SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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FORM 10-Q
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(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, 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
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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
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(Registrant's telephone number, including area code)
N/A
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(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 March 31, 1998, 823,695 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 March 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
United Bancshares, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks 6,113,365 4,604,408
Interest bearing deposits with banks 337,868 334,288
Federal funds sold 4,837,000 7,821,000
----------- -----------
Cash & cash equivalents 11,288,233 12,759,696
Investment securities:
Held-to-maturity, at amortized cost 9,905,653 10,854,711
Available-for-sale, at market value 14,998,891 7,398,607
Loans held for sale, net of unearned discount 0 1,979,177
Loans, net of unearned discount 72,216,308 72,183,255
Less: allowance for loan losses (480,931) (468,806)
----------- -----------
Net loans 71,735,377 73,693,626
Bank premises & equipment, net 1,842,149 1,862,647
Accrued interest receivable 1,517,348 1,439,587
Deferred branch acquisition cost 56,072 75,753
Other real estate owned 159,317 165,188
Prepaid expenses and other assets 632,846 664,475
----------- -----------
Total Assets 112,135,885 108,914,290
=========== ===========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 17,473,254 17,697,901
Demand deposits, interest bearing 20,898,425 20,922,107
Savings deposits 23,351,932 22,925,881
Time deposits, $100,000 and over 15,927,414 13,852,356
Time deposits 23,846,800 24,028,818
----------- -----------
101,497,825 99,427,063
Long-term debt 35,731 43,688
Securities sold to repurchase 1,801,432 1,341,053
Accrued interest payable 559,143 541,225
Accrued expenses and other liabilities 1,158,549 502,406
----------- -----------
Total Liabilities 105,052,680 101,855,435
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932
500,000 shrs auth., 93,150 issued and outstanding
Common stock, $.01 par value; 2,000,000 shares authorized;
823,695 shares issued and outstanding
at March 31, 1998 and December 31, 1997 8,237 8,237
Additional-paid-in-capital 10,426,222 10,426,222
Accumulated deficit (3,414,505) (3,438,699)
Net unrealized gain on available-for-sale securities 62,319 62,163
----------- -----------
Total Shareholders' equity 7,083,204 7,058,855
=========== ===========
112,135,885 108,914,290
=========== ===========
</TABLE>
<PAGE>
United Bancshares, Inc.
Statements of Operations
(unaudited)
Quarter ended Quarter ended
March 31, March 31,
1998 1997
---- ----
Interest Income:
Interest and fees on loans $1,603,331 1,439,992
Interest on investment securities 280,881 218,753
Interest on Federal Funds sold 134,556 89,751
Interest on time deposits
with other banks 7,570 6,172
----------- ----------
Total interest income 2,026,338 1,754,668
Interest Expense:
Interest on time deposits 497,332 464,816
Interest on demand deposits 151,665 76,400
Interest on savings deposits 110,979 115,803
Interest on borrowed funds 9,688 7,588
----------- ----------
Total interest expense 769,664 664,607
----------- ----------
Net interest income 1,256,674 1,090,061
Provision for loan losses 25,500 22,500
----------- ----------
Net interest income less provision for
loan losses 1,231,174 1,067,561
----------- ----------
Noninterest income:
Gain on sale of loans 29,688 115,652
Customer service fees 293,796 264,114
Other income 26,835 25,197
----------- ----------
Total noninterest income 350,319 404,963
Non-interest expense
Salaries, wages, and employee benefits 612,314 573,018
Occupancy and equipment 282,975 244,951
Office operations and supplies 133,407 118,448
Marketing and public relations 20,739 22,988
Professional services 59,923 86,766
Data processing 223,188 206,502
Deposit insurance assessments 19,208 17,545
Other noninterest expense 205,540 137,668
----------- ----------
Total non-interest expense 1,557,294 1,407,886
Net income $ 24,199 $ 64,638
=========== ==========
Earnings per share-basic $ 0.03 $ 0.08
----------- ----------
Weighted average number of shares 823,695 816,355
=========== ==========
<PAGE>
United Bancshares, Inc.
Statements of Cashflows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income 24,199 64,638
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 25,500 22,500
Gain on sale of loans (29,688) 115,652
Depreciation and amortization 145,104 141,694
Proceeds from sale of student loans 2,022,500 5,110,843
Increase (decrease) in accrued interest
receivable and other assets (40,260) (17,701)
Increase in accrued interest
payable and other liabilites 674,061 37,498
---------- ----------
Net cash provided by operating activities 2,821,416 5,475,124
Cash flows from investing activities
Purchase of investments-Available-for-Sale (7,997,940) (1,052)
Purchase of investments-Held-to-Maturity (1,500,000) (2,499,219)
Proceeds from maturity & principal reductions
of investments-Available-for-Sale 393,852 946,256
Proceeds from maturity & principal reductions
of investments-Held-to-Maturity 2,448,248 1,020,338
Net (increase) in loans (60,063) (2,936,187)
Purchase of premises and equipment (100,159) (190,181)
---------- ----------
Net cash provided by (used in) investing activities (6,816,062) (3,660,045)
Cash flows from financing activities
Net increase (decrease) in deposits 2,070,762 2,507,921
Repayments on long term debt (7,957) (7,710)
Reverse repurchase agreement 460,379 1,506,732
---------- ----------
Net cash provided by financing activities 2,523,184 4,006,943
(Decrease) increase in cash and cash equivalents (1,471,462) 5,822,022
Cash and cash equivalents at beginning of period 12,759,696 9,244,312
Cash and cash equivalents at end of period 11,288,234 15,066,334
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 746,805 676,231
Write-down of cumulative effect of change in method
of accounting for invesment securities --
========== ==========
</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, QUARTER ENDED QUARTER ENDED
except per share data) MARCH 31, 1998 MARCH 31, 1997
-------------- -----------------
Net interest income $1,231 $1,090
Provision for loan losses 26 23
Noninterest income 350 405
Noninterest expense 1,557 1,408
Net income (loss) $ 24 $ 65
Earnings per share - basic $.03 $.08
Balance sheet totals: MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Total assets $112,136 $108,914
Loans, net $ 71,735 $ 73,693
Investment securities $ 24,905 $ 18,253
Deposits $101,498 $ 99,427
Shareholders' equity $ 7,114 $ 7,091
Ratios
Return on assets .07% .18%
Return on equity .99% 2.69%
Equity to assets ratio 6.57% 6.61%
<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 $8.8 million, or 9.51%, during the quarter ending March
31, 1998. Average funding uses increased $9.9 million, or 10.45%, for the same
quarter.
Sources and Uses of Funds Trends
DECEMBER 31,
MARCH 31, 1998 INCREASE 1997
AVERAGE (DECREASE) AVERAGE
BALANCE AMOUNT % BALANCE
------- ------ ----- -------
Funding uses:
Loans $75,416 $6,529 9.48% $68,887
Investment securities
Held-to-maturity 10,184 (38) (.37%) 10,222
7,251 999 15.98% 6,252
Available-for-sale
Federal funds sold 11,583 2,396 26.08% 9,187
-------- ----- -------
Total uses $104,435 $9,887 $94,548
======== ====== =======
Funding sources:
Demand deposits
Noninterest-bearing $18,678 $2,773 17.43% $15,905
Interest-bearing 24,764 9,952 67.19% 14,812
Savings deposits 19,507 (3,770) (16.20%) 23,277
Time deposits 37,811 183 .49% 37,627
Other borrowed funds 957 (305) (24.19%) 1,262
------- ------ -------
Total sources $101,716 $8,833 $92,883
======== ====== =======
Loans
Average loans increased approximately $6.5 million, or 9.48% during the quarter
ended March 31, 1998. This increase was primarily due to the purchase of $8
million automobile loans at the end of November 1997. These loans were
strategically purchased to replace lower yielding/higher cost to service student
loans which were sold in September 1997. During 1998, the Bank continues to
employ this strategy. In March 1998, it sold approximately $2 million student
loans and in April 1998 purchased approximately $5 million additional automobile
loans. The automobile loans were purchased from another financial institution
and were selected based on the fact that they were seasoned (remaining average
life of approximately 2 years) and had no history of delinquency.
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
MARCH 31, DECEMBER 31,
1998 1997
---- ----
Commercial and industrial $12,709 $12,095
Commercial real estate 2,097 1,515
Consumer loans 22,521 24,590
Residential mortgages 34,889 35,961
Loans held-for-sale -- 1,979
------- -------
Total Loans $72,216 $74,162
======= =======
Residential mortgage loans at March 31, 1998 comprise the greatest percentage of
total loans representing approximately 48.3% of total loans. However, these
loans as a percentage of the total portfolio continue to decline due to
refinancing and paydowns while other loan categories such as commercial loans
and consumer loans continue to increase.
<PAGE>
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
(Dollars in thousands) MARCH 31, 1998
- ---------------------- --------------
Balance at January 1 $ 468
-------
Charge-offs:
Commercial and industrial --
Commercial real estate --
Residential mortgages --
Consumer loans (21)
------
(21)
Recoveries - consumer loans 8
------
Net charge-offs (13)
Additions charged to operations 26
------
Balance at December 31 $ 481
======
Ratio of net charge-offs to average
loans outstanding 0.02%
======
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 .67% at March
31, 1998. In evaluating the adequacy of the allowance for loan loss, 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 March 31,
1998, charge-offs as a percentage of average loans represented .02%.
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, 1998, non-accrual loans were $1.2 million. Approximately $847 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, 1998, approximately 31.4% 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, 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
$3.4 million, or 13.08%, during the quarter ended March 31, 1998. The increase
is due the growth in average deposit levels and the temporary deployment of the
proceeds from the sale of $2 million in student loans in Federal Funds Sold
until automobile loans were purchased in April 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.
Deposits
Non-interest bearing demand deposits increased on average by approximately $2.7
million, or 17.43%, during the quarter ended March 31, 1998. The increase was
primarily due to increased balances in small business checking (specifically,
the "Entrepreneurial-25" checking product which was designed for small start-up
businesses). In addition, the Bank experienced growth in its "Church-affiliated"
checking balances due to its alliance with several religious organizations in
the region. Finally, the Bank continues to strictly enforce its compensating
balance arrangements with commercial loan borrowers.
Interest bearing demand deposits increased on average by approximately $9.9
million, or 67.19%, during the quarter ended March 31, 1998. The increase was
primarily due to the introduction of sweep deposit accounts in December 1997 as
a vehicle to attract larger deposits by sweeping funds out of
noninterest-bearing demand deposit accounts and investing them overnight in
interest-bearing deposit accounts.
Other Borrowed Funds
The average balance for other borrowed funds decreased $305 thousand, or
24.19%, during the quarter ended March 31, 1998. The decrease is due to the
maturity of a $1.3 million reverse repurchase agreement in February 1998 which
was not rolled over until the late March 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 March 31, 1998 are summarized
below:
Commitments to extend credit $2,700,000
Outstanding letter of credit $ 100,000
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, 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 $10.6 million at March 31, 1998, representing 44% of the
investment portfolio. Other types of assets such as federal funds sold, as well
as maturing loans, are sources of liquidity. Approximately $3.6 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, 1998:
(Thousands of dollars)
3 months or less $ 6,707
Over 3 through 12 months 8,806
Over 1 through five years 300
Over five years 114
-------
Total $15,927
=======
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 March 31, 1998 and
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). 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, 1998, a liability sensitive
position is maintained on a cumulative basis through 1 year of -5.67% 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. 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 MARCH 31, 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 338 -- -- -- 338
Investment securities:
U.S. Government 8,997 1,651 500 1,749 4,497 312 17,706
Mortgage-backed 5,058 735 899 413 7,105
Federal funds sold 4,837 -- -- -- -- 4,837
Real Estate Loans 4,017 1,001 2,126 1,915 14,764 13,906 37,730
All Other Loans 21,948 1,425 6,900 1,190 1,767 1,256 34,486
------ ------- ------ ----- ------ ------ -------
Total interest-
sensitive assets 45,195 4,077 9,526 5,589 21,927 15,887 102,202
------ ------- ------ ----- ------ ------ -------
INTEREST-SENSITIVE
LIABILITIES
Interest checking accounts 8,814 -- 1,516 -- -- 10,330
Money market accounts 5,986 -- 8,250 -- -- 14,236
Savings accounts 14,541 -- 5,142 -- -- 19,683
Certificates less
than $100,000 7,648 10,011 3,492 2,696 -- 23,847
Certificates more
than $100,000 6,707 8,806 300 114 -- 15,927
Other borrowings 1,801 36 -- -- -- 1,837
------ ------- ------ ----- ------ -------
Total Interest-
sensitive liabilities 45,498 18,853 18,699 2,810 -- 85,860
------ ------- ------ ----- ------ -------
Interest sensitivity gap (302) (14,766) (9,173) 2,779 21,927 15,887 16,342
------ ------- ------ ----- ------ ------ -------
Average 12 month Gap %
Earning Assets (5.67)
=======
</TABLE>
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 March 31, 1998 are as follows:
MARKET VALUE OF PERCENT OF
CHANGES IN RATE PORTFOLIO EQUITY CHANGE
--------------- ---------------- ------
(Dollars in thousands)
+400 basis points $ 87,941 (20.88)%
+300 basis points 93,743 (15.66)
+200 basis points 99,545 (10.44)
+100 basis points 105,347 (5.22)
Flat rate 111,149 --
-100 basis points 116,951 5.22
-200 basis points 122,753 10.44
-300 basis points 128,555 15.66
-400 basis points 134,357 20.88
<PAGE>
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 March 31, 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 $24 thousand during the
quarter ended March 31, 1998. The increase during the quarter was due to
internal capital generation in the form of net income of approximately $24
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, 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.
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,
1998 1997
---- ----
Tier 1 Capital $6,935 $6,891
Tier 2 Capital 481 468
------ -------
Total Qualifying Capital $7,416 $7,359
====== ======
Risk Adjusted Total Assets
(including off-balance
sheet exposures) $51,029 $51,868
Tier 1 Risk-Based Capital Ratio 13.59% 13.29%
Tier 2 Risk-Based Capital Ratio 14.53% 14.19%
Leverage Ratio 6.26% 6.59%
<PAGE>
RESULTS OF OPERATIONS
Summary
The Bank had net income of approximately $24 thousand ($.03 per common share)
for the quarter ended March 31, 1998 compared to a profit of $65 thousand ($.08
per common share) for the same quarter in 1997. Net income for the quarter
ending March 31, 1997 included a $110 thousand gain on the sale of $4.9 million
student loans. For the quarter ending March 31, 1998, the Bank sold
approximately $2 million student loans for a gain of $30 thousand. Excluding
gains on sales of loans, there was a $45 thousand improvement in the Bank's
operating performance during the quarter ended March 31, 1998 compared to the
same quarter in 1997. This improvement is primarily a result of an increase in
the Bank's earning assets(more loans), an increase in the net interest margin,
and an increased level of customer service fees--$294 thousand in 1998 compared
to $264 thousand in 1997.
Net Interest Income
Net interest income is an effective measure of how well management has balanced
the Bank's interest rate sensitive assets and liabilities. Net interest income,
the difference between (a) interest and fees on interest earning assets and
interest paid on interest-bearing liabilities, is a significant component of the
Bank's earnings. Changes in net interest income result primarily from increases
or decreases in the average balances of interest earning assets, the
availability of particular sources of funds and changes in prevailing interest
rates.
Net interest income was $1.3 million for the quarter ending March 31, 1998
compared to $1.1 million for the same quarter in 1997. The primary determinants
of the increase was the increase in the Bank's average earning assets from $93.2
million at March 31, 1997 to $105 million at March 31, 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 in the
above sections. 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.
Also contributing to the increase in the net interest income was an
increase in the Bank's net interest margin from 4.66% to 4.81% as a result of
growth in the loan portfolio--specifically, purchased automobile loans which
have an average yield of approximately 10%.
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, 1998 was $26 thousand compared to $23 thousand for the same
quarter in 1997. The increase is due to the increase in the average balance of
loans outstanding and the sale of student loans which have a 98% government
guarantee compared to purchased automobile loans.
<PAGE>
Noninterest Income
The amount of the Bank's noninterest income generally reflects the volume of the
transactional and other accounts handled by the Bank and includes such fees and
charges as low balance account charge, overdrafts, account analysis, and other
customer service fees. Deposit-related noninterest income increased from 1.05%
of average total assets to 1.12% for the quarter ended March 31, 1997 compared
to the quarter ended March 31, 1998. The increase is primarily attributable to
an increase in ATM surcharge fees ($120 thousand for the quarter ending March
31, 1998 compared to $94 thousand for the same quarter in 1997) due to growth in
the ATM network from 15 to 28 machines. In addition, continued growth in the
number of demand deposit accounts to which activity charges apply and the
implementation of a low-balance charge on "free checking" accounts when the
balance falls below $100 resulted in a $5 thousand increase in demand
deposit-related fee income--including overdraft fees, low balance fees, and
activity charges.
Noninterest expense
Salaries and benefits represented 2.22% and 2.30% of average assets for the
quarters ended March 31, 1998 and 1997, respectively. For the quarter ended
March 31, 1998, staffing levels remained relatively constant with some planned
attrition and management's concerted effort to minimize new hiring and control
personnel expense while average earning assets increased by 10.45%.
Data processing expenses represented .81% and .83% of the total average
assets for the quarters ended March 31, 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 $38 thousand for the quarter
ended March 31, 1998 compared to the quarter ended March 31, 1997. This increase
is primarily attributable to annual escalations in lease payments and
maintenance contracts required to service the Bank's growing ATM network.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
REGULATORY MATTERS
At March 31, 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.
<PAGE>
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
$50,000 to $100,000. 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.
In addition, 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.
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 June 1998, the Company will begin its testing and renovation phases
to ensure that all in-house processing, servicers, vendors and loan customers
which have indicated compliance are in fact compliant. This phase will also
include the development of contingency plans in the event that primary
processors do not meet the Year 2000 compliance deadlines.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
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. The Company has not identified any segments which require disclosure.
<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.
The Registrant has solicited proxies with respect to the Annual Meeting of
its stockholders scheduled for May 22, 1998 by proxy statement filed with the
Commission.
The following matters are scheduled to be voted upon at the Annual Meeting:
1. ELECTION OF DIRECTORS
The following individuals are scheduled for re-election as directors of the
Registrant:
James F. Bodine
Verdaynea F. Eason
William C. Green
2. INDEPENDENT ACCOUNTANT
The shareholders are scheduled to vote on the ratification of Grant
Thornton, LLP as the independent accountant for the Registrant.
No further matters have been submitted to a vote of the Registrant's
securityholders
ITEM 5. OTHER INFORMATION.
None
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 March 31, 1998.
<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 21, 1998 /S/ EMMA C.CHAPPELL
------------------------
Emma C. Chappell
Chairman, President & CEO
/S/ BRENDA HUDSON-NELSON
------------------------
Brenda Hudson-Nelson
Controller
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