SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-Q
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(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 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
-------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
714 MARKET STREET, PHILADELPHIA, PA 19106
- -------------------------------------- --------
(Address of principal executive office) (Zip Code)
(215) 829-2265
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Registrant has two classes of capital stock authorized - 2,000,000 shares
of $.01 par value common stock, of which as of April 30, 1999, 913,490 shares
were issued and outstanding and 500,000 authorized shares of Series Preferred
Stock. The Board of Directors of United Bancshares, Inc. designated one series
of the Series Preferred Stock (the "Series A Preferred Stock") of which 132,999
shares were outstanding as of November 15, 1998. The Board of Directors
designated a subclass of the common stock, designated Class B Common Stock, by
filing of Articles of Amendment on September 30, 1998. Of the 2,000,000 shares
of Common Stock authorized, 250,000 have been designated Class B Common Stock.
As of April 30, 1999, 166,666 shares of Class B Common Stock were issued and
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
United Bancshares, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
1999 1998
---- ----
ASSETS
Cash and due from banks 8,575,512 3,675,010
Interest bearing deposits with banks 353,644 350,024
Federal funds sold 7,535,000 12,318,000
----------- -----------
CASH & CASH EQUIVALENTS 16,464,156 16,343,034
Investment securities:
Held-to-maturity, at amortized cost 14,105,164 8,049,875
Available-for-sale, at market value 7,247,329 35,146,148
Loans, net of unearned discount 76,155,934 57,950,133
Less: allowance for loan losses (742,201) (679,557)
----------- -----------
NET LOANS 75,413,733 57,270,576
Bank premises & equipment, net 1,544,296 1,565,131
Accrued interest receivable 848,695 1,749,623
Other real estate owned 384,320 262,368
Prepaid expenses and other assets 1,791,595 1,595,925
----------- -----------
TOTAL ASSETS 117,799,288 121,982,681
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits, non-interest bearing 19,830,993 19,999,226
Demand deposits, interest bearing 25,010,430 29,114,484
Savings deposits 23,669,103 23,393,986
Time deposits, $100,000 and over 13,855,315 13,942,008
Time deposits 22,899,888 22,614,098
----------- -----------
105,265,728 109,063,802
----------- -----------
Long-term debt 2,815 11,191
Securities sold to repurchase 0 1,557,755
Accrued interest payable 495,801 598,352
Accrued expenses and other liabilities 2,094,592 1,847,665
----------- -----------
TOTAL LIABILITIES 107,858,937 113,078,365
Shareholders' equity:
Preferred Stock, Series A, non-cum.,
6%, $.01 par value, 500,000 shrs
auth., 132,999 issued and
outstanding 1,330 1,330
Common stock, $.01 par value;
2,000,000 shares authorized;
996,823 and 913,490 shares
issued and outstanding at
March 31, 1999 and
December 31, 1998, repectively 9,968 9,134
Additional-paid-in-capital 13,284,994 12,286,233
Accumulated deficit (3,393,321) (3,428,169)
Net unrealized gain on
available-for-sale securities 37,379 35,788
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,940,350 8,904,316
----------- -----------
117,799,287 121,982,681
----------- -----------
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Interest Income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,457,658 1,603,331 $ 5,912,901 5,566,650
Interest on investment securities 420,520 280,881 1,067,762 977,117
Interest on Federal Funds sold 130,723 134,556 482,856 224,594
Interest on time deposits with other banks 4,304 7,570 25,334 20,519
----------- ---------- ----------- -----------
Total interest income 2,013,205 2,026,338 7,488,852 6,788,880
Interest Expense:
Interest on time deposits 425,255 497,332 1,852,080 1,650,740
Interest on demand deposits 142,924 151,665 379,397 294,363
Interest on savings deposits 95,883 110,979 459,035 506,458
Interest on borrowed funds 19,053 9,688 54,841 78,629
----------- ---------- ----------- -----------
Total interest expense 683,115 769,664 2,745,353 2,530,190
----------- ---------- ----------- -----------
NET INTEREST INCOME 1,330,090 1,256,674 4,743,499 4,258,690
Provision for loan losses 65,000 25,500 97,500 85,000
----------- ---------- ----------- -----------
NET INTEREST INCOME LESS
PROVISION FOR LOAN LOSSES 1,265,090 1,231,174 4,645,999 4,173,690
----------- ---------- ----------- -----------
Noninterest income:
Gain on sale of loans 3,888 29,688 187,471 11,188
Customer service fees 395,938 293,796 1,181,082 907,557
Resolution Trust Corp fees 0 0 0 90,000
Other income 34,499 26,835 148,867 99,821
----------- ---------- ----------- -----------
Total noninterest income 434,325 350,319 1,517,420 1,108,565
Non-interest expense
Salaries, wages, and employee benefits 674,256 612,314 2,397,861 2,255,079
Occupancy and equipment 311,373 282,975 1,015,419 898,464
Office operations and supplies 127,437 133,407 522,525 509,158
Marketing and public relations 66,282 20,739 172,326 136,352
72,793 59,923 274,999 266,955
Professional services
Data processing 221,947 223,188 844,009 811,531
Deposit insurance assessments 0 0 66,274 616,025
Other noninterest expense 189,882 224,748 689,415 629,603
----------- ---------- ----------- -----------
Total non-interest expense 1,663,970 1,557,294 5,982,829 6,123,167
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ 35,445 24,199 $ 180,590 ($ 840,912)
----------- ---------- ----------- -----------
EARNINGS PER SHARE-BASIC $ 0.04 $ 0.03 #REF! ($ 1.04)
EARNINGS PER SHARE-DILUTED $ 0.04 $ 0.03 #REF! #REF!
----------- ---------- ----------- -----------
Weighted average number of shares 937,101 823,695 #REF! 810,729
----------- ---------- ----------- -----------
LINES 41 & 42 ARE ADJUSTED FOR 1997 FDIC ASSESSMENT
EXPENSE QUARTERLY & YEARLY. BELOW
IS FDIC MONTHLY, QUARTERLY, & YEARLY NUMBERS 809,422
----------
</TABLE>
<PAGE>
United Bancshares, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, June 30,
1997 1996
------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) 89,536 (233,369)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 45,000 40,000
Gain on sale of loans 120,862 (289)
Depreciation and amortization 274,921 127,878
Realized investment securities gains -- (9,157)
Increase in accrued interest receivable (136,447) (235,947)
(Decrease) in accrued interest payable (65,254) (92,176)
---------- ----------
Net cash provided by (used in) operating activities 328,618 (403,060)
Cash flows from investing activities
Purchase of investments--Available-for-Sale (1,009,516) (3,503,840)
Purchase of investments--Held-to-Maturity (3,511,452) (6,095,331)
Proceeds from maturity & principal reductions of invest 1,325,985 1,198,132
Proceeds from maturity & principal reductions of invest 1,022,352 5,107,749
Proceeds from sale of investment securities--Available-for -- 4,562,444
Proceeds from sale of loans 5,110,843 --
Net increase in loans (3,902,230) (2,875,945)
Purchase of premises and equipment (224,934) (131,425)
---------- ----------
Net cash (used in) investing activities (1,188,952) (1,738,216)
Cash flows from financing activities
Net increase in deposits 3,913,046 1,287,478
Repayments on long term debt (15,255) (14,522)
Reverse repurchase agreement 1,522,439 --
Net proceeds from issuance of common stock 33,659 53,516
---------- ----------
Net cash provided by financing activities 5,453,889 1,326,472
Increase (decrease) in cash and cash equivalents 4,593,555 (814,804)
Cash and cash equivalents at beginning of period 9,244,312 10,825,547
---------- ----------
Cash and cash equivalents at end of period 13,837,866 10,010,743
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 1,295,765 1,232,317
</TABLE>
<PAGE>
United Bancshares, Inc.
Statements of Cashflows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $35,445 24,194
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 65,000 25,500
Gain on sale of loans (3,888) (29,688)
Depreciation and amortization 139,390 145,109
Proceeds from sale of student loans 0 2,022,500
Increase (decrease) in accrued interest
receivable and other assets 583,306 (40,260)
Increase (decrease) in accrued interest
payable and other liabilites 144,376 674,061
------------ ----------
Net cash provided by operating activities 963,629 2,821,416
Cash flows from investing activities
Purchase of investments-Available-for-Sale 0 (7,997,940)
Purchase of investments-Held-to-Maturity 0 (1,500,000)
Proceeds from maturity & principal reductions
of investments-Available-for-Sale 778,827 393,852
Proceeds from maturity & principal reductions
of investments-Held-to-Maturity 21,053,641 2,448,248
Net (increase) decrease in loans 3,778,064 (60,063)
Purchase of automobile loans (21,982,333) 0
Purchase of premises and equipment (106,502) (100,159)
------------ ----------
Net cash provided by (used in) investing activities 3,521,697 (6,816,062)
Cash flows from financing activities
Net increase (decrease) in deposits (3,798,074) 2,070,762
Repayments on long term debt (8,376) (7,957)
Sale of Common Stock 1,000,000
Reverse repurchase agreement (1,557,755) 460,379
------------ ----------
Net cash provided by (used in) financing activities (4,364,205) 2,523,184
Increase (decrease) in cash and cash equivalents 121,122 (1,471,462)
Cash and cash equivalents at beginning of period 16,343,034 12,759,696
Cash and cash equivalents at end of period 16,464,156 11,288,234
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for interest 682,892 746,805
Write-down of cumulative effect of change in method
of accounting for invesment securities 0 --
=========== ===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted
in favor of the formation of a bank holding company, United Bancshares, Inc.
(the Company). Accordingly, in October 1994 the Company became a bank holding
company in conjunction with the issuance of its common shares in exchange for
the common shares of the Bank. Since 1994, the financial statements are prepared
on a consolidated basis to include the accounts of the Company and the Bank.
The purpose of this discussion is to focus on information about the Bank's
financial condition and results of operations which is not otherwise apparent
from the consolidated financial statements included in this annual report.
Reference should be made to those statements and the selected financial data
presented elsewhere in this report for an understanding of the following
discussion and analysis.
Selected Financial Data
The following table sets forth selected financial data for the each of the
following periods:
QUARTER ENDED QUARTER ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(Thousands of dollars, except per share data)
Net interest income $ 1,265 $ 1,231
Provision for loan losses 65 26
Noninterest income 434 350
Noninterest expense 1,664 1,557
Net income (loss) $ 35 $ 24
Earnings per share-basic and diluted $ .04 $ .03
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Balance sheet totals:
Total assets $117,799 $121983
Loans, net $ 75,413 $ 57,270
Investment securities $ 21,352 $ 43,196
Deposits $105,266 $109,064
Shareholders' equity $ 9,940 $ 8,904
Ratios
Return on assets .03% .01%
Return on equity .35% .14%
Equity to assets ratio 8.44% 6.40%
Financial Condition
Sources and Uses of Funds
The financial condition of the Bank 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 $6.8 million, or 6.53%, during the
quarter ending March 31, 1999. Average funding uses also increased $754
thousand, or .72%, for the same quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
AVERAGE INCREASE (DECREASE) AVERAGE
BALANCE AMOUNT % BALANCE
------- ------ ------ -------
Funding uses:
<S> <C> <C> <C> <C>
Loans $ 70,950 ($ 388) (.54%) $ 71,338
Investment securities
Held-to-maturity 23,120 11,684 102.17% 11,436
Available-for-sale 5,013 (3,379) (40.26%) 8,392
Federal funds sold 11,843 (1,116) (8.61%) 12,959
-------- -------- ------- --------
Total uses $110,926 $ 6,801 $104,125
======== ======== ======= ========
Funding sources:
Demand deposits $ 21,547 $ 1,807 9.15% $ 19,740
Noninterest-bearing 23,375 753 3.33% 22,622
Interest-bearing
Savings deposits 24,289 1,006 4.32% 23,283
Time deposits 34,521 (2,844) (7.61%) 37,365
Other borrowed funds 1,553 32 2.10% 1,521
-------- -------- ------- --------
Total sources $105,285 $ 754 $104,531
======== ======== ======= ========
</TABLE>
<PAGE>
Loans
Average loans decreased approximately $388 thousand, or .54%, during the quarter
ended March 31, 1999. This decrease was primarily due to the sale of
approximately $11 million of student loans in late December 1998. These loans
were strategically sold with the plan to replace them with higher yielding/lower
cost to service automobile loans. In February 1999, the Bank purchased
approximately $21 million automobile loans from another financial institution
and were selected based on the fact that they were seasoned (remaining average
life of approximately 3 years) and had no history of delinquency.
The following table shows the composition of the loan portfolio of the Bank by
type loan.
(Thousands of Dollars)
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Commercial and industrial $ 12,535 $13,643
Commercial real estate 1,641 1,518
Consumer loans 31,793 11,423
Residential mortgages 30,186 31,365
------- -------
Total Loans $76,156 $74,162
======= =======
Residential mortgage loans at March 31, 1999 comprise the greatest percentage of
total loans representing approximately 39.6% of total loans However, these loans
as a percentage of the total portfolio continue to decline as mortgage loan
balances decline due to refinancing and payoffs/paydowns while other loan
categories such as commercial loans and consumer loans continue to increase.
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.
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
QUARTER ENDED
MARCH 31, 1999
--------------
(Dollars in thousands)
Balance at January 1 $ 680
------
Charge-offs:
Commercial and industrial --
Commercial real estate --
Residential mortgages --
Consumer loans (54)
(54)
Recoveries 51
--------
Net charge-offs (3)
Additions charged to operations 65
-
Balance at December 31 $ 742
Ratio of net charge-offs to average
loans outstanding 0.004%
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 .97% at March
31, 1999. In evaluating the adequacy of the allowance for loan loss, only the
net exposure (un-guaranteed portion) should be considered. As a result of the
loan portfolio composition (primarily residential mortgage loans, Small Business
Administration (SBA) guaranteed loans, and guaranteed student loans), less than
25% of the loan portfolio represents some level of risk--no guarantee features,
significant collateral, or proven track record of repayment. In addition, the
Bank has an excellent collection record. During the quarter ending March 31,
1999, charge-offs as a percentage of total loans represented .004%.
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
March 31, 1999, non-accrual loans were $1.5 million. Approximately $864 thousand
of the total nonaccrual loans were residential mortgages while the remainder
consisted primarily of loans with SBA loans. There is no known information about
possible credit problems other than those classified as nonaccrual that causes
management to be uncertain as to the ability of any borrower to comply with
present loan terms.
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the economy of the
region.
<PAGE>
At March 31, 1999, approximately 35% of the commercial loan portfolio of
the Bank were 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 religious community of the
Philadelphia region. Loans made to these organizations were primarily for
expansion and repair of church facilities. At March 31, 1999, none of these
loans was nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average
by $7.1 million, or 21.92%, during the quarter ended March 31, 1999. The
increase is due the temporary deployment of the proceeds from the sale of $11
million in student loans in Federal Funds Sold until automobile loans were
purchased in February 1999.
The investment portfolio of the Bank primarily consists of mortgage-backed
pass-through agency securities, U.S. Treasury securities, and other
government-sponsored agency securities. The Bank does not invest in high-risk
securities or complex structured notes.
Deposits
Non-interest bearing demand deposits increased on average by approximately
$1.8 million, or 9.15%, during the quarter ended March 31, 1999. The increase
was primarily due to increased marketing and cross selling efforts. This
strategy was employed to increase the level of core deposits as well by
capitalizing the recent regional mega-bank mergers that have taken place within
the last year.
Interest bearing demand deposits increased on average by approximately $753
thousand, or 3.33%, during the quarter ended March 31, 1999. The increase was
primarily due to the continued marketing of the "Prestige" premium checking
product that was introduced in March 1998. This product offers such benefits as
life insurance, discount shopping, etc.
Time Deposits declined on average by $2.8 million, or 7.61%, during the
quarter ended March 31, 1999. This decrease was primarily attributable to the
maturity of large certificates of deposits. The Bank continues its strategy of
building a low cost core deposit base.
Other Borrowed Funds
The average balance for other borrowed funds increased $33 thousand, or
2.10%, during the quarter ended March 31, 1999. The level of other borrowed
funds is dependent on many items such as capital adequacy, loan growth, deposit
growth and interest rates paid on these funds.
Commitments and Lines of Credit
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, which are conditional commitments issued by the Bank to guarantee the
performance of an obligation of a customer to a third party. Both arrangements
have credit risk essentially the same as that involved in extending loans, and
are subject to the normal credit policies of the Bank. Collateral may be
obtained based on management's assessment of the customer. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
financial instruments is represented by the contractual amount of those
instruments.
The Bank's financial instrument commitments at March 31, 1999 are
summarized below:
Commitments to extend credit $7,245,00
Outstanding letter of credit $259,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
<PAGE>
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rate.
The Bank is required to maintain minimum levels of liquid assets as defined
by FRB regulations. This requirement is evaluated in relation to the composition
and stability of deposits; the degree and trend of reliance on short-term,
volatile sources of funds, including any undue reliance on particular segments
of the money market or brokered deposits; any difficulty in obtaining funds; and
the liquidity provided by securities and other assets. In addition,
consideration is given to the nature, volume and anticipated use of commitments;
the adequacy of liquidity and funding policies and practices, including the
provision for alternate sources of funds; and the nature and trend of
off-balance-sheet activities. As of March 31, 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. At March 31, 1999, the average
duration of the investment portfolio was 2.48 years. Other types of assets such
as federal funds sold, as well as maturing loans, are sources of liquidity.
Approximately $5.3 million in loans are scheduled to mature within one year.
The Bank's overall liquidity has been enhanced by a significant level of
core deposits which management has determined are less sensitive to interest
rate movements. The Bank has avoided reliance on large denomination time
deposits as well as brokered deposits.
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at March 31, 1999:
(Thousands of
dollars)
-------------
3 months or less $ 4,808
Over 3 through 12 months 8,585
Over 1 through five years 340
Over five years 122
-------
Total $13,855
=======
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 March 31, 1998, a liability sensitive position is maintained on a
cumulative basis through 1 year of -10.6% which is within the Bank's policy
guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is
primarily due to the high concentration of fixed rate mortgage loans the Bank
has in its loan portfolio but is somewhat mitigated by the Bank's high level of
core deposits which have been placed in longer repricing intervals. Generally,
because of the Bank's negative gap position in shorter time frames, the Bank can
anticipate that increases in market rates will have a negative impact on the net
interest income, while decreases will have the opposite effect.
<PAGE>
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
negative gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and
off-balance-sheet instruments. The calculated estimates of changes in market
value of portfolio value at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
MARKET VALUE OF PERCENT OF
CHANGES IN RATE PORTFOLIO EQUITY CHANGE
--------------- ---------------- ------
(Dollars in thousands)
<S> <C> <C>
+400 basis points $ 87,941 (20.88)%
+300 basis points 93,743 (15.66)
+200 basis points 99,545 (10.44)
+100 basis points 105,347 (5.22)
Flat rate 111,149 -
-100 basis points 116,951 5.22
-200 basis points 122,753 10.44
-300 basis points 128,555 15.66
-400 basis points 134,357 20.88
</TABLE>
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest sensitivity of the Company's assets and
liabilities, as well as the estimated effect of changes in interest rates on the
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest-rate
exposure is not considered to be significant and is within the Bank's policy
limits at March 31, 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.
The Board of Directors has determined that active supervision of the
interest-rate spread between yield on earnings assets and cost of funds will
decrease the Bank's vulnerability to interest-rate cycles.
Capital Resources
Total shareholders' equity increased approximately $1 million during the
quarter ended March 31, 1999. The increase during the quarter was due to the
sale of $1 million Class B, non-voting Common Stock to another financial
institution as well as internal capital generation in the form of net income of
approximately $35 thousand.
The Federal Reserve Bank's ("FRB") standards for measuring capital adequacy
for U.S. Banking organizations requires that banks maintain capital based on
"risk-adjusted" assets so that categories of assets with potentially higher risk
will require more capital backing than assets with lower risk. In addition,
banks are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1
consists of common shareholders' equity, non-cumulative and cumulative perpetual
preferred stock, and minority interests less goodwill. Tier 2 capital consists
of allowance for loan losses, hybrid capital instruments, term subordinated
debt, and intermediate-term preferred stock. Banks are required to meet a
minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at
least 4% Tier 1 capital and a Tier I Leverage ratio of at least 6%. Capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
As indicated in the table below, the Bank's risk-based capital ratios are
above the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
to the public as well as increasing the rate of internal capital growth as a
means of maintaining the required capital ratios. The Company and the Bank do
not anticipate paying dividends in the near future.
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Tier 1 Capital $ 9,855 $ 8,823
Tier 2 Capital 742 679
------- -------
Total Qualifying Capital $10,597 $ 9,502
======= =======
Risk Adjusted Total Assets
(including off-
balance sheet exposures) $72,442 $54,373
Tier 1 Risk-Based Capital Ratio 13.60% 16,23%
Tier 2 Risk-Based Capital Ratio 14.62% 17.48%
Leverage Ratio 8.59% 7.62%
RESULTS OF OPERATIONS
Summary
The Bank had net income of approximately $35 thousand ($.04 per common
share) for the quarter ended March 31, 1999 compared to net income of $24
thousand ($.03 per common share) for the same quarter in 1998. Net income for
the quarter ending March 31, 1998 included a $30 thousand gain on the sale of $2
million in student loans. Excluding the gain on the sale of loans, there was a
$41 thousand improvement in the Bank's operating performance during the quarter
ended March 31, 1999 compared to 1998. This improvement is primarily a result of
an increased level of customer service fees--from $294 thousand in 1998 to $396
thousand in 1999.
<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 increased $34 thousand, or 2.76%, for the quarter ended
March 31, 1999 compared to 1998. The increase was primarily attributable to a
lower interest rate environment that resulted in a reduction in interest paid on
deposit accounts. Conversely, much of the loan portfolio of the Bank is fixed
rate in nature and does not fluctuate with prime. The result was an increase in
the net interest margin.
Provision for Loan Losses
The Bank adopted Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," effective January 1, 1995. As a result of applying the new rules,
certain impaired loans are reported at the present value of expected future cash
flows using the loan's initial effective interest rate, or as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. The adoption of these standards
did not have a material impact on the Bank's financial position or results of
operations.
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings for the quarter
ending March 31, 1999 was $65 thousand compared to $26 thousand for the same
quarter in 1999. The increase is due to the increase in the amount of loans
outstanding as well as specific provision made for one community development
loan in the commercial loan portfolio of the Bank.
Noninterest Income
The amount of the Bank's noninterest income generally reflects the volume
of the transactional and other accounts handled by the Bank and includes such
fees and charges as low balance account charge, overdrafts, account analysis,
and other customer service fees. Deposit-related noninterest income increased
approximately $100 thousand during the quarter ended March 31, 1999 compared to
1998. Approximately $55 thousand of the increase was attributable to a higher
level of service charges on demand deposit products. The level of demand
deposits increased approximately $3 million from March 1998 to March 1999 as a
result of new product offerings (i.e. "Prestige" premium checking) as well as
increased marketing and cross-selling efforts. In addition, ATM surcharge fees
continue to increase as a result of growth in the ATM network from 28 to 31
machines.
Noninterest expense
Salaries and benefits increased $62 thousand, or 10.1%, during the quarter
ended March 31, 1999 compared to 1998. This increase is primarily attributable
to annual raises for employees as well as filling unfilled staff positions.
Management continues to recognize the need to grow the deposit level of the Bank
to generate operating economies of scale and net interest income to cover the
cost of operations
Data processing expenses represented .78% and .81% of the total average
assets for the quarters ended March 31, 1999 and 1998, respectively. 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. In an effort to reduce these costs, the Bank has systematically and
strategically sold portions of its student loan portfolio and replaced it with
commercial and other consumer loans with lower servicing costs.
<PAGE>
Occupancy expense increased approximately $28 thousand for the quarter
ended March 31, 1999 compared to the quarter ended March 31, 1998. This increase
is primarily attributable to annual escalations in lease payments and
maintenance contract cost to service the Bank's growing ATM network. In
addition, the "free rent" lease from the Resolution Trust Corporation (RTC, now
FDIC) on the Bank's Wadsworth Avenue Branch expired in July 1998. The Bank has
extended the lease through June 30, 1999 at a monthly rate of $1,875. Options
are currently under evaluation as to whether the Bank will purchase this branch
office or seek other lease arrangements.
Marketing and public relations expense increased approximately $46 thousand
for the quarter ended March 31, 1999 compared to the quarter ended March 31,
1998. The increase was primarily related to the new "Prestige" premium checking
product for which the Bank pays an outside vendor to provide premiums (i.e. life
insurance, discount shopping, etc.)
Professional Services increased approximately $13 thousand, or 21.4%, for
the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998.
This increase is primarily attributable to consulting fees related to the Year
2000 Remediation Plan and Customer Awareness seminars.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
REGULATORY MATTERS
At March 31, 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
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.
<PAGE>
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 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.
* 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
is in the process of writing a Year 2000 Business Resumption Plan that
contains all mission critical systems and services. This Plan will be
completed by June 30, 1999.
* 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
* 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.
* 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.
<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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material claims have been instituted or threatened by or against
Registrant or its affiliates other than in the ordinary course of business.
ITEM 2. WORKING CAPITAL RESTRICTIONS ON PAYMENT OF DIVIDENDS.
The holders of the Common Stock are entitled to such dividends as may be
declared by the Board of Directors out of funds legally available therefor under
the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking
Code of 1965, funds available for cash dividend payments by a bank are
restricted to accumulated net earnings and if the surplus of a Bank is less than
the amount of its capital the Registrant shall, until surplus is equal to such
amount, transfer to surplus an amount which is at least 10% of the net earnings
of the Registrant for the period since the end of the last fiscal year or any
shorter period since the declaration of a dividend. If the surplus of a bank is
less than 50% of the amount of its capital, no dividend may be declared or paid
by the bank without prior approval of the Secretary of Banking of the
Commonwealth of Pennsylvania.
Under the Federal Reserve Act, if a bank has sustained losses up to or
exceeding its undivided profits, no dividend shall be paid, and no dividends can
ever be paid in an amount greater than such bank's net profits less losses and
bad debts. Cash dividends must be approved by the Federal Reserve Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Registrant's net profits
for that year plus its retained net profits from the preceding two years, less
any required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the Board has the power to prohibit the
payment of cash dividends by a bank if it determines that such a payment would
be an unsafe or unsound banking practice.
The Federal Deposit Insurance act generally prohibits all payments of
dividends a bank which is in default of any assessment to the Federal Deposit
Insurance Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any material default with
respect to any indebtedness of the Registrant exceeding five percent of the
total assets of the Registrant.
(b) There have been no material arrearage or delinquencies as discussed in
Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No
obligations pursuant to those securities have become due.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the securityholders of the Registrant.
ITEM 5. OTHER INFORMATION.
In December, 1998, the Registrant sold an additional 83,333 shares of its Class
B Common Stock to First Union Corporation ("First Union") for a purchase price
of $12 per share. The sale was exempt from registration requirements pursuant to
section 4(2) of the Securities Exchange Act of 1933 (the "Act").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) A list of the exhibits submitted with this Form 10-Q are as follows:
Copy of the Registrant's Call Report for the Period
ending September 30, 1998. [Filed with Schedule SE]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANCSHARES, INC.
Date: May 19, 1999 /s/ EMMA C. CHAPPELL
----------------------------
Emma C. Chappell
Chairman, President & CEO
/s/ BRENDA HUDSON-NELSON
----------------------------
Brenda Hudson-Nelson
Controller
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