SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1996 OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM ______________ TO _____________
UNITED BANCSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2802415
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
714 Market Street, Philadelphia, PA 19106
----------------------------------- -----
(Address of principal executive office) (Zip Code)
(215) 829-2265
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Registrant has two classes of capital stock authorized - 2,000,000 shares
of $.01 par value common stock, of which as of October 31, 1996, 809,422 shares
were issued and outstanding and 500,000 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 80,650 shares
were outstanding as of October 31, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
United Bancshares, Inc. Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
Cash and due from banks 4,523,721 2,620,372
Interest bearing deposits with banks 316,502 305,175
Federal funds sold 2,460,000 7,900,000
---------- ----------
Cash & cash equivalents 7,300,223 10,825,547
Investment securities:
Held-to-maturity, at amortized cost 9,054,656 8,070,348
Available-for-sale, at market value 5,749,341 8,669,695
Loans, net of unearned discount 66,899,485 62,172,571
Less: allowance for loan losses (509,736) (476,132)
---------- ----------
Net loans 66,389,749 61,696,439
Bank premises & equipment, net 1,595,747 1,573,759
Accrued interest receivable 1,414,850 1,197,423
Deferred branch acquisition cost 174,156 233,197
Prepaid expenses and other assets 721,735 368,804
---------- ----------
Total Assets 92,400,457 92,635,212
========== ==========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 12,414,946 8,568,450
Demand deposits, interest bearing 13,602,861 11,911,190
Savings deposits 23,838,869 22,997,104
Time deposits, $100,000 and over 8,589,307 13,544,983
Time deposits less than $100,000 25,225,378 27,206,277
---------- ----------
83,671,361 84,228,004
Long-term debt 82,047 103,962
Accrued interest payable 467,976 489,234
Accrued expenses and other liabilities 1,358,853 344,177
---------- ----------
Total Liabilities 85,580,237 85,165,377
Shareholders' equity:
Preferred Stock, Series A, non-cumulative, 6%, $.01 par value, 932 932
500,000 shrs authorized., 93,150 issued & outstanding
Common stock, $.01 par value; 2,000,000 shares authorized;
809,422 and 802,480 issued and outstanding, respectively 8,094 8,024
Additional-paid-in-capital 10,335,770 10,210,581
Accumulated deficit (3,511,921) (2,786,937)
Net unrealized losses on available-for-sale securities (12,655) 37,236
---------- ----------
Total shareholders' equity 6,820,220 7,469,835
---------- ----------
92,400,457 92,635,212
========== ==========
</TABLE>
<PAGE>
United Bancshares, Inc. Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Quarter ended Quarter ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,398,652 $1,261,505 $4,119,188 $3,806,512
Interest on investment securities 332,502 250,066 751,888 742,696
Interest on Federal Funds sold 56,506 101,164 199,591 341,078
Interest on time deposits with other banks 5,606 3,541 15,306 7,439
---------- ---------- ---------- ----------
Total interest income 1,793,266 1,616,276 5,085,973 4,897,725
---------- ---------- ---------- ----------
Interest Expense:
Interest on time deposits 406,587 425,322 1,234,147 1,290,381
Interest on demand deposits 76,297 75,701 221,089 224,107
Interest on savings deposits 128,631 132,215 380,778 385,385
Interest on borrowed funds 74,913 1,532 77,521 4,921
---------- ---------- ---------- ----------
Total interest expense 686,428 634,770 1,913,535 1,904,794
---------- ---------- ---------- ----------
Net interest income 1,106,838 981,506 3,172,438 2,992,931
Provision for loan losses 22,500 10,000 62,500 63,166
---------- ---------- ---------- ----------
Net interest income less provision for
loan losses 1,084,338 971,506 3,109,938 2,929,765
Noninterest income:
Gain on sale of loans 7,852 1,799 8,140 3,510
Customer service fees 242,270 175,550 651,824 473,942
(Loss) Gain on sale of investments 0 0 9,157 0
Other income 69,884 15,964 113,549 45,269
---------- ---------- ---------- ----------
Total noninterest income 320,006 193,313 782,670 522,721
Non-interest expense
Salaries, wages, and employee benefits 560,818 600,290 1,690,275 1,706,274
Occupancy and equipment 229,549 212,409 633,668 609,685
Office operations & supplies 133,374 131,369 371,892 380,825
Marketing & public relations 38,235 14,986 100,944 69,649
Professional services 53,523 58,604 151,562 175,611
Data processing 247,378 167,389 699,268 463,098
Other noninterest expense 633,082 181,246 969,387 581,706
---------- ---------- ---------- ----------
Total non-interest expense 1,895,959 1,366,293 4,616,996 3,986,848
Net loss ($491,615) ($201,474) ($724,388) ($534,362)
========== ========== ========== ==========
Loss per share ($0.61) ($0.27) ($0.89) ($0.71)
========== ========== ========== ==========
Weighted average number of shares 809,422 756,605 809,422 756,605
========== ========== ========== ==========
</TABLE>
<PAGE>
United Bancshares, Inc. Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss (724,984) (535,361)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses 62,500 63,166
Gain on sale of loans (8,140) --
Depreciation and amortization 349,836 356,351
Realized investment securities gains (9,157) --
Increase in accrued interest
receivable and other assets (570,358) (13,000)
Increase (decrease) in accrued interest payable
and other liabilities 993,418 (147,000)
---------- ---------
Net cash used in operating activities 93,115 (275,844)
Cash flows from investing activities
Purchase of investments-Available-for-Sale (3,504,882) --
Purchase of investments-Held-to-Maturity (6,095,331) --
Proceeds from maturity & principal reductions of
investments-Available-for-Sale 1,782,588 1,625,186
Proceeds from maturity & principal reductions of
investments-Held-to-Maturity 5,112,809 273,172
Proceeds from sale of investment securities-Available-for-Sale 4,562,444 --
Net increase in loans (4,747,670) (5,917,647)
Residential mortgage loans sold to other institutions -- 10,417,481
Purchase of premises and equipment (275,099) (157,335)
---------- ---------
Net cash provided by investing activities (3,165,141) 6,240,857
Cash flows from financing activities
Net (decrease) in deposits (556,643) (9,432,000)
Repayments on long term debt (21,915) (20,839)
Net proceeds from issuance of common stock 125,260 171,111
---------- ---------
Net cash used in financing activities (453,298) (9,281,728)
Decrease in cash and cash equivalents (3,525,324) (3,316,715)
Cash and cash equivalents at beginning of period 10,010,743 15,300,000
Cash and cash equivalents at end of period 6,485,419 11,983,285
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 1,938,666 1,915,840
Write-down of cumulative effect of change in method
of accounting for investment securities -- (446,452)
========== =========
</TABLE>
Notes to Financial Statements
September 30, 1996
Note 1--Regulatory Matters
In May 1995, as a result of a regulatory examination completed in February 1995,
the Bank entered into a Memorandum of Understanding with the Federal Reserve
Bank of Philadelphia with regard to, among other things, achievement of agreed
upon capital levels, implementation of a viable earnings plan and addressing
interest rate sensitivity risks. Effective July 26, 1996, the Memorandum of
Understanding was terminated as a result of the Bank's full compliance with its
terms as indicated in an examination completed as of March 31, 1996 and noted
improvements in the Bank's policies and procedures, internal controls and
capital position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 report. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis.
Selected Financial Data
The following table sets forth selected financial data for the each of the
following periods:
(Thousands of dollars, except per share data)
Quarter ended Quarter ended
September 30, 1996 September 30, 1995
------------------ ------------------
Net interest income $1,107 $982
Provision for loan losses 23 10
Noninterest income 320 194
Noninterest expense 1,895 1,367
Net income (loss) $(492) $(201)
Loss per share $(0.61) $(0.27)
Balance sheet totals: September 30, 1996 December 31,1995
------------------ ----------------
Total assets $92,400 $92,635
Loans, net $66,390 $61,696
Investment securities $14,804 $16,739
Deposits $83,671 $84,228
Shareholders' equity $ 6,820 $ 7,470
Ratios
Return on assets (1.98)% (.87)%
Return on equity (29.9)% (11.83)%
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 the following
table indicates how the Bank has managed these elements. Average funding uses
increased approximately $6.9 million or 7.4% during the quarter ending September
30, 1996. Average funding sources increased approximately $7.5 million or 8.7%
for the same quarter in 1996.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
Average Increase (Decrease) Average
Balance Amount % Balance
------- ------ --- -------
<S> <C> <C> <C> <C>
Funding uses:
Loans $66,755 $ 1,889 2.91% $64,867
Investment securities
Held-to-maturity 9,053 1,195 15.21% 7,858
Available-for-sale 12,662 5,893 87.07% 6,768
Federal funds sold 3,869 (2,105) (35.23%) 5,974
------- -------- -------
Total uses $92,339 $ 6,872 $85,467
======= ======== =======
Funding sources:
Demand deposits
$11,902 $ 1,061 9.79% $10,841
Noninterest-bearing
Interest-bearing 12,034 (142) (1.17%) 12,176
Savings deposits 20,144 (46) (.23%) 20,190
Time deposits 34,497 (270) (.78%) 34,767
Other borrowed funds 6,964 6,870 7,282.69% 94
------- -------- --------- -------
Total sources $85,541 $ 7,473 $78,068
======= ======== =======
</TABLE>
Loans
Average loans increased by approximately $1.9 million or 2.91% during the
quarter ended September 30, 1996. The increase in loans during this period was
primarily due the origination of more than $1.1 million in student loans and
approximately $500 thousand in consumer loans during the quarter. Commercial and
residential mortgage loans remained relatively stable during the quarter.
Investment Securities and other short-term investments
Investment securities, increased on average by 48.5% or $7.1 million during the
quarter ended September 30, 1996. The increase was primarily related to a $10
million reverse repurchase agreement the Bank entered into in July 1996 for
which the underlying collateral was a U.S. Treasury Note. This transaction
matured in September 1996.
Deposits
Non-interest bearing demand deposits increased on average by approximately $1.1
million or 9.79% during the quarter ended September 30, 1996. The increase was
primarily due to continued marketing of two new demand deposit product offerings
which began in 1995--the "free" checking and "entrepreneurial-25" checking. In
addition, the Bank has strict enforcement of compensating balance arrangements
with commercial loan borrowers which has resulted in additional demand deposits.
In line with the Bank's deposit mix strategy, there was decline in certificates
of deposit. In general, to better control its cost of funds and maximize its net
interest margin, the Bank seeks to replace higher cost certificates with other
lower cost core deposit products.
Loans
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
September December
30, 1996 31, 1995
-------- --------
Commercial and industrial $ 10,085 $ 8,021
Commercial real estate 606 627
Consumer loans 20,201 16,254
Residential mortgages 36,008 37,271
------- -------
Total Loans $66,900 $62,173
======= =======
Although declining, residential mortgage loans at September 30, 1996 continue to
comprise the greatest percentage of total loans representing approximately 53.8%
of total loans compared to 60% at December 31, 1995. Residential mortgage loans
continue to decline as a result of payoffs/paydowns and are being replaced with
commercial loans (primarily SBA guaranteed) and consumer loans (primarily
student loans).
Non-performing and Non-accrual Loans
The Bank generally determines a loan to be "non-performing" 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 "non-performing"
before the lapse of 90 days. The Bank's policy is to charge-off unsecured loans
after 90 days past due. Interest on "non-performing" loans ceases to accrue
except for loans which are well collateralized and in the process of collection.
When a loan is placed on non-accrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of and interest on the loan appears to be available. At
September 30, 1996, non-accrual loans were $932 thousand. Approximately $493
thousand of the total non accrual loans were residential mortgages while the
remainder consisted primarily of loans with SBA guarantees.
<PAGE>
Commitments and Lines of Credit
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit, which are conditional commitments issued by the Bank to guarantee the
performance of an obligation of a customer to a third party. Both arrangements
have credit risk essentially the same as that involved in extending loans, and
are subject to the Bank's normal credit policies. Collateral may be obtained
based on management's assessment of the customer. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments is represented by the contractual amount of those instruments.
The Bank's financial instrument commitments at September 30, 1996 are summarized
below:
Commitments to extend credit $3,375,000
Outstanding letter of credit $ 115,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rate.
The Bank's principal source of asset liquidity included marketable securities
consisting principally of U.S. Government and agency issues held in its
"available for sale" investment category and mortgage-backed securities with
monthly repayments of principal and interest. Securities held in the "available
for sale" investment category totaled approximately $5.7 million Other types of
assets such as federal funds sold paydowns on mortgage-backed securities and
residential mortgage loans, as well as maturing loans , are sources of
liquidity. Approximately $4.9 million of the loan portfolio is scheduled to
mature within one year.
The Bank is required to maintain minimum levels of liquid assets as defined by
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.
<PAGE>
The Bank's overall liquidity has been enhanced by the significant level of core
deposits. Core deposits represented approximately $78 million or 90% of total
deposits at September 30, 1996. The Bank has avoided reliance on large
denomination time deposits as well as brokered deposits.
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at September 30, 1996:
(Thousands of dollars)
----------------------
3 months or less $3,446
Over 3 through 12 months 4,730
Over 1 through five years 309
Over five years 104
------
Total $8,589
======
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to prime or other short term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than passbook savings
accounts. The shorter term interest rate sensitivities are key to measuring the
interest sensitivity gap, or excess earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations.
The following table sets forth the maturity distribution of the Bank's interest
earning assets and interest bearing liabilities at September 30, 1996, 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 September 30, 1996, an asset sensitive position of
+.04% is maintained on a cumulative basis through 1 year. This is a relatively
balanced position. Generally, because of the Bank's balanced gap position in
shorter time frames, the Bank can anticipate that increases or decreases in
market rates will not have a significant impact on net interest income. During
1995, the Bank re-evaluated its deposit base to better identify core deposits
based on historical data. 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 pushed out to longer
repricing intervals versus immediate repricing time frames making the analysis
more reflective of the Bank's historical experience.
<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of September 30, 1996
More than More than More than More than
0 to 3 3 to 6 6 to 12 1 to 5 5
(Thousands of dollars) months months months years years Cumulative
- ---------------------- ------ ------ ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Time deposits 102 -- 215 -- -- 317
Investment securities:
Held-to-maturity 2,468 2,098 1,500 2,988 -- 9,054
Available-for-sale 4,427 927 -- 5,354
Mutual funds 79 79
Federal funds sold 2,460 2,460
Fixed rate loans 199 139 267 2,632 34,354 37,591
Floating rate loans 23,189 326 4,731 131 28,377
Total interest-sensitive assets 32,924 2,563 6,713 6,678 34,354 83,232
------ ------ ------ ------ ------ ------
Cumulative totals 32,924 35,487 42,200 48,878 83,232
------ ------ ------ ------ ------
Interest-sensitive liabilities
Interest checking accounts 143 429 1,775 3,378 5,725
Money market accounts 299 898 3,713 7,066 11,976
Savings accounts 494 1,481 6,119 11,647 19,740
Certificates less than $100,000 6,741 6,035 5,864 6,586 25,226
Certificates more than $100,000 3,446 3,496 1,234 309 104 8,589
Other borrowings 82 82
------ ------ ------ ------ ------ ------
Total interest-sensitive liabilities 11,123 12,339 18,705 29,067 104 71,338
Cumulative totals 11,123 23,642 42,167 71,234 71,338
====== ====== ====== ====== ======
Interest sensitivity gap 21,801 (9,776) (11,992) (22,389) 34,250
====== ====== ====== ====== ======
Cumulative gap 20,572 11,764 753 (22,356) 11,894
====== ====== ====== ====== ======
Cumulative gap/total earning assets 26.19% 14.45% .04% (26.76%) 14.39%
====== ====== ====== ====== ======
Interest sensitive assets to
interest sensitive liabilities 2.96 .21 .36 .23 .00
====== ====== ====== ====== ======
</TABLE>
During June, 1996 banking regulators issued a "Joint Agency Policy Statement:
Interest Rate Risk" (FDICIA 305). The agencies agreed that the focus should be
on the risk to both net interest income (or net income) as outlined above in the
traditional gap analysis and economic (or fair) value of equity. The premise is
that changes in interest rates affect a bank's earnings by changing its net
interest income and the level of other interest-sensitive income and operating
expenses. However, changes in interest rates also affect the underlying economic
value of the bank's assets, liabilities and off-balance sheet instruments
because the present value of future cash flows and some cases, cash flows
themselves, change when interest rates change. The combined effects of the
changes in these present values reflect the change in the bank's underlying
economic value. At a minimum. this Policy Statement requires that policies and
procedures be implemented to determine acceptable levels of Interest Rate Risk
Exposure, given the Bank's profile and capital position and to monitor and
control the bank's overall interest rate risk. The regulators did not quantify
the impact on capital standards in their policy statement, but left it up to
banks to determine their own limits, with a minimum requirement based on
exposure to a +/- 200 basis point rate change.
The Bank is currently in the process of revising its policies and procedures to
conform with FDICIA 305. An estimated fair value simulation (per FDICIA 305: +/-
200 basis point rate shock) as of September 30, 1996, demonstrates slightly
above average risk with Fair Value Equity increasing .75% in a -200 basis point
rate environment and declining 1.70% in a +200 basis point rate environment.
This analysis indicates that United Bank has more exposure to increasing rates
than to decreasing rates, consistent with most of the banking industry.
<PAGE>
Capital Resources
The Bank maintains an adequate capital base to take advantage of business
opportunities while ensuring that it has resources to absorb the risks inherent
in the business. The Federal Reserve Board's standards for measuring capital
adequacy for U.S. Banking organizations requires that banks maintain capital
based on "risk-adjusted" assets so that categories of assets with potentially
higher risk will require more capital backing than assets with lower risk. In
addition, banks are required to maintain capital to support, on a risk adjusted
basis, certain off-balance sheet activities such as loan commitments.
The FRB standards classify capital into two tiers, referred to as Tier 1 and
Tier 2. Tier 1 consists of common shareholders' equity, non cumulative and
cumulative perpetual preferred stock, and minority interests less goodwill. Tier
2 capital consists of allowance for loan losses, hybrid capital instruments,
term subordinated debt, and intermediate-term preferred stock. Banks are
required to meet a minimum ratio of 8% of qualifying capital to risk-adjusted
total assets with at least 4% Tier 1 capital. Capital that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital. The FRB requires "de novo" banks
to maintain a primary capital ratio of 9%. As of March 23, 1995, the Bank's
third year anniversary, the Bank was no longer considered "de novo" by the FRB
for purposes of capital requirements. Therefore, the Bank must meet only the
normal minimum ratios outlined above.
As indicated in the table below, the Bank's risk based capital ratios are well
above the minimum requirements Tier 1 Risk-based Capital ratio has increased and
remains above the 4.0% minimum regulatory guideline. The increase in this ratio
is primarily attributable a decline in the Risk adjusted total assets--while
total assets remained relatively constant, the mix of the bank's assets to
include more government sponsored loans (i.e. SBA and student loans) results
lower risk weighted assets. Conversely, the leverage ratio has decline (but
remains above minimum levels) due to growth in average assets (primarily a
result of the $10 million reverse repurchase agreement the Bank entered into
during the quarter) and an increase in the accumulated deficit as a result of
losses the Bank incurred during the quarter ended September 30, 1996. 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. As of September 30, 1996, the Company had raised approximately $70
thousand in additional capital through the exercise of warrants and the purchase
of additional common stock. The Company and the Bank do not anticipate paying
dividends in the near future.
September 30, December 31,
1996 1995
---- ----
Tier 1 Capital $ 6,559 $ 6,991
Tier 2 Capital 510 476
------- -------
Total Qualifying Capital $ 7,069 $ 7,467
======= =======
Risk Adjusted Total Assets
(including off-balance sheet exposures) $41,309 $51,560
Tier 1 Risk-Based Capital Ratio 15.88% 13.56%
Tier 2 Risk-Based Capital Ratio 17.11% 14.48%
Leverage Ratio 6.57% 8.62%
Results of Operations
Summary
The Bank had a net loss of approximately $492 thousand for the quarter ended
September 30, 1996 compared with a loss of approximately $201 thousand for the
same quarter in 1995. On a per common share basis, this amounts to ($.61) at
September 30, 1996 to ($.27) at September 30,1995.
The increase in the loss is attributable to a one time FDIC SAIF Special
Assessment of approximately $470,000. On September 30, 1996, Congress passed a
Bill to re-capitalize the Savings Association Insurance Fund (SAIF). As a
result, Commercial banks, like United Bank, which were members of the Bank
Insurance Fund (BIF) which owned SAIF-assessable deposits (so-called OAKAR
banks) are required to pay 65.7 basis points of total SAIF-assessable deposits
on November 27, 1996. Because the Bank acquired deposits of failed savings and
loan institutions from the RTC, approximately $71 million of its deposits are
deemed SAIF-assessable. The Bank is in the process of appealing this Special
Assessment and previous SAIF assessments due to tremendous hardship these
assessments cause and the incorrect classification of its deposits under SAIF,
as at the time of acquisition of branches from the RTC, it had over $30 million
in deposits accumulated and insurable under BIF. Further, since its acquisition
of deposits from the RTC, a significant amount of acquired RTC savings and loan
deposits have run-off to less than $20 million. Currently, the Bill does not
make any provision for deposit run-off.
<PAGE>
Excluding the SAIF Special Assessment, the Bank's loss for the quarter ending
September 30, 1996 would have been approximately $20 thousand or .002 per share.
The improvement during the quarter compared to the same quarter in 1995 was a
result of increased earning assets and a higher level of noninterest bearing
accounts. In addition, there was an increased level of noninterest income-- from
$193 thousand in 1995 to $320 thousand in 1996. A $90 thousand settlement in a
case with the RTC and customer service fees accounted for most of the increase
as the number of transactional accounts increased significantly during 1996 as a
result of new checking account products and compensating balance requirements.
Net Interest Income
Net interest income is an effective measure of how well management has balanced
the Bank's interest rate sensitive assets and liabilities. Net interest income,
the difference between (a) interest and fees on interest earning assets and
interest paid on interest-bearing liabilities, is a significant component of the
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 was $1.1 million for the quarter ending September 30, 1996
compared to $982 thousand for the same quarter in 1995. The primary determinant
of the increase was the increase in new loan originations funded by noninterest
bearing demand deposit accounts which resulted in higher net interest margin
spreads. While there was a decline in the net interest margin from 5.05% at
September 30, 1995 to 4.90% at September 30, 1996, the volume of loans
increased, thereby producing more interest income.
Provision for Loan Losses
The provision for loan losses is an expense charged against operating income and
added to the allowance for loan losses. The allowance for loan losses represents
funds which have been set aside for the specific purpose of absorbing losses
which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation of the
risks inherent in the loan portfolio, both generally and with respect to
specific loans and the state of the economy. It is the Bank's practice to
maintain an allowance based on the classification of its portfolio which equals
at a minimum the sum of the following: 100% of all loans classified as "loss";
50% of all loans classified as "doubtful", 20% of all loans classified as
"substandard"; and 10% of all loans classified as "watch".
The allowance as a percentage of total loans was .74% at September 30, 1996,
slightly lower than the December 1995 ration of .78%. The reduction in the
allowance is due to charge-offs and a change in the mix of the Bank's loan
portfolio toward an increasing percentage of residential mortgage loans, Small
Business Administration (SBA) guaranteed loans and guaranteed student loans for
which the exposure is minimized due to collateral or other related guarantee
features Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, management believes that the allowance
is adequate in light of all known relevant factors. There was a net provision of
$22,500 made to the allowance for loan losses during the quarter ended September
30, 1996 compared to $10,000 for the same quarter in 1995. The net charge-offs
during the quarter ended September 30, 1996 were approximately $23 thousand.
Noninterest Income
The amount of the Bank's noninterest income generally reflects the volume of the
transactional and other accounts handled by the Bank and includes such fees and
charges as low balance account charge, overdrafts, account analysis, and other
customer service fees. Deposit related noninterest income increased from .81% of
average total assets to 1.04% from the quarter ended September 30, 1995 to the
quarter ended September 30, 1996. The increase is primarily attributable to an
increase in transactional deposit accounts as a result of new successful product
offerings--"free" checking" and "entrepreneurial-25" checking as well as
enforcement of compensating balance arrangements. In addition, during September
1996, the Bank implemented a surcharge of $.75 per transaction for all
non-customer use of it Automated Teller Machines (ATMs).
<PAGE>
Noninterest expense
Excluding the SAIF Special Assessment, salaries and benefits represented 39% and
44% of the total noninterest expense for the quarters ended September 30, 1996
and 1995, respectively. The level of salary and benefits decreased as a result
of attrition and streamlining of staffing levels.
Excluding the SAIF Special Assessment, data processing expenses represented
17.3% and 12.3% of the total noninterest expense for the quarters ended
September 30, 1996 and 1995, respectively. In general, data processing expenses
are a result of the Bank's management decision to out source data processing to
third party processors the bulk of its data processing. Such expenses are
reflective of the high level of accounts being serviced for which the Bank is
charged a per account charge by processors. The increase for the quarter ended
September 30, 1996 compared to the same quarter in 1995 is primarily
attributable to an increased level of student loans for which the Bank pays an
outside vendor to process. In addition, the Bank uses outside loan servicing
companies to service its mortgage, credit card, and installment loan portfolios.
Occupancy and equipment expense increased approximately $17,000 from the quarter
ended September 30, 1995 compared to the quarter ended September 30, 1996. This
increase is primarily attributed to annual escalations in lease payments and new
maintenance contract entered into to service the Bank's growing ATM network. In
addition, In July 1996, the Bank entered into a lease for a new branch it opened
in West Philadelphia.
All other expenses are reflective of the general cost to do business in the
current regulatory environment and maintenance of adequate insurance coverage.
Significant Financial Ratios
Quarter ended Quarter ended
September 30, 1996 September 30, 1995
------------------ ------------------
Return on Equity (29.9%) (7.9%)
Return on Assets (1.98%) (.61%)
Results of operations can be measured by various ratio analysis. Two widely
recognized performance indicators are the return on equity and the return on
assets. The Bank's return on equity decreased from (7.9%) to (29.9%) for the
quarters ended September 30, 1995 and 1996, respectively. In addition, the
Bank's return on assets decreased from (.61%) to (1.98%) for the quarters ended
September 30, 1995 and 1996, respectively. Decreases were solely due to the SAIF
Special Assessment.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
United Bank of Philadelphia (Plaintiff) settled its suit against the
Resolution Trust Corporation (Defendant) filed on March 31, 1995 in the Federal
District Court for the Eastern District of Pennsylvania. The Plaintiff alleged
that a contract entered into with the Defendant requires that the Defendant pay
the Plaintiff accrued interest on a designated loan portfolio from the date 45
days after the resolution of the former Ukrainian Federal Savings and Loan
Association, a branch of which was purchased by the Plaintiff on June 21, 1994,
through December 21, 1994. Defendant argued that the interest due pursuant to
the contract should be reduced by the fed funds rate applicable to that time
period.
The case was heard by the Federal District Court for the Eastern District
of Pennsylvania in April, 1996. The case resulted in a hung jury. As a result,
no verdict was rendered. The Bank and the RTC settled the case upon a payment by
the RTC's successor in interest, the Federal Deposit Insurance Corporation to
the Bank of $90 thousand. As a result of the settlement, the Bank withdrew its
case.
Item 2. Working Capital Restrictions on Payment of Dividends.
The holders of the Common Stock are entitled to such dividends as may be
declared by the Board of Directors out of funds legally available therefor under
the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking
Code of 1965, funds available for cash dividend payments by a bank are
restricted to accumulated net earnings and if the surplus of a Bank is less than
the amount of its capital the Registrant shall, until surplus is equal to such
amount, transfer to surplus an amount which is at least 10% of the net earnings
of the Registrant for the period since the end of the last fiscal year or any
shorter period since the declaration of a dividend. If the surplus of a bank is
less than 50% of the amount of its capital, no dividend may be declared or paid
by the bank without prior approval of the Secretary of Banking of the
Commonwealth of Pennsylvania.
Under the Federal Reserve Act, if a bank has sustained losses up to or
exceeding its undivided profits, no dividend shall be paid, and no dividends can
ever be paid in an amount greater than such bank's net profits less losses and
bad debts. Cash dividends must be approved by the Federal Reserve Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Registrant's net profits
for that year plus its retained net profits from the preceding two years, less
any required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the Board has the power to prohibit the
payment of cash dividends by a bank if it determines that such a payment would
be an unsafe or unsound banking practice.
The Federal Deposit Insurance act generally prohibits all payments of
dividends a bank which is in default of any assessment to the Federal Deposit
Insurance Corporation.
<PAGE>
Item 3. Defaults Upon Senior Securities.
(a) There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any material default with
respect to any indebtedness of the Registrant exceeding five percent of the
total assets of the Registrant.
(b) There have been no material arrearage or delinquencies as discussed in
Item 3(b). Registrant has declared and issued a Series A Preferred Stock, no
obligations pursuant to those securities have become due.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters have been submitted to a vote of security holders.
Item 5. Other Information.
Bancshares Limited offering of Common Stock and Warrants
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 were
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), will be issued at $12.00 per unit. The
warrant exercise price will be $8.00 per share for the 1996 Warrant (exercisable
March 23, 1996 to March 30, 1996), $9.00 per share for the 1997 Warrant
(exercisable March 23, 1997 to March 30, 1997), and $10.00 per share for the
1988 Warrant (exercisable March 23, 1998 to March 30, 1998). The exercise price
of the warrants may be adjusted to avoid dilution of warrant holders. 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 September 30, 1995.
A copy of the Offering Memorandum was filed with the Registrant's periodic
report on Form 10-Q for the period ending June 30, 1995 and is incorporated by
reference.
Pursuant to the exercise of the 1996 warrants, the Registrant has received
offers to purchase an additional 6,690 shares of its common stock at $8.00 per
share. These shares were sold pursuant to an exemption from registration
contained in section 4(2) of the Act. No underwriters were used and no
commissions were paid as a result of this warrant exercise.
Establishment of Branch Location of the Bank
On July 22, 1996, the Bank established a new branch location at 3750
Lancaster Avenue, Philadelphia, Pennsylvania. The location comprised of
approximately 3000 square feet including a lobby and teller area, customer
service center and branch staff offices. The location was established pursuant
to applications submitted to the Federal Reserve Bank of Philadelphia and the
Pennsylvania Department of Banking. The facility is leased by the Bank
<PAGE>
at a monthly rental of $1,891.50, pursuant to the terms of a lease assumed from
Midlantic Bank, N.A., the prior occupant of the facility. A definitive lease for
the facility is attached as an exhibit hereto.
FDIC Special Assessment.
As a result of Section 205 of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") the Federal Deposit Insurance Corporation
("FDIC") became the primary insurer for all thrift institutions whose deposits
were previously insured by the Federal Savings and Loan Insurance Corporation
("FSLIC").
Under FIRREA two separate insurance funds were created to insure the
deposits of banks and savings associations. The two funds are the Bank Insurance
Fund ("BIF") to insure bank deposits, and the Savings Association Insurance Fund
("SAIF") to insure savings association deposits.
The FDIC sets assessments, or premium rates, for deposit insurance
annually. Each of SAIF and BIF rates are established independently. As a result
of closures experienced in the thrift industry in the 1980s, the SAIF fund
experienced substantial capital expenditures and is, as a result, severely
undercapitalized.
Pursuant to its acquisitions of various deposits from the Resolution Trust
Corporation ("RTC"), the Bank submitted an Oakar application to the FDIC for
permission to acquire SAIF deposits. As a result of the Oakar transaction,
thereafter, a portion of the Bank's deposits continued to be insured by SAIF.
In order to remedy the ailing SAIF, Congress passed the Deposit Insurance
Funds Act of 1996 (the "Funds Act"). Pursuant to the Funds Act, the FDIC issued
a final rule calling for a special assessment of SAIF insured institutions to
recapitalize the fund. As a result, the Bank received an invoice for
$522,161.92. The Bank has filed an appeal to the calculation of the assessment
based upon errors in calculation and a hardship exemption, claiming that to pay
the special assessment would act as an undue hardship on the Bank. The Bank
expects a determination based on its appeal within several weeks.
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits submitted with this Form 10-Q are as follows:
Copy of the Registrant's Call Report for the Period ending
June 30, 1996.
Lease Agreement between United Bancshares, Inc. and Horowitz & Hertzfeld
dated July 22, 1996.
(b) No reports on Form 8-K have been filed during the quarter for
which this Form 10-Q is filed.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCSHARES, INC.
Date November 13, 1996 /s/ Emma C. Chappell
--------------------
Emma C. Chappell
Chairman, President & CEO
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