SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998.
UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
0-25976
(Registrant's file number)
Pennsylvania 23-2802415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
714 Market Street, Philadelphia, PA 19106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (215)829-2265
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the 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 12 months ( or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [_]
There is no market for the Common Stock. None of the shares of the Registrant's
stock were sold within 60 days of the filing of this Form 10-K. As of March 15,
1999 the aggregate number of the shares of the Registrant's Common Stock
outstanding was 913,490.
<PAGE>
Registrant also has 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 March 31, 1999. The Board of Directors designated a
subclass of the common stock, designated Class B Common Stock, by filing of
Articles of Amendment with the Commonwealth of Pennsylvania 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 March 31, 1999, 166,666 shares of Class B
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference as filed with the
Registrant's 1998 Form 10-K
1. Consolidated Statements of Operations for the years ended December 31,
1996.
2. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996.
3. Consolidated Statements of Cash Flows for the years ended December 31,
1996.
4. Articles of Incorporation of the Bank and UBS
5. Bylaws of the Bank and UBS
6. Voting Trust Agreements
7. Long Term Incentive Compensation Plan
8. Lease Agreements for the Bank's premises.
9. Employment Agreement among Registrant, the Bank and Dr. Emma C. Chappell
PART I
ITEM 1 BUSINESS
United Bancshares, Inc.
United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for United
Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of the
Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the Bank
Holding Company of the Bank, pursuant to the Bank Holding Company Act of 1956,
as amended, on October 14, 1994.
The Bank commenced operations on March 23, 1992. UBS provides banking services
through the Bank. The principal executive offices of UBS and the Bank are
located at 714 Market Street, Philadelphia, Pennsylvania 19106. The Registrant's
telephone number is (215) 829-2265.
As of March 31, 1999, UBS and the Bank had a total of 75 employees.
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United Bank of Philadelphia
The Bank, an African-American -controlled, state-chartered member bank of the
Federal Reserve System is regulated by both the Federal Reserve Board and the
Commonwealth of Pennsylvania Department of Banking (the "Department"). The
deposits held by the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC").
The Bank conducts all its banking activities through its six offices located as
follows: (i) Main Branch 714 Market Street, Philadelphia, PA; (ii) Center City
Branch Two Penn Center, Philadelphia, PA; (iii) West Philadelphia Branch 37th &
Lancaster Avenues, Philadelphia, PA; (iv) Mount Airy Branch 1562 East Wadsworth
Avenue, Philadelphia, PA; (v) Frankford Branch 4806 Frankford Avenue,
Philadelphia, PA; and (vi) West Girard Branch 2820 West Girard Avenue,
Philadelphia, PA. Through these locations, the Bank offers a broad range of
commercial and consumer banking services. At December 31, 1998, the Bank had
total deposits aggregating approximately $57.2 million and had total net loans
outstanding of approximately $109 million. Although the Bank's primary service
area for Community Reinvestment Act purposes is Philadelphia County, it also
services, generally, the Delaware Valley, which consists of portions of
Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle
County in Delaware; and Camden, Burlington, and Gloucester Counties in New
Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on
1990 census data, 204 or 58% of these are designated as low to moderate-income
tracts while 105 or 30% are characterized both as low to moderate-income and
minority tracts. The Bank's primary service area consists of a population of
1,577,815, which includes a minority population of 752,309.
The Bank engages in the commercial banking business, serving the banking needs
of its customers with a particular focus on, and sensitivity to, groups that
have been traditionally under-served, including Blacks, Hispanics and women. The
Bank offers a wide range of deposit products, including checking accounts,
interest-bearing NOW accounts, money market accounts, certificates of deposit,
savings accounts and Individual Retirement Accounts.
The focus of the Bank's lending activities is on the origination of commercial,
consumer and residential loans. A broad range of credit products are offered to
the businesses and consumers in the Bank's service area, including commercial
loans, mortgage loans, student loans, home improvement loans, auto loans,
personal loans, home equity loans and home equity lines of credit. At March 31,
1999 the Bank's maximum legal lending limit was approximately $1,838,000 per
borrower. However, the Bank's internal Loan Policy limits the Bank's lending to
$500,000 per borrower in order to diversify the loan portfolio. The Bank has
established relationships with correspondent banks to participate in loans that
exceed the Bank's internal policies or legal lending limits. The Board of
Directors of the Bank maintains the ability to waive its internal lending limit
upon consideration of a loan. The Board of Directors has exercised this power
with respect to loans and participants on occasion. However, the Bank maintains
no credit that exceeds its legal lending limit.
The Bank also offers commercial and retail products. In the area of commercial
loans, the Bank has flexibility to develop loan arrangements targeted at a
customer's objectives. Typically, these loans are term loans or revolving credit
arrangements with interest rate, collateral and repayments terms, varying based
upon the type of credit, and various factors used to evaluate risk. The Bank
participates in the government-sponsored Small Business Administration ("SBA")
lending program and when the Bank deems it appropriate, obtains SBA guarantees
for up to 90% of the loan amount. This guaranty effectively reduces the Bank's
exposure to loss in its commercial loan portfolio. Commercial loans are
typically made of the basis of cash flow to support repayment with secondary
reliance placed on the underlying collateral.
The Bank's consumer loan program includes installment loans for home improvement
and the purchase of consumer goods and automobiles, student loans, home equity
and VISA secured and unsecured revolving lines of credit, and checking overdraft
protection. The Bank also offers residential mortgage loans to its customers.
The Bank's concentration in the retail area is in the category of student loans
where it can minimize its risk of non-payment with government guaranties.
In addition, the Bank offers safe deposit boxes, travelers' checks, money
orders, direct deposit of payroll and Social Security checks, wire transfers and
access to regional and national automated teller networks as well as
international and trust services through correspondent institutions.
The management and Board of the Bank are very active in their respective
communities, allowing the Bank to closely
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monitor the needs of individuals and businesses in the communities in which it
operates. The Bank continually focuses on developing programs to serve those
needs. To this end, the Bank has been instrumental in establishing Philadelphia
United Community Development Corporation ("Philadelphia United"). Philadelphia
United is a non-profit corporation incorporated in the Commonwealth of
Pennsylvania. In 1997, the Bank received certification as a Community
Development Financial Institution from the Department of Treasury Community
Development Financial Institution ("CDFI") Fund. Additionally, the CDFI Fund has
agreed to provide Philadelphia United with $500 thousand for the purpose of
carrying out community development efforts. The Bank has also implemented
programs aimed at counseling individuals and businesses on financial
responsibility and credit repair. Much of this education and training service
provided by the Bank has been assumed by Philadelphia United. Philadelphia
United's programs will give individuals and businesses, located primarily in
Philadelphia's enterprise zones, access to sophisticated planning skills and
abilities.
Competition
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with local, regional and national commercial
banks, as well as savings banks and savings and loan associations. Many of these
banks and financial institutions have an amount of capital that allows them to
do more advertising and promotion and to provide a greater range of services to
customers. To date, the Bank has attracted, and believes it will continue to
attract its customers from the deposit base of such existing banks and financial
institutions largely due to the Bank's mission to service groups of people who
have traditionally been under-served and by its devotion to personalized
customer service. The Bank's strategy has been, and will continue to be, to
emphasize personalized services with special sensitivity to the needs of Blacks,
Hispanics and women and to offer competitive rates to borrowers and depositors.
In order to compete, the Bank relies upon personal contacts by the officers,
directors, advisory board and employees of the Bank to establish and maintain
relationships with Bank customers. The Bank focuses its efforts on the needs of
individuals and small and medium-sized businesses. In the event there are
customers whose loan demands exceed the Bank's lending limit, the Bank will seek
to arrange for such loans on a participation basis with other financial
institutions and intermediaries. The Bank will also assist those customers
requiring other services not offered by the Bank to obtain such services from
its correspondent banks.
Registrant believes that a portion of the Bank's customer base is derived from
customers who were dissatisfied with the level of service provided at larger
financial institutions. While some of such customers have followed officers of
those institutions who were hired by the Bank, others were attracted to the Bank
by calling programs of its officers and referrals from other customers. The Bank
has sought, in the past, and intends to continue in the future, to hire customer
contact officers who have good relationships with desirable customers. These
personal relationships, provision of a high level of customer services, and
referrals from satisfied customers, form the basis of the Bank's competitive
approach, as opposed to advertising, rate competition or the development of
proprietary banking products, services or programs.
In the past, the principal competition for deposits and loans have been other
depository institutions. However, now the Bank also competes with other
financial intermediaries such as brokerage houses offering investment vehicles
to the general public. Other entities, both public and private, seeking to raise
capital through the issuance and sale of debt or equity securities are also
competitors with banks and savings and loan associations in the acquisition of
deposits. In order to address the risk of deposit reduction due to investment in
non-bank alternatives, the Bank has established a relationship with American
Express Financial Advisors ("AEFA"). AEFA provides the Bank with two certified
financial advisors who consult with the Bank's customers wishing to consider
alternative investments. These advisors maintain their offices in the Main
Branch and Wadsworth Branch of the Bank. The Bank receives compensation from
AEFA for each securities purchase made through these advisors, thus yielding
additional fee income.
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ITEM 2 - Properties
Main Branch
The Bank's principal office is located on the first floor of a multi-tenant
retail and commercial office building in Center City, Philadelphia, Pennsylvania
located at 714 Market Street, Philadelphia, PA 19106. The Bank occupies
approximately 5,700 square feet of space pursuant to a lease which expires on
February 28, 2002. The lease has renewal options for two five-year periods and
is subject to escalation clauses. The space is occupied by UBS, the Bank.
Philadelphia United subleases a portion of this facility from the Bank. The
first floor contains a banking lobby, the vault, customer service area,
executive and administrative offices, as well as the Bank's compliance and
marketing groups. The Bank's finance, branch administrative and operations
functions are located on the second floor of the same building, where the Bank
leases an additional space on a month-to-month basis. The aggregate monthly rent
for this location is 8,629.39.
Mt. Airy Branch
North Philadelphia Branch
The Bank operates a branch at 1562 East Wadsworth Avenue, in the Mt. Airy
section of Philadelphia. This facility, comprising a retail banking lobby,
teller area, offices, vault and storage space is currently leased from the
Federal Deposit Insurance Corporation ("FDIC") at a monthly rental of $1675.00.
Center City Branch
The Bank operates a branch location at Two Penn Center, 15th Street and JFK
Boulevard, Philadelphia, PA. The Bank leases approximately 4,769 square feet at
its Two Penn Center location. The space includes lobby, teller area, customer
service area, primary lending area and administrative offices, as well as a
vault. The aggregate monthly rent for this location is $13,114.75.
Frankford Branch
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. The main
floor of the facility houses teller and customer service areas. The basement
houses administrative offices.
West Girard Branch
In 1994, the Bank purchased a branch facility at 2820 West Girard Avenue. The
facility is comprised of a teller area, customer service area, lobby, vault and
administrative offices.
West Philadelphia Branch
On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster Avenue
from PNC Bank. The facility is comprised of approximately 3,000 square feet. The
main floor houses teller and customer service areas, a drive-up teller facility
and automated teller machine. The basement provides storage for the facility.
The aggregate monthly rental is approximately $2,500.00 exclusive of taxes,
insurance, utilities and janitorial service.
ITEM 3 - Legal Proceedings
Other than the following, no material claims have been instituted or threatened
by or against UBS or its affiliates other than in the normal course of business.
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ITEM 4 - Submission of Matters to Vote of Security Holders
Not Applicable. No matters were submitted to a vote of Registrant's security
holders since the Registrant's last periodic filing.
PART II
ITEM 5 - Market for the Registrant's Common Stock.
Common Stock
As of March 31, 1999 there were 3,177 shareholders of record of UBS's Common
Stock.
The Common Stock is not traded on any national exchange or otherwise traded in
any recognizable market. Prior to December 31, 1993, the Bank conducted a
limited offering (the "Offering") pursuant to a registration exemption provided
in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Securities
Act"). The price-per-share during the Offering was $12.00. Prior to the
Offering, the Bank conducted an initial offering of the Common Stock (the
"Initial Offering") at $10.00 per share pursuant to the same registration
exemption.
Beginning April 24, 1995, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock and 750,000 warrants
to purchase a share of the common stock. 18,465 shares and 55,395 warrants have
been sold pursuant to this offering. Each unit, consisting of one share of
common stock and three warrants to purchase one share of common stock in each of
three subsequent years (total 3 shares), were issued at $12.00 per unit. The
warrant exercise price was $8.00 per share for the 1996 Warrant was $9.00 per
share for the 1997 Warrant, and will be $10.00 per share for the 1998 Warrant.
The exercise price of the warrants may be adjusted to avoid dilution of warrant
holders. The units were offered pursuant to an exemption from registration
contained in section 4(2) and 3(a)(5) of the Act. No underwriters were used and
no commissions were paid as a result of this offering. The offering closed on
December 31, 1995. In December 1995, the Registrant sold 41,666 shares of
Registrant's common stock in an offering exempt from registration pursuant to
section 4(2) of the Act at a purchase price of $12.00 per share. This sale was
accomplished pursuant to a commitment to purchase these securities issued in
December 1994.
Beginning May 10, 1996, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock. 6,934 shares were
sold pursuant to this offering. The stock was offered pursuant to an exemption
from registration contained in 4(2) and 3(a)(5) of the Act. During 1996, the
Registrant received, $55,536 and issued 6,942 shares as a result of warrant
exercises by shareholders to purchase common stock at a price of $8.00 per
share. Beginning May 19, 1997, Registrant commenced an offering solely to
existing stockholders of 250,000 shares of its common stock, initially on a
pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was
offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act.
During 1997, the Registrant received $34,710 and issued 3,856 shares as a result
of exercise of the 1997 warrants at $9.00 per share. During 1998, Registrant
received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per
share and sold 6,492 shares of common stock as a result to its offering solely
to stockholders of record. This offering was exempt pursuant to an exemption
from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March
31, 1999, there were no warrants outstanding to purchase common stock of the
Bank.
Class B Common Stock
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, 1999, 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
Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B
Common Stock to First Union for a purchase
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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").
Series A Preferred Stock
Registrant has engaged in the sale of Series A Preferred Stock which has the
characteristics identified in the UBS Articles of Incorporation incorporated by
reference as an Exhibit hereto pursuant to an exemption from registration
contained in Section 4(2) of the Securities Act. On July 23, 1998, the
Registrant sold 39,849 shares of its Series A Preferred Stock to the Federal
National Mortgage Association at a purchase price of $20 per share.
Dividends
Registrant has not, during the three most recent fiscal periods declared or paid
any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended,
provides that cash dividends may be declared and paid only from accumulated net
earnings and that, prior to the declaration of any dividend, if the surplus of a
bank is less than the amount of its capital, the bank shall, until surplus is
equal to such amount, transfer to surplus an amount which is at least ten
percent of the net earnings of the bank 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 the prior approval of the Pennsylvania
Department of Banking.
Under the Federal Reserve Act, if a bank has sustained losses equal to or
exceeding its undivided profits then on hand, 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 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 Bank'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. As a result of this regulation, the
Bank, and therefore the Registrant, will most likely be unable to pay any
dividends while an accumulated deficit exists. The Registrant does not
anticipate that dividends will be paid for the forseeable future.
The Federal Deposit Insurance Act generally prohibits all payments of dividends
by a bank which is in default of any assessment to the FDIC.
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ITEM 6 - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net interest income $ 5,241 $ 4,744 $ 4,259 $ 4,012 $ 3,766
Provision for loan losses 351 97 85 78 385
Noninterest income 1,816 1,517 1,118 741 940
Noninterest expense 6,696 5,983 6,123 5,454 5,068
Net income (loss) 10 181 (832) (779) (747)
Net income (loss) per share - basic/diluted .01 0.22 (1.03) (1.04) (1.01)
Balance sheet totals:
Total assets $121,983 $108,914 $ 96,769 $ 92,635 $ 95,255
Net loans 57,271 73,694 69,097 61,696 63,043
Investment securities 43,196 18,253 14,460 16,739 18,944
Deposits 109,063 99,427 88,761 84,228 87,451
Shareholders' equity 8,904 7,059 6,759 7,470 6,799
Ratios:
Equity to assets 6.40% 6.61% 7.45 % 7.36 % 6.54 %
Return on assets .01% 0.18% (0.89)% (0.87)% (0.83)%
Return on equity .14% 2.69% (12.02)% (11.83)% (12.69)%
</TABLE>
ITEM 7 - MANAGEMENT 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. Financial data for prior periods are presented for the Bank only.
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. This
discussion and analysis should be read in conjunction with the financial
statements presented elsewhere in this report.
RESULTS OF OPERATIONS
Summary
The Company recorded net income of $10,000 ($.01 per share) for 1998
compared to net income of $181,000 ($0.22 per share) in 1997 and a loss of
$832,000 ($1.03 per share) in 1996. The decline in earnings during 1998 is
primarily attributable to an increase in the provision for loan losses. A more
detailed explanation for each component of earnings is included in the sections
below.
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. During 1998, average-earning assets increased
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approximately $9.6 million, or 10.1%, while the net yield on average interest
earning assets increased slightly to 5.03%. The result was an increase of
$497,000 in net interest income from 1997 to 1998
The allowance for loan losses as a percentage of total loans increased from
0.63% in 1997 to 1.17% in 1998. This increase is primarily attributable to a
specific provision of approximately $200,000 for one commercial loan as well as
a $16 million decline in total loans outstanding at year-end.
TABLE 1 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------- --------------------------- -------------------
Average Yield/ Average Yield/ Average Yield/
balance Interest rate balance Interest rate balance Interest rate
------- -------- ------ -------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans 71,338 6,270 8.79% $ 68,887 $5,913 8.58% $65,243 $5,567 8.53%
Investment securities
held-to-maturity 11,436 746 6.52 10,222 659 6.45 8,110 502 6.19
Investment securities
available-for-sale 8,392 557 6.63 6,252 434 6.94 8,319 495 5.95
Federal funds sold 12,959 688 5.31 9,187 483 5.26 4,350 225 5.17
-------- -------- ------ ------- -------- ------
Total interest-earning
assets 104,125 8,261 7.93 94,548 7,489 7.92 86,022 6,789 7.89
Noninterest-earning assets:
Cash and due from banks 4,646 4,271 3,671
Premises and equipment, net 1,760 1,846 1,657
Other assets 3,576 1,564 2,129
Less allowance for loan losses (565) (468) (506)
------- -------- -------
Total 113,542 $101,761 $92,973
======= ======== =======
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits 22,622 620 2.74% $ 14,812 379 2.56% $13,072 294 2.25%
Savings deposits 23,283 428 1.84 23,277 459 1.97 24,046 506 2.10
Time deposits 37,365 1899 5.08 37,627 1,852 4.92 34,806 1,651 4.74
Other borrowed funds 1,521 73 4.85 1,262 55 4.36 1,821 79 4.34
-------- -------- ------ ------- -------- ------
Total interest-bearing
liabilities 84,791 3,020 3.56 76,978 2,745 3.57 73,745 2,530 3.43
Noninterest-bearing liabilities:
Demand deposits 19,740 15,905 11,197
Other 1,747 2,153 1,107
Shareholders' equity 7,264 6,725 6,924
------- -------- -------
Total 113,542 $101,761 $92,973
======= ======== =======
Net interest earnings 5,241 $4,744 $4,259
Net yield on interest-earning assets 5.03% 5.01% 4.95%
</TABLE>
For purposes of computing the average balance, loans are not reduced for
nonperforming loans.
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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 (b) 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 for 1998 totaled $5.2 million, an increase of $497,000, or
10.5%, compared to 1997. Net interest income in 1997 totaled $4.7 million, an
increase of $485,000, or 11.4%, compared to 1996.
TABLE 2 - RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
--------------------------- ---------------------------
Increase (decrease) due to Increase (decrease) due to
--------------------------- ---------------------------
Volume Rate Net Volume Rate Net
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans .................... $ 221 $ 136 $ 357 $ 245 $ 101 $ 346
Investment securities
held-to-maturity ....... 81 6 87 136 21 157
Investment securities
available-for-sale ..... 175 (52) 123 (144) 83 (61)
Federal funds sold ....... 203 2 205 254 4 258
----- ----- ----- ----- ----- -----
Total interest-earning
assets ............. 680 92 772 491 209 700
----- ----- ----- ----- ----- -----
Interest paid on:
Demand deposits .......... 218 23 241 76 9 85
Savings deposits ......... 2 (33) (31) 13 (60) (47)
Time deposits ............ (9) 56 47 68 133 201
Other borrowed funds ..... 9 9 18 (98) 74 (24)
----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities ........ 220 55 275 59 156 215
----- ----- ----- ----- ----- -----
Net interest income .. $ 460 $ 37 $ 497 $ 432 $ 53 $ 485
===== ===== ===== ===== ===== =====
</TABLE>
Changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
In 1998, there was an increase in net interest income of $460,000 due to
changes in volume and an increase of $37,000 due to changes in rate. In 1997,
there was an increase in net interest income of $432,000 due to changes in
volume and a decrease of $53,000 due to changes in rate.
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Average earning assets increased from $94.5 million in 1997 to $104.1
million in 1998 and from $86 million in 1996 to $94.5 million in 1997. This
growth in earning assets is primarily attributed to an increase in average
interest-bearing demand deposit balances. In December 1997, the Bank implemented
a new deposit transfer ("sweep") product for its nonprofit and municipal
customers which provides for the overnight transfer of available funds from a
noninterest-bearing account to an interest-bearing account. In addition, new
"Prestige" checking products were developed in April 1998. These products offer
premiums such as life insurance, discount shopping, premium certificate of
deposit rates, etc. While benefiting customers, these products also serve as
means of generating low cost funds for the Bank as well as a source of service
charge income from monthly membership, low balance and overdraft fees.
The Bank's net interest margin increased slightly to 5.03% in 1998 and 1997
compared to 4.95% in 1996. The prime rate increased 50 basis points during 1998
from 8.25% to 8.75%, the Bank did not experience a similar increase in yield on
its loan portfolio. This is because much of the Bank's loan portfolio is fixed
rate in nature and not related to prime.
During 1998, the average federal funds rate increased slightly to 5.31%
compared to 5.26% in 1997 and 5.17% in 1996. During 1998, the average investment
in federal funds increased by $3.8 million as a result of an increased level of
deposits in the Bank's "sweep" checking account which represent high balance
short-term deposits. In addition, during 1998, the Bank experienced high levels
of payoffs/paydowns in its mortgage and purchased automobile loan portfolios.
Funds were temporarily placed in federal funds sold until other loans were
originated and/or purchased.
The yield on the investment portfolio decreased 6 basis points to 6.57% in
1998 compared to 6.63% in 1997 and 6.07% in 1996. The decline in yield during
1998 was due to call options in certain higher yielding Government Agency
securities that were exercised during year. The Bank was not able to place the
proceeds from these premature maturities into securities with comparable yields
due to a lower rate environment.
The cost of interest-bearing deposits remained relatively unchanged at
3.56% in 1998 compared to 3.57% in 1997 and 3.41% in 1996. During 1998 and 1997,
interest rates paid on deposits remained relatively constant. The increase
during 1997 was primarily related to the introduction of a fourth tier for
balances in excess of $250,000 on the Bank's Business Money Market Account,
which earns a higher interest rate. This product was designed to attract
customers with larger deposit balances.
Provision for Loan Losses
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 and allowance for loan losses charged against earnings in
1998 was $350,500 compared to $97,000 in 1997 and $85,000 in 1996. The increase
in 1998 is primarily related to one community development construction loan for
which there was a specific provision allocated of $200,000. In addition, during
1998, there was an increased level of loans for which there was no related
government guaranteeCpurchased automobile loans and commercial loans. Also,
although the Bank has not charged-off loans in its residential mortgage loan
portfolio, there was an increased level of delinquencies/classifications. As a
result of the increased credit risk in the portfolio, a higher level of loan
loss provision was made. Management believes the level of the allowance for loan
losses was adequate as of December 31, 1998.
10
<PAGE>
Noninterest Income
Noninterest income increased $299,000 in 1998 compared to 1997. The
increase was primarily related to an increased level of fees on deposits as a
result of the elimination of the Bank's "free checking" product and the
introduction of a new premium checking product--"Prestige checking". This new
product offers premiums such as discount shopping, bonus certificate of deposit
rates, insurance, etc. to customers but also has a minimum balance and monthly
membership fee requirements. In addition, the Bank's ATM fees increased $142,000
during 1998 as a result of increased volume at its machines as well as growth in
the ATM network from 26 to 28 machines. Finally, the Bank sold loans
approximately $13.2 million in loans during 1998 for a gain of $200,000.
Noninterest income increased $399,000 in 1997 compared to 1996. The
increase was primarily a result of increased ATM surcharge fees ($418,000 in
1997 compared to $150,000 in 1996) due to a full year of ATM surcharge fees
compared to two quarters in 1996, an increase in the ATM surcharge from $0.90
per transaction in 1996 to $1.00 in 1997, and growth in the ATM network from 15
to 23 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 $113,000 increase in demand deposit-related fee income--including overdraft
fees, low balance fees, and activity charges. Finally, during 1997, the Bank
sold approximately $9.7 million student loans for a gain of $187,000.
Noninterest Expense
Noninterest expense increased $713,000, or 11.9%, in 1998 to $6.7 million
compared to $6 million in 1997 and $6.1 million in 1996.
Salaries and benefits increased $158,000, or 6%, in 1998 compared to an
increase of $142,000, or 6.3%, in 1997. In addition to normal salary
adjustments, the increase during 1998 came as a result of an increase in
staffing levels to handle increased work volumes due to growth in the Bank's
deposit levels during the year. In addition, during 1997 the chief executive
officer's employment contract was amended to provide her with a defined
contribution retirement plan, which resulted in a $48,000 expense for both 1998
and 1997. Also, during 1998, the chief executive officer received incentive
compensation totaling approximately $28,000.
Occupancy and equipment expense increased approximately $260,000, or 26%,
during 1998 compared to an increase of $117,000, or 13%, during 1997. The
increase during 1998 was primarily attributable to annual escalations in lease
payments, a July 1998 expiration of a "free rent" agreement with the RTC on the
Bank's Wadsworth Avenue branch, and increased maintenance cost to service the
Bank's growing ATM network. The Bank negotiated a month-to-month extension of
its lease with the Federal Deposit Insurance Corporation (previously RTC) for
$1,875 per month. Purchase of this branch is currently under consideration. Upon
appropriate evaluation and review of the current appraised value, a decision
will be made as to whether the Bank continues to lease or purchase the branch.
Data processing expenses increased by $25,000, or 3%, during 1998 compared
to $32,000, or 4%, in 1997. The bulk of the Bank's data processing is outsourced
to third-party processors. These expenses are reflective of the high level of
low-balance accounts being serviced for which the Bank is charged a per-account
charge by processors. The increase during 1998 was primarily attributable to
growth in deposit levels as well as increased charges by vendors. 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 outsourcing, and the possible renegotiation of existing contracts with
servicers. In an effort to reduce these costs during 1998, the Bank continues to
sell its student loan portfolio and replace it with commercial and other
consumer loans with lower servicing costs.
Marketing and public relations expense increased by $49,000, or 28%, in
1998 compared to an increase of $36,000, or 28%, in 1997. The increase in 1998
was primarily related to the introduction of the new "Prestige checking" product
for which the Bank pays an outside vendor to provide premiums (i.e. life
insurance, discount
11
<PAGE>
shopping, etc.).
Federal deposit insurance premiums were $82,000 in 1998 compared to $66,000
in 1997 and $616,000 in 1996. FDIC insurance premiums are applied to all
financial institutions based on a risk-based premium assessment system. Under
this system, bank strength is based on three factors: 1) asset quality, 2)
capital strength, and 3) management. Premium assessments are then assigned based
on the institution's overall rating, with the stronger institutions paying lower
rates. During 1996, there was a one-time SAIF Special Assessment of
approximately $485,000 resulting from legislation passed by Congress on
September 30, 1996 to recapitalize the SAIF. As a result, commercial banks, like
United Bank, which were members of the BIF and owned SAIF-assessable deposits,
were required to pay a one-time assessment of 65.7 basis points of total
SAIF-assessable deposits on November 27, 1996. Because the Bank acquired
deposits of failed savings and loan institutions from the RTC in 1993 and 1994,
approximately $71 million of its deposits are considered SAIF-assessable. Almost
immediately following the acquisitions, a significant amount of acquired RTC
savings and loan deposits ran off, leaving a balance of less than $20 million.
However, the legislation did not make any provision for deposit runoff. The
assessment during 1998 and 1997 was based on 1.29 basis points for
BIF-assessable deposits and 6.28 basis points for SAIF-assessable deposits.
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.
12
<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 Table 3
indicates how the Bank has managed these elements. Average funding uses
increased approximately $9.6 million, or 10.12%, in 1998 compared to $8.5
million, or 9.98%, in 1997.
TABLE 3 - SOURCES AND USES OF FUNDS TRENDS
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------
Increase Increase
Average (decrease) Average (decrease) Average
balance amount Percent balance amount Percent balance
-------- ------- ----- ------- ------- ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Loans $ 71,338 $ 2,451 3.56% $68,887 $ 3,644 5.59% $65,243
Investment securities:
Held-to-maturity 11,436 1,214 11.88 10,222 2,112 26.04 8,110
Available-for-sale 8,392 2,140 34.23 6,252 (2,067) (24.85) 8,319
Federal funds sold 12,959 3,772 41.06 9,187 4,837 111.20 4,350
-------- ------- ------- ------- -------
Total uses $104,125 $ 9,577 $94,548 $ 8,526 $86,022
======== ======= ======= ======= =======
Funding sources:
Demand deposits:
Noninterest-bearing $ 19,740 $ 3,835 24.11% $15,905 $ 4,708 42.05% $11,197
Interest-bearing 22,622 7,810 52.73 14,812 1,740 13.31 13,072
Savings deposits 23,283 6 .03 23,277 (769) (3.20) 24,046
Time deposits 37,365 (262) (.70) 37,627 2,821 8.11 34,806
Other borrowed funds 1,521 259 20.52 1,262 (559) (30.70) 1,821
-------- ------- ------- ------- -------
Total sources $104,531 $11,648 $92,883 $ 7,941 $84,942
======== ======= ======= ======= =======
</TABLE>
*Includes held-to-maturity and available-for-sale securities
Investment Securities and other Short-Term Investments
The Bank's investment portfolio is classified as either held-to-maturity or
available-for-sale. Investments classified as held-to-maturity are carried at
amortized cost and are those securities the Bank has both the intent and ability
to hold to maturity. Investments classified as available-for-sale are those
investments the Bank intends to hold for an indefinite amount of time, but not
necessarily to maturity, and are carried at fair value, with the unrealized
holding gains and losses reported as a component of shareholders' equity on the
balance sheet.
Average investment securities and federal funds sold, in the aggregate,
increased by $7.1 million, or 27.8%, in 1998 compared to an increase of $4.9
million, or 23.5%, in 1997. The increase during 1998 is a result of 12.4%
deposit growth and the temporary investment of the proceeds from loan sales and
paydowns/payoffs in the mortgage and purchased automobile loan portfolios in
federal funds sold until loans were originated and/or purchased.
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.
As reflected in Table 4, the assumed average maturity of the investment
portfolio was 3.59 years at year-end
13
<PAGE>
1998. Approximately 18.3% of the portfolio consists of mortgage-backed
pass-through securities that have longer-term contractual maturities but are
sometimes paid off/down before maturity or have repricing characteristics that
occur before final maturity. The Bank has attempted to minimize the repayment
risk (risk of very fast or very slow repayment) associated with these types of
securities by investing primarily in a number of seasoned mortgage pools for
which there is a repayment history. This history better enables the Bank to
project the repayment speeds of these pools. In addition, the Bank has minimized
the interest rate risk associated with these mortgage-backed securities by
investing in a variety of pools, many of which have variable rates with indices
that track closely with the current interest rate environment.
TABLE 4 - ANALYSIS OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Within After one but After five but After
one year within five years within ten years ten years
--------------- ---------------- ------------------ ----------------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,000 5.45% $ -- --% $ 1,000
Other government securities 17,957 5.03 6,756 6.05% 9,176 6.50% 33,938
Mutual funds 90 5.57 320 6.00 90
Other investments 320
Mortgage-backed securities 7,898
------- ------ ------ ---- -------
Total securities $19,047 $6,756 $9,496 $ -- $43,196
======= ====== ====== ==== =======
Average maturity years 3.59
</TABLE>
The above table sets forth the maturities of investment securities at December
31, 1998 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security).
Loans
Average loans increased approximately $2.4 million, or 3.56%, in 1998
compared to an increase of $3.6 million, or 5.59%, in 1997. The increase during
1998 was primarily due to an increase in commercial loan originations and the
purchase of approximately $8 million in seasoned automobile loans in November
1997 and $4.5 million in April 1998. During 1998, the Bank sold $13.1 million
($2 million in March 1998 and $11.1 million in December 1998) in student loans
in an effort to reduce data processing costs and to improve the overall yield on
the loan portfolio by shifting the funds into higher-yielding commercial and
consumer loans. In addition, during 1998 mortgage loans continue to decline as a
result of payoff/paydowns and refinancings due to the low mortgage rate
environment.
The Bank's policy is to make its loans and commitments in the market area
it serves. However, from time-to-time, the Bank has purchased a significant
portion of its loan portfolio to adequately match its level of deposits and to
improve the net interest margin. The Bank continues to originate loans and a
strong pipeline of loans located within the Philadelphia region.
14
<PAGE>
TABLE 5 - LOANS OUTSTANDING, NET OF UNEARNED INCOME
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial $13,643 $12,095 $10,107 $ 8,021 $ 3,037
Commercial real estate 1,518 1,515 649 627 1,608
Consumer loans 11,424 22,611 17,340 16,254 9,503
Residential mortgages 31,365 35,962 36,622 37,271 39,398
Loans held-for-sale -- 1,979 4,906 -- 10,223
------- ------- ------- ------- -------
Total loans $57,950 $74,162 $69,624 $62,173 $63,769
======= ======= ======= ======= =======
</TABLE>
TABLE 6 - LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
Within After one but After
one year within five years ten years Total
-------- ----------------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $ 4,163 $ 3,720 $ 5,760 $13,643
Commercial real estate 614 355 549 1,518
Consumer loans 1,117 7,417 2,890 11,424
Residential mortgages 31,365 31,365
-------- ------- ------- -------
Total loans $ 5,894 $11,492 $40,564 $57,950
======== ======= ======= =======
Loans maturing after one year with:
Fixed interest rates $ 40,995
========
Variable interest rates $ 11,061
========
</TABLE>
Nonperforming Loans
Table 7 reflects the Bank's nonperforming loans for the last five years.
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 that are well-collateralized and in the process of collection. When a loan
is placed on nonaccrual, 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.
15
<PAGE>
TABLE 7 - NONPERFORMING LOANS
1998 1997 1996 1995 1994
--------------------------------------------
(Dollars in thousands)
Nonaccrual loans $1,720 $1,179 $800 $949 $572
Interest income included in
net income for the year 37 14 6 23 --
Interest income that would
have been recorded
under original terms 189 112 45 37 41
Loans past due 90 days and
still accruing 125 306 408 10 --
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 December 31, 1998, approximately 33% 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 December 31, 1998, none of these loans were
nonperforming.
During 1998, nonaccrual loans increased to $1.7 million, up from $1.2
million at December 31, 1997. The increase in the level of nonaccrual loans
during 1998 is primarily attributable to one community development construction
loan and the aging of the residential mortgage loan portfolios the Bank acquired
in 1993 and 1994. At December 31, 1998, approximately $501,000 of the total
nonaccrual loans were residential mortgages. The underlying collateral minimizes
the risk of loss associated with these loans. Loans past due 90 days and still
accruing consist primarily of student loans for which there is a 98% guarantee
of principal and interest.
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. Table 9 presents
the allocation of loan losses by major category for the past five years. The
specific allocations in any particular category may prove to be excessive or
inadequate and consequently may be reallocated in the future to reflect
then-current conditions.
16
<PAGE>
TABLE 8 B ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995
------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent
of loans of loans of loans of loans
in each in each in each in each
category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $272 23.54% $144 16.31% $222 14.52% $113 12.90%
Commercial real estate 132 2.62 13 2.04 13 0.93 13 1.01
Residential mortgages 55 19.71 180 48.49 245 52.60 246 59.95
Consumer loans 188 54.12 97 33.16 44 31.95 65 26.14
Unallocated 32 -- 34 -- 4 -- 39 --
---- ------ ---- ------ ---- ------ ---- ------
$679 100% $468 100.00% $528 100.00% $476 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
TABLE 9 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 468 $ 528 $ 476 $ 726 $ 629
----- ------- -------- --------- ---------
Charge-offs:
Commercial and industrial (66) (17) (195) (298)
Commercial real estate - - - -
Residential mortgages (9) - - -
Consumer loans (180) (160) (25) (5) (44)
----- ------- -------- --------- ---------
(180) (235) (42) (200) (342)
Recoveries - consumer loans 41 78 9 6 3
----- ------- -------- --------- ---------
Net charge-offs (139) (157) (33) (194) (339)
Additions charged to operations 350 97 85 78 385
Allowance allocated to acquired loans -- -- -- 185
Allowance previously allocated to
sold loans -- -- -- (134) (134)
----- ------- -------- --------- ---------
Balance at December 31 $ 679 $ 468 $ 528 $ 476 $ 726
===== ======= ======== ========= =========
Ratio of net charge-offs to average
loans outstanding .19% 0.23% 0.05% 0.34% 0.63%
===== ======= ======== ========= =========
</TABLE>
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.
17
<PAGE>
Deposits
Average deposits grew approximately $11.4 million, or 12.4%, in 1998
compared to growth of $8.5 million, or 10.2%, in 1997. Sweep deposit accounts
were introduced in late 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. At December 31, 1998, there were
$10 million in such accounts. In addition, in 1998, non-interest bearing
deposits increased on average by $3.8 million as a result of the introduction of
the new "Prestige checking" product.
TABLE 10 - DEPOSITS BY CLASS AND RATE
1998 1997 1996
------------ -------------- --------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Noninterest-bearing
demand deposits $19,740 --% $15,905 --% $11,197 --%
Interest-bearing demand
deposits 22,622 2.74 14,812 2.56 13,072 2.25
Savings deposits 23,283 1.84 23,277 1.97 24,046 2.10
Time deposits 37,365 5.08 37,627 4.92 34,806 4.74
Other Borrowed Funds
The average balance for other borrowed funds increased $259,000, or 20.52%,
in 1998 compared to a decrease of $559,000, or 30.70%, in 1997. The increase in
other borrowed funds during 1998 was due to higher-balance reverse repurchase
agreements the Bank entered into in 1998 compared to 1997. The level of other
borrowed funds is dependent on many items such as loan growth, deposit growth,
customer collateral/security requirements and interest rates paid for these
funds.
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 enhance
consistent growth of net interest income through periods of changing interest
rates.
The Bank is required to maintain minimum levels of liquid assets as defined
by Federal Reserve Board (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 December 31, 1998, management believes
the Bank's liquidity is satisfactory and in compliance with 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 $19 million at December 31, 1998, representing 44% of the
investment portfolio. Other types of assets such as federal funds sold,
18
<PAGE>
as well as maturing loans, are sources of liquidity. Approximately $5.9 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. Table 11 provides a breakdown of the
maturity of deposits of $100,000 or more.
TABLE 11 - MATURITY OF DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
3 months or less $ 10,591
Over 3 through 6 months 2,892
Over 6 months through 1 year
Over 1 through five years 459
Over five years -
--------
Total $ 13,942
========
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 that 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 interest-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. Table 12 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 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 December 31, 1998, a liability sensitive position is maintained on a
cumulative basis through one year of -12.24% that is within the Bank's policy
guidelines of +/-15% on a cumulative one-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 that 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.
For purposes of the gap analysis, such deposits (savings, MMA, NOW) which
do not have definitive maturity dates and do not readily react to changes in
interest rates have been placed in longer repricing intervals versus immediate
repricing time frames, making the analysis more reflective of the Bank's
historical experience.
19
<PAGE>
TABLE 12 - INTEREST SENSITIVITY ANALYSIS
Interest rate sensitivity gaps
<TABLE>
<CAPTION>
as of December 31, 1998
-----------------------------------------------------------------------------
Over
Over 1 year Over
3 months 3 through 12 through 3 through Over five
or less months 3 years 5 years years Cumulative
------- ------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Interest-bearing deposits
with banks $ 350 $ $ $ $ $ 350
Investment securities:
Held-to-maturity 18,957 198 250 5,015 10,726 35,146
Available-for-sale 4,133 2,006 1,911 8,050
Federal funds sold 12,318 12,318
Loans 12,842 2,099 6,947 3,905 32,157 57,950
------- ------- ------- ------- ------- --------
Total interest-sensitive
assets 48,600 2,297 7,197 10,926 44,794 $113,814
------- ------- ------- ------- ------- ========
Cumulative totals 48,600 50,897 58,094 69,020 113,814
------- ------- ------- ------- -------
Interest-sensitive liabilities:
Interest checking accounts 19,593 9,521 $ 29,114
Savings accounts 13,866 9,527 23,393
Certificates less than
$100,000 6,072 10,247 3,710 2,585 22,614
Certificates of $100,000
or more 10,591 2,892 339 120 13,942
Other Borrowed Funds 1,558 11 1,569
------- ------- ------- ------- ------- --------
Total interest-sensitive
liabilities 51,680 13,150 23,097 2,705 -- $ 90,632
------- ------- ------- ------- ------- ========
Cumulative totals $51,680 $64,830 $87,927 $90,632 $90,632
======= ======= ======= ======= =======
Interest sensitivity gap ($3,080) ($10,853) $(15,900) $8,221 $44,794
======= ======= ======= ======= =======
Cumulative gap ($3,080) ($13,933) ($29,833) ($21,612) $23,182
======= ======= ======= ======= =======
Cumulative gap/total earning
Assets 2.71% (12.24%) (26.21%) 18.98% 20.37%
======= ======= ======= ======= =======
Interest-sensitive assets to
interest-sensitive liabilities 94.04% 17.46% 31.15% 403.91% --%
======= ======= ======= ======= =======
</TABLE>
Core deposits such as checking and savings deposits have been placed in
repricing intervals based on historical trends and management's estimates.
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
20
<PAGE>
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 forecast 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 December 31, 1998 are as follows:
Market value of Percent of
Changes in rate portfolio equity change
(Dollars in thousands)
+400 basis points ($19,251) (764)%
+300 basis points (13,714) (573)
+200 basis points (8,176) (382)
+100 basis points (2,640) (191)
Flat rate 2,898 --
-100 basis points 8,436 191
-200 basis points 13,972 382
-300 basis points 19,510 573
-400 basis points 25,048 764
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 significant and is within the Bank's policy limits at December
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 and movement into money market
deposit accounts and short-term certificates of deposit 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 earning assets and cost of funds will
decrease the Bank's vulnerability to interest rate cycles.
Capital Resources
Total shareholders' equity increased $1.9 million in 1998 compared to an
increase of approximately $300,000 in 1997. The increase in 1998 is a result of
retained earnings ($10,000), sale of common stock ($1.1 million), and the sale
of preferred stock ($796,000).
The FRB standards for measuring capital adequacy for U.S. Banking
organizations require 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,
21
<PAGE>
noncumulative and cumulative perpetual preferred stock, and minority interests
less goodwill. Tier 2 capital consists of allowance for loan losses, hybrid
capital instruments, term subordinated debt, and intermediate-term preferred
stock. Banks are required to meet a minimum ratio of 8% of qualifying capital to
risk-adjusted total assets with at least 4% Tier 1 capital and a Tier I leverage
ratio of at least 6%. Capital that qualifies as Tier 2 capital is limited to
100% of Tier 1 capital.
As indicated in Table 13, 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.
TABLE 13 - CAPITAL RATIOS
1998 1997 1995
--------------------------------
(Dollars in thousands)
Tier 1 capital $ 8,823 $ 6,891 $ 6,558
Tier 2 capital 679 468 504
------- ------- -------
Total qualifying capital $ 9,502 $ 7,359 $ 7,062
======= ======= =======
Risk-adjusted total assets (including off-
balance-sheet exposures) $54,373 $51,868 $40,306
======= ======= =======
Tier 1 risk-based capital ratio 16.23% 13.29% 16.27%
Total (Tier I and II) risk-based capital ratio 17.48% 14.19% 17.52%
Tier 1 leverage ratio 7.62% 6.59% 7.09%
Regulatory Matters
At December 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.
Income (Loss) Per Share
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
eliminates primary and fully diluted earnings per share (EPS) and requires
presentation of basic and diluted EPS in conjunction with the disclosure of the
methodology used in computing such EPS. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average common shares outstanding during the period. Diluted EPS takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common stock. Prior
period EPS calculations have been restated to reflect the adoption of SFAS No.
128.
Reporting Comprehensive Income
In January 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive
Income. This standard establishes new standards for reporting comprehensive
income which includes net income as well as certain other items which result in
a change to equity during the period. These financial statements have been
reclassified to reflect the provisions of SFAS No. 130.
22
<PAGE>
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, 1998. 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. Management is currently evaluating the disclosure impact of SFAS No.
131 on its financial statements. Management has determined that the Bank
operates in one segment, namely community banking.
Cautionary Statement
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based upon
various assumptions (some of which are beyond the control of the Bank and the
Company), may be identified by reference to a future period, or periods, or by
the use of forward-looking terminology such as "may," "will," "believe,"
"expect," "estimate," "anticipate," "continue," or similar terms or variations
on those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, economic growth;
governmental monetary policy, including interest rate policies of the FRB;
sources and costs of funds; levels of interest rates; inflation rates; market
capital spending; technological change; the state of the securities and capital
markets; acquisition; consumer spending and savings; expense levels; tax,
securities, and banking laws; and prospective legislation.
23
<PAGE>
Year 2000
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 vendor that have time-sensitive software may
recognize the date using "00" as the year 1900 rather than the Year 2000. This
could result in major system failure or miscalculations. The "Year 2000"
potential problems create risk for the Company from unforeseen problems in its
own computer system and from third parties such as other financial institutions,
the federal government, federal agencies, vendors and customers. Failures of the
Company's or third party's computer systems could have a material effect on the
Company's abilities to conduct business, especially to process and account for
the transfer of funds electronically
Like many financial institutions, the Company relies upon computers for
conducting its daily operations. Failure to resolve Year 2000 issues presents
the following risks to the Company: (1) the Bank could lose customers to other
financial institutions, resulting in loss revenue, if the Bank is unable to
properly account for customer transactions; (2) governmental agencies, such as
the Federal Home Loan Bank, and correspondent institutions could fail to provide
funds to the Bank which could materially impair the Bank's liquidity and affect
the Bank's ability to fund loans and deposit withdrawals; (3) concern on the
part of depositors that Year 2000 issues could impair access to their deposit
account balances could result in the Bank experiencing deposit outflows prior to
December 31, 1999; and (4) the bank could incur increased personnel costs if
additional staff is required to perform functions that inoperative systems would
have otherwise performed. Management believes that it is not possible to
estimate the potential lost revenue due to the Year 2000 issue, as the extent
and longevity of any potential problem cannot be predicted.
The Company has conducted a comprehensive review of its computer systems,
both internal and outsourced processing, to identify the systems that could be
affected by the "Year 2000" issue and has developed a Year 2000 Plan to modify
or replace the affected systems and test them for Year 2000 readiness, To date,
the Company has taken the following actions to mitigate the potential effects of
the Year 2000 issue:
o The Bank has upgraded all applicable computer systems (hardware and
software) to be Year 2000 ready. Management is currently testing all
systems to ensure Year 2000 Compliance and is developing an implementation
plan to resolve the issue.
o The Board of Directors has adopted a Year 2000 Plan that Management is
currently implementing. The Plan address the overall status of the Year
2000 Project, details of the Company's contingency plan, describes mission
critical systems and non-mission critical systems, identifies all third
party vendors and applicable testing strategies and test dates. The Company
has also written a Year 2000 Business Resumption Plan that contains all
mission critical systems and services.
o The Company has established a Year 2000 Committee consisting of members of
senior management which currently meets at least monthly to discuss
progress on the Year 2000 Plan, and
o A Year 2000 budget has been developed which estimates the cost associated
with Year 2000 readiness. Current estimates of the cost to be incurred to
prepare for the Year 2000 range from do not exceed $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.
o The Bank holds customer awareness seminars and has contacted its major loan
and deposit customers to advise them to review their own systems for
possible Year 2000 problems. In determining credit risk for existing
customers as well as in making credit decisions for major borrowers, the
Bank considers the impact of the Year 2000 issues.
24
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
United Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of United
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and comprehensive income, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
April 9, 1999
25
<PAGE>
United Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,675,010 $ 4,604,408
Interest-bearing deposits with banks 350,024 334,288
Federal funds sold 12,318,000 7,821,000
------------- -------------
Cash and cash equivalents 16,343,034 12,759,696
Investment securities:
Available-for-sale, at market value 8,049,875 7,398,607
Held-to-maturity, at amortized cost (market value of $35,203,274 in 1998) 35,146,148 10,854,711
Loans held-for-sale (market value of $2,008,865 in 1997) 1,979,177
Loans, net of unearned discount of $301,540 and $361,350 in 1998 and
1997, respectively 57,950,133 72,183,255
Less allowance for loan losses (679,557) (468,806)
------------- -------------
Net loans 57,270,576 73,693,626
Bank premises and equipment, net 1,565,131 1,862,647
Accrued interest receivable 1,749,623 1,439,587
Foreclosed real estate 262,368 165,188
Deferred branch acquisition costs 75,753
Prepaid expenses and other assets 1,595,926 664,475
------------- -------------
$ 121,982,681 $ 108,914,290
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits, noninterest-bearing $ 19,999,226 $ 17,697,901
Demand deposits, interest-bearing 29,114,084 20,922,107
Savings deposits 23,393,986 22,925,881
Time deposits, $100,000 and over 13,942,008 13,852,356
Time deposits 22,614,098 24,028,818
------------- -------------
109,063,402 99,427,063
Long-term debt 11,191 43,688
Securities sold to repurchase 1,557,755 1,341,053
Accrued interest payable 598,352 541,225
Accrued expenses and other liabilities 1,847,665 502,406
------------- -------------
Total liabilities 113,078,365 101,855,435
------------- -------------
Shareholders' equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares
authorized; 132,999 and 93,150 issued and outstanding
in 1998 and 1997 1,330 932
Common stock, $0.01 par value; 2,000,000 shares authorized; 913,490 and
823,695 issued and outstanding in 1998 and 1997, respectively 9,134 8,236
Additional paid-in-capital 12,286,233 10,425,626
Accumulated deficit (3,428,169) (3,438,102)
Accumulated other comprehensive income 35,788 62,163
------------- -------------
Total shareholders' equity 8,904,316 7,058,855
------------- -------------
$ 121,982,681 $ 108,914,290
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,270,323 $ 5,912,901 $ 5,566,650
Interest on investment securities 1,275,542 1,067,762 977,117
Interest on federal funds sold 688,285 482,856 224,594
Interest on time deposits with other banks 26,329 25,333 20,519
----------- ----------- -----------
Total interest income 8,260,479 7,488,852 6,788,880
----------- ----------- -----------
Interest expense:
Interest on time deposits 1,898,967 1,852,080 1,650,740
Interest on demand deposits 619,921 379,397 294,363
Interest on savings deposits 427,682 459,035 506,458
Interest on borrowed funds 73,265 54,841 78,629
----------- ----------- -----------
Total interest expense 3,019,835 2,745,353 2,530,190
----------- ----------- -----------
Net interest income 5,240,644 4,743,499 4,258,690
Provision for loan losses 350,500 97,500 85,000
----------- ----------- -----------
Net interest income after provision for loan losses 4,890,144 4,645,999 4,173,690
----------- ----------- -----------
Noninterest income:
Gain on sale of loans 201,664 187,471 11,188
Customer service fees 1,457,508 1,181,082 907,557
Resolution Trust Corporation fee -- -- 90,000
Gain on sale of investments 1,201 -- 9,157
Other income 155,663 148,867 99,820
----------- ----------- -----------
Total noninterest income 1,816,036 1,517,420 1,117,722
----------- ----------- -----------
Noninterest expense:
Salaries, wages, and employee benefits 2,555,774 2,397,861 2,255,079
Occupancy and equipment 1,275,902 1,015,419 898,464
Office operations and supplies 525,771 522,525 509,158
Marketing and public relations 221,348 172,326 136,352
Professional services 232,793 274,999 266,955
Data processing 868,665 844,009 811,531
Deposit insurance assessments 82,389 66,274 616,025
Other operating 933,605 689,416 629,603
----------- ----------- -----------
Total noninterest expense 6,696,247 5,982,829 6,123,167
----------- ----------- -----------
Net income (loss) $ 9,933 $ 180,590 $ (831,755)
=========== =========== ===========
Net income (loss) per common share -- basic/diluted $ .01 $ 0.22 $ (1.03)
=========== =========== ===========
Weighted average number of common shares 845,902 818,240 810,729
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Series A Accumulated Total
preferred stock Common stock Additional other share-
---------------- ---------------- paid-in Accumulated comprehensive holders' Comprehensive
Shares Amount Shares Amount capital deficit income (loss) equity income (loss)
------ ------ ------ ------ ------- ------- ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 93,150 $ 932 802,480 $8,024 $10,210,580 $(2,786,937) $37,236 $7,469,835 $ --
Proceeds from issuance of
common stock -- -- 13,875 139 138,409 -- -- 138,548
Unrealized losses on
investment securities -- -- -- -- -- -- (17,960) (17,960) (17,960)
Net loss -- -- -- -- -- (831,755) -- (831,755) (831,755)
------- ------ ------- ------ ----------- ----------- ------- ---------- --------
Balance at December 31, 1996 93,150 932 816,355 8,163 10,348,989 (3,618,692) 19,276 6,758,668 $849,715
Proceeds from issuance of
common stock -- -- 7,340 73 76,637 -- -- 76,710
Unrealized gains on
investment securities -- -- -- -- -- -- 42,887 42,887 42,887
Net income -- -- -- -- -- 180,590 -- 180,590 0,590
------- ------ ------- ------ ----------- ----------- ------- ---------- --------
Balance at December 31, 1997 93,150 932 823,695 8,236 10,425,626 (3,438,102) 62,163 7,058,855 $223,477
Proceeds from issuance of
referred stock 39,849 398 796,582 796,980
Proceeds from issuance of
common stock 89,795 898 1,064,025 1,064,923
Unrealized losses on
investment securities (26,375) (26,375) (26,375)
Net income -- -- -- -- -- 9,933 -- 9,933 9,933
------- ------ ------- ------ ----------- ----------- ------- ---------- --------
Balance at December 31, 1998 132,999 $1,330 913,490 $9,134 $12,286,233 $3,428,169) $35,788 $8,904,316 ($16,442)
======= ====== ======= ====== =========== ========== ======= ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,933 $ 180,590 $ (831,755)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 350,500 97,500 85,000
Gain on sale of loans (201,664) (187,471) (11,188)
Depreciation and amortization 584,744 542,193 512,045
Realized investment securities gains -- -- (9,157)
(Increase) decrease in accrued interest receivable
and other assets (1,345,070) (244,534) (570,347)
(Decrease) increase in accrued interest payable
and other liabilities 1,402,386 (131,570) 341,790
------------ ------------ ------------
Net cash provided by (used in) operating activities 800,829 256,708 (483,612)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale investments (11,708,818) (3,738,899) (4,154,304)
Purchase of held-to-maturity investments (33,748,996) (6,094,788) (6,095,331)
Proceeds from maturity and principal
reductions of available-for-sale investments 11,057,565 1,856,565 2,218,412
Proceeds from maturity and principal
reductions of held-to-maturity investments 9,429,511 4,185,109 5,692,377
Proceeds from sale of available-for-sale investments -- -- 4,562,444
Proceeds from sale of student loans 12,846,705 9,677,111 --
Net decrease (increase) in loans 8,276,373 (4,512,352) (7,474,235)
Purchase of residential mortgage loans -- (1,623,782) --
Purchase of automobile loans (4,848,864) (8,047,769) --
Purchase of premises and equipment (203,413) (495,501) (489,100)
------------ ------------ ------------
Net cash (used in) provided by investing activities (8,899,937) (8,794,306) (5,739,737)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 9,636,339 10,666,092 4,532,967
Repayments on long-term debt (32,497) (30,873) (29,401)
Reverse repurchase agreement 216,702 1,341,053 --
Net proceeds from issuance of common stock 1,064,922 76,710 138,548
Net proceeds from issuance of preferred stock 796,980 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 11,682,446 12,052,982 4,642,114
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,583,338 3,515,384 (1,581,235)
Cash and cash equivalents at beginning of year 12,759,696 9,244,312 10,825,547
------------ ------------ ------------
Cash and cash equivalents at end of year $ 16,343,034 $ 12,759,696 $ 9,244,312
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,960,086 $ 2,726,349 $ 2,502,283
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of United
Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank
of Philadelphia (the Bank). All significant intercompany transactions and
balances have been eliminated.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold on an
overnight basis.
Securities Held-to-Maturity
Bonds, notes, and debentures for which the Bank has both the positive
intent and ability to hold are classified as held-to-maturity and carried
at cost, adjusted for premiums and discounts that are recognized in
interest income using the interest method over the period to maturity.
Securities Available-for-Sale
Available-for-sale securities consist of bonds, notes and debentures, and
certain equity securities for which the Bank does not have positive intent
to hold to maturity. These securities are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders'
equity net of related income tax effects.
Gains and losses on the sale of available-for-sale securities are
determined by the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Loans
Loans are stated at the amount of unpaid principal, reduced by net unearned
discount and an allowance for loan losses. Interest income on loans is
recognized as earned based on contractual interest rates applied to daily
principal amounts outstanding and accretion of discount. It is the Bank's
policy to discontinue the accrual of interest income when a default of
principal or interest exists for a period of 90 days except when, in
management's judgment, the collection of principal and interest is
reasonably anticipated or adequate collateral exists (including a loan
impaired under SFAS No. 114). Interest received on nonaccrual loans is
either applied against principal or reported as interest income according
to management's judgment as to collectibility of principal. When interest
accruals are discontinued, interest credited to income is reversed and the
loan is classified as nonperforming.
30
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Unearned discount is amortized over the weighted average maturity of the
mortgage loan portfolio.
Loan origination and commitment fees and certain direct loan origination
costs are deferred, and the net amount is amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over the
contractual life of the loan.
Loans Held-for-Sale
Loans held-for-sale are carried at the aggregate of lower of cost or market
value.
For purchased loans, the discount remaining after the loan loss allocation
is being amortized over the remaining life of the purchased loans using the
interest method.
Allowance for Loan Losses
The Bank adopted Statement of Financial Accounting Standards (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. Under SFAS No. 114, the allowance
for loan losses related to "impaired loans" is based on the discounted cash
flows using the impaired loans' initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral-dependent
loans. A loan is impaired when it meets the criteria to be placed on
nonaccrual status. Loans which are evaluated for impairment pursuant to
SFAS No. 114 are assessed on a loan-by-loan basis and include only
commercial nonaccrual loans. Large groups of smaller, homogeneous loans,
such as credit cards, student loans, residential mortgages, and other
student loans, are evaluated collectively for impairment. The adoption of
these standards did not have any impact on the Bank's financial position or
results of operations.
The allowance for loan losses is maintained at a level considered adequate
to provide for potential losses in the loan portfolio. The allowance is
increased by provisions charged to operating expenses and reduced by
charge-offs net of recoveries. Management's determination of the adequacy
of the allowance is based on continuous credit reviews of the loan
portfolio, consideration of the current economic conditions, review of
specific problem loans, and other relevant factors. This evaluation is
subjective as it requires material estimates, including the amounts and
timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold
improvements is computed over the shorter of the related lease term or the
useful life of the assets.
Income Taxes
The liability method is used in accounting for income taxes. Deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
31
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income (Loss) Per Share
During 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share." SFAS No. 128 eliminates primary and fully diluted earnings per
share (EPS) and requires presentation of basic and diluted EPS in
conjunction with the disclosure of the methodology used in computing such
EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted EPS takes into account the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock. Prior period EPS
calculations have been restated to reflect the adoption of SFAS No. 128.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable.
Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
In June 1998, the Financial Accounting Standards Board (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 (gains and
losses) depends on the intended use of the 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 adoption of SFAS No. 133 is
not anticipated to have a material impact on the Bank's financial position
or results of operations.
Loans held-for-sale: Fair values are estimated using quoted rates based
upon secondary market sources for similar loans.
32
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loans: The fair value of loans was estimated using a discounted cash flow
analysis, which considered estimated prepayments and amortizations.
Prepayments and discount rates were based on current marketplace estimates
and pricing. Residential mortgage loans were discounted at the current
effective yield, including fees, of conventional loans, adjusted for their
maturities with a spread to the Treasury yield curve.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are equal to the amounts payable on demand at the
reporting date (e.g. their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate the fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation. The Treasury yield curve was utilized for discounting
cash flows as it approximates the average marketplace certificate of
deposit rates across the relevant maturity spectrum.
Commitments to extend credit: The carrying amounts for commitments to
extend credit approximate fair value as such commitments are not
substantially different from the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparts.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management, and the real estate is carried at
the lower of carrying amount or fair value less the cost to sell. Revenue
and expenses from operations and changes in valuation allowance are charged
to operations. The historical average holding period for such properties is
24 months.
Management's Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
In 1998, the Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 redefines how operating segments are determined
and requires disclosures of certain financial and descriptive information
about the Bank's operating segments. Management has determined the Bank
operates in one business segment, community banking.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation.
33
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Comprehensive Income
In January 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive
Income. This standard establishes new standards for reporting comprehensive
income which includes net income as well as certain other items which
result in a change to equity during the period. These financial statements
have been reclassified to reflect the provisions of SFAS No. 130.
The income tax effects allocated to comprehensive income is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
Net of
Before tax Tax tax
amount expense amount
-------- ------- --------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding losses arising during period $(39,963) $13,588 ($26,375)
Less reclassification adjustment for gains
realized in net income -- -- --
-------- ------- --------
Other comprehensive income (loss), net $(39,963) $13,588 ($26,375)
======== ======= ========
December 31, 1997
-----------------------------------
Net of
Before tax Tax tax
amount expense amount
-------- ------- --------
Unrealized gains on securities
Unrealized holding losses arising during period $ 72,284 $29,397 $42,887
Less reclassification adjustment for gains
realized in net income -- -- --
-------- ------- -------
Other comprehensive income (loss), net $ 72,284 $29,397 $42,887
======== ======= =======
</TABLE>
Organizational Costs
The American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued Statement of Position (SOP)98-5,
Reporting on Costs of Start-up Activities. SOP 98-5 requires that costs of
start-up activities, as defined, including organizational costs, be
expensed as incurred. This statement is effective for fiscal years
beginning after December 15, 1998. Upon adoption, the application of this
statement is reported as the cumulative effect of a change in accounting
principle.
34
<PAGE>
2. CASH AND DUE FROM BANK BALANCES
The Bank maintains various deposit accounts of $726,000 with other banks to
meet normal funds transaction requirements and to compensate other banks
for certain correspondent services. The withdrawal or usage restrictions of
these balances did not have a significant impact on the operations of the
Bank as of December 31, 1998.
3. INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and
estimated market value of the available-for-sale and held-to-maturity
investment securities by major security type at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Other Government Securities 2,248,700 5,840 -- 2,254,540
Mortgage-backed securities 5,337,225 48,383 5,385,608
----------- ----------- ----------- -----------
Total debt securities 7,585,925 54,223 -- 7,640,148
Investments in mutual funds 89,527 -- -- 89,527
Other investments 320,200 -- -- 320,200
----------- ----------- ----------- -----------
$ 7,995,652 $ 54,223 $ -- $ 8,049,875
=========== =========== =========== ===========
Held-to-maturity:
U.S. Treasury securities $ 1,000,141 $ 1,109 $ -- $ 1,001,250
Other Government securities 31,633,770 50,483 -- 31,684,253
Mortgage-backed securities 2,512,237 5,534 -- 2,517,771
----------- ----------- ----------- -----------
$35,146,148 $ 57,126 $ -- $35,203,274
=========== =========== =========== ===========
</TABLE>
35
<PAGE>
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $ 649,186 $ 814 $ -- $ 650,000
Mortgage-backed securities 6,250,234 93,372 -- 6,343,606
----------- ----------- ----------- -----------
Total debt securities 6,899,420 94,186 -- 6,993,606
Investments in mutual funds 84,801 -- -- 84,801
Other investments 320,200 -- -- 320,200
----------- ----------- ----------- -----------
$ 7,304,421 $ 94,186 $ -- $ 7,398,607
=========== =========== =========== ===========
Held-to-maturity:
U.S. Treasury securities $ 3,298,383 $ 3,035 $ -- $ 3,301,418
Other Government securities 6,346,155 52,520 -- 6,398,675
Mortgage-backed securities 1,210,173 4,500 -- 1,214,673
----------- ----------- ----------- -----------
$10,854,711 $ 60,055 $ -- $10,914,766
=========== =========== =========== ===========
</TABLE>
Maturities of investment securities classified as available-for-sale and
held-to-maturity at December 31, 1998 were as follows. Expected maturities
may differ from contractual maturities.
Amortized Market
cost value
----------- -----------
Available-for-sale:
Due after three years through five years $ 1,998,700 $ 2,006,235
Due after five years through fifteen years 250,000 248,305
Mortgage-backed securities 5,337,225 5,385,608
----------- -----------
Total debt securities 7,585,925 7,640,148
Investments in mutual funds 89,527 89,527
Other investments 320,200 320,200
----------- -----------
$ 7,995,652 $ 8,049,875
=========== ===========
Held-to-maturity:
Due in three months or less $18,955,560 $18,940,538
Due after three months through one year -- --
Due after one year through three years 250,125 250,157
Due after three years through five years 4,499,844 4,524,345
Due after five years through fifteen years 8,928,382 8,970,463
----------- -----------
Due after fifteen years -- --
----------- -----------
Total debt securities 32,633,911 32,685,503
Mortgage-backed securities 2,512,237 2,517,771
----------- -----------
$35,146,148 $35,203,274
=========== ===========
36
<PAGE>
There were no sales of investments during 1998 and 1997. The proceeds from
sales of investments in debt securities during 1996 were $4,571,601. Gross
gains of $9,157 were realized on those sales.
As of December 31, 1998 and 1997, investment securities with a book value
of $11,703,948 and $11,122,211, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the net loans is as follows:
1998 1997
------------ ------------
Commercial and industrial $ 13,643,535 $ 12,095,471
Commercial real estate 1,517,979 1,515,146
Residential mortgages 31,364,864 35,961,372
Consumer loans 11,423,755 24,590,443
------------ ------------
Total loans 57,950,133 74,162,432
Less allowance for loan losses (679,557) (468,806)
------------ ------------
Net loans $ 57,270,576 $ 73,693,626
============ ============
Student loans held-for-sale at December 31, 1997 totaled $1,979,177 and are
carried at the lower of cost or market.
As of December 31, 1998 and 1997, the Bank had loans to certain officers
and directors and their affiliated interests in aggregate dollar amounts of
approximately $1,148,000 and $886,000, respectively. During 1998, new loans
to such related parties amounted to $467,500 and repayments amounted to
$276,127. Such transactions are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for other nonrelated party transactions.
Nonaccrual loans totaled approximately $1,720,000 and $1,179,000 as of
December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, unamortized deferred fees and costs totaled
$177,847 and $149,396, respectively.
Loans having a carrying value of $127,800 and $100,000 were transferred to
foreclosed real estate in 1998 and 1997, respectively.
37
<PAGE>
Changes in the allowance for possible loan losses are as follows:
1998 1997 1996
--------- --------- ---------
Balance, beginning of year $ 468,806 $ 527,507 $ 476,132
Provision 350,500 97,500 85,000
Charge-offs (180,727) (234,638) (42,271)
Recoveries 40,978 78,437 8,646
--------- --------- ---------
$ 679,557 $ 468,806 $ 527,507
========= ========= =========
At December 31, 1998 and 1997, the recorded investment in loans that were
on a nonaccrual basis and were considered to be impaired under SFAS No. 114
was $845,500 and $208,000, respectively. At December 31, 1998 and 1997, the
related allowance for loan losses was $183,000 and $0, respectively. At
December 31, 1998 and 1997, impaired loans of $208,000 are SBA guaranteed
and do not have an allowance for loan losses. The average recorded
investment in impaired loans during the years ended December 31, 1998 and
1997 was approximately $526,000 and $208,000, respectively. For the years
ended December 31, 1998 and 1997, the Bank recognized interest income on
those impaired loans of $36,800 and $0, respectively.
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. During 1998, approximately 33% of the Bank's
commercial loan portfolio was concentrated in loans made to religious
organizations.
5. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
Estimated
useful life 1998 1997
----------- ----------- -----------
Buildings and leasehold improvements 10-15 years $ 1,343,898 1,295,948
Furniture and equipment 3-7 years 2,183,743 2,028,280
----------- -----------
3,527,641 3,324,228
Less accumulated depreciation (1,962,510) (1,461,581)
----------- -----------
$ 1,565,131 $ 1,862,647
=========== ===========
38
<PAGE>
5. BANK PREMISES AND EQUIPMENT--Continued
The Bank leases various premises under noncancellable agreements which
expire through the year 2006 and require minimum annual rentals. The
minimum rental commitments under these leases are as follows:
1999 $ 301,830
2000 302,980
2001 302,921
2002 219,548
2003 193,002
Thereafter 106,115
----------
$1,426,396
==========
In conjunction with the branch acquisitions from the Resolution Trust
Corporation, the Bank operated three branches under a five-year free-rent
agreement. In November 1996, the Bank closed two of these branches and
terminated the related leases. The Bank operated one branch under a
free-rent agreement for which the related lease expired on July 30, 1998.
Upon expiration, the Bank had the option to purchase the building at a
price equivalent to 93% of the appraised value. The Bank deferred the
decision to purchase the building and entered into a month-to-month lease
with the FDIC at a monthly rate of $1,875.
The total rental expense included in the statement of operations for the
years ended December 31, 1998, 1997, and 1996 was approximately $323,330,
$288,959 and $244,000, respectively.
6. LONG-TERM DEBT
The Bank has a loan from PIDC-Local Development Corporation (PIDC) which
financed the acquisition of furniture and fixtures. The loan bears interest
at 5% per annum. Principal and interest are paid in equal monthly payments
of $2,827. The loan is secured by furniture, fixtures, and equipment of the
Bank, and is further collateralized by the assignment of a $50,000
Certificate of Deposit with PNC Bank to PIDC. Scheduled repayment of the
loan is as follows:
1999 $ 11,191
==========
7. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was $13,942,008 and $13,852,356 at
December 31, 1998 and 1997, respectively.
39
<PAGE>
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows (dollars in thousands):
1999 $ 29,802
2000 2,490
2001 1,559
2002 960
2003 1,416
Thereafter 329
----------
$ 36,556
==========
8. REVERSE REPURCHASE AGREEMENTS
The Bank enters into sales of securities under agreements to repurchase
identical securities or reverse repurchase agreements. The amounts advanced
to the Bank under these agreements represent short-term loans and would be
reflected as a payable in the balance sheet. The securities underlying the
agreements are book-entry securities maintained at the Federal Reserve Bank
of Philadelphia. The average balance of reverse purchase agreements entered
into during 1998 was $1.5 million, and the maximum amount outstanding at
any month-end during 1998 was $1.5 million.
9. CAPITAL STOCK OFFERINGS
On September 30, 1998,the Company designated a sub-class of its Common
Stock as Class B. 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. On October 9, 1998, the Company sold 83,333
shares of Class B Common Stock to one shareholder for a purchase price of
$12 per share.
In April 1997, the Bank began its fifth offering of a maximum 250,000
shares of common stock at a price of $12 per share ($0.01 par value). As of
December 31, 1997, the Bank had received $42,600 and had issued 3,550
shares of common stock from this offering. This offering was limited to
existing shareholders of record as of April 20, 1997. The offering
terminated on December 31, 1997.
In May 1996, the Bank began its fourth offering of a maximum 250,000 shares
of common stock at a price of $12 per share ($0.01 par value). As of
December 31, 1996, the Bank had received $83,012 and had issued 6,934
shares of common stock from this offering. This offering was limited to
existing shareholders of record as of April 20, 1996. The offering
terminated on December 31, 1996.
During 1996, the Bank received $55,536 and issued 6,942 shares as a result
of warrants exercised by shareholders to purchase common stock at a price
of $8.00 per share.
During 1997, the Bank received $34,110 and issued 3,790 shares as a result
of warrants exercised by shareholders to purchase common stock at a price
of $9.00 per share. As of December 31, 1997, 7,733 warrants remained
outstanding.
40
<PAGE>
9. CAPITAL STOCK OFFERINGS--continued
During 1998, the Bank received $64,922 and issued 6,492 shares as a result
of warrants exercised by shareholders to purchase common stock at a price
of $10.00 per share. As of December 31, 1998, no warrants remain
outstanding.
In July 1998, the Company began a limited offering of its Series A
Preferred Stock (noncumulative, 6%, $0.01 par value) to FannieMae
Corporation. The nonvoting preferred stock was offered at a price of $20
per share, in an amount for which the aggregate purchase price does not
exceed the lesser of (1) 9.99% of the total equity of the Company or (2)
$880,000. During 1998, the Company received $796,980 and issued 39,849
shares of preferred stock from this offering.
Upon the declaration of a common dividend, each of the Series A preferred
shares will be accorded a non-cumulative dividend preference equal to 6% of
the purchase price of the stock per annum prior to the payment of any
dividend on account of any other class or series of the Company. No
dividends have been declared or paid.
10. INCOME TAXES
The Bank accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes."
At December 31, 1998, the Bank has net operating loss carryforwards of
approximately $2,656,446 for income tax purposes that begins to expire in
2007.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. For
financial reporting purposes, a valuation allowance of $1,120,565 and
$1,094,889 as of December 31, 1998 and 1997, respectively, has been
recognized to offset the deferred tax assets related to the cumulative
temporary differences and the tax loss carryforwards. Significant
components of the Bank's deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses 164,653 40,607
Unrealized gains on investment securities (18,435) (32,023)
Depreciation 42,725 32,818
Net operating loss carryforwards 903,192 977,558
Other 28,430 11,883
Valuation allowance for deferred tax assets (1,120,565) (1,030,843)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
41
<PAGE>
10. INCOME TAXES--Continued
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Effective rate reconciliation:
Tax at statutory rate $ 2,314 $ 61,400 $(282,797)
Nondeductible expenses 17,634 11,849 5,828
(Utilization of) increase in net operating loss (19,948) (73,249) 276,969
--------- --------- ---------
Total tax expense $ -- $ -- $ --
========= ========= =========
</TABLE>
11. FINANCIAL INSTRUMENT COMMITMENTS
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.
Summaries of the Bank's financial instrument commitments are as follows:
1998 1997
---------- ----------
Commitments to extend credit $7,269,229 $2,950,271
Outstanding letters of credit 259,000 105,000
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 and
unused credit card lines. 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.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments is required to be
disclosed, whether or not recognized in the balance sheet, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash
flows or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
42
<PAGE>
12. FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Certain financial instruments and all nonfinancial instruments are exempt
from disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $16,343 $16,343 $12,760 $12,760
Investment securities 43,196 43,253 18,253 18,313
Loans held-for-sale -- -- 1,979 2,009
Loans, net of allowance for loan losses 57,271 56,577 71,715 71,595
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Liabilities:
Demand deposits 49,114 49,114 38,620 38,620
Savings deposits 23,394 23,394 22,926 22,926
Time deposits 36,556 36,352 37,881 37,884
Off Balance Sheet:
Commitments to extend credit 7,172 -- 2,950 --
Outstanding letters of credit 259 -- 105 --
</TABLE>
13. EMPLOYEE COMPENSATION
The Bank entered into a five-year employment agreement with its chief
executive officer covering such items as salaries, bonuses, and benefits.
The agreement expires in 2000 and provides for guaranteed minimum annual
compensation of $150,000 over the term of the contract. The contract,
entered into on September 13, 1993 and amended January 1, 1994, also
granted the chief executive officer the option to acquire up to 4% of the
Bank's stock as of December 31, 1993 at $8.54 per share, which was the book
value at the date of grant. The contract, as amended on January 1, 1997,
also provides for a minimum contribution of $58,200 per year to the chief
executive officer's retirement benefit. The Company made no stock-based
compensation awards to any employee during 1998 or 1997.
14. DEFERRED BRANCH ACQUISITION COST
The Bank incurred approximately $149,000 and $224,000 in 1994 and 1993,
respectively, in consulting and other costs directly related to these
branch acquisitions which have been deferred and are being amortized over
five years. Amortization totaled $ 78,700 for each of the years ended
December 31, 1998, 1997, and 1996.
43
<PAGE>
15. RESOLUTION TRUST CORPORATION FEE
Pursuant to the acquisition of the Ukrainian branch in June 1994, the Bank
was granted an option to purchase residential real estate loans from the
Resolution Trust Corporation (RTC) equal to the amount of deposits acquired
in the branch acquisition. However, the Bank found the pricing methodology
used by the RTC to be unacceptable. The RTC then offered the Bank two
options: (1) to exercise its right to purchase the loans using the current
loan pricing or (2) to receive a fee equivalent to the accrued interest on
the balance of the offered loan portfolio for which the interest accrual
period began 45 days after the date of the branch acquisition and to waive
its right to purchase loans from the RTC. Under protest, the Bank agreed to
option (2) which required it to waive its right to purchase loans from the
RTC. Also under protest, the Bank accepted the accrued interest as
calculated by the RTC of approximately $303,000. The Bank disputed the
RTC's calculation of accrued interest. During 1996, as a result of
litigation, the Bank received a settlement for $90,000.
16. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
December 31,
----------------------
1998 1997
-------- --------
(Dollars in thousands)
Assets:
Due from banks (subsidiary) $ 265 $ 186
Investment in United Bank of Philadelphia 8,639 6,873
-------- --------
Total assets $ 8,904 $ 7,059
======== ========
Shareholders' equity:
Series A preferred stock $ 1 $ 1
Common stock 9 8
Additional paid-in-capital 12,286 10,426
Accumulated deficit (3,428) (3,438)
Net unrealized holding gains on securities
available-for-sale 36 62
-------- --------
Total shareholders' equity $ 8,904 $ 7,059
======== ========
44
<PAGE>
16. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY- Continued
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------
1998 1997 1996
----- ----- -----
(Dollars in thousands)
Equity in net income (loss) of subsidiary $ 10 $ 181 $(832)
----- ----- -----
Net income (loss) $ 10 $ 181 $(832)
===== ===== =====
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10 $ 181 $ (832)
Equity in net income (loss) of subsidiary (10) (181) 832
------- ------- -------
Net cash provided by operating activities -- -- --
------- ------- -------
Cash flows from investing activities:
Investment in subsidiary (1,783) (76) (139)
------- ------- -------
Net cash used in investing activities (1,783) (76) (139)
------- ------- -------
Cash flows from financing activities:
Issuance of preferred stock 797 -- --
Issuance of common stock 1,065 76 139
------- ------- -------
Net cash provided by financing activities 1,862 76 139
------- ------- -------
Net increase in cash and cash equivalents 79 -- --
Cash and cash equivalents at beginning of year 186 186 186
------- ------- -------
Cash and cash equivalents at end of year $ 265 $ 186 $ 186
======= ======= =======
</TABLE>
18. REGULATORY MATTERS
The Bank engages in the commercial banking business, with a particular
focus on serving Blacks, Hispanics and women, and is subject to substantial
competition from financial institutions in the Bank's service area. As a
bank holding company and a banking subsidiary, the Company and the Bank,
respectively, are subject to regulation by the Federal Reserve Board and
the Pennsylvania Department of Banking and are required to maintain capital
requirements established by those regulators. Prompt corrective actions may
be taken by those
45
<PAGE>
18. REGULATORY MATTERS--Continued
regulators against banks that do not meet minimum capital requirements.
Prompt corrective actions range from restriction or prohibition of certain
activities to the appointment of a receiver or conservator of an
institution's net assets. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions
by regulators that if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices, the Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
The most recent notification from the Federal Deposit Insurance Corporation
(FDIC) categorized the Bank as "well capitalized" under the regulatory
framework for prompt and corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below.
There are no conditions or events at December 31, 1998 that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital to risk-
weighted assets:
Consolidated $9,502 17.48% $4,350 8.00% $5,437 10.00%
Bank 9,236 16.99 4,350 8.00 5,437 10.00
Tier 1 capital to risk-
weighted assets:
Consolidated 8,823 16.23 2,175 4.00 3,262 6.00
Bank 8,557 15.74 2,175 4.00 3,262 6.00
Tier 1 capital to average
assets:
Consolidated 8,823 7.67 4,603 4.00 5,754 5.00
Bank 8,557 7.44 4,592 4.00 5,740 5.00
</TABLE>
46
<PAGE>
18. REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital to risk-
weighted assets:
Consolidated $7,359 14.19% $4,149 >/=8.00% $5,187 >/=10.00%
Bank 7,173 13.83 4,149 >/=8.00 5,187 >/=10.00
Tier 1 capital to risk-
weighted assets:
Consolidated 6,891 13.29 2,075 >/=4.00 3,112 >/=6.00
Bank 6,705 12.93 2,075 >/=4.00 3,112 >/=6.00
Tier 1 capital to average
assets:
Consolidated 6,891 6.59 4,183 >/=4.00 5,229 >/=5.00
Bank 6,705 6.41 4,176 >/=4.00 5,220 >/=5.00
</TABLE>
In May 1995, as a result of a regulatory examination completed in February
1995, the Bank entered into a Memorandum of Understanding with its primary
regulator with regard to, among other things, achievement of agreed-upon
capital levels, implementation of a viable earnings plan, and addressing
interest rate sensitivity risks through the development of systems for
monitoring the risks. Effective July 26, 1996, the Memorandum of
Understanding was terminated as a result of the Bank's full compliance with
its terms as determined in an examination completed as of March 31, 1996
and noted improvements in the Bank's policies and procedures, internal
controls, and capital position. Beginning in 1996, the Bank has operated
under a Supervisory Letter from its primary regulator. The Supervisory
Letter prevents the Bank and the Company from declaring or paying dividends
without the prior written approval of its regulators and prohibits the Bank
and Company from issuing long-term debt.
19. DEPOSIT INSURANCE ASSESSMENTS
Deposits of the Bank are insured by the FDIC. On September 30, 1996,
Congress passed a bill to recapitalize the Savings Insurance Fund (SAIF) of
the FDIC. As a result, commercial banks, like United Bank, which were
members of the Bank Insurance Fund (BIF), which owned SAIF-assessable
deposits, were required to pay on November 27, 1996, a one-time assessment
of 65.7 basis points of total SAIF-assessable deposits. Because the Bank
acquired deposits of failed savings and loan institutions from the RTC in
1993 and 1994, approximately $71 million of its deposits are considered
SAIF-assessable. As a result, the Bank had to pay a one-time SAIF Special
Assessment of approximately $485,000. The Bank filed an appeal of this
because management believes a significant portion of its deposits are
misclassified under the SAIF, as at the time of acquisition of branches
from the RTC it had over $30 million in deposits accumulated and insurable
under the BIF. Furthermore, since its acquisition of deposits, a
significant amount of acquired RTC savings and loan deposits have run off
and been replaced with commercial deposits. Currently, the law does not
make any provision for deposit runoff or for appeals on this basis. To
date, the Bank has been unsuccessful in its appeal efforts.
47
<PAGE>
20. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is a
defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial condition of
the Company.
21. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $ 9,933
=========
Basic loss per share
Income available to stockholders $ 9,933 845,902 $ .01
========= ======= ======
<CAPTION>
Year ended December 31, 1997
----------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $ 180,590
=========
Basic EPS
Income available to stockholders $ 180,590 818,240 $ 0.22
========= ======= ======
Effect of dilutive securities
Warrants -- 7,733
--------- -------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 180,590 825,973 $ 0.22
========= ======= ======
<CAPTION>
Year ended December 31, 1996
----------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss $(831,755)
=========
Basic loss per share
Loss available to stockholders $(831,755) 810,729 $(1.03)
========= ======= ======
</TABLE>
48
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Registrant.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND YEAR FIRST TERM
NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE
- ---- --- ------------------- --------------- -----------
<S> <C> <C> <C> <C>
James F.
Bodine ... 77 Retired as Managing 1993 2002
Partner, Urban Affairs
Partnership
Phila., PA.
S. Amos
Brackeen ... 80 Founder and Pastor, 1993 1999
Philippian Baptist
Church of Phila., PA.
Emma C.
Chappell .. 54 Chairman of 1993 1999
The Board, President and CEO
of Registrant and United Bank
of Philadelphia
Luis A.
Cortes, Jr.. 41 Executive Director 1993 2000
of the Hispanic Clergy
of Philadelphia & Vicinity.
Kemel G.
Dawkins ... 75 President, Kemrodco 1993 2001
Development and
Construction Company, Inc.,
President, Kem-Her
Construction Company
Inc., Phila., PA.
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
L. Armstead
Edwards ... 56 Treasurer, 1993 2000
United Bancshares, Inc.
Owner and President,
P.A.Z., Inc.,
Philadelphia., PA
Marionette Y. 54 Partner, 1996 2000
Frazier ... John Frazier, Inc.
Philadelphia, PA
William C.
Green ... 74 Co-founder, Ivy Leaf 1993 2002
Middle School,
Philadelphia, PA
Angela M.
Huggins ... 58 President and CEO 1993 2001
RMS Technologies
Inc. Foundation
William B.
Moore ... 56 Secretary,
United Bancshares, Inc.
Pastor, Tenth Memorial 1993 1999
Baptist Church,
Philadelphia, PA
Ernest L.
Wright ... 70 Founder, President and 1993 2000
CEO of Ernest L. Wright
Construction Company
Phila., PA
</TABLE>
50
<PAGE>
(b) Executive Officers of Registrant.
NAME AGE OFFICE
Emma C. Chappell (1).......... 54 Chairman, President and Chief
Executive Officer
James F. Bodine .............. 77 Vice Chairman
Reverend William B.
Moore ....................... 56 Secretary
L. Armstead Edwards .......... 56 Treasurer
(1) Dr. Chappell is the only Executive Officer of the Registrant compensated for
her services as such. Dr. Chappell serves as Chairman, President and Chief
Executive Officer of the Bank pursuant to a written employment agreement entered
into September 13, 1993 and amended as of January 1, 1994 by and among Dr.
Chappell, the Bank and United Bancshares, Inc. This employment agreement
provides for an employment term ending December 31, 2000 and further provides
that Dr. Chappell will receive a guaranteed annual base salary of $150,000. A
copy of this employment was filed with Registrant's 1998 Form 10-K and is
incorporated herein by reference. The employment agreement was amended effective
January 1, 1997 to revise the defined benefit nature of the retirement benefit
identified in the contract to a defined contribution retirement obligation.
(c) Family Relationships.
No family relationships between any director, executive officer or person
nominated or chosen by the Bank to become a director or executive officer.
(d) Other
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or executive officer during the past five years.
51
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION.
COMPENSATION TABLE
Name of
Individual or
Number Capacities in
in Group Which Served 1998 Salary 1998 Cash Bonus 1998 Options
- --------------------- ----------- --------------- ------------
Emma C.
Chairman, President $162,000 $18,000 29,694(1)
Chappell Chief Executive Officer
1997 Salary 1997 Cash Bonus
----------- ---------------
$162,000 $0
1996 Salary 1996 Cash Bonus
----------- ---------------
$162,000 $0
(1) These options to purchase the Registrant's Common Stock at $8.54 per
share were issued in December 1998 to replace options that expired in 1998. The
options have a five year term.
Directors of the Bank are compensated for each meeting attended in the amount of
three hundred dollars fifty ($350) per Board meeting attended and one hundred
fifty dollars ($150) for each committee meeting attended. Directors who are also
salaried officers of the Bank receive no remuneration for their services as
Directors. During the year ended December 31, 1996, the Bank paid Directors'
fees to its "non-interested" Directors totaling $39,100. UBS has paid no
director fees since its inception.
52
<PAGE>
Dr. Emma C. Chappell, Chairman of the Board and Chief Executive Officer of the
Bank and Registrant since its formation, receives a minimum annual salary of
$150,000. A copy of the employment agreement entered into among Dr. Chappell,
the Bank and UBS is incorporated hereing by reference.
One hundred thousand shares of the Bank's Common Stock are subject to a Long
Term Incentive Compensation Plan (the "Plan") under which options to purchase
the Bank's Common Stock may be granted to key employees of a price not less than
the fair market value thereof at the date of the grant ("Options"), and Common
Stock may be awarded as Restricted Stock, subject for a period of time to
substantial risk of forfeiture and restrictions on disposition as determined by
the Compensation Committee as of the date of the grant ("Restricted Stock").
Pursuant to the Plan, options are granted in tandem with Stock Appreciation
Rights allowing the holder of an Option to surrender the Option and receive an
amount equal to the appreciation in market value of a fixed number of shares of
Common Stock from the date of the grant of the Option ("SARs"). SARs may be
payable in Common Stock or cash or a combination of both. The Plan also allows
the Compensation Committee to grant Performance Shares, which are contingent
rights to receive, when certain performance criteria have been attained, amounts
of Common Stock and cash determined by the Compensation Committee for such an
award. Such rights are subject to forfeiture or reduction if performance goals
specified are not met during the performance period. No such options, restricted
stock or SARs were granted for 1998 performance.
No deferred compensation, incentive compensation or any further
compensation pursuant to any plan has been paid by the Bank, or will be paid by
the Bank based on services rendered to the Bank to the date of this filing.
At its annual meeting held May 6, 1994, the shareholders of the Registrant
approved the establishment of an Employee Stock Ownership Plan ("ESOP"). The
ESOP has not been formally activated by the Registrant. No purchases have been
made pursuant to the ESOP.
53
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Shareholders Owning in Excess of Five Percent of Registrant's Common Stock
Amount of UBS Beneficial Percentage
Shareholders Ownership Common Stock
- ------------ --------- ------------
First Union Corporation 133,333 14.60%
Broad and Chestnut Streets
Philadelphia, PA 19101
Greater Philadelphia Urban Affairs Coalition 47,500 5.20%
121 North Broad Street
Philadelphia, PA 19107
Philadelphia Municipal 71,667 7.84%
Retirement System
2000 Two Penn Center
Philadelphia, PA 19102
Directors and Officers of the Bank
Shares of Registrant's Common Stock Beneficially
Name Owned Percentage
- ---- --------- ------------
James F. Bodine 10,833 1.19%
S. Amos Brackeen 5,000 .56%
Emma C. Chappell(1) 7,000 .77%
Luis A. Cortes, Jr. 500 .05%
Kemel G. Dawkins 8,333 .91%
L. Armstead Edwards 10,833 1.19%
Marionette Y. Frazier 9,350 1.02%
William C. Green (2) 13,833 1.51%
Angela M. Huggins 4,200 .46%
William B. Moore 1,000 .11%
Ernest L. Wright 5,000 .55%
------ -----
TOTAL 75,882 8.31%
====== =====
54
<PAGE>
(1) Dr. Chappell also acts as Trustee of a voting trust agreement pursuant to
which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS with Dr.
Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the
Voting Trust. The term of the Voting Trust is ten years.
Dr. Chappell acts as Trustee of a voting trust agreement pursuant to which
NationsBank Corporation deposited 33,500 shares of Common Stock of UBS with Dr.
Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the
Voting Trust. The term of the Voting Trust is ten years.
Dr. Chappell also owns options to purchase up to 29,694 shares of the common
stock of UBS at a purchase price of $8.54 per share . This option was awarded on
September 15, 1993 and remains in effect for a term of five years from that
date.
(2) Owned jointly with Liller B. Green, his wife.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
UNITED BANK OF PHILADELPHIA
United Bank of Philadelphia ("UBP") is a Pennsylvania bank subsidiary of
Registrant. The Directors of UBP are as follows:
PRINCIPAL OCCUPATION YEAR FIRST
NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR
- ---- --- ------------------- ---------------
James F.
Bodine ... 77 Retired as Managing 1992
Partner, Urban Affairs
Partnership
Phila., PA.
S. Amos
Brackeen ... 80 Founder and Pastor, 1992
Philippian Baptist
Church of Phila., PA.
Emma C.
Chappell ... 54 Founder, Chairman of 1992
the Board, President
and CEO of the
Bank and Registrant.
Luis A.
Cortes, Jr... 41 Executive Director 1992
of the Hispanic Clergy
of Philadelphia & Vicinity.
Kemel G.
Dawkins ... 75 President, Kemrodco 1992
Development and
Construction Company, Inc.,
President, Kem-Her
Construction Company
Inc., Phila., PA.
55
<PAGE>
L. Armstead
Edwards ... 56 Owner and President, 1992
P.A.Z., Inc.,
Philadelphia., PA
Marionette Y. 54 Partner 1996
Frazier ... John Frazier, Inc.
Philadelphia, PA
William C.
Green .... 74 Co-Founder, Ivy Leaf 1992
Middle School,
Philadelphia, PA
Angela M.
Huggins ... 58 President and CEO 1992
RMS Technologies, Inc. Foundation
Moorestown, NJ
William B.
Moore ... 56 Pastor, Tenth Memorial 1992
Baptist Church,
Philadelphia, PA
Ernest L.
Wright ... 70 Founder, President and 1992
CEO of Ernest L. Wright
Construction Company, Phila., PA
Each of these officers and directors are officers and directors of the
Registrant.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements: December 31, 1998
Report of Independent Auditors, April 9, 1999
Consolidated Balance Sheets at December 31, 1998.
Consolidated Statements of Operations for the years ended December 31, 1998.
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998.
Consolidated Statements of Cash Flows for the years ended December 31, 1998.
56
<PAGE>
Notes to Consolidated Financial Statements.
Reports on Form 8-K
Not Applicable.
SIGNATURES
UNITED BANCSHARES, INC.
BY:
-------------------------------
Emma C. Chappell, Chairman, President & CEO
- ----------------------------------
James F. Bodine
- ----------------------------------
S. Amos Brackeen
- ----------------------------------
Emma C. Chappell
- ----------------------------------
Luis A. Cortes, Jr.
- ----------------------------------
Kemel G. Dawkins
- ----------------------------------
L. Armstead Edwards
- ----------------------------------
Marionette Y. Frazier
- ----------------------------------
William C. Green
- ----------------------------------
Angela M. Huggins
- ----------------------------------
William B. Moore
- ----------------------------------
Ernest L. Wright
57
