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, 1998 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 November 15, 1998, 830,157 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 132,999
shares were outstanding as of November 15, 1998. The Board of Directors
designated a subclass of the common stock, designated Class B Common Stock, by
filing of Articles of Amendment on September 30, 1998. Of the 2,000,000 shares
of Common Stock authorized, 250,000 have been designated Class B Common Stock.
As of November 15, 1998, 83,333 shares of Class B Common Stock were issued and
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks 5,567,733 4,604,408
Interest bearing deposits with banks 345,269 334,288
Federal funds sold 10,525,000 7,821,000
----------- -----------
CASH & CASH EQUIVALENTS 16,438,002 12,759,696
Investment securities:
Held-to-maturity, at amortized cost 12,657,124 10,854,711
Available-for-sale, at market value 12,031,825 7,398,607
Loans held for sale, net of unearned discount 0 1,979,177
Loans, net of unearned discount 69,758,342 72,183,255
Less: allowance for loan losses (788,065) (468,806)
----------- -----------
NET LOANS 68,970,277 73,693,626
Bank premises & equipment, net 1,665,573 1,862,647
Accrued interest receivable 2,847,874 1,439,587
Deferred branch acquisition cost 16,711 75,753
Other real estate owned 210,077 165,188
Prepaid expenses and other assets 1,041,124 664,475
----------- -----------
TOTAL ASSETS 115,878,587 108,914,290
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits, non-interest bearing 19,872,395 17,697,901
Demand deposits, interest bearing 24,520,410 20,922,107
Savings deposits 22,846,493 22,925,881
Time deposits, $100,000 and over 12,872,379 13,852,356
Time deposits 23,740,230 24,028,818
----------- -----------
103,851,909 99,427,063
Other borrowed funds 770,963 43,688
Securities sold to repurchase 1,538,472 1,341,053
Accrued interest payable 550,082 541,225
Accrued expenses and other liabilities 1,506,568 502,406
----------- -----------
TOTAL LIABILITIES 108,217,994 101,855,435
=========== ===========
Shareholders' equity:
Preferred Stock, Series A, non-cum.,
6%, $.01 par value, 500,000 shrs auth.,
93,150 issued and outstanding 932 932
Common stock, $.01 par value;
2,000,000 shares authorized;
830,157 shares issued and
outstanding at September 30, 1998
and December 31, 1997 8,302 8,237
Additional-paid-in-capital 11,208,059 10,426,222
Accumulated deficit (3,708,781) (3,438,699)
Net unrealized gain on
available-for-sale securities 152,082 62,163
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,660,593 7,058,855
----------- -----------
115,878,587 108,914,290
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $4,767,193 4,429,595 $1,521,678 1,522,981
Interest on investment securities 880,211 749,333 $330,314 293,227
Interest on Federal Funds sold 517,641 331,380 $198,239 105,387
Interest on time deposits with other banks 14,781 21,210 $3,550 5,614
---------- --------- ---------- ---------
Total interest income 6,179,826 5,531,517 2,053,781 1,927,208
Interest Expense:
Interest on time deposits 1,439,216 1,392,692 458,646 462,499
Interest on demand deposits 461,595 266,841 156,819 44,071
Interest on savings deposits 329,806 345,873 103,562 169,729
Interest on borrowed funds 53,688 40,171 21,397 15,856
---------- --------- ---------- ---------
Total interest expense 2,284,305 2,045,577 740,424 692,155
---------- --------- ---------- ---------
NET INTEREST INCOME 3,895,521 3,485,940 1,313,357 1,235,053
Provision for loan losses 385,500 75,000 320,000 30,000
---------- --------- ---------- ---------
NET INTEREST INCOME LESS PROVISION FOR
LOAN LOSSES 3,510,021 3,410,940 993,357 1,205,053
---------- --------- ---------- ---------
Noninterest income:
Gain on sale of loans 34,362 186,968 4,674 66,106
Customer service fees 1,015,664 861,445 379,294 268,418
Gain on sale of investments 1,201
Other income 100,457 109,675 32,771 75,295
---------- --------- ---------- ---------
Total noninterest income 1,151,684 1,158,087 416,739 409,818
---------- --------- ---------- ---------
Non-interest expense
Salaries, wages, and employee benefits 1,849,174 1,738,734 605,791 600,441
Occupancy and equipment 937,804 750,053 334,929 267,983
Office operations and supplies 392,284 366,303 157,062 120,313
Marketing and public relations 156,232 132,044 70,292 52,050
Professional services 190,127 260,843 68,942 80,714
Data processing 664,312 640,008 219,347 219,365
Deposit insurance assessments 61,033 46,326 21,006 19,551
Other noninterest expense 680,817 480,933 246,964 190,226
---------- --------- ---------- ---------
Total non-interest expense 4,931,783 4,415,244 1,724,333 1,550,643
========== ========= ========== =========
NET INCOME (LOSS) ($270,078) 153,783 ($314,237) $64,228
========== ========= ========== =========
EARNINGS PER SHARE ($0.33) $0.19 ($0.38) $0.08
EARNINGS PER SHARE-DILUTED ($0.33) $0.19 ($0.38) $0.08
====== ===== ====== =====
Weighted average number of shares 825,345 820,095 825,345 820,095
========== ========= ========== =========
</TABLE>
<PAGE>
United Bancshares, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (270,078) 153,783
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 385,500 75,000
Gain on sale of loans 34,362 186,968
Depreciation and amortization 452,156 403,366
Realized investment securities gains 1,201 0
Proceeds from sale of student loans 2,022,500 4,407,029
(Increase) decrease in accrued interest
receivable and other assets (1,829,825) (28,219)
Increase (decrease) in accrued interest
payable and other liabilities 1,013,019 (88,544)
---------- ----------
Net cash provided by operating activities 1,808,835 5,109,383
Cash flows from investing activities
Purchase of investments-Available-for-Sale (13,204,090) (3,737,744)
Purchase of investments-Held-to-Maturity (7,680,000) (4,562,764)
Proceeds from maturity & principal reductions
of investments-Available-for-Sale 9,617,690 1,558,368
Proceeds from maturity & principal reductions
of investments-Held-to-Maturity 5,874,710 2,632,719
Purchase of automobile loans (4,873,421) 0
Net (increase) decrease in loans 7,289,373 343,364
Purchase of premises and equipment (286,233) (402,346)
---------- ----------
Net cash (used in) investing activities (4,261,970) (4,168,403)
Cash flows from financing activities
Net increase (decrease) in deposits 4,424,846 3,289,806
Other borrowed funds 727,275 (23,015)
Proceeds from sale of common stock 64,620 33,659
Proceeds from sale of preferred stock 717,282 0
Reverse repurchase agreement 197,419 1,327,091
---------- ----------
Net cash provided by (used in) financing activities 6,131,442 4,627,541
Increase (decrease) in cash and cash equivalents 3,678,306 5,568,521
Cash and cash equivalents at beginning of period 12,759,696 9,244,312
Cash and cash equivalents at end of period 16,438,002 14,812,831
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 1,734,256 2,034,530
========== ==========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In April 1993, the shareholders of United Bank of Philadelphia (the Bank)
voted in favor of the formation of a bank holding company, United Bancshares,
Inc. (the Company). Accordingly, in October 1994 the Company became a bank
holding company in conjunction with the issuance of its common shares in
exchange for the common shares of the Bank. Since 1994, the financial statements
are prepared on a consolidated basis to include the accounts of the Company and
the Bank.
The purpose of this discussion is to focus on information about the Bank's
financial condition and results of operations which is not otherwise apparent
from the consolidated financial statements included in this annual report.
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, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Net interest income $3,510 $3,411
Provision for loan losses 385 75
Noninterest income 1,152 1,158
Noninterest expense 4,932 4,415
Net income (loss) $(270) $154
Earnings per share ($.33) $.19
Balance sheet totals: SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Total assets $115,879 $108,914
Loans, net $68,970 $73,693
Investment securities $24,689 $18,253
Deposits $103,852 $99,427
Shareholders' equity $7,661 $7,091
Ratios
Return on assets (.32)% .09%
Return on equity (4.68)% 1.37%
Equity to assets ratio 6.61% 6.56%
<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 sources
increased approximately $2.6 million, or 2.49%, during the quarter ending
September 30, 1998. Average funding uses decreased $2.3 million, or 2.13%, for
the same quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 JUNE 30, 1998
AVERAGE INCREASE (DECREASE) AVERAGE
BALANCE AMOUNT % BALANCE
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Funding uses:
Loans $ 71,790 ($ 3,073) (4.10%) $ 74,863
Investment securities
Held-to-maturity 10,769 679 6.73% 10,090
Available-for-sale 7,822 (406) (4.93%) 8,228
Federal funds sold 14,152 522 3.83% 13,630
-------- -------- --------
Total uses $104,533 ($ 2,278) $106,811
======== ======== ========
Funding sources:
Demand deposits
Noninterest-bearing $ 17,872 ($ 1,642) (8.41%) $ 19,514
Interest-bearing 25,739 786 3.15% 24,953
Savings deposits 20,317 (115) (.56%) 20,432
Time deposits 36,821 (1,519) (3.96%) 38,340
Other borrowed funds 1,715 (127) (6.89%) 1,842
-------- -------- --------
Total sources $102,464 ($ 2,617) $105,081
======== ======== ========
</TABLE>
Loans
Average loans decreased approximately $3 million, or 4.10%, during the quarter
ended September 30, 1998. This decrease was primarily due to monthly paydowns in
the acquired automobile loan portfolios for which 38% of the portfolio has paid
down during 1998. In addition, there have been a significant level of
prepayments in the mortgage loan portfolio as a result of refinancings in the
current low interest rate environment. Strategies continue to be reviewed to
originate and/or purchase loans to minimize the impact of portfolio paydowns.
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
Commercial and industrial $ 12,391 $12,095
Commercial real estate 1,604 1,515
Consumer loans 23,138 24,590
Residential mortgages 32,625 35,961
Loans held-for-sale -- 1,979
------- -------
Total Loans $69,758 $74,162
======= =======
Residential mortgage loans at September 30, 1998 continue to comprise the
greatest percentage of total loans representing approximately 46.8% of total
loans However, these loans as a percentage of the total portfolio continue to
decline as mortgage loan balances are reduced due to refinancing and paydowns
while other loan categories such as commercial loans and consumer loans continue
to increase. In addition, majority of the new residential mortgage loans
originated are sold at closing due to the current low interest rate environment
and the interest rate risk associated with holding these loans.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation of the
loan portfolio, assessment of economic conditions, the diversification and size
of the portfolio, adequacy of collateral, past and anticipated loss experience,
and the amount and quality of nonperforming loans. The following Table presents
an analysis of the allowance for loan losses.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
QUARTER ENDED
SEPTEMBER 30, 1998
------------------
(Dollars in thousands)
Balance at July 1 $ 495
-------
Charge-offs:
Commercial and industrial --
Commercial real estate --
Residential mortgages --
Consumer loans (66)
-------
(66)
Recoveries - consumer loans 39
--------
Net charge-offs (27)
Additions charged to operations 320
--------
Balance at September 30, 1998 $788
========
Ratio of net charge-offs to average
loans outstanding 0.04%
========
The amount charged to operations and the related balance in the allowance for
loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
The allowance for loan losses as a percentage of total loans was 1.13% and 45%
of classified loans at September 30, 1998 compared to .67% and 26%,
respectively, at June 30, 1998. The increase in the allowance is primarily
related to two commercial loans identified during the quarter as having an
increased level of credit risk thereby requiring specific reserves totaling $265
thousand. In evaluating the adequacy of the allowance for loan loss for the
remiainder of the portfolio, only the net exposure (un-guaranteed portion)
should be considered. As a result of the loan portfolio composition (primarily
residential mortgage loans, Small Business Administration (SBA) guaranteed
loans, and guaranteed student loans), less than 25% of the loan portfolio
represents some level of risk--no guarantee features, significant collateral, or
proven track record of repayment. In addition, the Bank has an excellent
collection record. During the quarter ending September 30, 1998, net charge-offs
as a percentage of average total loans represented .04%.
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, 1998, non-accrual loans were $1.5 million. Approximately $476
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 September 30, 1998, approximately 31% 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, 1998, none of these loans were
nonperforming.
<PAGE>
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average
by $522 thousand, or 3.83%, during the quarter ended September 30, 1998. The
increase is due the growth in average deposit levels prepayments in the loan
portfolio. Longer term investment strategies have been developed to achieve
higher yields were implemented in September 1998.
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. The average duration of the portfolio is
2.02 years.
Deposits
Non-interest bearing demand deposits decreased on average by approximately
$1.6 million, or 8.41%, during the quarter ended September 30, 1998. The
decrease was primarily a result of deposit fluctuations in the account of a
significant customer as well as the promotion of a new interest-bearing product
(PRESTIGE) which offers, among other benefits, interest on balances for an $8
per month membership fee. The Bank is actively promoting this product as a means
of increasing its core deposit base and related fee income. Many of the Bank's
customers have transferred their existing account relationships to this new
product.
Interest bearing demand deposits increased on average by approximately $786
thousand, or 3.15%, during the quarter ended September 30, 1998. The increase
was primarily due to the introduction of new interest-bearing checking products
(PRESTIGE) which are packaged with benefits such as discount travel, eye care,
and life insurance. This product was designed to increase the Bank's core
deposit base with low cost funds.
Other Borrowed Funds
The average balance for other borrowed funds decreased $127 thousand, or
6.89%, during the quarter ended September 30 , 1998. The decrease is due to the
roll-off of $300 thousand of an existing reverse repurchase agreement in August
1998. 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, 1998 are
summarized below:
Commitments to extend credit $7,246
Outstanding letter of credit $ 214
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 September 30, 1998, 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 $3.6 million at September 30, 1998, representing 14.78% of the
investment portfolio. Other types of assets such as federal funds sold, as well
as maturing loans, are sources of liquidity. Approximately $3.1 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 September 30, 1998:
(Thousands of
dollars)
--------------
3 months or less $4,963
Over 3 through 12 months 8,172
Over 1 through five years 538
Over five years 118
-------
Total $13,791
=======
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, 1998,
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, 1998, a liability sensitive position is
maintained on a cumulative basis through 1 year of -11.06% 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
as well as an increasing level of fixed rate investments. 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.
<PAGE>
INTEREST SENSITIVITY ANALYSIS
INTEREST RATE SENSITIVITY GAPS
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MORE THAN
0 TO 3 3 TO 12 3 TO 5 5-15 MORE THAN
(THOUSANDS OF DOLLARS) MONTHS MONTHS 1-3 YEARS YEARS YEARS 15 YEARS CUMULATIVE
- ---------------------- ------ ------ --------- ----- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS
Time deposits 345 -- -- -- 345
Investment securities:
U.S. Government 3,650 1,000 -- 4,015 8,460 257 17,382
Mortgage-backed 4,576 241 601 990 743 7,151
Federal funds sold 10,525 -- -- -- -- 10,525
Real Estate Loans 3,356 636 1,789 1,953 14,717 12,968 35,419
All Other Loans 13,687 1,482 9,981 2,388 3,969 2,833 34,340
------- ------- ------- ------- ------- ------- -------
Total interest-sensitive assets 36,139 3,359 11,770 8,957 28,136 16,801 105,162
------- ------- ------- ------- ------- ------- -------
INTEREST-SENSITIVE LIABILITIES
Interest checking accounts 11,847 -- 2,880 -- -- 14,727
Money market accounts 5,777 -- 7,296 -- -- 13,073
Savings accounts 12,747 -- 6,765 -- -- 19,512
Certificates less than $100,000 6,262 9,893 4,041 2,580 -- 22,776
Certificates more than $100,000 4,963 8,172 538 118 -- 13,791
Other borrowings 1,538 771 -- -- -- 2,309
------- ------- ------- ------- ------- -------
Total Interest-
sensitive liabilities 43,134 18,836 21,520 2,698 -- 86,188
------- ------- ------- ------- ------- -------
Interest sensitivity gap (6,995) (15,477) (9,750) 6,259 28,136 16,801 18,974
======= ======= ======= ======= ======= ======= =======
Average 12 month Gap % Earning Assets (11.06)
=======
</TABLE>
<PAGE>
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
negative gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and
off-balance-sheet instruments. The calculated estimates of changes in market
value of portfolio value at September 30, 1998 are as follows:
MARKET VALUE OF PERCENT OF
CHANGES IN RATE PORTFOLIO EQUITY CHANGE
--------------- ---------------- ------
(Dollars in thousands)
+400 basis points $(15,169) (251)%
+300 basis points (8,870) (188)
+200 basis points (2,571) (126)
+100 basis points 3,728 (63)
Flat rate 10,027 --
-100 basis points 16,326 63
-200 basis points 22,625 126
-300 basis points 28,924 188
-400 basis points 35,223 251
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest sensitivity of the Company's assets and
liabilities, as well as the estimated effect of changes in interest rates on the
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest-rate
exposure is not considered to be significant and is within the Bank's policy
limits at September 30, 1998. 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 $480 thousand during the
quarter ended September 30, 1998 as a result of a receipt of $796 thousand
Series A Preferred equity investment by FannieMae in August 1998. This capital
infusion was offset by a $314 thousand loss incurred by the Bank during the
quarter. As of September 30, 1998, the Bank has outstanding commitments totaling
$2.4 million from both FannieMae(up to 9.9% of capital or an additional
$204,000--maximum total investment of $1 million) and First Union (up to $2
million).
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, 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 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.
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Tier 1 Capital $7,458 $6,891
Tier 2 Capital 671 468
------- -------
Total Qualifying Capital $8,129 $7,359
======= =======
Risk Adjusted Total Assets
(including off-balance
sheet exposures) $53,716 $51,868
Tier 1 Risk-Based Capital Ratio 13.88% 13.29%
Tier 2 Risk-Based Capital Ratio 15.18% 14.19%
Leverage Ratio 6.51% 6.59%
RESULTS OF OPERATIONS
Summary
The Bank had a net loss of $314 thousand ($.38 per common share) for the
quarter ended September 30, 1998 compared to net income of $64 thousand ($.08
per common share) for the same quarter in 1997. The loss for the quarter ending
September 30, 1998 is primarily due to a $320 thousand loan loss provision to
adequately cover additional credit risk identified during the quarter. Net
income for the quarter ended September 30, 1997 included a $66 thousand gain o
the sale of loans.
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 $1.3 million for the quarter ending September 30,
1998 compared to $1.2 million for the same quarter in 1997. The primary
determinants of the increase was the increase in the Bank's average earning
assets from $101.5 million at September 30, 1997 to $104 million at September
30, 1998. This growth in earning assets is primarily attributable to an increase
in average demand deposit balances (both interest and non-interest bearing) as
outlined above. The increase in volume of investable funds was primarily used to
fund new loan originations and Federal Funds Sold temporary investments.
Offsetting the impact of the increase in earning assets was a decline in
the yield n earning assets from 8.31% at September 30, 1997 to 7.83% at
September 30, 1998. This decline came a result of paydowns in the Bank's
automobile and residential mortgage loan portfolios. Funds have been temporarily
transferred to lower yielding investments until additional loans are originated
or purchased. The Bank's rate on interest bearing liabilities was 10 basis
points lower (3.50% vs. 3.60%) at September 30, 1998 compared to September 30,
1997.
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, 1998 was $320 thousand compared to $30 thousand for the
same quarter in 1997. The increase in the provision is primarily related to two
commercial loans identified during the quarter as having an increased level of
credit risk thereby requiring specific reserves totaling $265 thousand.
Management is in the process of working with identified borrowers to correct
identified weaknesses. These loans and others will continue to be monitored as
to the adequacy of specific reserves.
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 was $379
thousand and $268 thousand for the quarters ending September 30, 1998 and 1997,
respectively. This income totaled 1.33% of average total assets at September 30,
1998 compared to 1.13% for the quarter ended September 30, 1997. The increase in
noninterest income is primarily due to ATM surcharge fees as a result of growth
in the ATM network from 15 to 28 machines. In June 1998, City Council of
Philadelphia introduced a Bill to limit and/or ban ATM surcharge fees for Banks
serving as depository for the City of Philadelphia. The Bank, along with other
Bank's in the City, lobbied with success to have this Bill vetoed.
Noninterest expense
Salaries and benefits represented 2.13% and 1.71% of average assets for the
quarters ended September 30, 1998 and 1997, respectively. Management continues
to recognize the need to grow the Bank's deposit level to generate operating
economies of scale and net interest income to cover the cost of operations.
Data processing expenses represented .77% and .63% of the total average
assets for the quarters ended September 30, 1998 and 1997, 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 re-negotiation of existing contracts with servicers. In an effort to
reduce these costs, the Bank has systematically and strategically sold portions
of its student loan portfolio and replaced it with commercial and other consumer
loans with lower servicing costs.
Occupancy expense increased approximately $67 thousand for the quarter
ended September 30, 1998 compared to the quarter ended September 30, 1997. This
increase is primarily attributable to annual escalations in lease payments and
maintenance contract cost 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 maintain adequate insurance
coverage.
REGULATORY MATTERS
At September 30, 1998, 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.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems,
both internal and out-sourced processing, to identify the systems that could be
affected by the "Year 2000" issue and has developed an implementation plan to
resolve the issue. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs or that of its vendors that have time sensitive
software may recognize the a date using "00" as the year 1900 rather than the
Year 2000. This could result in major system failure or miscalculations.
To date, the Company has completed its assessment phase of the Year 2000
problem. It has received confirmations from its primary computer software and
processing vendors that they are addressing the Year 2000 issue. Current
estimates of the cost to be incurred to prepare for the Year 2000 range from
$100,000-$200,000. In conjunction with Year 2000 preparation, the Bank plans to
make most hardware upgrades as a normal part of replacement of
equipment--thereby minimizing cost. Cost estimates include primarily personnel
and consulting time to ensure all business components/processes have been
considered and tested for compliance. While currently not known or estimable,
additional costs may be identified during testing/renovation phase if certain
systems/equipment are found to be non-compliant with Year 2000.
The Bank has contacted its major loan customers to advise them to review
their own systems for possible Year 2000 problems. In making credit decisions
for major borrowers, the Bank will consider the impact of the Year 2000 issues.
In addition, the Bank plans to hold "Customer Awareness" seminars in November
1998 to ensure all of its major loan and deposit customers are aware of Year
2000 implications and are working towards compliance.
The "Year 2000" potential problems create risk for the Company from
unforeseen problems in its own computer systems and from third parties; such as
other financial institutions, the Federal government, Federal agencies, vendors
and customers. Failures of the Company's or third parties' computer systems
could have a material effect on the Company's abilities to conduct business and
especially to process and account for the transfer of funds electronically.
During September 1998, the Company successfully completed the testing of
its core processing system and found it to be Year 2000 compliant. Further
testing/validation of other ancillary systems/servicers will be performed during
the fourth quarter of 1998 to ensure that all servicers, vendors and loan
customers which have indicated compliance are in fact compliant. The Bank is in
the process of the development of a comprehensive contingency plan in the event
that any of its processors do not meet the Year 2000 compliance deadlines.
ACCOUNTING ISSUES/DISCLOSURES
In June 1997, the FASB issued SFAS No. 131, which is effective for all
periods beginning after December 15, 1997. SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic area in which they operate, and their major
customers.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. The Company is currently
reviewing the provisions of SFAS No. 133.
<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(a). 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 the securityholders of the Registrant.
ITEM 5. OTHER INFORMATION.
On September 30, 1998, the Registrant filed Articles of Amendment to its
Articles of Incorporation with the Secretary of State of the Commonwealth of
Pennsylvania. The filing amended the Articles of Incorporation of the Registrant
to designate a sub-class of ist Common Stock as Class B Common Stock. Pursuant
to the terms of the amendment, holders of the Class B Common Stock have all
rights of Common Stockholders, with the exception of voting rights.
Effective October 9, the Registrant sold 83,333 shares of its Class B Common
Stock to First Union Corporation ("First Union") for a purchase price of $12 per
share. The sale was exempt from registration requirements pursuant to section
4(2) of the Securities Exchange Act of 1933 (the "Act").
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, 1998. [Filed with Schedule SE]
Articles of Amendment to the
Articles of Incorporation of United
Bancshares, Inc. dated September
30, 1998 [Filed with Schedule SE].
<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: August 19, 1998 /S/ EMMA C. CHAPPELL
------------------------
Emma C. Chappell
Chairman, President & CEO
/S/ BRENDA HUDSON-NELSON
------------------------
Brenda Hudson-Nelson
Controller
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,568
<INT-BEARING-DEPOSITS> 345
<FED-FUNDS-SOLD> 10,525
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,032
<INVESTMENTS-CARRYING> 12,657
<INVESTMENTS-MARKET> 9,378
<LOANS> 69,758
<ALLOWANCE> (798)
<TOTAL-ASSETS> 115,879
<DEPOSITS> 103,852
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,366
<LONG-TERM> 0
0
1
<COMMON> 8
<OTHER-SE> 7,661
<TOTAL-LIABILITIES-AND-EQUITY> 115,879
<INTEREST-LOAN> 4,767
<INTEREST-INVEST> 880
<INTEREST-OTHER> 532
<INTEREST-TOTAL> 6,180
<INTEREST-DEPOSIT> 2,230
<INTEREST-EXPENSE> 54
<INTEREST-INCOME-NET> 3,510
<LOAN-LOSSES> 386
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,084
<INCOME-PRETAX> (270)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270)
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.83
<LOANS-NON> 1,575
<LOANS-PAST> 2,159
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 468
<CHARGE-OFFS> 108
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 788
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