars in thousands) Other government securities $ -- -- $ 12,698 6.50% $15,906 6.83% $ -- 28,604 Mutual funds 94 5.60 -- 94 Other investments 406 6.00 -- 406 Mortgage-backed securities 22,329 ------- -------- ------- ------ -------- Total securities $ 94 $ 12,698 $16,312 $ -- $ 51,433 ======= ======== ======= ====== ======== Average maturity 5.08 years The above table sets forth the maturities of investment securities at December 31, 1999 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). LOANS Average loans decreased approximately $2.8 million, or 3.94%, in 1999 compared to an increase of $2.5 million, or 3.56%, in 1998. Although, the Bank purchased a $22 million portfolio of seasoned automobile loans from NationsBank in February 1999, close to 50% of this portfolio had paid down by year-end. In addition, mortgage loans continue to decline as a result of payoffs/paydowns and refinancings due to the low mortgage rate environment without a high volume of new originations to replace them. The Bank's policy is to make its loans and commitments in the market area it serves. However, from time-to-time, the Bank has purchased a significant portion of its loan portfolio to adequately match its level of deposits and to improve the net interest margin. The Bank continues to originate loans and has a pipeline of loans located within the Philadelphia region. 28 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 5 - LOANS OUTSTANDING, NET OF UNEARNED INCOME DECEMBER 31, -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Commercial and industrial $13,664 $13,643 $12,095 $10,107 $ 8,021 Commercial real estate 1,288 1,518 1,515 649 627 Consumer loans 19,822 11,424 22,611 17,340 16,254 Residential mortgages 26,237 31,365 35,962 36,622 37,271 Loans held-for-sale -- -- 1,979 4,906 -- ------- ------- ------- ------- ------- Total loans $61,011 $57,950 $74,162 $69,624 $62,173 ======= ======= ======= ======= ======= TABLE 6 - LOAN MATURITIES AND INTEREST SENSITIVITY WITHIN AFTER ONE BUT AFTER ONE YEAR WITHIN FIVE YEARS TEN YEARS TOTAL -------- ----------------- --------- ----- (Dollars in thousands) Commercial and industrial $ 5,957 $ 4,288 $ 3,419 $13,664 Commercial real estate 750 - 538 1,288 Consumer loans 1,455 15,431 2,916 19,822 Residential mortgages 2,309 5,537 18,481 26,237 ------- ------- ------- ------- Total loans $10,471 $25,256 $25,354 $61,011 ======= ======= ======= ======= Loans maturing after one year with: Fixed interest rates $43,152 ======= Variable interest rates $ 7,140 ======= NONPERFORMING LOANS Table 7 reflects the Bank's nonperforming loans for the last five years. 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 Bank's policy 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 nonaccrual, 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. 29 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 7 - NONPERFORMING LOANS 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccrual loans $2,027 $1,720 $1,179 $ 800 $ 949 Interest income included in net income for the year 67 37 14 6 23 Interest income that would have been recorded under original terms 113 189 112 45 37 Loans past due 90 days and still accruing 53 125 306 408 10 There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At December 31, 1999, approximately 28% of the commercial loan portfolio of the Bank 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 December 31, 1999, none of these loans was nonperforming. During 1999, nonaccrual loans increased to $2 million, up from $1.7 million at December 31, 1998. This increase is primarily attributable to one community development construction project that accounts for $754,000 of the total nonaccrual loans. At December 31, 1999, approximately $411,000 of the total nonaccrual loans was residential mortgages. The underlying real estate collateral associated with these loans minimizes the risk of loss. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. Table 8 presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and consequently may be reallocated in the future to reflect then-current conditions. 30 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 8 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES 1999 1998 1997 1996 ------------------------ ---------------------- ----------------------- ---------------------- PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Commercial and Industrial $ 263 22.40% $ 272 23.55% $ 144 16.31% $ 222 14.52% Commercial real estate 877 2.11 132 2.62 13 2.04 13 0.93 Residential mortgages 144 43.00 55 19.71 180 48.49 245 52.60 Consumer loans 283 32.49 188 54.12 97 33.16 44 31.95 Unallocated 32 -- 34 -- 4 -- ------ ------ ------ ------ ------ ------ ------ ------ $1,567 100.00% $ 679 100.00% $ 468 100.00% $ 528 100.00% ====== ====== ====== ====== ====== ====== ====== ====== Management believes that the allowance for loan losses is adequate. 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. 31 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 9 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at January 1 $ 679 $ 468 $ 528 $ 476 $ 726 ------- ------- ------- ------- ------- Charge-offs: Commercial and industrial (25) -- (66) (17) (195) Commercial real estate -- -- -- -- -- Residential mortgages (47) -- (9) -- -- Consumer loans (315) (180) (160) (25) (5) ------- ------- ------- ------- ------- (387) (180) (235) (42) (200) Recoveries - consumer loans 268 41 78 9 6 ------- ------- ------- ------- ------- Net charge-offs (119) (139) (157) (33) (194) Provisions charged to operations 1,007 350 97 85 78 Allowance previously allocated to sold loans -- -- -- -- (134) ------- ------- ------- ------- ------- Balance at December 31 $ 1,567 $ 679 $ 468 $ 528 $ 476 ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans outstanding 0.17% 0.19% 0.23% 0.05% 0.34% ======= ======= ======= ======= ======= The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses. DEPOSITS Average deposits grew approximately $2.7 million, or 2.6%, in 1999 compared to growth of $11.4 million, or 12.4%, in 1998. The increase is primarily related to the acquisition of $31.5 million in deposits from First Union Corporation in September 1999. These deposits included primarily core deposits consisting of checking and savings accounts. The Bank introduced "sweep" deposit accounts in late 1997 as a vehicle to attract larger deposits by sweeping funds out of noninterest-bearing demand deposit accounts and investing them overnight in interest-bearing deposit accounts. At December 31, 1999, there were $7 million in such accounts compared to $10 million in 1998. 32 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 10 - AVERAGE DEPOSITS BY CLASS AND RATE 1999 1998 1997 ---------------------- ---------------------- -------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ---- ------ ---- ------ ---- (Dollars in thousands) Noninterest-bearing demand deposits $24,019 --% $19,740 --% $15,905 --% Interest-bearing demand deposits 19,892 2.86 22,622 2.74 14,812 2.56 Savings deposits 26,744 1.65 23,283 1.84 23,277 1.97 Time deposits 35,020 4.84 37,365 5.08 37,627 4.92 OTHER BORROWED FUNDS The average balance for other borrowed funds decreased $275,000, or 18.08%, in 1999 compared to an increase of $259,000, or 20.52%, in 1998. The decrease in 1999 was due to the March 31, 1999 maturity of a $1.5 million reverse repurchase agreement the Bank entered into in 1998. This decline was offset by a $1.5 million capital lease obligation related to the Bank's lease of a building for its corporate offices in July 1999. 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. 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 enhance consistent growth of net interest income through periods of changing interest rates. The Bank is required to maintain minimum levels of liquid assets as defined by Federal Reserve Board (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 December 31, 1999, management believes the Bank's liquidity is satisfactory and in compliance with 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. There are no securities maturing in one year or less. However, other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $10.5 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large-denomination time deposits as well as brokered deposits. Table 11 provides a breakdown of the maturity of deposits of $100,000 or more. 33 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 11 - MATURITY OF DEPOSITS OF $100,000 OR MORE (Dollars in thousands) 3 months or less $ 7,472 Over 3 through 6 months 4,632 Over 6 months through 1 year -- Over 1 through five years 402 Over five years 128 ------- Total $12,634 ======= 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 that 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 interest-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. Table 12 sets forth the earliest repricing distribution of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 1999, the Bank's interest rate sensitivity gap ratio (i.e. excess of interest rate-sensitive assets over interest rate-sensitive liabilities, divided by total assets) and the Bank's cumulative interest rate sensitivity gap ratio. For purposes of the table, except for savings deposits, an asset or liability is considered rate-sensitive within a specified period when it matures or could be repriced within such period or repriced within such period in accordance with its contractual terms. At December 31, 1999, an asset sensitive position is maintained on a cumulative basis through one year of 6.66%. This level is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. The current gap position is relatively evenly matched as a result of the number of loans either repricing or maturing in 12 months closely matching certificate of deposit maturities. Interest rate risk is minimized by the Bank's high level of core deposits that have been placed in longer repricing intervals. Generally, because of the Bank's positive gap position in shorter time frames, the Bank can anticipate that decreases in market rates will have a negative impact on the net interest income, while increases will have the opposite effect. For purposes of the gap analysis, such deposits (savings, MMA, NOW) which do not have definitive maturity dates and do not readily react to changes in interest rates have been placed in longer repricing intervals versus immediate repricing time frames, making the analysis more reflective of the Bank's historical experience. 34 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED TABLE 12 - INTEREST SENSITIVITY ANALYSIS INTEREST RATE SENSITIVITY GAPS AS OF DECEMBER 31, 1999 OVER OVER 1 YEAR OVER 3 MONTHS 3 THROUGH 12 THROUGH 3 THROUGH OVER FIVE OR LESS MONTHS 3 YEARS 5 YEARS YEARS CUMULATIVE ------- ------ ------- ------- ----- ---------- (Dollars in thousands) Interest-sensitive assets: Interest-bearing deposits with banks $ 92 $ 91 $ 183 $ $ $ 366 Investment securities: 3,003 2,440 5,168 25,676 15,146 51,433 Federal funds sold 7,158 7,158 Loans 14,545 5,180 9,062 10,770 19,887 59,444 --------- ------- -------- -------- -------- --------- Total interest-sensitive assets 24,798 7,711 14,413 36,446 35,033 $ 118,401 --------- --------- --------- --------- -------- ========= Cumulative totals 24,798 32,509 46,922 83,368 118,401 --------- ------- -------- -------- -------- Interest-sensitive liabilities: Interest checking accounts -- 3,828 1,688 3,220 $ 20,384 29,120 Savings accounts -- -- 3,027 3,027 27,288 33,342 Certificates less than 100,000 6,788 3,473 6,791 6,412 -- 23,464 Certificates of $100,000 or more 7,524 1,565 3,036 509 -- 12,634 Other Borrowed Funds 1,445 -- -- 1,445 --------- ------- -------- -------- -------- --------- Total interest-sensitive liabilities $ 15,757 8,866 14,542 13,168 47,672 $ 100,005 --------- --------- --------- --------- --------- ========= Cumulative totals $ 15,757 $ 24,623 $ 39,165 $ 52,333 $ 100,005 ========= ========= ========= ========= ========= Interest sensitivity gap $ 9,041 ($ 1,155) ($ 129) $ 23,278 ($ 12,639) ========= ========= ========= ========= ========= Cumulative gap $ 9,041 $ 7,886 $ 7,757 $ 31,035 $ 18,396 ========= ========= ========= ========= ========= Cumulative gap/total earning Assets 7.64% 6.66% 6.55% 26.21% 15.54% ======= ====== ======= ======= ======= Interest-sensitive assets to interest-sensitive liabilities 157.38% 86.97% 99.11% 276.78% 73.49% ======= ====== ======= ======= ======= Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management's estimates. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a 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 35 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED 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. The calculated estimates of net income or "earnings" at risk at December 31, 1999 are as follows: PERCENT OF CHANGES IN RATE NET INTEREST INCOME CHANGE --------------- ------------------- ------ (Dollars in thousands) +200 basis points 6,019 (3.7)% +100 basis points 6,209 (0.7) Flat rate 6,252 -- -100 basis points 6,322 1.1 -200 basis points 6,372 1.9 A simulation model is also used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the economic value of the Bank. This model produces an interest rate exposure report that measures the long-term rate risks in the balance sheet by valuing the Bank's assets and liabilities at market. It simulates what amount would be left over if the Bank liquidated its assets and liabilities. This is otherwise known as "economic value" of the capital of the Bank. The calculated estimates of economic value at risk at December 31, 1999 are as follows: PERCENT OF CHANGES IN RATE NET EQUITY CHANGE --------------- ---------- ------ (Dollars in thousands) +200 basis points 19,439 (6.8)% +100 basis points 20,751 (0.5) Flat rate 20,863 -- -100 basis points 20,287 (2.8) -200 basis points 19,757 (5.3) The assumptions used in evaluating the vulnerability of the Company's earnings and equity 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 earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest rate exposure is not significant and is within the policy limits of the Bank at December 31, 1999. 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 and movement into money market deposit accounts and short-term certificates of deposit through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the Bank's balance sheet. 3. Restructure the Bank's investment portfolio. The Board of Directors has determined that active supervision of the interest rate spread between yield on earning assets and cost of funds will decrease the Bank's vulnerability to interest rate cycles. 36 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED CAPITAL RESOURCES Total shareholders' equity increased $123 thousand in 1999 compared to an increase of approximately $1.9 million in 1998. The increase in 1999 is a result of the sale of common stock ($1.4 million) and the sale of preferred stock ($203,000). However, the net loss of $1.2 million resulted in an increase in the accumulated deficit The FRB standards for measuring capital adequacy for U.S. Banking organizations require 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, noncumulative and cumulative perpetual preferred stock, and minority interests less goodwill and/or intangible assets). 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 Table 13, the Company's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) for sale to the public as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. However, the Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios The Company and the Bank do not anticipate paying dividends in the near future. TABLE 13 - CAPITAL RATIOS 1999 1998 1997 ---- ---- ---- (Dollars in thousands) Total Capital $ 9,223 $ 8,823 $ 6,891 Less: Intangible Assets (2,429) -- -- -------- -------- -------- Tier 1 capital 6,794 8,823 6,891 Tier 2 capital 770 679 468 -------- -------- -------- Total qualifying capital $ 7,564 $ 9,502 $ 7,359 ======== ======== ======== Risk-adjusted total assets (including off- balance-sheet exposures) $ 60,795 $ 54,373 $ 51,868 ======== ======== ======== Tier 1 risk-based capital ratio 11.18% 16.23% 13.29% Total (Tier I and II) risk-based capital ratio 12.44% 17.48% 14.19% Tier 1 leverage ratio 5.08% 7.67% 6.59% REGULATORY MATTERS In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written 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. Management has begun to address all matters outlined in the Agreement and expects to be in full compliance with its terms and conditions within the required timelines. As part of this Agreement, the Bank is required to achieve a Tier 1 leverage ratio of 6.50% by June 30, 2000 and at all times thereafter during the term of this Agreement, maintain its Tier 1 leverage ratio at a level of no less than 7%. Failure to comply could result in additional regulatory supervision and/or actions. 37 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED The most recent notification dated February 10, 2000, from the Federal Reserve Bank categorized the Bank as "adequately" under the regulatory framework for prompt and corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. The Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. Subsequent to this statement, SFAS No 137 was issued, which amended the effective date of SFAS No. 133 to be all fiscal years beginning after June 15, 2000. Based on the Company's minimal use of derivatives at the current time, management does not anticipate the adoption of SFAS No. 133 will have a significant impact on earnings or financial position of the Company. However, the impact from adopting SFAS No. 133 will depend on the nature and purpose of the derivative instruments in use by the Company at that time. CAUTIONARY STATEMENT Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based upon various assumptions (some of which are beyond the control of the Bank and the Company), may be identified by reference to a future period, or periods, or by the use of forward-looking terminology such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, economic growth; governmental monetary policy, including interest rate policies of the FRB; sources and costs of funds; levels of interest rates; inflation rates; market capital spending; technological change; the state of the securities and capital markets; acquisition; consumer spending and savings; expense levels; tax, securities, and banking laws; and prospective legislation. 38 United Bancshares, Inc. and Subsidiary MANAGEMENT DISCUSSION AND ANALYSIS--CONTINUED YEAR 2000 The Bank was successfully prepared for the Year 2000 potential problems that could have resulted from computer programs being written using two digits rather than four to define the applicable year. This could have resulted in major system failures or miscalculations. The Company completed a comprehensive review of its computer systems, both internal and outsourced processing, to identify the systems that could be affected by the "Year 2000" issue. Where necessary, software and hardware were replaced/remediated. As a result, there were no reportable events or exceptions related to the Year 2000. However, while not expected, there can be no assurance that the Company will not experience any problems in the future. If any problems were to occur in the future, the Company will follow its contingency plan. 39 ITEM 8 - FINANCIAL STATEMENTS See Consolidated Financial Statements attached hereto as Exhibits. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) DIRECTORS OF THE REGISTRANT. PRINCIPAL OCCUPATION AND YEAR FIRST TERM NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE - ---- --- ------------------- --------------- ----------- James F. Bodine 78 Retired as Managing 1993 2002 Partner, Urban Affairs Partnership Phila., PA. S. Amos Brackeen 81 Founder and Pastor, 1993 2003 Philippian Baptist Church of Phila., PA. Emma C. Chappell 59 Chairman of 1993 2003 the Board, President and CEO of Registrant and United Bank of Philadelphia Kemel G. Dawkins 76 President, Kemrodco 1993 2001 Development and Construction Company, Inc., President, Kem-Her Construction Company Inc., Phila., PA. 40 L. Armstead Edwards 57 Treasurer, 1993 2000 United Bancshares, Inc. Owner and President, P.A.Z., Inc., Philadelphia., PA Marionette 55 Partner, 1996 2000 Y. Frazier John Frazier, Inc. Philadelphia, PA William C. Green 75 Co-founder, Ivy Leaf 1993 2002 Middle School, Philadelphia, PA Angela M. Huggins 60 President and CEO 1993 2001 RMS Technologies Inc. Foundation William B. Moore 57 Secretary, 1993 2003 United Bancshares, Inc. Pastor, Tenth Memorial Baptist Church, Philadelphia, PA Ernest L. Wright 71 Founder, President and 1993 2000 CEO of Ernest L. Wright Construction Company Phila., PA 41 (b) EXECUTIVE OFFICERS OF REGISTRANT. NAME AGE OFFICE - ---- --- ------ Emma C. Chappell (1) 59 Chairman, President and Chief Executive Officer James F. Bodine 78 Vice Chairman Reverend William B. Moore 57 Secretary L. Armstead Edwards 57 Treasurer (1) Dr. Chappell is the only Executive Officer of the Registrant compensated for her services as such. Dr. Chappell serves as Chairman, President and Chief Executive Officer of the Bank pursuant to a written employment agreement entered into September 13, 1993 and amended as of January 1, 1994 by and among Dr. Chappell, the Bank and United Bancshares, Inc. This employment agreement provides for an employment term ending December 31, 2000 and further provides that Dr. Chappell will receive a guaranteed annual base salary of $150,000. A copy of this employment agreement was filed with Registrant's 1998 Form 10-K and is incorporated herein by reference. The employment agreement was amended effective January 1, 1997 to revise the defined benefit nature of the retirement benefit identified in the contract to a defined contribution retirement obligation. (c) FAMILY RELATIONSHIPS. There are no family relationships between any director, executive officer or person nominated or chosen by the Bank to become a director or executive officer. (d) OTHER There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years. 42 ITEM 11 - EXECUTIVE COMPENSATION. COMPENSATION TABLE NAME OF INDIVIDUAL OR NUMBER CAPACITIES IN IN GROUP WHICH SERVED - -------- ------------ 1999 SALARY 1999 BONUS 1999 OPTIONS SERP ----------- ---------- ------------ ---- Emma C. Chairman, President $174,500 $11,183 $ 0 $51,840 Chappell Chief Executive Officer 1998 SALARY 1998 BONUS 1998 OPTIONS SERP ----------- ---------- ------------ ---- $165,000 $18,000 $29,694(1) $48,000 1997 SALARY 1997 BONUS SERP ----------- ---------- ---- $162,000 $0 $48,000 (1) These options to purchase the Registrant's Common Stock at $8.54 per share were issued in December 1998 to replace options that expired in 1998. The options have a five year term. Directors of the Bank are compensated for each meeting attended in the amount of three hundred dollars fifty ($350) per Board meeting attended and one hundred fifty dollars ($150) for each committee meeting attended. Directors who are also salaried officers of the Bank receive no remuneration for their services as Directors. During the year ended December 31, 1999, the Bank paid Directors' fees to its "non-interested" Directors totaling $31,550. UBS has paid no director fees since its inception. Dr. Emma C. Chappell, Chairman of the Board and Chief Executive Officer of the Bank and Registrant since its formation, receives a minimum annual salary of $150,000. A copy of the employment agreement entered into among Dr. Chappell, the Bank and UBS is incorporated herein by reference. 43 One hundred thousand shares of the Bank's Common Stock are subject to a Long Term Incentive Compensation Plan (the "Plan") under which options to purchase the Bank's Common Stock may be granted to key employees of a price not less than the fair market value thereof at the date of the grant ("Options"), and Common Stock may be awarded as Restricted Stock, subject for a period of time to substantial risk of forfeiture and restrictions on disposition as determined by the Compensation Committee as of the date of the grant ("Restricted Stock"). Pursuant to the Plan, options are granted in tandem with Stock Appreciation Rights allowing the holder of an Option to surrender the Option and receive an amount equal to the appreciation in market value of a fixed number of shares of Common Stock from the date of the grant of the Option ("SARs"). SARs may be payable in Common Stock or cash or a combination of both. The Plan also allows the Compensation Committee to grant Performance Shares, which are contingent rights to receive, when certain performance criteria have been attained, amounts of Common Stock and cash determined by the Compensation Committee for such an award. Such rights are subject to forfeiture or reduction if performance goals specified are not met during the performance period. No such options, restricted stock or SARs were granted for 1999 performance. No deferred compensation, incentive compensation or any further compensation pursuant to any plan has been paid by the Bank, or will be paid by the Bank based on services rendered to the Bank to the date of this filing. At its annual meeting held May 6, 1994, the shareholders of the Registrant approved the establishment of an Employee Stock Ownership Plan ("ESOP"). The ESOP has not been formally activated by the Registrant. No purchases have been made pursuant to the ESOP. 44 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SHAREHOLDERS OWNING IN EXCESS OF FIVE PERCENT OF REGISTRANT'S COMMON STOCK AMOUNT OF UBS PERCENTAGE SHAREHOLDERS BENEFICIAL OWNERSHIP COMMON STOCK - ------------ -------------------- ------------ First Union Corporation 241,666 23.49% Broad and Chestnut Streets (50,000 or 4.86% are Philadelphia, PA 19101 voting shares) Philadelphia Municipal 71,667 6.97% Retirement System 2000 Two Penn Center Philadelphia, PA 19102 DIRECTORS AND OFFICERS OF THE BANK SHARES OF REGISTRANT'S COMMON STOCK NAME BENEFICIALLY OWNED PERCENTAGE - ---- ------------------ ---------- James F. Bodine 10,833 1.19% S. Amos Brackeen 5,000 .56% Emma C. Chappell(1) 7,000 .77% Kemel G. Dawkins 8,333 .91% L. Armstead Edwards 10,833 1.19% Marionette Y. Frazier 9,350 1.02% William C. Green (2) 13,833 1.51% Angela M. Huggins 4,200 .46% William B. Moore 1,000 .11% Ernest L. Wright 5,000 .55% ------ ----- TOTAL 75,382 8.27% ====== ===== (1) Dr. Chappell also acts as Trustee of a voting trust agreement pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS with Dr. Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. Dr. Chappell acts as Trustee of a voting trust agreement pursuant to which NationsBank Corporation deposited 33,500 shares of Common Stock of UBS with Dr. Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. Dr. Chappell also owns options to purchase up to 29,694 shares of the common stock of UBS at a purchase price of $8.54 per share . This option was awarded in December, 1998 and remains in effect for a term of five years from that date. (2) Owned jointly with Liller B. Green, his wife. 45 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. UNITED BANK OF PHILADELPHIA United Bank of Philadelphia ("UBP") is a Pennsylvania bank subsidiary of Registrant. The Directors of UBP are as follows: PRINCIPAL OCCUPATION YEAR FIRST NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR - ---- --- ------------------- --------------- James F. Bodine ... 78 Retired as Managing 1992 Partner, Urban Affairs Partnership Phila., PA. S. Amos Brackeen ... 81 Founder and Pastor, 1992 Philippian Baptist Church of Phila., PA. Emma C. Chappell ... 59 Founder, Chairman of 1992 the Board, President and CEO of the Bank and Registrant. of Philadelphia & Vicinity. Kemel G. Dawkins ... 76 President, Kemrodco 1992 Development and Construction Company, Inc., President, Kem-Her Construction Company Inc., Phila., PA. L. Armstead Edwards ... 57 Owner and President, 1992 P.A.Z., Inc., Philadelphia., PA Marionette Y. 55 Partner 1996 Frazier ... John Frazier, Inc. Philadelphia, PA William C. Green .... 75 Co-Founder, Ivy Leaf 1992 Middle School, Philadelphia, PA Angela M. Huggins ... 60 President and CEO 1992 RMS Technologies, Inc. Foundation Moorestown, NJ William B. Moore ... 57 Pastor, Tenth Memorial 1992 Baptist Church, Philadelphia, PA Ernest L. Wright ... 71 Founder, President and 1992 CEO of Ernest L. Wright Construction Company, Phila., PA Each of these officers and directors are officers and directors of the Registrant. PHILADELPHIA UNITED Dr. Chappell, Chairman, President and CEO of the Bank and Registrant also serves as Chairman of Philadelphia United Community Development Corporation ("Philadelphia United"). Her daughter, Tracey Carter serves as President of Philadelphia United. The Bank subleases office space to Philadelphia United. A copy of this lease is submitted as an exhibit hereto. 300 NORTH THIRD STREET The Bank leases its corporate headquarters facility from ECC Properties, LLC. ECC Properties, LLC is owned by Dr. Chappell. For a detailed discussion of this transaciton, see "Item 2 - Properties". 46 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K Leases for office space and branch locations a. 1. FINANCIAL STATEMENTS: December 31, 1999 Report of Independent Auditors, April 10, 2000 Consolidated Balance Sheets at December 31, 1999 and 1998. Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 3. The following exhibits are filed herewith or incorporated by reference as a part of this Annual Report. 3(i) Articles of Incorporation (Incorporated by reference to Registrant's 1997 Form 10-K). 3(ii) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K). 9.l Voting Trust Agreement with NationsBank (Incorporated by reference to Registrant's 1997 Form 10-K). 9.2 Voting Trust Agreement with Fahnstock (Incorporated by reference to Registrant's 1997 Form 10-K). 10.1 Lease Agreements between the Bank and various landlords. 10.2 Lease Agreement between ECC Properties, LLC and the Bank 10.3 Lease Agreement between the Bank and Philadelphia United Community Development Corporation. 10.4 Written Agreement by and among United Bancshares, Inc., United Bank of Philadelphia and Federal Reserve Bank of Philadelphia 11. Statement of Computation of Earnings Per Share. Included at Item 8 hereof. 12. Statement of Computation of Ratios. Included at Item 8 hereof. 23. Consent of Independent Accountants. 27. Financial Data Schedule. (b) Report on 8-K filed February 25, 2000 incorporated by reference. (c) The exhibits required to be filed by this item are listed under Item 14(a)3 above. (d) Not applicable. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Emma C. Chappell ----------------------------- Emma C. Chappell, Chairman, Date: April 14, 2000 President & CEO - ----------------------------- James F. Bodine - ----------------------------- S. Amos Brackeen - ----------------------------- Emma C. Chappell - ----------------------------- Kemel G. Dawkins - ----------------------------- L. Armstead Edwards - ----------------------------- Marionette Y. Frazier - ----------------------------- William C. Green - ----------------------------- Angela M. Huggins - ----------------------------- William B. Moore - ----------------------------- Ernest L. Wright 48 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF UNITED BANCSHARES, INC. AND SUBSIDIARY Report of Independent Auditors, April 10, 2000 50 Consolidated Balance Sheets at December 31, 1999 and 1998 51 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 52 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 53 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 54 Notes to Consolidated Financial Statements 55 49 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders and Board of Directors United Bancshares, Inc. and subsidiary We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 16 to the financial statements, the Bank entered into a Written Agreement with the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking dated February 10, 2000. Management's plans in regard to this matter are described in Note 16. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Philadelphia, Pennsylvania April 10, 2000 50 United Bancshares, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------------------- 1999 1998 ---- ---- ASSETS Cash and due from banks $ 9,396,669 $ 3,675,010 Interest-bearing deposits with banks 365,547 350,024 Federal funds sold 7,158,000 12,318,000 ------------ ------------ Cash and cash equivalents 16,920,216 16,343,034 Investment securities: Available-for-sale, at market value 19,129,535 8,049,875 Held-to-maturity, at amortized cost (market value of $31,470,822 and $35,203,274 in 1999 and 1998, respectively) 32,303,774 35,146,148 Loans, net of unearned discount of $225,302 and $301,540 in 1999 and 1998, respectively 61,010,995 57,950,133 Less allowance for loan losses (1,566,642) (679,557) ------------ ------------ Net loans 59,444,353 57,270,576 Bank premises and equipment, net 3,825,321 1,565,131 Accrued interest receivable 1,221,679 1,749,623 Foreclosed real estate 397,641 262,368 Core deposit intangible 2,428,524 -- Prepaid expenses and other assets 1,578,036 1,595,926 ------------ ------------ $137,249,079 $121,982,681 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits, noninterest-bearing $ 26,206,218 $ 19,999,226 Demand deposits, interest-bearing 29,119,779 29,114,084 Savings deposits 33,342,400 23,393,986 Time deposits, $100,000 and over 12,633,964 13,942,008 Time deposits 23,464,035 22,614,098 ------------ ------------ 124,766,396 109,063,402 Long-term debt -- 11,191 Securities sold to repurchase -- 1,557,755 Obligations under capital leases 1,444,607 -- Accrued interest payable 600,546 598,352 Accrued expenses and other liabilities 1,410,215 1,847,665 ------------ ------------ Total liabilities 128,221,764 113,078,365 ------------ ------------ Shareholders' equity: Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 143,150 and 132,999 issued and outstanding in 1999 and 1998 1,432 1,330 Common stock, $0.01 par value; 2,000,000 shares authorized; 1,028,753 and 913,490 issued and outstanding in 1999 and 1998, respectively 10,288 9,134 Additional paid-in-capital 13,870,169 12,286,233 Accumulated deficit (4,658,391) (3,428,169) Accumulated other comprehensive income (loss) (196,183) 35,788 ------------ ------------ Total shareholders' equity 9,027,315 8,904,316 ------------ ------------ $137,249,079 $121,982,681 ============ ============ The accompanying notes are an integral part of these statements. 51 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ---- ---- ---- Interest income: Interest and fees on loans $ 5,589,589 $ 6,270,323 $ 5,912,901 Interest on investment securities 1,812,983 1,275,542 1,067,762 Interest on federal funds sold 680,715 688,285 482,856 Interest on time deposits with other banks 24,834 26,329 25,333 ----------- ----------- ----------- Total interest income 8,108,121 8,260,479 7,488,852 ----------- ----------- ----------- Interest expense: Interest on time deposits 1,695,078 1,898,967 1,852,080 Interest on demand deposits 568,903 619,921 379,397 Interest on savings deposits 440,002 427,682 459,035 Interest on borrowed funds 140,075 73,265 54,841 ----------- ----------- ----------- Total interest expense 2,844,058 3,019,835 2,745,353 ----------- ----------- ----------- Net interest income 5,264,063 5,240,644 4,743,499 Provision for loan losses 1,007,003 350,500 97,500 ----------- ----------- ----------- Net interest income after provision for loan losses 4,257,060 4,890,144 4,645,999 ----------- ----------- ----------- Noninterest income: Gain on sale of loans 43,856 201,664 187,471 Customer service fees 2,031,245 1,457,508 1,181,082 Gain on sale of investments -- 1,201 -- Other income 151,303 155,663 148,867 ----------- ----------- ----------- Total noninterest income 2,226,404 1,816,036 1,517,420 ----------- ----------- ----------- Noninterest expense: Salaries, wages, and employee benefits 2,962,500 2,555,774 2,397,861 Occupancy and equipment 1,437,775 1,275,902 1,015,419 Office operations and supplies 715,207 525,771 522,525 Marketing and public relations 304,537 221,348 172,326 Professional services 393,607 232,793 274,999 Data processing 863,208 868,665 844,009 Deposit insurance assessments 104,991 82,389 66,274 Other operating 931,861 933,605 689,416 ----------- ----------- ----------- Total noninterest expense 7,713,686 6,696,247 5,982,829 ----------- ----------- ----------- Net income (loss) $(1,230,222) $ 9,933 $ 180,590 =========== =========== =========== Net income (loss) per common share - basic and diluted $ (1.24) $ 0.01 $ 0.22 =========== =========== =========== Weighted average number of common shares 995,699 845,902 818,240 =========== =========== =========== The accompanying notes are an integral part of these statements. 52 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1999, 1998 and 1997 SERIES A ACCUMULATED TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER SHARE- --------------- ------------ PAID-IN ACCUMULATED COMPREHENSIVE HOLDERS' COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) EQUITY INCOME (LOSS) ------ ------ ------ ------ ------- ------- ------------- ------ ------------- Balance at January 1, 1997 93,150 $932 816,355 $8,163 $10,348,989 $(3,618,692) $19,276 $6,758,668 Proceeds from issuance of common stock -- -- 7,340 73 76,637 -- 76,710 Unrealized gains on investment securities -- -- -- -- -- -- 42,887 42,887 $ 42,887 Net income -- -- -- -- -- 180,590 -- 180,590 180,590 -------- ------ --------- ------- ----------- ---------- --------- ---------- ------------ Balance at December 31, 1997 93,150 932 823,695 8,236 10,425,626 (3,438,102) 62,163 7,058,855 223,477 ============ Proceeds from issuance of preferred stock 39,849 398 -- -- 796,582 -- -- 796,980 Proceeds from issuance of common stock 89,795 898 1,064,025 1,064,923 Unrealized losses on investment securities -- -- -- -- -- -- (26,375) (26,375) (26,375) Net income -- -- -- -- -- 9,933 -- 9,933 9,933 -------- ------ --------- ------- ----------- ---------- --------- ---------- ------------ BALANCE AT DECEMBER 31, 1998 132,999 1,330 913,490 9,134 12,286,233 (3,428,169) 35,788 8,904,316 (16,442) ============ PROCEEDS FROM ISSUANCE OF PREFERRED STOCK 10,151 102 202,918 203,020 PROCEEDS FROM ISSUANCE OF COMMON STOCK 115,263 1,154 1,381,018 1,382,172 UNREALIZED LOSSES ON INVESTMENT SECURITIES (231,971) (231,971) (231,971) NET LOSS -- -- -- -- -- (1,230,222) (1,230,222) (1,230,222) -------- ------ --------- ------- ----------- ---------- --------- ---------- ------------ BALANCE AT DECEMBER 31, 1999 143,150 $1,432 1,028,753 $10,288 $13,870,169 ($4,658,391) $(196,183) $9,027,315 $(1,462,193) ======= ====== ========= ======= =========== =========== ========= ========== =========== The accompanying notes are an integral part of this statement. 53 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (1,230,222) $ 9,933 $ 180,590 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 1,007,003 350,500 97,500 Gain on sale of loans (43,856) (201,664) (187,471) Depreciation and amortization 677,452 584,744 542,193 (Increase) decrease in accrued interest receivable and other assets 410,561 (1,345,070) (244,534) (Decrease) increase in accrued interest payable and other liabilities (435,256) 1,402,386 (131,570) ------------ ------------ ------------ Net cash provided by (used in) operating activities 385,682 800,828 256,708 ------------ ------------ ------------ Cash flows from investing activities: Purchase of available-for-sale investments (14,688,776) (11,708,818) (3,738,899) Purchase of held-to-maturity investments (48,678,917) (33,748,996) (6,094,788) Proceeds from maturity and principal reductions of available-for-sale investments 3,377,145 11,057,565 1,856,565 Proceeds from maturity and principal reductions of held-to-maturity investments 51,501,203 9,429,511 4,185,109 Net proceeds from branch acquisitions 27,694,690 -- -- Proceeds from sale of student loans 2,975,360 12,846,705 9,677,111 Net decrease (increase) in loans 15,870,049 8,276,373 (4,512,352) Purchase of residential mortgage loans -- -- (1,623,782) Purchase of automobile loans (21,982,333) (4,848,864) (8,047,769) Purchase of premises and equipment (1,429,324) (203,413) (495,501) ------------ ------------ ------------ Net cash (used in) provided by investing activities 14,639,097 (8,899,937) (8,794,306) ------------ ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits (14,463,843) 9,636,339 10,666,092 Repayments on long-term debt (11,191) (32,497) (30,873) Securities sold to repurchase (1,557,755) 216,702 1,341,053 Net proceeds from issuance of common stock 1,382,172 1,064,922 76,710 Net proceeds from issuance of preferred stock 203,020 796,980 -- ------------ ------------ ------------ Net cash provided by (used in) financing activities (14,447,597) 11,682,446 12,052,982 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 577,182 3,583,338 3,515,384 Cash and cash equivalents at beginning of year 16,343,034 12,759,696 9,244,312 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 16,920,216 $ 16,343,034 $ 12,759,696 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,780,355 $ 2,960,086 $ 2,726,349 ============ ============ ============ The accompanying notes are an integral part of these statements. 54 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of United Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank of Philadelphia (the Bank). All significant intercompany transactions and balances have been eliminated. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold on an overnight basis. SECURITIES HELD-TO-MATURITY Bonds, notes, and debentures for which the Bank has both the positive intent and ability to hold are classified as held-to-maturity and carried at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. SECURITIES AVAILABLE-FOR-SALE Available-for-sale securities consist of bonds, notes and debentures, and certain equity securities for which the Bank does not have positive intent to hold to maturity. These securities are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity net of related income tax effects. Gains and losses on the sale of available-for-sale securities are determined by the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. LOANS The Bank has both the positive intent and ability to hold its loans to maturity. These loans are stated at the amount of unpaid principal, reduced by net unearned discount and an allowance for loan losses. Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding and accretion of discount. It is the Bank's policy to discontinue the accrual of interest income when a default of principal or interest exists for a period of 90 days except when, in management's judgment, the collection of principal and interest is reasonably anticipated or adequate collateral exists. Interest received on nonaccrual loans is either applied against principal or reported as interest income according to management's judgment as to collectibility of principal. When interest accruals are discontinued, interest credited to income is reversed and the loan is classified as nonperforming. 55 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Unearned discount is amortized over the weighted average maturity of the mortgage loan portfolio. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts over the contractual life of the loan. LOANS HELD-FOR-SALE Loans held-for-sale are carried at the aggregate of lower of cost or market value. For purchased loans, the discount remaining after the loan loss allocation is being amortized over the remaining life of the purchased loans using the interest method. ALLOWANCE FOR LOAN LOSSES The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures". Under SFAS No. 114, the allowance for loan losses related to "impaired loans" is based on the discounted cash flows using the impaired loans' initial effective interest rate as the discount rate, or the fair value of the collateral for collateral-dependent loans. A loan is impaired when it meets the criteria to be placed on nonaccrual status. Loans which are evaluated for impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis and include only commercial nonaccrual loans. Large groups of smaller, homogeneous loans, such as credit cards, student loans, residential mortgages, and other student loans, are evaluated collectively for impairment. The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the loan portfolio. The allowance is increased by provisions charged to operating expenses and reduced by charge-offs net of recoveries. Management's determination of the adequacy of the allowance is based on continuous credit reviews of the loan portfolio, consideration of the current economic conditions, review of specific problem loans, and other relevant factors. This evaluation is subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. However, actual losses on specific loans, which are encompassed in the analysis, may vary from estimated losses. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed over the shorter of the related lease term or the useful life of the assets. INCOME TAXES The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 56 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INCOME (LOSS) PER SHARE During 1997, the Company adopted the provisions of SFAS No. 128, which eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable. FINANCIAL INSTRUMENTS 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 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. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. Subsequent to this statement, SFAS No 137 was issued, which amended the effective date of SFAS No. 133 to be all fiscal years beginning after June 15, 2000. Based on the Company's minimal use of derivatives at the current time, management does not anticipate the adoption of SFAS No. 133 will have a significant impact on earnings or financial position of the Company. However, the impact from adopting SFAS No. 133 will depend on the nature and purpose of the derivative instruments in use by the Company at that time. Loans held-for-sale: Fair values are estimated using quoted rates based upon secondary market sources for similar loans. 57 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments and amortizations. 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. 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. 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. FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less the cost to sell. Revenue and expenses from operations and changes in valuation allowance are charged to operations. The historical average holding period for such properties is 24 months. MANAGEMENT'S USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. SEGMENTS On January 1, 1998, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 131, which redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Bank's operating segments. Management has determined the Bank operates in one business segment, community banking. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. 58 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ORGANIZATIONAL COSTS On January 1, 1999, the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, Reporting on Costs of Start-Up Activities which requires that costs of start-up activities, as defined, including organizational costs, be expensed as incurred. The adoption of SOP 98-5 had no material impact on the Company's financial statements. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, which establishes new standards for reporting comprehensive income which includes net income as well as certain other items which result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income (loss) is as follows for the year ended: DECEMBER 31, 1999 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT BENEFIT AMOUNT ------ ------- ------ Unrealized losses on securities Unrealized holding losses arising during period $(348,498) ($116,527) $(231,971) Less reclassification adjustment for gains realized in net income -- -- -- --------- --------- --------- Other comprehensive loss, net $(348,498) ($116,527) $(231,971) ========= ========= ========= DECEMBER 31, 1998 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT BENEFIT AMOUNT ------ ------- ------ Unrealized losses on securities Unrealized holding losses arising during period $(39,462) ($12,282) $(27,180) Less reclassification adjustment for gains realized in net income 1,201 396 805 -------- -------- -------- Other comprehensive loss, net $(38,261) ($11,886) $(26,375) ======== ======== ======== 59 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 DECEMBER 31, 1997 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT BENEFIT AMOUNT ------ ------- ------ Unrealized gains on securities Unrealized holding gains arising during period $72,284 $29,397 $42,887 Less reclassification adjustment for gains realized in net income -- -- -- ------- ------- ------- Other comprehensive income, net $72,284 $29,397 $42,887 ======= ======= ======= 2. CASH AND DUE FROM BANK BALANCES The Bank maintains various deposit accounts of $645,328 with other banks to meet normal funds transaction requirements and to compensate other banks for certain correspondent services. The withdrawal or usage restrictions of these balances did not have a significant impact on the operations of the Bank as of December 31, 1999. 60 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 3. INVESTMENTS The amortized cost, gross unrealized holding gains and losses, and estimated market value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 1999 and 1998 are as follows: 1999 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- AVAILABLE-FOR-SALE: OTHER GOVERNMENT SECURITIES $ 11,255,096 $ (207,335) $ 11,047,761 MORTGAGE-BACKED SECURITIES 7,668,672 (86,940) 7,581,732 ------------ ------------ ------------ ------------ TOTAL DEBT SECURITIES 18,923,768 -- (294,275) 18,629,493 INVESTMENTS IN MUTUAL FUNDS 94,092 -- -- 94,092 OTHER INVESTMENTS 405,950 -- -- 405,950 ------------ ------------ ------------ ------------ $ 19,423,810 $ -- $ (294,275) $ 19,129,535 ============ ============ ============ ============ HELD-TO-MATURITY: OTHER GOVERNMENT SECURITIES 17,556,702 -- (506,631) 17,050,071 MORTGAGE-BACKED SECURITIES 14,747,072 -- (326,321) 14,420,751 ------------ ------------ ------------ ------------ $ 32,303,774 $ -- $ (832,952) $ 31,470,822 ============ ============ ============ ============ 1998 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-for-sale: Other Government Securities $ 2,248,700 $ 5,840 $ -- $ 2,254,540 Mortgage-backed securities 5,337,225 48,383 -- 5,385,608 ----------- ----------- ----------- ----------- Total debt securities 7,585,925 54,223 -- 7,640,148 Investments in mutual funds 89,527 -- -- 89,527 Other investments 320,200 -- -- 320,200 ----------- ----------- ----------- ----------- $ 7,995,652 $ 54,223 $ -- $ 8,049,875 =========== =========== =========== =========== Held-to-maturity: U.S. Treasury securities $ 1,000,141 $ 1,109 $ -- $ 1,001,250 Other Government securities 31,633,770 50,483 -- 31,684,253 Mortgage-backed securities 2,512,237 5,534 -- 2,517,771 ----------- ----------- ----------- ----------- $35,146,148 $ 57,126 $ -- $35,203,274 =========== =========== =========== =========== Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 1999 were as follows. Expected maturities may differ from contractual maturities. 61 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 3. INVESTMENTS - CONTINUED AMORTIZED MARKET COST VALUE ---- ----- AVAILABLE-FOR-SALE: DUE AFTER ONE YEAR THRU THREE YEARS $ 250,000 $ 247,260 DUE AFTER THREE YEARS THROUGH FIVE YEARS 5,690,486 5,404,452 DUE AFTER FIVE YEARS THROUGH FIFTEEN YEARS 5,314,610 5,396,049 MORTGAGE-BACKED SECURITIES 7,668,672 7,581,732 ----------- ----------- TOTAL DEBT SECURITIES 18,923,768 18,629,493 INVESTMENTS IN MUTUAL FUNDS 94,092 94,092 OTHER INVESTMENTS 405,950 405,950 ----------- ----------- $19,423,810 $19,129,535 =========== =========== HELD-TO-MATURITY: DUE AFTER ONE YEAR THROUGH THREE YEARS 1,250,000 1,230,030 DUE AFTER THREE YEARS THROUGH FIVE YEARS 5,796,809 5,663,703 DUE AFTER FIVE YEARS THROUGH FIFTEEN YEARS 10,509,893 10,156,338 MORTGAGE-BACKED SECURITIES 14,747,072 14,420,751 ----------- ----------- $32,303,774 $31,470,822 =========== =========== There were no sales of investments during 1999 or 1997. The Bank recorded a gain on the sale of investments during 1998 of $1,201. As of December 31, 1999 and 1998, investment securities with a book value of $9,964,172 and $11,703,948, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows: 1999 1998 ---- ---- Commercial and industrial $ 13,664,212 $ 13,643,535 Commercial real estate 1,288,232 1,517,979 Residential mortgages 26,236,947 31,364,864 Consumer loans 19,821,604 11,423,755 ------------ ------------ Total loans 61,010,995 57,950,133 Less allowance for loan losses (1,566,642) (679,557) ------------ ------------ Net loans $ 59,444,353 $ 57,270,576 ============ ============ 62 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 4. LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED As of December 31, 1999 and 1998, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of approximately $1,442,600 and $1,148,000, respectively. During 1999, new loans to such related parties amounted to $429,000 and repayments amounted to $126,700. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other nonrelated party transactions. Nonaccrual loans totaled approximately $2,027,000 and $1,720,000 as of December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, unamortized deferred fees and costs totaled $151,645 and $177,847, respectively. Loans having a carrying value of $406,400 and $127,800 were transferred to foreclosed real estate in 1999 and 1998, respectively. Changes in the allowance for possible loan losses are as follows: 1999 1998 1997 ---- ---- ---- Balance, beginning of year $ 679,557 $ 468,806 $ 527,507 Provision 1,007,003 350,500 97,500 Charge-offs (387,480) (180,727) (234,638) Recoveries 267,562 40,978 78,437 ---------- --------- --------- Balance, end of year $1,566,642 $ 679,557 $ 468,806 ========== ========= ========= At December 31, 1999 and 1998, the recorded investment in loans that were on a nonaccrual basis and were considered to be impaired under SFAS No. 114 was $844,300 and $845,500, respectively. At December 31, 1999 and 1998, the related allowance for loan losses was $674,100 and $183,000, respectively. The average recorded investment in impaired loans during the years ended December 31, 1999 and 1998 was approximately $844,300 and $526,000, respectively. For the years ended December 31, 1999, 1998 and 1997, the Bank recognized interest income on those impaired loans of $9,100, $36,800 and $0, respectively. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. During 1999, approximately 28% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. 63 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 5. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation are as follows: ESTIMATED USEFUL LIFE 1999 1998 ----------- ---- ---- Buildings, capital lease and leasehold improvements 10-15 years $ 3,654,194 $ 1,343,898 Furniture and equipment 3-7 years 2,710,371 2,183,743 ----------- ----------- 6,364,565 3,527,641 Less accumulated depreciation and amortization (2,539,244) (1,962,510) ----------- ----------- $ 3,825,321 $ 1,565,131 =========== =========== The Bank occupies a building which houses its corporate headquarters under a non-cancellable capital lease from a related party which expires in the year 2009. This lease is with a company which is owned by an officer of the Bank. This lease is recorded as a capital lease at December 31, 1999 in the amount of $1,483,000 with accumulated depreciation of $74,150. The Bank leases other facilities and other equipment under non-cancelable operating lease agreements. The amount of expense for operating leases for the years ended December 31, 1999, 1998, and 1997 was $367,554, $323,330, and $288,959. Future minimum lease payments under capital and operating leases are as follows: CAPITALIZED OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES ------------------------ ------ ------ 2000 $ 323,125 $ 417,566 2001 331,250 392,797 2002 338,750 296,611 2003 346,250 233,502 2004 353,750 49,115 Thereafter 1,680,000 57,000 ----------- ----------- Total minimum lease payments $ 3,373,125 $ 1,446,591 =========== Less amount representing interest (1,928,518) ----------- Present value of future minimum rentals $ 1,444,607 =========== 64 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 6. DEPOSITS The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was $12,633,964 and $13,942,008 at December 31, 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities of certificates of deposit are as follows (dollars in thousands): 2000 $29,047 2001 2,915 2002 1,589 2003 1,517 2004 805 Thereafter 225 ------- $36,098 ======= 8. REVERSE REPURCHASE AGREEMENTS The Bank entered into sales of securities under agreements to repurchase identical securities or reverse repurchase agreements. The amounts advanced to the Bank under these agreements represent short-term loans and would be reflected as a payable in the balance sheet. The securities underlying the agreements are book-entry securities maintained at the Federal Reserve Bank of Philadelphia. The average balance of reverse purchase agreements entered into during 1998 was $1.5 million, and the maximum amount outstanding at any month-end during 1998 was $1.5 million. The repurchase agreement matured on March 31, 1999. 9. CAPITAL STOCK OFFERINGS On September 30, 1998, the Company designated a subclass of its Common Stock as Class B. Pursuant to the terms of the amendment, holders of the Class B Common Stock have rights of Common Stockholders, with the exception of voting rights. On October 9, 1998, the Company sold 83,333 shares of Class B Common Stock to one shareholder for a purchase price of $12 per share. On February 9, 1999 and September 24, 1999, the Bank sold 83,333 and 25,000 shares of Class B Stock, respectively, to the same shareholder at $12 per share. In April 1997, the Bank began its fifth offering of a maximum 250,000 shares of common stock at a price of $12 per share ($0.01 par value). As of December 31, 1997, the Bank had received $42,600 and had issued 3,550 shares of common stock from this offering. This offering was limited to existing shareholders of record as of April 20, 1997. The offering terminated on December 31, 1997. During 1997, the Bank received $34,110 and issued 3,790 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $9.00 per share. As of December 31, 1997, 7,733 warrants remained outstanding. During 1998, the Bank received $64,922 and issued 6,492 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $10.00 per share. As of December 31, 1998, no warrants remained outstanding. 65 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 9. CAPITAL STOCK OFFERINGS--CONTINUED In July 1998, the Company began a limited offering of its Series A Preferred Stock (noncumulative, 6%. $.01 par value) to Fannie Mae Corporation. The nonvoting preferred stock was offered at a price of $20 per share, in an amount for which the aggregate purchase price does not exceed the lesser of (1) 9.99% of the total equity. During 1998, the Company received $796,980 and issued 39,849 shares of preferred stock from this offering. During 1999, the Company received $203,020 from Fannie Mae and issued 10,151 shares of preferred stock from this offering. Upon the declaration of a common dividend, each of the Series A preferred shares will be accorded a non-cumulative dividend preference equal to 6% of the purchase price of the stock per annum prior to the payment of any dividend on account of any other class or series of the Company. No dividends have been declared or paid. 10. INCOME TAXES The Bank accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." At December 31, 1999, the Bank has net operating loss carryforwards of approximately $2,500,000 for income tax purposes that begin to expire in 2008. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. For financial reporting purposes, a valuation allowance of $1,499,042 and $1,120,565 as of December 31, 1999 and 1998, respectively, has been recognized to offset the deferred tax assets related to the cumulative temporary differences and the tax loss carryforwards. Significant components of the Bank's deferred tax assets are as follows: 1999 1998 ---- ---- Deferred tax assets: Provision for loan losses $ 467,180 $ 164,653 Unrealized losses (gains) on investment securities 98,092 (18,435) Depreciation 29,390 42,725 Net operating loss carryforwards 880,707 903,192 Other 23,673 28,430 Valuation allowance for deferred tax assets (1,499,042) (1,120,565) ----------- ----------- Net deferred tax assets $ -- $ -- =========== =========== 66 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 10. INCOME TAXES--CONTINUED 1999 1998 1997 ---- ---- ---- Effective rate reconciliation: Tax at statutory rate $(418,275) $ 3,377 $ 61,400 Nondeductible expenses 33,742 17,634 11,849 Increase in valuation allowance 379,094 -- -- Other 6,055 Utilization of net operating loss (616) (21,011) (73,249) --------- --------- --------- Total tax expense $ -- $ -- $ -- ========= ========= ========= 11. FINANCIAL INSTRUMENT COMMITMENTS 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. Summaries of the Bank's financial instrument commitments are as follows: 1999 1998 ---- ---- Commitments to extend credit $6,140,622 $ 7,269,229 Outstanding letters of credit 259,000 259,000 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 and unused credit card lines. 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. 67 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 12. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value information about financial instruments is required to be disclosed, whether or not recognized in the balance sheet, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. 1999 1998 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (Dollars in thousands) Assets: Cash and cash equivalents $16,920 $16,920 $16,343 $16,343 Investment securities 51,433 50,600 43,196 43,253 Loans, net of allowance for loan losses 59,444 58,209 57,271 56,577 1999 1998 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (Dollars in thousands) Liabilities: Demand deposits 55,326 55,326 49,113 49,113 Savings deposits 33,342 33,342 23,394 23,394 Time deposits 36,098 36,198 36,556 36,352 Off Balance Sheet: Commitments to extend credit 6,141 6,141 7,269 7,269 Outstanding letters of credit 259 259 259 259 13. EMPLOYEE COMPENSATION The Bank entered into a five-year employment agreement with its chief executive officer covering such items as salaries, bonuses, and benefits. The agreement expires in 2000 and provides for guaranteed minimum annual compensation of $150,000 over the term of the contract. The contract, entered into on September 13, 1993 and amended January 1, 1994, also granted the chief executive officer the option to acquire up to 4% of the Bank's stock as of December 31, 1993 at $8.54 per share, which was the book value at the date of grant. The contract, as amended on January 1, 1997, also provides for a minimum contribution of $58,200 per year to the chief executive officer's retirement benefit. The Company made no stock-based compensation awards to any employee during 1999, 1998, and 1997. 68 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 14. CORE DEPOSIT INTANGIBLE On September 24, 1999, the Bank acquired four branches from First Union Corporation with deposits totaling $31.5 million. The Bank paid a deposit premium of 7%, or $2,186,500, and incurred approximately $ 351,650 in consulting and other costs directly related to these branch acquisitions. Subsequent to the acquisition, the Bank transferred back to First Union one significant deposit relationship totaling $940,000 and received a $66,000 refund of deposit premium. The premium and branch acquisition costs are being amortized over 14 years. Amortization totaled $43,626 for the year ended December 31, 1999. 15. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY CONDENSED BALANCE SHEETS DECEMBER 31, ----------------------- 1999 1998 ---- ---- (Dollars in thousands) Assets: Due from banks (subsidiary) $ 289 $ 265 Investment in United Bank of Philadelphia 8,738 8,639 -------- -------- Total assets $ 9,027 $ 8,904 ======== ======== Shareholders' equity: Series A preferred stock $ 1 $ 1 Common stock 10 9 Additional paid-in-capital 13,870 12,286 Accumulated deficit (4,658) (3,428) Net unrealized holding gains (losses) on securities available-for-sale (196) 36 -------- -------- Total shareholders' equity $ 9,027 $ 8,904 ======== ======== CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in thousands) Equity in net income (loss) of subsidiary $(1,230) $ 10 $ 181 ------- ------- ------- Net income (loss) $(1,230) $ 10 $ 181 ======= ======= ======= 69 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 15. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY--CONTINUED CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in thousands) Cash flows from operating activities: Net income (loss) $(1,230) $ 10 $ 181 Equity in net income (loss) of subsidiary 1,230 (10) (181) ------- ------- ------- Net cash provided by operating activities -- -- -- ------- ------- ------- Cash flows from investing activities: Investment in subsidiary (1,561) (1,783) (76) ------- ------- ------- Net cash used in investing activities (1,561) (1,783) (76) ------- ------- ------- Cash flows from financing activities: Issuance of preferred stock 203 797 -- Issuance of common stock 1,382 1,065 76 ------- ------- ------- Net cash provided by financing activities 1,585 1,862 76 ------- ------- ------- Net increase in cash and cash equivalents 24 79 -- Cash and cash equivalents at beginning of year 265 186 186 ------- ------- ------- Cash and cash equivalents at end of year $ 289 $ 265 $ 186 ======= ======= ======= 16. REGULATORY MATTERS The Bank engages in the commercial banking business, with a particular focus on serving Blacks, Hispanics and women, and is subject to substantial competition from financial institutions in the Bank's service area. As a bank holding company and a banking subsidiary, the Company and the Bank, respectively, are subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and are required to maintain capital requirements established by those regulators. Prompt corrective actions may be taken by those regulators against banks that do not meet minimum capital requirements. Prompt corrective actions range from restriction or prohibition of certain activities to the appointment of a receiver or conservator of an institution's net assets. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) for capital adequacy purposes. Management believes, as of December 31, 1999, that the Bank meets the capital adequacy requirements to which it is subject. 70 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 16. REGULATORY MATTERS - CONTINUED In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement ("Agreement") with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. This will require an increase in capital and/or a reduction in assets. To achieve this capital ratio, Management has developed plans that include: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management has begun to address all matters outlined in the Agreement and expects to be in full compliance with its terms and conditions within the required timelines. Failure to comply could result in additional regulatory supervision and/or actions. Beginning in 1996, the Bank has operated under a Supervisory Letter from its primary regulator. The Supervisory Letter prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and Company from issuing long-term debt. The most recent notification dated February 10, 2000, from the Federal Reserve Bank categorized the Bank as "adequately" capitalized under the regulatory framework for prompt and corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. The Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. The Company's and the Bank's actual capital amounts and ratios are as follows: (IN THOUSANDS) TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------------------------- --------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 1999: TOTAL CAPITAL TO RISK- WEIGHTED ASSETS: COMPANY (CONSOLIDATED) $ 7,564 12.44% $ 4,864 equal or greater than 8.00% N/A BANK 7,275 12.07 4,822 equal or greater than 8.00 6,027 equal or greater than 10.00% TIER 1 CAPITAL TO RISK- WEIGHTED ASSETS: COMPANY (CONSOLIDATED) 6,794 11.18 2,431 equal or greater than 4.00 N/A BANK 6,505 10.80 2,409 equal or greater than 4.00 3,614 equal or greater than 6.00% TIER 1 CAPITAL TO AVERAGE ASSETS: COMPANY (CONSOLIDATED) 6,794 5.08 5,350 equal or greater than 4.00 N/A BANK 6,505 4.87 5,343 equal or greater than 4.00 6,679 equal or greater than 5.00% 71 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 16. REGULATORY MATTERS - CONTINUED TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------------------------- --------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of December 31, 1998: Total capital to risk- weighted assets: Company (consolidated) $9,502 17.48% $4,349 equal or greater than 8.00% N/A Bank 9,236 16.99 4,349 equal or greater than 8.00 5,436 equal or greater than 10.00% Tier 1 capital to risk- weighted assets: Company (consolidated) 8,823 16.23 2,175 equal or greater than 4.00 N/A Bank 8,557 15.74 2,175 equal or greater than 4.00 3,262 equal or greater than 6.00% Tier 1 capital to average assets: Company (consolidated) 8,823 7.67 4,601 equal or greater than 4.00 N/A Bank 8,557 7.44 4,601 equal or greater than 4.00 5,751 equal or greater than 5.00% 17. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, 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. 18. EARNINGS PER SHARE COMPUTATION In accordance with SFAS No. 128, income (loss) per share is calculated as follows: YEAR ENDED DECEMBER 31, 1999 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ NET LOSS $(1,230,222) =========== BASIC LOSS PER SHARE LOSS AVAILABLE TO STOCKHOLDERS $(1,230,222) 995,699 $(1.24) =========== ======== ====== YEAR ENDED DECEMBER 31, 1998 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net income $ 9,933 ======= Basic EPS Income available to stockholders $ 9,933 845,902 $0.01 ======= ======= ===== 72 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999 and 1998 18. EARNINGS PER SHARE COMPUTATION--CONTINUED YEAR ENDED DECEMBER 31, 1997 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net income $180,590 Basic income per share Income available to stockholders $180,590 818,240 $0.22 ======== ======= ===== Effect of dilutive securities Warrants 7,733 ------- Diluted EPS Income available to common stockholders Plus assumed conversions $180,590 825,973 $0.22 ======== ======= ===== 73 EXHIBIT INDEX 3(i) Articles of Incorporation (Incorporated by reference to Registrant's 1997 Form 10-K). 3(ii) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K). 9.l Voting Trust Agreement with NationsBank (Incorporated by reference to Registrant's 1997 Form 10-K). 9.2 Voting Trust Agreement with Fahnstock (Incorporated by reference to Registrant's 1997 Form 10-K). 10.1 Lease Agreements between the Bank and various landlords. 10.2 Lease Agreement between ECC Properties, LLC and the Bank 10.3 Lease Agreement between the Bank and Philadelphia United Community Development Corporation. 10.4 Written Agreement by and among United Bancshares, Inc., United Bank of Philadelphia and Federal Reserve Bank of Philadelphia 11. Statement of Computation of Earnings Per Share. Included at Item 8 hereof. 12. Statement of Computation of Ratios. Included at Item 8 hereof. 23. Consent of Independent Accountants. 27. Financial Data Schedule. 74