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, 1997 OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
_____________
UNITED BANCSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
0-25976
-------
SEC File Number
Pennsylvania 23-2802415
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, 1997, 816,355 shares
were issued and outstanding and 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 93,150
shares were outstanding as of October 31, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
United Bancshares, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Cash and due from banks 3,215,650 3,544,110
Interest bearing deposits with banks 331,182 320,202
Federal funds sold 11,266,000 5,380,000
------------ -----------
Cash & cash equivalents 14,812,832 9,244,312
Investment securities:
Held-to-maturity, at amortized cost 10,907,717 8,476,638
Available-for-sale, at market value 7,699,635 5,983,461
Loans held for sale, net of unearned discount 4,906,455
Loans, net of unearned discount 64,557,270 64,717,914
Less: allowance for loan losses (472,768) (527,507)
------------ -----------
Net loans 64,084,502 69,096,862
Bank premises & equipment, net 1,883,662 1,788,937
Accrued interest receivable 1,338,476 1,376,416
Deferred branch acquisition cost 95,433 154,475
Prepaid expenses and other assets 714,459 648,300
============ ===========
Total Assets 101,536,716 96,769,401
============ ===========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 16,027,463 12,393,256
Demand deposits, interest bearing 15,896,831 13,126,327
Savings deposits 22,462,779 23,484,301
Time deposits, $100,000 and over 10,968,825 14,001,981
Time deposits 26,694,879 25,755,107
------------ -----------
92,050,777 88,760,971
Long-term debt 51,546 74,561
Reverse Repurchase Agreement 1,327,091
Accrued interest payable 528,190 525,161
Accrued expenses and other liabilities 558,468 650,040
------------ -----------
Total Liabilities 94,516,071 90,010,733
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932
500,000 shrs auth., 93,150 issued and outstanding
Common stock, $.01 par value; 2,000,000 shares authorized;
820,095 and 816,355 shares issued and
outstanding 1997 & 1996, respectively 8,201 8,164
Additional-paid-in-capital 10,383,208 10,348,989
Accumulated deficit (3,465,506) (3,618,692)
Net unrealized gain on available-for-sale securities 93,811 19,276
------------ -----------
Total shareholders' equity 7,020,645 6,758,668
============ ===========
101,536,716 96,769,401
============ ===========
</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,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,522,981 $1,398,652 $4,429,595 $4,119,188
Interest on investment securities 293,227 332,502 749,333 751,888
Interest on Federal Funds sold 105,387 56,506 331,380 199,591
Interest on time deposits with other banks 5,614 5,606 21,210 15,306
---------- ---------- ---------- ----------
Total interest income 1,927,208 1,793,266 5,531,517 5,085,973
Interest Expense:
Interest on time deposits 462,499 406,587 1,392,692 1,234,147
Interest on demand deposits 98,714 76,297 266,841 221,089
Interest on savings deposits 115,067 128,631 345,873 380,778
Interest on borrowed funds 15,856 74,913 40,171 77,521
---------- ---------- ---------- ----------
Total interest expense 692,136 686,428 2,045,577 1,913,535
---------- ---------- ---------- ----------
Net interest income 1,235,072 1,106,838 3,485,940 3,172,438
Provision for loan losses 30,000 22,500 75,000 62,500
---------- ---------- ---------- ----------
Net interest income less provision for
loan losses 1,205,072 1,084,338 3,410,940 3,109,938
---------- ---------- ---------- ----------
Noninterest income:
Gain on sale of loans 66,106 7,852 186,968 8,140
Customer service fees 302,869 242,270 861,445 651,824
Gain on sale of investments 9,157
Other income 40,844 69,884 109,675 113,549
---------- ---------- ---------- ----------
Total noninterest income 409,818 320,006 1,158,087 782,670
Non-interest expense
Salaries, wages, and employee benefits 600,441 560,818 1,738,734 1,690,275
Occupancy and equipment 267,983 229,549 750,053 633,668
Office operations and supplies 120,313 133,374 366,303 371,892
Marketing and public relations 52,050 38,235 132,044 100,944
Professional services 80,714 53,523 260,843 151,562
Data processing 219,365 247,378 640,008 699,268
Other noninterest expense 209,777 633,082 527,259 969,387
---------- ---------- ---------- ----------
Total non-interest expense 1,550,643 1,895,959 4,415,244 4,616,996
========== ========== ========== ==========
Net income (loss) $64,247 ($491,615) $153,783 ($724,388)
========== ========== ========== ==========
Earnings (loss) per share $0.08 ($0.61) $0.19 ($0.89)
========== ========== ========== ==========
Weighted average number of shares 820,095 809,422 820,095 809,422
========== ========== ========== ==========
</TABLE>
<PAGE>
United Bancshares, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) 153,783 (724,984)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 75,000 62,500
Gain (loss) on sale of loans 186,968 (8,140)
Depreciation and amortization 403,366 349,836
Realized investment securities loss -- (9,157)
Decrease in accrued interest receivable and other assets (28,219) (570,358)
Increase (decrease) in accrued interest payable and other liabilities (88,544) 993,418
----------- -----------
Net cash provided by operating activities 702,354 93,115
Cash flows from investing activities
Purchase of investments-Available-for-Sale (3,737,744) (3,504,882)
Purchase of investments-Held-to-Maturity (4,562,764) (6,095,331)
Proceeds from maturity & principal reductions of investments-Available-for-Sale 1,558,368 1,782,588
Proceeds from maturity & principal reductions of investments-Held-to-Maturity 2,632,719 5,112,809
Proceeds from sale of investment securities-Available-for-Sale -- 4,562,444
Proceeds from sale of loans 4,407,029 --
Net (increase) decrease in loans 343,364 (4,747,670)
Purchase of premises and equipment (402,346) (275,099)
----------- -----------
Net cash provided by (used in) investing activities 238,624 (3,165,141)
Cash flows from financing activities
Net increase (decrease) in deposits 3,289,806 (556,643)
Repayments on long term debt (23,015) (21,915)
Reverse repurchase agreement 1,327,091 --
Net proceeds from issuance of common stock 33,659 125,260
----------- -----------
Net cash provided by (used in) financing activities 4,627,541 (453,298)
Increase (decrease) in cash and cash equivalents 5,568,519 (3,525,324)
Cash and cash equivalents at beginning of period 9,244,312 10,010,743
Cash and cash equivalents at end of period 14,812,831 6,485,419
============ ===========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 2,034,530 1,938,666
============ ===========
</TABLE>
<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, 1997 September 30, 1996
------------------ ------------------
Net interest income $1,235 $1,107
Provision for loan losses 30 23
Noninterest income 410 320
Noninterest expense 1,551 1,895
Net income (loss) $65 $(492)
Earnings (Loss) per share $.08 $(0.61)
Balance sheet totals: September 30, 1997 December 31, 1996
------------------ -----------------
Total assets $101,537 $96,769
Loans, net $ 64,085 $69,097
Investment securities $ 18,607 $14,460
Deposits $ 92,051 $88,761
Shareholders' equity $ 7,021 $ 6,759
Ratios
Return on assets .15% (.89)%
Return on equity 2.35% (12.02)%
Equity to assets ratio 6.53% 7.45%
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 $942 thousand or .10% during the quarter ending
September 30, 1997. Average funding sources increased $624 thousand for the same
quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
------------------ -------------
Average Increase (Decrease) Average
Balance Amount % Balance
------- ------ ------ -------
<S> <C> <C> <C> <C>
Funding uses:
Loans $68,750 ($ 240) (.35%) $68,990
Investment securities
Held-to-maturity 10,837 868 8.71% 9,969
Available-for-sale 7,053 2,181 44.76% 4,872
Federal funds sold 7,692 (1,867) (19.53%) 9,559
------- ------- -------
Total uses $94,332 $ 942 $93,282
======= ======= =======
Funding sources:
Demand deposits
Noninterest-bearing $17,451 $ 2,340 15.49% $15,111
Interest-bearing 14,924 644 4.51% 14,280
Savings deposits 23,454 57 .25% 23,396
Time deposits 36,834 (2,328) (5.94%) 39,162
Other borrowed funds 1,487 89 (5.65%) 1,576
------- ------- -------
Total sources $94,150 $ 624 $93,526
======= ======= =======
</TABLE>
<PAGE>
Loans
Average loans decreased approximately $240 thousand or .35% during the quarter
ended September 30, 1997. This decrease was primarily due to the sale of
approximately $4.5 million of student loans in September 1997. The proceeds will
be used to purchase higher yielding/lower cost to service consumer loans. While
there were new loan originations during the quarter, they we offset by
paydowns/payoffs in the portfolio.
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
September December
30, 1997 31, 1996
-------- --------
Commercial and industrial $11,688 $10,107
Commercial real estate 1,420 649
Consumer loans 15,984 17,240
Residential mortgages 35,464 36,622
Loans held-for-sale -- 4,906
------- -------
Total Loans $64,556 $69,624
======= =======
Residential mortgage loans at September 30, 1997 continue to comprise the
greatest percentage of total loans ,representing approximately 55% of the total
portfolio. These loans as a percentage of the total portfolio increased during
the quarter as a result of the sale of student loans. However, as the Bank moves
forward to purchase consumer loans and to originate more commercial loans
(primarily SBA guaranteed), this concentration is expected to decrease.
Nonperforming and nonaccrual Loans
The Bank generally determines a loan to be "nonperforming" when interest or
principal is past due 90 days or more. If it otherwise appears doubtful that the
loan will be repaid, management may consider the loan to be "nonperforming"
before the lapse of 90 days. The Bank's policy is to charge-off unsecured loans
after 90 days past due. Interest on "nonperforming" 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, 1997, non-accrual loans were $1 million. Approximately $649
thousand of the total nonaccrual loans were residential mortgages while $297
thousand had SBA guarantees. 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 September 30, 1997, approximately 32.75% of the Bank's commercial loan
portfolio was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At September 30, 1997, none of these loans were
nonperforming.
<PAGE>
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average
by 4.84%, or $1.2 million, during the quarter ended September 30, 1997. The
decrease is due to an increase in the Bank's deposits and the September 1997
sale of $4.5 million student loans for which the sale proceeds were temporarily
placed in Federal Funds Sold. There are plans to use the loan sale proceeds and
other excess liquidity to purchase consumer loans in November 1997.
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.
Deposits
Non-interest bearing demand deposits increased on average by approximately
$2.3 million, or 15.49%, during the quarter ended September 30, 1997. The
increase was primarily due to continuous corporate business development efforts
which resulted in new large demand deposit accounts. In addition, continued
enforcement of compensating balance arrangements with commercial loan borrowers
has resulted in additional demand deposits.
Other Borrowed Funds
The average balance for other borrowed funds decreased $89 thousand, or
5.65%, from June 30, 1997 to September 30, 1997. The decrease is due to the
rollover/reduction of a reverse repurchase agreement from $1.5 million to $1.3
million. The level of other borrowed funds is dependent on many items such as
capital adequacy, loan growth, deposit growth and interest rates paid on these
funds.
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, 1997 are
summarized below:
Commitments to extend credit $2,107,206
Outstanding letter of credit $ 109,000
<PAGE>
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 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. As of September 30, 1997, management believes the
Bank's liquidity is satisfactory and in compliance with the FRB regulations.
The Bank's principal sources of asset liquidity include investment
securities consisting principally of U.S. Government and agency issues,
particularly those of shorter maturities, and mortgage-backed securities with
monthly repayments of principal and interest. Securities maturing in one year or
less amounted to $2.3 million at September 30, 1997, representing 12% of the
investment portfolio. Other types of assets such as federal funds sold, as well
as maturing loans, are sources of liquidity. Approximately $6.4 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.
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at September 30, 1997:
(Thousands of dollars)
----------------------
3 months or less $ 8,973
Over 3 through 12 months 4,240
Over 1 through five years 200
Over five years 111
-------
Total $13,524
=======
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.
<PAGE>
The following table sets forth the maturity distribution of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1997,
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, 1997, a liability sensitive position is
maintained on a cumulative basis through 1 year of -7.01% which is within the
Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current
gap position is primarily due to the high concentration of fixed rate mortgage
loans the Bank has in its loan portfolio but is somewhat mitigated by the Bank's
high level of core deposits which have been placed in longer repricing
intervals. 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 timeframes making the analysis more reflective of the Bank's
historical experience. Generally, because of the Bank's negative gap position in
shorter time frames, the Bank can anticipate that increases in market rates will
have a negative impact on the net interest income, while decreases will have the
opposite effect.
Interest Sensitivity Analysis
Interest Rate Sensitivity Gaps
As of September 30, 1997
<TABLE>
<CAPTION>
More than More than More than More than More than
0 to 3 3 to 6 6 to 12 1 to 3 3 to 5 5 to 15 More than
(Thousands of dollars) months months months years years years 15 years Cumulative
------ ------ ------ ----- ----- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Time deposits -- 288 43 -- -- -- -- 327
Investment securities:
Held-to-maturity 772 -- 2,297 2,501 1,499 3,347 493 10,966
Available-for-sale 4,928 2 649 398 1,402 -- 5,354
Federal funds sold 11,266 -- -- -- -- -- -- 7,845
Loans and leases 20,563 -- 1,408 1,714 1,154 3,243 35,467 67,323
------- ------- ------- ------- ------- ------- ------- -------
Total interest-sensitive assets 37,529 288 3,750 4,864 3,051 7,992 35,960 91,815
------- ------- ------- ------- ------- ------- ------- -------
Cumulative totals 37,529 37,817 41,567 46,431 49,482 57,474 93,434
------- ------- ------- ------- ------- ------- -------
Interest-sensitive liabilities
Interest checking accounts 163 488 2,017 3,838 -- -- -- 4,971
Money market accounts 326 978 4,041 7,690 -- -- -- 12,865
Savings accounts 471 1,413 5,840 11,115 -- -- -- 19,519
Certificates of deposit
less than $100,000 6,575 7,266 3,999 3,616 2,665 -- -- 38,365
Certificates of deposit
more than $100,000 8,973 1,911 2,329 200 -- 111 --
------- ------- ------- ------- ------- ------- ------- -------
Other borrowings -- -- 1,327 52 -- -- -- 1,581
------- ------- ------- ------- ------- ------- ------- -------
Total Interest-sensitive
liabilities 16,507 12,055 19,552 26,511 2,665 111 -- 77,301
------- ------- ------- ------- ------- ------- ------- -------
Cumulative totals 16,507 28,563 48,115 74,626 77,291 77,402 77,402
======= ======= ======= ======= ======= ======= =======
Interest sensitivity gap 21,022 (11,767) (15,802) (21,647) 386 7,881 35,960
======= ======= ======= ======= ======= ======= =======
Cumulative gap 21,022 9,254 (6,548) (28,195) (27,809) (19,928) 16,032
======= ======= ======= ======= ======= ======= =======
Cumulative gap/
total earning assets 22.5% 9.90% (7.01%) (30.18) (29.76) (21.33%) 17.16%
======= ======= ======= ======= ======= ======= =======
Interest sensitive assets to
interest sensitive liabilities 2.27 .02 .19 .18 1.14 72.00 00
======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
In 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 in the table
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, in 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's policies and procedures conform with FDICIA 305 and indicate a
limit of 20% as an acceptable fair value equity change in a +/- 200 basis point
rate shock environment. Management performs a fair value simulation which
demonstrates the fair value of equity increasing 5% if rates decrease 200 basis
points and declining 10% if rates increase 200 basis points. This analysis
confirms that the Bank has more exposure to increasing rates than to decreasing
rates.
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 considered to be significant and is within the Bank's policy
limits at September 30, 1997. However, if significant interest rate risk arises,
the Board of Directors and management may take (but are not limited to) one or
all of the following steps to reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit (CDs) and movement into money
market deposit accounts and short-term CDs through pricing and other
marketing strategies.
2. Purchase quality loan participations with appropriate interest
rate/gap match for the 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 earnings assets and cost of funds will
decrease the Bank's vulnerability to interest-rate cycles.
Capital Resources
Total shareholders' equity increased approximately $98 thousand during the
quarter ended September 30, 1997. The increase during the quarter was due to
internal capital generation in the form of net income of approximately $64
thousand and a $34 thousand increase in the unrealized gain on
available-for-sale securities.
The Federal Reserve Bank's ("FRB") standards for measuring capital adequacy
for U.S. Banking organizations requires that banks maintain capital based on
"risk-adjusted" assets so that categories of assets with potentially higher risk
will require more capital backing than assets with lower risk. In addition,
banks are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1
consists of common shareholders' equity, noncumulative 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 I capital and a Tier I Leverage ratio of at least 6%. Capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
As indicated in the table below, the Bank'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. The Company and the Bank do
not anticipate paying dividends in the near future.
September 30, December 31,
1997 1996
---- ----
Tier 1 Capital $ 6,801 $ 6,558
Tier 2 Capital 473 504
------- -------
Total Qualifying Capital $ 7,274 $ 7,062
======= =======
Risk Adjusted Total Assets
(including off-balance
sheet exposures) $44,540 $40,306
Tier 1 Risk-Based Capital Ratio 15.27% 16.27%
Tier 2 Risk-Based Capital Ratio 16.33% 17.52%
Leverage Ratio 6.70% 7.09%
<PAGE>
RESULTS OF OPERATIONS
Summary
The Bank had net income of approximately $64 thousand for the quarter ended
September 30, 1997 compared to a loss of $492 thousand for the same quarter in
1996. The improvement in the Bank's earnings performance is primarily
attributable to an increase in the Bank's net interest income, an increased
level of other noninterest income and a reduction in noninterest expenses (from
$1.9 million in 1996 to $1.5 million in 1997). Noninterest expense during the
quarter ended September 30, 1996 included a one time FDIC SAIF Special
Assessment of approximately $470,000.
On a per common share basis, there was an improvement from ($.61) at
September 30, 1996 to $.08 at September 30, 1997.
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 $1.235 million for the quarter ending September 30,
1997 compared to $1.106 million for the same quarter in 1996. The primary
determinant of the increase was the increase in the Bank's average earning
assets from $101.5 million at September 30, 1996 to $99.3 million at September
30, 1997. This growth in earning assets is primarily attributable to an increase
in average demand deposit balances due to continued corporate business
development efforts. The increase in volume of investable funds was primarily
used to fund new loan originations and temporary investments in Federal Funds
Sold.
The Bank's net interest margin has remained relatively constant at
approximately 5%.
Provision for Loan Losses
The Bank adopted Statement of Financial Accounting Standard ("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," effective January 1, 1995. As a result of applying the new rules,
certain impaired loans are reported at the present value of expected future cash
flows using the loan's initial effective interest rate, or as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. The adoption of these standards
did not have a material impact on the Bank's financial position or results of
operations.
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings for the quarter ending
September 30, 1997 was $30 thousand, compared with $23 thousand for the quarter
ended June 30, 1996. The increase in the provision for the quarter is primarily
due to net charge-offs of approximately $61 thousand in the credit card
portfolio. However, the composition of the loan portfolio with heavy
concentration in residential mortgage loans, purchased or originated commercial
SBA loans and student loans results in a portfolio with significantly lower
credit risk characteristics due to collateral positions and government
guarantees.
<PAGE>
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 1.13% of average total assets to .78% for the quarter ended September 30,
1996 compared to the quarter ended September 30, 1997. The increase is primarily
attributable to a continued increase in transactional deposit accounts as a
result of the significant corporate business development efforts. In addition,
the Bank continues to strongly enforce compensating balance arrangements with
its loan customers. In addition, during the quarter ended September 30, 1997,
the Bank implemented a $5 surcharge on its "free" checking product if a $100
minimum is not maintained.
Noninterest expense
Salaries and benefits represented 1.71% and 1.70% of total average assets
for the quarters ended September 30, 1997 and 1996, respectively. For the
quarter ended September 30, 1997, staffing levels remained relatively constant
with some planned attrition and management's concerted effort to minimize new
hirings and control personnel expense.
Data processing expenses represented .63% and .70% of the total average
assets for the quarters ended September 30, 1997 and 1996, respectively. 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. In addition, the Bank
uses outside loan servicing companies to service its mortgage, credit card,
installment and student loan portfolios. The decline in data processing expenses
compared to September 30, 1996 is due to the sale of student loans during the
quarters ended March 31, 1997 and September 30, 1997 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
out-sourcing, and the possible renegotiation of existing contracts with
servicers.
Occupancy expense increased approximately $38 thousand for the quarter
ended September 30, 1996 compared to the quarter ended September 30, 1997. This
increase is primarily attributable to annual escalations in lease payments and
maintenance contracts to service the Bank's growing ATM network.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
Regulatory Matters
At September 30, 1997, the Bank is operating under a Supervisory Letter
from its primary regulator. The Supervisory Letter among other things, prevents
the Bank and the Company from declaring or paying dividends without the prior
written approval of its regulators, and prohibits the Bank and the Company from
issuing debt.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material claims have been instituted or threatened by or against
Registrant or its affiliates other than in the ordinary course of business.
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.
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.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were 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 was $8.00 per share for the 1996 Warrant, $9.00 per share
for the 1997 Warrant and will be $10.00 per share for the 1998 Warrant. 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 6,942 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. Pursuant to the exercise of the 1997
Warrants, the Registrant has received offers to purchase an additional 3,667
shares of its common stock at $9.00 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 commission was paid as a result of any warrant
exercise.
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 3(a)(5) of the Act.
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.
Beginning May 19, 1997, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock. No shares wer yet
sold pursuant to this offering. The stock is offered pursuant to an exemption
from registration contained in 4(2) and 3(a)(5) of the Act.
<PAGE>
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 September
30, 1997 filed with Form SE.
(b) Registrant's report on Form 8-K filed October 31, 1997 identifying the
change in Registrant's certifying accountant is incorporated herein by
reference.
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, 1997 /s/ Emma C. Chappell
-------------------------
Emma C. Chappell
Chairman, President & CEO
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,216
<INT-BEARING-DEPOSITS> 331
<FED-FUNDS-SOLD> 11,266
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,700
<INVESTMENTS-CARRYING> 10,908
<INVESTMENTS-MARKET> 10,951
<LOANS> 64,557
<ALLOWANCE> (473)
<TOTAL-ASSETS> 101,537
<DEPOSITS> 92,051
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,465
<LONG-TERM> 0
0
1
<COMMON> 8
<OTHER-SE> 7,012
<TOTAL-LIABILITIES-AND-EQUITY> 101,537
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<INTEREST-TOTAL> 1,927
<INTEREST-DEPOSIT> 676
<INTEREST-EXPENSE> 16
<INTEREST-INCOME-NET> 1,235
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,551
<INCOME-PRETAX> 64
<INCOME-PRE-EXTRAORDINARY> 64
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> .08
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.17
<LOANS-NON> 1,009
<LOANS-PAST> 3,888
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 530
<CHARGE-OFFS> 93
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 473
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