SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999 OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______________ TO _____________
UNITED BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
0-25976
- --------------------------------------------------------------------------------
SEC File Number
Pennsylvania 23-2802415
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North Third Street, Philadelphia, PA 19106
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(Address of principal executive office) (Zip Code)
(215) 829-2265
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
<PAGE>
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Registrant has two classes of capital stock authorized - 2,000,000
shares of $.01 par value common stock, of which as of November 15, 1999,
1,023,753 shares were issued and outstanding and 500,000 authorized shares of
Series Preferred Stock. The Board of Directors of United Bancshares, Inc.
designated one series of the Series Preferred Stock (the "Series A Preferred
Stock") of which 132,999 shares were outstanding as of November 15, 1999. The
Board of Directors designated a subclass of the common stock, designated Class B
Common Stock, by filing of Articles of Amendment on September 30, 1998. Of the
2,000,000 shares of Common Stock authorized, 250,000 have been designated Class
B Common Stock. As of November 15, 1999, 196,666 shares of Class B Common Stock
were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UNITED BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------
<S> <C> <C>
Assets
Cash and due from banks 8,411,092 3,675,010
Interest bearing deposits with banks 361,473 350,024
Federal funds sold 12,545,000 12,318,000
---------------------------------
Cash & cash equivalents 21,317,565 16,343,034
Investment securities:
Held-to-maturity, at amortized cost 46,879,269 8,049,875
Available-for-sale, at market value 11,319,961 35,146,148
Loans , net of unearned discount 63,974,071 57,950,133
Less: allowance for loan losses (769,072) (679,557)
---------------------------------
Net loans 63,204,999 57,270,576
Bank premises & equipment, net 3,732,584 1,565,131
Accrued interest receivable 1,337,282 1,749,623
Other real estate owned 145,780 262,368
Prepaid expenses and other assets 4,149,543 1,595,925
---------------------------------
Total Assets 152,086,983 121,982,681
=================================
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 31,153,766 19,999,226
Demand deposits, interest bearing 33,972,430 29,114,484
Savings deposits 36,772,892 23,393,986
Time deposits, $100,000 and over 10,635,613 13,942,008
Time deposits 25,607,380 22,614,098
---------------------------------
138,142,082 109,063,802
Long-term debt 0 11,191
Securities sold to repurchase 0 1,557,755
Obligations under Capital Leases 1,483,000
Accrued interest payable 568,746 598,352
Accrued expenses and other liabilities 1,794,806 1,847,665
---------------------------------
Total Liabilities 141,988,634 113,078,365
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value, 1,432 1,330
500,000 shrs auth., 143,150 and 132,999 issued and outstanding at
September 30, 1999 and December 31, 1998, respectively Common stock,
$.01 par value; 2,000,000 shares authorized; 998,753 and 913,490
shares issued and outstanding at September 30, 1999 and 9,988 9,134
December 31, 1998, repectively
Additional-paid-in-capital 13,810,470 12,286,233
Accumulated deficit (3,646,735) (3,428,169)
Net unrealized gain on available-for-sale securities (76,804) 35,788
---------------------------------
Total Shareholders' Equity 10,098,350 8,904,316
---------------------------------
Total Liabilities & Shareholders' Equity 152,086,983 121,982,681
=================================
</TABLE>
1
<PAGE>
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Quarter ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,289,534 $1,521,678 $4,223,275 $4,767,193
Interest on investment securities $389,654 $330,314 $1,097,294 $880,211
Interest on Federal Funds sold $202,996 $198,239 $425,968 $517,641
Interest on time deposits with other banks $7,915 $3,550 $17,249 $14,781
--------------------------------------------------------------
Total interest income $1,890,099 $2,053,781 $5,763,786 $6,179,826
Interest Expense:
Interest on time deposits $423,268 $458,646 $1,252,443 $1,439,216
Interest on demand deposits $195,743 $156,819 $464,563 $461,595
Interest on savings deposits $34,246 $103,562 $231,596 $329,806
Interest on borrowed funds $0 $21,397 $19,093 $53,688
--------------------------------------------------------------
Total interest expense $653,257 $740,424 $1,967,695 $2,284,305
Net interest income $1,236,842 $1,313,357 $3,796,091 $3,895,521
Provision for loan losses $75,000 $320,000 $215,000 $385,500
--------------------------------------------------------------
Net interest income less provision for
loan losses $1,161,842 $993,357 $3,581,091 $3,510,021
--------------------------------------------------------------
Noninterest income:
Gain on sale of loans $0 $4,674 $43,857 $34,362
Customer service fees $477,016 $379,294 $1,303,113 $1,015,664
Gain on sale of investments $0 $0 $0 $1,201
Other income $36,407 $32,771 $98,931 $100,457
--------------------------------------------------------------
Total noninterest income $513,423 $416,739 $1,445,900 $1,151,684
Non-interest expense
Salaries, wages, and employee benefits $704,096 $605,791 $2,017,568 $1,849,174
Occupancy and equipment $391,766 $334,929 $1,011,287 $937,804
Office operations and supplies $161,248 $157,062 $422,566 $392,284
Marketing and public relations $65,399 $70,292 $179,325 $156,232
Professional services $90,681 $68,942 $233,889 $190,127
Data processing $383,749 $219,347 $612,893 $664,312
Other noninterest expense $328,757 $267,970 $767,432 $741,850
--------------------------------------------------------------
Total non-interest expense $3,580,990 $1,724,333 $5,244,960 $4,931,783
--------------------------------------------------------------
Net income (loss) ($228,485) ($314,237) ($217,969) ($270,078)
==============================================================
Earnings per share-basic ($0.23) ($0.38) ($0.22) ($0.33)
Earnings per share-diluted ($0.23) ($0.38) ($0.22) ($0.33)
--------------------------------------------------------------
Weighted average number of shares 986,244 825,345 986,244 825,345
==============================================================
</TABLE>
2
<PAGE>
United Bancshares, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1999 1998
-------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($217,969) 44,159
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 140,000 65,500
(Gain) loss on sale of loans 43,857 29,688
Depreciation and amortization 398,487 301,356
Realized investment securities (gains) losses 0 1,201
Proceeds from sale of student loans 3,059,985 2,022,500
Increase (decrease) in accrued interest receivable and other assets (4,105,468) (401,719)
Increase (decrease) in accrued interest payable and other liabilites 294,481 278,226
-------------------------------
Net cash provided by operating activities (168,659) 2,340,911
Cash flows from investing activities
Purchase of investments-Available-for-Sale (6,027,846) (9,752,787)
Purchase of investments-Held-to-Maturity 28,452,729 (3,000,000)
Proceeds from maturity & principal reductions of investments-Available-for-Sale 9,015,655
Proceeds from maturity & principal reductions of investments-Held-to-Maturity 4,527,847
Proceeds from sale of investment securities-Available-for-Sale 0 3,425,663
Purchase of automobile loans (21,982,333) 0
Net (increase) decrease in loans 10,076,233 (3,425,663)
Purchase of premises and equipment (289,161) (157,668)
-------------------------------
Net cash provided by (used in) investing activities 10,229,622 (814,713)
Cash flows from financing activities
Net increase (decrease) in deposits (8,357,740) 7,838,486
Repayments on long term debt (11,191) (16,657)
Reverse repurchase agreement (1,557,755) 1,217,073
Net proceeds from issuance of common stock 234,168 64,620
Net proceeds from issuance of preferred stock 1,000,000 482,518
-------------------------------
Net cash provided by (used in) financing activities (8,692,518) 9,586,640
Increase (decrease) in cash and cash equivalents 1,368,446 11,112,838
Cash and cash equivalents at beginning of period 16,343,034 12,759,697
Cash and cash equivalents at end of period 0 17,711,480 23,872,535
===============================
Supplemental disclosures of cash flow information
Cash paid during the period for interest 906,211 991,159
===============================
</TABLE>
3
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted
in favor of the formation of a bank holding company, United Bancshares, Inc.
(the Company). Accordingly, in October 1994 the Company became a bank holding
company in conjunction with the issuance of its common shares in exchange for
the common shares of the Bank. Since 1994, the financial statements are prepared
on a consolidated basis to include the accounts of the Company and the Bank.
The purpose of this discussion is to focus on information about the Bank's
financial condition and results of operations which is not otherwise apparent
from the consolidated financial statements included in this annual report.
Reference should be made to those statements and the selected financial data
presented elsewhere in this report for an understanding of the following
discussion and analysis.
Selected Financial Data
The following table sets forth selected financial data for the each of the
following periods:
<TABLE>
<CAPTION>
(Thousands of dollars, Quarter ended Quarter ended
except per share data) September 30, 1999 September 30, 1998
<S> <C> <C>
Net interest income $1,237 $1,313
Provision for loan losses 75 320
Noninterest income 1,011 993
Noninterest expense 3,581 1,724
Net income (loss) $(228) $(314)
Earnings per share ($.22) ($.38)
Balance sheet totals: September 30, 1999 December 31, 1998
Total assets $152,086 $121,983
Loans, net $63,205 $57,270
Investment securities $58,199 $43,196
Deposits $138,430 $109,064
Shareholders' equity $10,098 $8,904
Ratios
Return on assets (.19)% .01%
Return on equity (2.22)% .14%
Equity to assets ratio 8.44% 6.40%
</TABLE>
Financial Condition
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in the following
table indicates how the Bank has managed these elements. Average funding sources
increased approximately $5.9 million, or 6.17%, during the quarter ending
September 30, 1999. Average funding uses increased $2.5 million, or 2.43%, for
the same quarter.
4
<PAGE>
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
September 30, 1999 June 30,1999
Average Increase (Decrease) Average
Balance Amount % Balance
Funding uses:
Loans $66,308 ($7,806) (10.53%) $74,114
Investment securities
Held-to-maturity 17,656 7566 74.99% 10,090
Available-for-sale 7,528 (294) (3.76%) 7,822
Federal funds sold 12,010 2,992 33.18% 9,018
-------- ------ -------
Total uses $103,502 ($2,458) $101,044
======== ====== =======
Funding sources:
Demand deposits
Noninterest-bearing $24,725 $5,211 26.70% $19,514
Interest-bearing 21,981 1,614 7.92% 20,367
Savings deposits 22,371 1,180 5.57% 21,191
Time deposits 33,232 (2,055) (5.82%) 35,287
Other borrowed funds 1 (0) 0% 1
-------- ------ -------
Total sources $102,310 $5,950 $96,360
======== ====== =======
</TABLE>
Loans
Average loans decreased approximately $8 million, or 10.53%, during the quarter
ended September 30, 1999. This decrease was primarily due to repayments in the
$21 million automobile loan portfolio purchased in February 1999. Paydowns in
this portfolio are averaging $1 million per month. In addition, prepayments in
the mortgage loan portfolio continue as consumers rush to refinance existing
loans or sell existing homes to purchase new homes in anticipation of interest
rate hikes. Strategies continue to be reviewed to originate and/or purchase
loans to minimize the impact of portfolio paydowns.
The following table shows the composition of the Bank's loan portfolio by type
loan.
(Thousands of Dollars)
September December
30, 1999 31, 1998
Commercial and industrial $ 13,302 $13,643
Commercial real estate 1,277 1,518
Consumer loans 22,059 11,423
Residential mortgages 27,336 31,365
------- -------
Total Loans $63,974 $57,950
======= =======
Residential mortgage loans at September 30, 1999 continue to comprise the
greatest percentage of total loans representing approximately 42.7% of total
loans However, these loans as a percentage of the total portfolio continue to
decline as mortgage loan balances decrease as a result of refinancing and
paydowns. In addition, majority of the new residential mortgage loans originated
are sold at closing due to the current low interest rate environment and the
interest rate risk associated with holding these loans.
In conjunction with a strategic alliance with another financial institution, the
Bank purchased a $21 million automobile loan portfolio in February 1999. These
were seasoned loans with a 2-3 year average life.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation of the
loan portfolio, assessment of economic conditions, the diversification and size
of the portfolio, adequacy of collateral, past and anticipated loss experience,
and the amount and quality of nonperforming loans. The following Table presents
an analysis of the allowance for loan losses.
5
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Nine Months ended
September 30, 1999
(Dollars in thousands)
Balance at January 1, 1999 $ 680
------
Charge-offs:
Commercial and industrial (12)
Commercial real estate -
Residential mortgages -
Consumer loans (212)
------
(224)
Recoveries 99
------
Net charge-offs (125)
Additions charged to operations 215
-
------
Balance at September 30, 1999 $770
======
Ratio of net charge-offs to average
loans outstanding 0.02%
======
The amount charged to operations and the related balance in the allowance for
loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
The allowance for loan losses as a percentage of total loans was 1.20% and 42%
of classified loans at September 30, 1999. In evaluating the adequacy of the
allowance for loan losses, only the net exposure (un-guaranteed portion) should
be considered. Because of the loan portfolio composition which includes a
significant level of residential mortgage loans and Small Business
Administration (SBA) guaranteed loans, risk in the portfolio is minimized. In
addition, the Bank has an excellent collection record. During the quarter ending
September 30, 1999, net charge-offs as a percentage of average total loans
represented .02%.
Nonperforming and nonaccrual Loans
The Bank generally determines a loan to be "nonperforming" when interest or
principal is past due 90 days or more. If it otherwise appears doubtful that the
loan will be repaid, management may consider the loan to be "nonperforming"
before the lapse of 90 days. The policy of the Bank 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 non-accrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of and interest on the loan appears to be available. At
September 30, 1999, non-accrual loans were $1.6 million--approximately $322
thousand were residential mortgage loans; approximately $600 thousand related to
one community development loan in the Bank's commercial loan portfolio; and, the
remainder consisted primarily of loans with SBA guarantees. Management is
working closely with the community development loan borrower to ensure
completion of the project while minimizing losses, if any, to the Bank. 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. From time to time, the Bank purchases loans from other
financial institutions. These loans are generally located in the Northeast
6
<PAGE>
corridor of the United States. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy.
At September 30, 1999, approximately 32% of the Bank's commercial loan
portfolio was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At September 30, 1999, none of these loans were
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average by
$10.3 million, or 38.1%, during the quarter ended September 30, 1999. The
increase is due the growth in average deposit levels repayments in the loan
portfolio. Longer-term investment strategies to achieve higher yields were
implemented in September 1999.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities, U.S. Treasury securities, and other
government-sponsored agency securities. The Bank does not invest in high-risk
securities or complex structured notes. The average duration of the portfolio is
4.32 years.
Deposits
On September 24, 1999, the Bank purchased four branches with total deposits of
$31 million at a premium of $2.1 million, or 7%. The bulk of the acquired
deposits are "core"--primarily checking and savings accounts. The Bank has
consolidated 2 of the acquired branches into its existing branch network and
will consolidate another within the next six months.
Non-interest bearing demand deposits increased on average by approximately $5.2
million, or 26.7%, during the quarter ended September 30, 1999. The increase was
primarily due to significant new account relationships with local corporations
and the purchase of deposits from First Union in September 1999.
Interest bearing demand deposits increased on average by approximately $1.6
million, or 7.92%, during the quarter ended September 30, 1999. The increase was
primarily an increase in the level of sweep deposit balances--balances swept
from a noninterest-bearing checking account to an interest-bearing (NOW) account
overnight.
Other Borrowed Funds
The level of other borrowed funds is dependent on many items such as capital
adequacy, loan growth, deposit growth and interest rates paid on these funds. At
September 30, 1999, the Bank did not have any borrowed funds.
Commitments and Lines of Credit
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit, which are conditional commitments issued by the Bank to guarantee the
performance of an obligation of a customer to a third party. Both arrangements
have credit risk essentially the same as that involved in extending loans, and
are subject to the Bank's normal credit policies. Collateral may be obtained
based on management's assessment of the customer. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments is represented by the contractual amount of those instruments.
7
<PAGE>
The Bank's financial instrument commitments at September 30, 1999 are summarized
below:
Commitments to extend credit $6,401
Outstanding letter of credit $259
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rate.
The Bank is required to maintain minimum levels of liquid assets as defined
by FRB regulations. This requirement is evaluated in relation to the composition
and stability of deposits; the degree and trend of reliance on short-term,
volatile sources of funds, including any undue reliance on particular segments
of the money market or brokered deposits; any difficulty in obtaining funds; and
the liquidity provided by securities and other assets. In addition,
consideration is given to the nature, volume and anticipated use of commitments;
the adequacy of liquidity and funding policies and practices, including the
provision for alternate sources of funds; and the nature and trend of
off-balance-sheet activities. As of September 30, 1999, management believes the
Bank's liquidity is satisfactory and in compliance with the FRB regulations
The Bank's principal sources of asset liquidity include investment securities
consisting principally of U.S. Government and agency issues, particularly those
of shorter maturities, and mortgage-backed securities with monthly repayments of
principal and interest. Securities maturing in one year or less amounted to
$26.8 million at September 30, 1999, representing 39% of the investment
portfolio. These securities primarily consisted of US Government Agency Discount
Notes with relatively short maturities. Other types of assets such as federal
funds sold, as well as maturing loans, are sources of liquidity. Approximately
$6.1 million in loans are scheduled to mature within one year.
The Bank's overall liquidity has been enhanced by a significant level of core
deposits which management has determined are less sensitive to interest rate
movements. The Bank has avoided reliance on large denomination time deposits as
well as brokered deposits
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at September 30, 1999:
(Thousands of dollars)
3 months or less $3,979
Over 3 through 12 months 7,530
Over 1 through five years 801
Over five years 126
-------
Total $12,436
=======
8
<PAGE>
Capital Resources
Total shareholders' equity increased approximately $19 thousand during the
quarter ended September 30, 1999 as a result of the purchase of $300,000 Class B
Common Stock by First Union, N.A. in conjunction and simultaneous with United
Bank's purchase of deposits/branches from First Union on September 24, 1999.
This capital infusion was offset by a $228 thousand loss incurred by the Bank
during the quarter. As of September 30, 1999, the Bank has an outstanding equity
investment commitment totaling $3 million from the U.S. Treasury Community
Development Financial Institution Fund which is expected to be funded by
December 31, 1999.
The Federal Reserve Bank's ("FRB") standards for measuring capital adequacy
for U.S. Banking organizations requires that banks maintain capital based on
"risk-adjusted" assets so that categories of assets with potentially higher risk
will require more capital backing than assets with lower risk. In addition,
banks are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1
consists of common shareholders' equity, non-cumulative and cumulative perpetual
preferred stock, and minority interests less goodwill. Tier 2 capital consists
of allowance for loan losses, hybrid capital instruments, term subordinated
debt, and intermediate-term preferred stock. Banks are required to meet a
minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at
least 4% Tier 1 capital and a Tier I Leverage ratio of at least 6%. Capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
As indicated in the table below, the Bank's risk-based capital ratios are
above the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
to the public as well as increasing the rate of internal capital growth as a
means of maintaining the required capital ratios. The Company and the Bank do
not anticipate paying dividends in the near future.
September 30, December 31,
1999 1998
Tier 1 Capital $7,946 $8,823
Tier 2 Capital 769 679
------ ------
Total Qualifying Capital $8,715 $9,502
====== ======
Risk Adjusted Total Assets (including
off- balance sheet exposures) $66,733 $54,373
Tier 1 Risk-Based Capital Ratio 11.47% 16.23%
Tier 2 Risk-Based Capital Ratio 12.63% 17.48%
Leverage Ratio 7.21% 7.62%
Results of Operations
Summary
The Bank had a net loss of approximately $228 thousand ($.23 per common share)
for the quarter ended September 30, 1999 compared to a net loss of $314 thousand
($.38 per common share) for the same quarter in 1998. The improvement is
primarily related to a lower provision for loan losses in 1999 compared to 1998.
9
<PAGE>
Net Interest Income
Net interest income is an effective measure of how well management has balanced
the Bank's interest rate sensitive assets and liabilities. Net interest income,
the difference between (a) interest and fees on interest earning assets and
interest paid on interest-bearing liabilities, is a significant component of the
earnings of the Bank. 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 decreased $76 thousand, or 6%, for the quarter ended
September 30, 1999 compared to 1998. The decrease was primarily attributable to
lower average loan balances compared to 1998---$66 million vs. $71 million. In
addition, because the Bank purchased loans instead of originating them, there
were less loan origination fees.
Provision for Loan Losses
The Bank adopted Statement of Financial Accounting Standard ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," effective January 1, 1995. As a result of applying the new rules,
certain impaired loans are reported at the present value of expected future cash
flows using the loan's initial effective interest rate, or as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. The adoption of these standards
did not have a material impact on the Bank's financial position or results of
operations.
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings for the quarter ending
September 30, 1999 was $75 thousand compared to $320 thousand for the same
quarter in 1998. The provision in 1998 was due to a specific provision made for
one community development loan in the commercial loan portfolio of the Bank.
This loan, which has a total exposure of $700 thousand, is currently in
nonaccrual status and carries a 50% reserve. Management is working closely with
the borrower to ensure completion of the development to minimize losses, if any,
on this loan.
Noninterest Income
The amount of the Bank's noninterest income generally reflects the volume of the
transactional and other accounts handled by the Bank and includes such fees and
charges as low balance account charge, overdrafts, account analysis, and other
customer service fees. Customer service fees increased $98 thousand, or 26%,
during the quarter primarily attributable to growth in ATM surcharge fees---the
Bank increased its fees for non-customers from $1.00 to $1.50 in April 1999 and
continues to install new ATM machines throughout the region. In addition, fees
on deposits increased as a result of an increase the level of demand deposit
accounts which result in more overdraft fees, activity service charges and low
balance fees.
Noninterest expense
Salaries and benefits increased $98 thousand, or 16%, during the quarter ended
September 30, 1999 compared to 1998. This increase is primarily attributable to
annual raises for employees as well as filling unfilled staff positions in
preparation for the acquisition of deposits/branches from First Union on
September 24, 1999.
10
<PAGE>
Data processing expenses increase $164 thousand, or 75%, during the quarter
ended September 30, 1999 compared to 1998. This increase is primarily
attributable to the purchase of $21 million in automobile loans from another
financial institution in February 1999 for which there is a 1% servicing fee.
Data processing expenses are a result of the management decision of the Bank to
out source data processing to third party processors the bulk of its data
processing. Such expenses are reflective of the high level of accounts being
serviced for which the Bank is charged a per account charge by processors. In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, installment and student loan portfolios. The Bank
continues to study methods by which it may reduce its data processing costs,
including but not limited to a consolidation of servicers, in-house processing
versus out-sourcing, and the possible re-negotiation of existing contracts with
servicers.
Occupancy expense increased approximately $56 thousand, or $57 thousand, as a
result a lease the Bank entered into in July 1999 to house its corporate
headquarters including its executive offices and other non-branch operating
departments. The Bank currently leases 25,000 square feet at an average cost of
$14.14 per foot. It has entered into subleases with other affiliated entities
for approximately 4,000 square feet. In accordance with Financial Accounting
Standards Board Statement 13, this lease has been accounted for as a capital
lease in the amount of $1,483,000 as the present value of future minimum lease
payments exceeds 90% of the fair market value of the building.
Professional Services increased approximately $21 thousand, or 32%, for the
quarter ended September 30, 1999 compared to 1998. This increase is primarily
attributable to consulting fees related to the Year 2000 Remediation Plan and
Customer Awareness seminars. In addition, in August 1999, the Bank entered into
a contract with a computer consulting firm to provide on site management of the
Bank's computer systems, build appropriate infra-structure, and provide
leadership in technology planning.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
Regulatory Matters
At September 30, 1999, the Bank is operating under a Supervisory Letter from its
primary regulator. The Supervisory Letter, among other things, prevents the Bank
and the Company from declaring or paying dividends without the prior written
approval of its regulators and prohibits the Bank and the Company from issuing
debt.
Year 2000
The 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
11
<PAGE>
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 has completed testing all
systems to ensure Year 2000 Compliance.
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 written a Year 2000 Business Resumption Plan that contains all mission
critical systems and services. This Plan was completed in June 30, 1999.
o The Company has established a Year 2000 Committee consisting of members of
senior management which currently meets 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.
12
<PAGE>
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 that
includes net income as well as certain other items that result in a change to
equity during the period. These financial statements have been reclassified to
reflect the provisions of SFAS No. 130.
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 has
determined that the Bank operates in one segment, namely community banking.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to prime or other short term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap, or excess earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations.
At September 30, 1999, a liability sensitive position is maintained on a
cumulative basis through 1 year of 3.66% that is within the Bank's policy
guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is
primarily due to the high concentration of fixed rate mortgage loans the Bank
has in its loan portfolio but is somewhat mitigated by the Bank's high level of
core deposits which have been placed in longer repricing intervals. Generally,
because of the Bank's negative gap position in shorter time frames, the Bank can
anticipate that increases in market rates will have a negative impact on the net
interest income, while decreases will have the opposite effect.
13
<PAGE>
While using the interest sensitivity gap analysis is a useful management tool as
it considers the quantity of assets and liabilities subject to repricing in a
given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
negative gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and
off-balance-sheet instruments. The calculated estimates of changes in market
value of portfolio value at September 30, 1999 are as follows:
Market value of
Changes in rate portfolio equity
(Dollars in thousands)
+400 basis points $532
+300 basis points 1,815
+200 basis points 4,490
+100 basis points 7,186
Flat rate 9,908
-100 basis points 12,580
-200 basis points 14,541
-300 basis points 17,136
-400 basis points 19,538
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest sensitivity of the Company's assets and
liabilities, as well as the estimated effect of changes in interest rates on the
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest-rate
exposure is not considered to be significant and is within the Bank's policy
limits at September 30, 1999. However, if significant interest rate risk arises,
the Board of Directors and management may take (but are not limited to) one or
all of the following steps to reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit (CDs) and movement into money
market deposit accounts and short-term CDs through pricing and other
marketing strategies.
2. Purchase quality loan participations with appropriate interest
rate/gap match for the Bank's balance sheet.
3. Restructure the Bank's investment portfolio.
14
<PAGE>
The Board of Directors has determined that active supervision of the
interest-rate spread between yield on earnings assets and cost of funds will
decrease the Bank's vulnerability to interest-rate cycles.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A writ of summons was filed by Monument Financial Group, Inc. and
Ronald Hatfield, respectively, an accountholder and its principal (collectively,
the "Plaintiffs") to commence an action against the Bank in the Court of Common
Pleas, Philadelphia County on June 29,1999. Subsequently, a complaint was filed
by the Plaintiffs. The suit involves the processing of transactions in alleged
non-compliance with the deposit contract by permitting the processing of
transactions with only one signature (the "Primary Claim"). This action by the
Bank allegedly resulted in a loss to the Plaintiffs. The Bank has conducted in
depth investigation into the circumstances arising in the Primary Claim. As a
result of this investigation, the Bank has determined that the deposit contract
was modified by the depositor. The depositor repeatedly affirmed, both by
telephone, and in person, that transactions should be permitted with a single
signature. This modification creates a firm defense to the Primary Claim.
Even if the deposit contract was not modified, the amount of the
Primary Claim must be reduced by the aggregate amount of the transactions
utilized for valid business purposes of the Plaintiff. The Bank's investigations
indicate that the proceeds of a substantial number of the transactions processed
with one signature were utilized to pay expenses of Monument Financial Group,
thus reducing any damage amount
Based upon the forgoing, the Bank believes that it will not be liable
for the Primary Claim. In addition, the Bank has insurance which, it has been
informed by the carrier representative, will cover any loss resulting from the
Primary Claim, including costs of defense, in excess of a $50,000 deductible.
The complaint also seeks damages for lost business opportunity, punitive damages
for alleged consequential losses to potential business ventures of the
Plaintiffs, and related claims (collectively, the "Ancillary Claims"). Based on
general legal principles and the foregoing facts, the Bank and its counsel
believe the Ancillary Claims are frivolous and without merit. The Bank and its
counsel have reviewed the Bank's comprehensive general liability coverage and
have indicated that any damages resulting from the Ancillary Claims will be
wholly-covered by this insurance.
No other material claims have been instituted or threatened by or
against Registrant or its affiliates other than in the ordinary course of
business.
Item 2.
Working Capital Restrictions on Payment of Dividends.
The holders of the Common Stock are entitled to such dividends as may
be declared by the Board of Directors out of funds legally available therefor
under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania
Banking Code of 1965, funds available for cash dividend payments by a bank are
restricted to accumulated net earnings and if the surplus of a Bank is less than
16
<PAGE>
the amount of its capital the Registrant shall, until surplus is equal to such
amount, transfer to surplus an amount which is at least 10% of the net earnings
of the Registrant for the period since the end of the last fiscal year or any
shorter period since the declaration of a dividend. If the surplus of a bank is
less than 50% of the amount of its capital, no dividend may be declared or paid
by the bank without prior approval of the Secretary of Banking of the
Commonwealth of Pennsylvania.
Under the Federal Reserve Act, if a bank has sustained losses up to or
exceeding its undivided profits, no dividend shall be paid, and no dividends can
ever be paid in an amount greater than such bank's net profits less losses and
bad debts. Cash dividends must be approved by the Federal Reserve Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Registrant's net profits
for that year plus its retained net profits from the preceding two years, less
any required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the Board has the power to prohibit the
payment of cash dividends by a bank if it determines that such a payment would
be an unsafe or unsound banking practice.
The Federal Deposit Insurance act generally prohibits all payments of
dividends a bank which is in default of any assessment to the Federal Deposit
Insurance Corporation.
Recent Sales of Securities
Registrant has sold 5,000 shares of its Class B Common Stock
(non-voting) to an individual investor at a purchase price of $12.00 per share
pursuant to an exemption from registration contained in Section 4(6) of the Act.
Registrant also sold 25,000 shares of its Class B Common Stock
(non-voting) to First Union Corporation at a purchase price of $12.00 per share
pursuant to an exemption from registration contained in Section 4(6) of the Act.
Item 3. Defaults Upon Senior Securities.
(a) There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any material default with
respect to any indebtedness of the Registrant exceeding five percent of the
total assets of the Registrant.
(b) There have been no material arrearage or delinquencies as discussed
in Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No
obligations pursuant to those securities have become due.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders.
17
<PAGE>
Item 5. Other Information.
Related Party Transactions
Beginning July 1, 1999, the Bank commenced a ten year lease
(the "Lease") of a headquarters and operations facility located at 300 North
Third Street, Philadelphia, Pennsylvania (the "Facility). The owner of the
Facility is ECC Properties, LLC, a Pennsylvania Limited Liability Company
controlled by Emma C. Chappell, Chairman, President and CEO of the Bank and the
Registrant.
The Facility comprises approximately 25,000 square feet and
houses the Bank's executive offices, operations, finance, human resources and
corporate services departments. The Bank has leased the entire facility for a
base rent of $12.75 per square foot, plus electric and cleaning. The Bank has
sublet the space that it is not currently using, consisting of approximately
4,000 square feet, for a term of five years.
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits submitted with this Form 10-Q are as
follows:
Copy of the Registrant's Call Report for the Period
ending September 30, 1999. [Filed with Schedule SE]
Lease between United Bank of Philadelphia and ECC Properties,
LLC [Filed with Schedule SE]
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCSHARES, INC.
Date: November 18, 1999 /s/ Emma C. Chappell
---------------------------------
Emma C. Chappell
Chairman, President & CEO
/s/ Brenda Hudson-Nelson
---------------------------------
Brenda Hudson-Nelson
Controller
18
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
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<TOTAL-ASSETS> 152,087
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<LOANS-NON> 1,593
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