SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 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 April 30, 1997, 818,555 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 April 30, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
United Bancshares, Inc.
Statements of Condition
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Cash and due from banks 5,570,512 3,544,110
Interest bearing deposits with banks 323,822 320,202
Federal funds sold 9,172,000 5,380,000
----------- ----------
Cash & cash equivalents 15,066,334 9,244,312
Investment securities:
Held-to-maturity, at amortized cost 9,959,417 8,476,638
Available-for-sale, at market value 5,010,840 5,983,461
Loans held for sale, net of unearned discount 0 4,906,455
Loans, net of unearned discount 67,335,345 64,717,914
Less: allowance for loan losses (551,291) (527,507)
----------- ----------
Net loans 66,784,054 69,096,862
Bank premises & equipment, net 1,876,336 1,788,937
Accrued interest receivable 1,339,510 1,376,416
Deferred branch acquisition cost 134,795 154,475
Prepaid expenses and other assets 702,907 648,300
----------- ----------
Total Assets 100,874,193 96,769,401
=========== ==========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 13,941,269 12,393,256
Demand deposits, interest bearing 14,678,354 13,126,327
Savings deposits 23,442,902 23,484,301
Time deposits, $100,000 and over 13,986,579 14,001,981
Time deposits 25,219,788 25,755,107
----------- ----------
91,268,892 88,760,971
Long-term debt 66,851 74,561
Reverse Repurchase Agreement 1,506,732 0
Accrued interest payable 507,764 525,161
Accrued expenses and other liabilities 704,935 650,040
----------- ----------
Total Liabilities 94,055,174 90,010,733
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932
500,000 shrs auth., 80,650 & 93,150
issued & o/s '95 & '96 respectively
Common stock, $.01 par value; 2,000,000 shares authorized;
816,355 issued and outstanding 8,164 8,164
Additional-paid-in-capital 10,349,585 10,348,989
Accumulated deficit (3,554,650) (3,618,692)
Net unrealized gain on AFS securities 14,989 19,276
----------- ----------
Total shareholders' equity 6,819,019 6,758,668
----------- ----------
100,874,193 96,769,401
=========== ==========
</TABLE>
<PAGE>
United Bancshares
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, March 31,
1997 1996
---- ----
<S> <C> <C>
Interest Income:
Interest and fees on loans 1,439,992 $ 1,354,882
Interest on investment securities 218,753 217,598
Interest on Federal Funds sold 89,751 60,703
Interest on time deposits with other banks 6,172 4,923
--------- ---------
Total interest income 1,754,668 1,638,106
Interest Expense:
Interest on time deposits 464,816 421,024
Interest on demand deposits 76,400 71,017
Interest on savings deposits 115,803 124,538
Interest on borrowed funds 7,588 1,334
--------- ---------
Total interest expense 664,607 617,914
Net interest income 1,090,061 1,020,192
Provision for loan losses 22,500 17,500
--------- ---------
Net interest income less provision for
loan losses 1,067,561 1,002,692
--------- ---------
Noninterest income:
Gain on sale of loans 115,652 288
Customer service fees 264,114 180,506
Gain (loss) on sale of investments 0 9,157
Other income 25,197 15,477
--------- ---------
Total noninterest income 404,963 205,428
Non-interest expense
Salaries, wages, and employee benefits 573,018 568,349
Occupancy and equipment 244,951 199,544
Office operations & supplies 118,448 112,705
Marketing & public relations 22,988 16,116
Professional services 86,766 49,894
Data processing 206,502 209,453
Other noninterest expense 155,213 164,566
--------- ---------
Total non-interest expense 1,407,885 1,320,627
--------- ---------
Net income (loss) 64,639 $ (112,507)
========= =========
Earnings (loss) per share $0.08 $(0.14)
========= =========
Weighted average number of shares 816,355 802,480
========= =========
</TABLE>
<PAGE>
United Bancshares, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, March 31,
1997 1996
-----------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) 64,638 (113,103)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 22,500 17,500
Gain on sale of loans 115,652 (289)
Depreciation and amortization 141,694 108,729
Realized investment securities gains -- (9,157)
Increase in accrued interest receivable and other assets (17,701) (22,356)
Increase (decrease) in accrued interest payable and other liabilities 37,498 (17,370)
---------- ---------
Net cash provided by (used in) operating activities 364,281 (36,045)
Cash flows from investing activities
Purchase of investments-Available-for-Sale (1,052) (4,602,815)
Purchase of investments-Held-to-Maturity (2,499,219) --
Proceeds from maturity & principal reductions of investments-Available-for-Sale 946,256 606,577
Proceeds from maturity & principal reductions of investments-Held-to-Maturity 1,020,338 2,004,622
Proceeds from sale of investment securities-Available-for-Sale -- 4,562,444
Proceeds from sale of loans 5,110,843 --
Net increase in loans (2,936,187) (1,708,088)
Purchase of premises and equipment (190,181) (153,586)
---------- ---------
Net cash provided by (used in) investing activities 1,450,799 709,153
Cash flows from financing activities
Net increase (decrease) in deposits 2,507,921 (2,342,765)
Repayments on long term debt (7,710) (7,231)
Reverse repurchase agreement 1,506,732 --
---------- ---------
Net cash provided by (used in) financing activities 4,006,943 (2,349,996)
Increase (decrease) in cash and cash equivalents 5,822,022 (1,676,888)
Cash and cash equivalents at beginning of period 9,244,312 10,825,547
Cash and cash equivalents at end of period 15,066,334 9,148,659
---------- ---------
Supplemental disclosures of cash flow information
Cash paid during the period for interest 676,231 612,921
---------- ---------
</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, Quarter ended Quarter ended
except per share data) March 31, 1997 March 31, 1996
-------------- --------------
Net interest income $1,090 $1,020
Provision for loan losses 23 18
Noninterest income 405 205
Noninterest expense 1,408 1,321
Net income (loss) $65 $(113)
Earnings (Loss) per share $.08 $(0.14)
Balance sheet totals: March 31, 1997 December 31, 1996
------------- -----------------
Total assets $100,874 $96,769
Loans, net $66,784 $69,097
Investment securities $14,970 $14,460
Deposits $91,269 $88,761
Shareholders' equity $6,819 $6,759
Ratios
Return on assets .07% (.89)%
Return on equity .99% (12.02)%
Equity to assets ratio 6.57% 7.45%
<PAGE>
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 $7.3 million or 7.78% during the quarter ending March
31, 1997. Average funding sources decreased less than $1 thousand for the same
quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
March 31, 1997
-------------- December 31, 1996
Increase (Decrease) -----------------
Average ------------------- Average
Balance Amount % Balance
------- ------ ----- -------
<S> <C> <C> <C> <C>
Funding uses:
Loans $68,657 $4,414 6.24% $65,243
Investment securities
Held-to-maturity 8,993 883 (17.12%) 8,110
Available-for-sale 5,566 (2,753) (9.06%) 8,319
Federal funds sold 9,065 4,715 39.75% 4,350
------- ------ -------
Total uses $93,282 $7,260 $86,022
======= ====== =======
Funding sources:
Demand deposits
Noninterest-bearing $12,693 $1,496 19.36% $11,197
Interest-bearing 12,598 (474) 4.47% 13,072
Savings deposits 23,389 (657) 2.08% 24,046
Time deposits 35,302 496 (.90%) 34,806
Other borrowed funds 736 (1,085) (14.12%) 1,821
------- ------ -------
Total sources $84,717 $ (225) $84,942
======= ====== =======
</TABLE>
Loans
Average loans increased approximately $4.4 million or 6.24% during the quarter
ended March 31, 1997. This increase was primarily due the origination of
approximately $1.5 million in commercial loans during the quarter. Student loan
fundings also increased by approximately $1 million during the quarter. However,
in February 1997, the Bank sold approximately $4.9 million of its student loan
proceeds and will use the proceeds to fund higher yielding commercial loans.
Residential mortgage loans have remained relatively constant with new
originations covering pay-offs/paydowns.
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
March 31, December 31,
1997 1996
---- ----
Commercial and industrial $10,485 $10,107
Commercial real estate 1,526 649
Consumer loans 18,740 17,240
Residential mortgages 36,584 36,622
Loans held-for-sale -- 4,906
------- -------
Total Loans $67,335 $69,624
======= =======
Residential mortgage loans at March 31, 1997 comprise the greatest percentage of
total loans representing approximately 54.3% of total loans However, these loans
as a percentage of the total portfolio continue to decline as mortgage loan
balances remain relatively constant while other loan categories such as
commercial loans (primarily SBA guaranteed) and consumer loans (primarily
student loans) continue to increase.
<PAGE>
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
March 31, 1997, non-accrual loans were $915 thousand. Approximately $462
thousand of the total nonaccrual loans were residential mortgages while the
remainder consisted primarily of loans with SBA loans. 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 March 31, 1997, approximately 29% 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 March 31, 1997, none of these loans were
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average
by 12.0% or $2.8 million during the quarter ended March 31, 1997. The increase
is due to approximately $5 million student loan sale proceeds which were
temporarily invested in Federal Funds Sold but will be used to fund the
origination of higher yielding commercial loans.
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
$1.5 million or 13.36% during the quarter ended March 31, 1997. The increase was
primarily due to increased balances in two successful demand deposit product
offerings which began in 1995--the "free" checking and "entrepreneurial-25"
checking. In addition, stricter enforcement of compensating balance arrangements
with commercial loan borrowers has resulted in additional demand deposits.
<PAGE>
Other Borrowed Funds
The average balance for other borrowed funds decreased $1.1 million, or
59.58%, from December 31, 1996 to March 31, 1997. The decrease is due to a $10
million reverse repurchase agreement the Bank entered into in 1996 versus a $1.5
million reverse repurchase agreement the Bank entered into in February 1997. 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 March 31, 1997 are
summarized below:
Commitments to extend credit $5,820,000
Outstanding letter of credit $ 125,000
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.
<PAGE>
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 March 31, 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 $3.9 million at March 31, 1997, representing 23.84% of the
investment portfolio. Other types of assets such as federal funds sold, as well
as maturing loans, are sources of liquidity. Approximately $4.1 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 March 31, 1997:
(Thousands of dollars)
----------------------
3 months or less $ 6,507
Over 3 through 12 months 7,048
Over 1 through five years 219
Over five years 213
-------
Total $13,987
=======
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 March 31, 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 March 31, 1997, a liability sensitive position is
maintained on a cumulative basis through 1 year of -7.54% 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
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of March 31, 1997
More than More than More than More than
0 to 3 3 to 6 6 to 12 1 to 5 than 5
(Thousands of dollars) months months months years years Cumulative
- ---------------------- ------ ------ ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Time deposits -- 42 282 -- -- 324
Investment securities:
Held-to-maturity 851 501 997 5,494 2,097 9,960
Available-for-sale 3,099 652 862 4,694
Federal funds sold 9,172 -- -- -- -- 9,172
Fixed rate loans 293 317 286 3,092 35,750 39,738
Floating rate loans 22,338 -- 4,274 70 -- 26,682
------- ------- ------- ------- ------- -------
Total interest-sensitive assets 35,853 860 5,839 9,308 38,709 90,570
------- ------- ------- ------- ------- -------
Cumulative totals 35,853 36,713 42,552 51,861 90,570
------- ------- ------- ------- -------
Interest-sensitive liabilities
Interest checking accounts 127 382 1,579 3,005 -- 5,093
Money market accounts 340 1,021 4,220 8,031 -- 13,612
Savings accounts 485 1,456 6,019 11,455 -- 19,416
Certificates less than $100,000 13,400 6,323 5,472 6,531 -- 25,219
Certificates more than $100,000 3,520 5,407 1,641 219 213 13,987
Other borrowings -- -- 1,507 67 -- --
------- ------- ------- ------- ------- -------
Total Interest-
sensitive liabilities 11,358 14,589 20,438 29,308 213 78,901
------- ------- ------- ------- ------- -------
Cumulative totals 11,358 28,942 49,380 78,688 78,901
======= ======= ======= ======= =======
Interest sensitivity gap 22,790 (13,729) (14,598) (20,000) 38,496
======= ======= ======= ======= =======
Cumulative gap 22,790 7,771 (6,827) (26,827) 11,669
======= ======= ======= ======= =======
Cumulative gap/total earning assets 23.74% 8.58% (7.54%) (29.62%) 12.88%
====== ===== ======= ======== ======
Interest sensitive assets to
interest sensitive liabilities 2.50 .06 .29 .32 181.73
==== === === === ======
</TABLE>
<PAGE>
In 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 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 has revised its policies and procedures to conform with FDICIA 305
and has established a policy limit of +/- 3% 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
.75% if rates decrease 200 basis points and declining 1.70% 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 March 31, 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 $61 thousand during the
quarter ended March 31, 1997. The increase during the quarter was due to
internal capital generation in the form of net income of approximately $65
thousand.
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 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.
<PAGE>
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.
March 31, December 31,
1997 1996
---- ----
Tier 1 Capital $6,640 $6,558
Tier 2 Capital 551 504
------ ------
Total Qualifying Capital $7,191 $7,062
====== ======
Risk Adjusted Total Assets
(including off-balance sheet exposures) $42,601 $40,306
Tier 1 Risk-Based Capital Ratio 15.59% 16.27%
Tier 2 Risk-Based Capital Ratio 16.88% 17.52%
Leverage Ratio 6.66% 7.09%
Results of Operations
Summary
The Bank had net income of approximately $65,000 for the quarter ended
March 31, 1997 compared to a loss of $112,500 for the same quarter in 1996. The
improvement in the Bank's earnings performance is primarily attributable to a
$110,000 gain on the sale of $4.9 million student loans in February 1997, an
increase in the Bank's net interest margin, and an increased level of other
noninterest income -- from $204 thousand in 1996 to $289 thousand in 1997.
Customer service fees accounted for most of this increase as the number of
transactional accounts increased significantly during 1996 as a result of new
checking account products and compensating balance requirements. Also, during
September 1996, the Bank implemented a surcharge for all non-customer use of its
Automated Teller Machines (ATMs).
On a per common share basis, there was an improvement from ($.14) at March
31, 1996 to $.08 at March 31, 1997.
<PAGE>
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 $1.090 million for the quarter ending March 31,
1997 compared to $1.020 million for the same quarter in 1996. The primary
determinants of the increase was the increase in the Bank's average earning
assets from $83.6 million at March 31, 1996 to $93.2 million at March 31, 1997.
This growth in earning assets is primarily attributable to an increase in
average demand deposit balances due to continued growth in new checking account
products--"free" checking and "entrepreneurial-25" checking. These products
provide a low-cost/minimum balance option for personal and small business
customers who have relatively low-volume activity in their checking accounts.
While benefiting customers, these products also serve as means of generating
noninterest-bearing funds for the Bank as well as a source of service charge
income from overdraft fees. The increase in volume of investable funds was
primarily used to fund new loan originations and Federal Funds Sold temporary
investments.
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 March 31, 1997 was $23 thousand compared to $18 thousand for the same
quarter in 1996. The increase is due to the increase in the average balance of
loans outstanding. However, the gradual change in the composition of the loan
portfolio during 1995 and 1996 from residential mortgage loans to purchased or
originated commercial SBA loans and student loans resulted in a portfolio with
significantly lower credit risk characteristics due to the related 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 .81% of average total assets to 1.05% for the quarter ended March 31, 1996
compared to the quarter ended March 31, 1997. The increase is primarily
attributable to an increase in transactional deposit accounts as a result of the
continued success of product offerings which were introduced in 1995--"free"
checking" and "entrepreneurial-25" checking. In addition, in 1996 the Bank
strongly enforced compensating balance arrangements with its loan customers.
Also contributing to the increase was the implementation of a surcharge for all
noncustomer use of the Bank's Automated Teller Machines (ATMs) in September 1996
and an expanded ATM network from 5 machines in 1995 to 15 machines in 1996.
During the 4th quarter of 1996, the Bank entered into an agreement with a
growing retail corporation which provides for the placement of ATM machines in
its retail stores.
During the quarter ended March 31, 1996 noninterest income also included a
gain on the sale of student loans. In February 1997, the Bank sold approximately
$4.9 million of its student loan portfolio for a net gain of $110 thousand.
Noninterest expense
Salaries and benefits represented 41% and 43% of the total noninterest
expense for the quarters ended March 31, 1997 and 1996, respectively. For the
quarter ended March 31, 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 14.6% and 15.8% of the total
noninterest expense for the quarters ended March 31, 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 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 $45 thousand for the quarter
ended March 31, 1996 compared to the quarter ended March 31, 1997. This increase
is primarily attributable to annual escalations in lease payments and a 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 and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
Regulatory Matters
At March 31, 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 long-term 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.
(a) An annual meeting of the security holders of the Registrant is
scheduled to be held on May 19, 1997.
(b) Proxies for the annual meeting of the Registrant scheduled for May 19,
1997, (the "Annual Meeting") were solicited by proxy statement filed with the
Commission on April 21, 1997.
(c) The following matters are to be voted upon at the Annual Meeting:
1. ELECTION OF DIRECTORS
The following individuals are proposed to be elected as directors of
the Registrant:
Luis A. Cortes, Jr.
Angela M. Huggins
Kemel G. Dawkins
Elmer Young, Jr.
2. INDEPENDENT ACCOUNTANT
The matter of ratification of independent accountants is to be submitted to
the shareholders at the Annual Meeting. The Board of Directors selected Ernst &
Young, LLP as independent accountants to audit and certify financial statements
of the Bank and the Registrant for the year ending December 31, 1996 and to
provide certain accounting services to the Bank during the 1997 fiscal year.
Ernst & Young, LLP has served in this capacity since the Bank's inception. In
connection with the audit function, Ernst & Young, LLP also reviewed the
Registrant's annual report to shareholders and filings with the Securities and
Exchange Commission. Neither Ernst & Young, LLP nor any of its partners has any
direct or material indirect financial interest in the Bank.
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.
<PAGE>
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 and additional
2,200 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.
Item 6. Exhibits and Reports on Form 8-K.
The following amendments are filed in paper format on Form SE
(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 March 31, 1997.
(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: May ___, 1997 /s/ Emma C. Chappell
-------------------------
Emma C. Chappell
Chairman, President & CEO
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