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 JUNE 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
------------------------ ---------------------
(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 August 15, 1999, 832,087 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 143,150
shares were outstanding as of August 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
August 15, 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 SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------------------
<S> <C> <C>
Assets
Cash and due from banks 7,149,013 3,675,010
Interest bearing deposits with banks 357,467 350,024
Federal funds sold 10,205,000 12,318,000
----------- -----------
Cash & cash equivalents 17,711,480 16,343,034
Investment securities:
Held-to-maturity, at amortized cost 13,986,010 8,049,875
Available-for-sale, at market value 6,693,419 35,146,148
Loans, net of unearned discount 66,713,100 57,950,133
Less: allowance for loan losses (762,705) (679,557)
----------- -----------
Net loans 65,950,395 57,270,576
Bank premises & equipment, net 1,471,136 1,565,131
Accrued interest receivable 2,370,752 1,749,623
Other real estate owned 365,847 262,368
Prepaid expenses and other assets 4,976,785 1,595,925
----------- -----------
Total Assets 113,525,824 121,982,681
=========== ===========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 21,379,020 19,999,226
Demand deposits, interest bearing 21,733,891 29,114,484
Savings deposits 24,072,369 23,393,986
Time deposits, $100,000 and over 12,304,198 13,942,008
Time deposits 21,216,584 22,614,098
----------- -----------
100,706,062 109,063,802
Long-term debt 0 11,191
Securities sold to repurchase 0 1,557,755
Accrued interest payable 540,180 598,352
Accrued expenses and other liabilities 2,200,318 1,847,665
----------- -----------
Total Liabilities 103,446,561 113,078,365
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 June 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 June 30, 1999 9,977 9,134
and December 31, 1998, repectively.
Additional-paid-in-capital 13,510,481 12,286,233
Accumulated deficit (3,418,249) (3,428,169)
Net unrealized gain on available-for-sale securities (24,379) 35,788
----------- -----------
Total Shareholders' equity 10,079,262 8,904,316
----------- -----------
113,525,823 121,982,681
=========== ===========
</TABLE>
<PAGE>
UNITED BANCSHARES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 1,476,083 1,642,184 2,933,741 3,245,515
Interest on investment securities $ 287,120 269,016 707,640 549,897
Interest on Federal Funds sold $ 92,249 184,846 222,972 319,402
Interest on time deposits with other banks $ 5,030 3,661 9,334 11,231
----------- --------- --------- ---------
Total interest income $ 1,860,482 2,099,707 3,873,687 4,126,045
Interest Expense:
Interest on time deposits $ 403,920 483,238 829,175 980,570
Interest on demand deposits $ 125,896 153,111 268,820 304,776
Interest on savings deposits $ 101,467 115,265 197,350 226,244
Interest on borrowed funds $ 40 22,603 19,093 32,291
----------- --------- --------- ---------
Total interest expense $ 631,323 774,217 1,314,438 1,543,881
NET INTEREST INCOME $ 1,229,159 1,325,490 2,559,249 2,582,164
Provision for loan losses $ 75,000 40,000 140,000 65,500
----------- --------- --------- ---------
NET INTEREST INCOME LESS PROVISION FOR
LOAN LOSSES $ 1,154,159 1,285,490 2,419,249 2,516,664
----------- --------- --------- ---------
Noninterest income:
Gain on sale of loans $ 39,969 0 43,857 29,688
Customer service fees $ 430,159 342,574 826,097 636,370
Other income $ 28,025 42,052 62,524 68,887
----------- --------- --------- ---------
Total noninterest income $ 498,153 384,626 932,478 734,945
Non-interest expense
Salaries, wages, and employee benefits $ 639,216 631,069 1,313,472 1,243,383
Occupancy and equipment $ 308,148 319,900 619,521 602,875
Office operations and supplies $ 133,881 101,815 261,318 235,222
Marketing and public relations $ 47,644 65,201 113,926 85,940
Professional services $ 70,415 61,262 143,208 121,185
Data processing $ 229,143 221,777 451,090 444,965
Other noninterest expense $ 248,793 249,132 438,675 473,880
----------- --------- --------- ---------
Total non-interest expense $ 1,677,240 1,650,156 3,341,210 3,207,450
----------- --------- --------- ---------
NET INCOME (LOSS) ($ 24,929) 19,960 10,517 44,159
=========== ========= ========= =========
EARNINGS PER SHARE-BASIC ($ 0.03) $ 0.11 $ 0.01 $ 0.05
EARNINGS PER SHARE-DILUTED ($ 0.03) $ 0.11 $ 0.01 $ 0.05
----------- --------- --------- ---------
Weighted average number of shares 978,730 816,355 978,730 823,695
=========== ========= ========= =========
</TABLE>
<PAGE>
United Bancshares, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 10,517 44,159
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 140,000 65,500
Gain on sale of loans 43,857 29,688
Depreciation and amortization 398,487 301,356
Realized investment securities gains 0 1,201
Proceeds from sale of student loans 3,059,983 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 liabilities 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 (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) (16,057)
Other borrowed funds (1,557,755) 1,217,073
Proceeds from sale of common stock 234,158 64,620
Reverse repurchase agreement 1,000,000 482,518
------------ ------------
Net cash provided by financing activities (8,692,578) 9,586,640
Increase in cash and cash equivalents 1,368,446 11,112,839
Cash and cash equivalents at beginning of period 16,343,034 12,759,696
Cash and cash equivalents at end of period 17,711,480 23,872,535
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest 906,211 991,159
============ ============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In April 1993, the shareholders of United Bank of Philadelphia (the Bank)
voted in favor of the formation of a bank holding company, United Bancshares,
Inc. (the Company). Accordingly, in October 1994 the Company became a bank
holding company in conjunction with the issuance of its common shares in
exchange for the common shares of the Bank. Since 1994, the financial statements
are prepared on a consolidated basis to include the accounts of the Company and
the Bank. The purpose of this discussion is to focus on information about the
Bank's financial condition and results of operations which is not otherwise
apparent from the consolidated financial statements included in this annual
report. Reference should be made to those statements and the selected financial
data presented elsewhere in this report for an understanding of the following
discussion and analysis.
Selected Financial Data
The following table sets forth selected financial data for the each of the
following periods:
(Thousands of dollars, Quarter ended Quarter ended
except per share data) June 30, 1999 June 30, 1998
- ---------------------- ------------- -------------
Net interest income $1,229 $1,285
Provision for loan losses 75 40
Noninterest income 498 385
Noninterest expense 1,677 1,650
Net income (loss) ($25) $20
Earnings per share-basic and diluted ($.03) $.05
Balance sheet totals: June 30, 1999 December 31, 1998
- --------------------- ------------- -----------------
Total assets $113,525 $121,983
Loans, net $ 65,950 $ 57,270
Investment securities $ 20,679 $ 43,196
Deposits $100,706 $109,064
Shareholders' equity $ 10,079 $ 8,904
Ratios
Return on assets .01% .01%
Return on equity .11% .14%
Equity to assets ratio 8.34% 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 decreased approximately $9.9 million, or 8.91%, during the
quarter ending June 30, 1999. Average funding uses also decreased $8.9 million,
or 8.48%, for the same quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
Average Increase (Decrease) Average
Balance Amount % Balance
- --------------------------------------------------------------------------------------------------------
Funding uses:
<S> <C> <C> <C> <C>
Loans $ 74,114 3,164 4.46% $ 70,950
Investment securities
Held-to-maturity 10,090 (13,030) (56.36%) 23,120
Available-for-sale 7,822 2,809 56.03% 5,013
Federal funds sold 9,018 (2,825) (23.85%) 11,843
--------- --------- ---------
Total uses $ 101,044 ($ 9,882) $ 110,926
========= ========= =========
Funding sources:
Demand deposits
Noninterest-bearing $ 19,514 ($ 2,033) 9.44% $ 21,547
Interest-bearing 20,367 (3,008) (12.87%) 23,375
Savings deposits 21,191 (3,098) (12.75%) 24,289
Time deposits 35,287 766 2.22% 34,521
Other borrowed funds 1 (1,552) (99.94%) 1,553
--------- --------- ---------
Total sources $ 96,360 ($ 8,925) $ 105,285
========= ========= =========
</TABLE>
Loans
Average loans increased approximately $3.2 million, or 4.46%, during the
quarter ended June 30, 1999. This increase was primarily due to the purchase of
$21 million seasoned automobile loans from another financial institution in
February 1999. These loans have an average remaining average life of
approximately 3 years and have no history of delinquency. Automobile loans were
strategically purchased to replace lower yielding/higher cost to service student
loans that were sold in December 1998.
The following table shows the composition of the loan portfolio of the Bank
by type loan. (Thousands of Dollars)
June 30, December 31,
1999 1998
------- -------
Commercial and industrial $12,154 $13,643
Commercial real estate 1,527 1,518
Consumer loans 11,423
24,907
Residential mortgages 28,124 31,365
------- -------
Total Loans $65,950 $57,950
======= =======
Residential mortgage loans at June 30, 1999 comprise the greatest
percentage of total loans representing approximately 43% of total loans.
However, these loans continue to decline due to refinancings and
payoffs/paydowns.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation
of the loan portfolio, assessment of economic conditions, the diversification
and size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount and quality of nonperforming loans. The following
Table presents an analysis of the allowance for loan losses.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Quarter Ended
June 30, 1999
(Dollars in thousands)
Balance at January 1 $ 680
-----
Charge-offs:
Commercial and industrial --
Commercial real estate --
Residential mortgages --
Consumer loans (142)
-----
(142)
Recoveries 85
-----
Net charge-offs (57)
Additions charged to operations 140
-----
Balance at December 31 $ 763
=====
Ratio of net charge-offs to average
loans outstanding 0.08%
=====
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 1.03% at
June 30, 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. At June 30, 1999,
charge-offs as a percentage of total loans represented .08%.
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
June 30, 1999, non-accrual loans were $1.4 million. Approximately $520 thousand
of the total nonaccrual loans were residential mortgages while the remainder
consisted primarily of loans with SBA guarantees. 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.
At June 30, 1999, approximately 33% 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 June 30, 1999, none of these loans was
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, decreased on average
by $13 million, or 32.63%, during the quarter ended June 30, 1999. This decrease
is due the use of funds from maturing securities to purchase $21 million in
automobile loans 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 decreased on average by approximately
$2 million, or 9.44%, during the quarter ended June 30, 1999. The decrease was
primarily due to normal fluctuations in account balances for significant deposit
relationships. The Bank continues to employ marketing/acquisition strategies to
increase the level of core deposits to capitalize on the recent regional
mega-bank mergers that have taken place within the last year.
Interest bearing demand deposits decreased on average by approximately $3
million, or 12.87%, during the quarter ended June 30, 1999. The decrease was
also due to normal fluctuations in account balances of significant
accountholders. To build core balances, the Bank continues to market its
"Prestige" premium checking product that was introduced in March 1998. This
product offers such benefits as life insurance, discount shopping, etc.
Time Deposits increased on average by $766 thousand, or 2.22%, during the
quarter ended June 30, 1999. The Bank continues its strategy of building a low
cost core deposit base by seeking deposits less than $100,000. It does not
purchase brokered deposits.
Other Borrowed Funds
The average balance for other borrowed funds decreased $1.5 million, or
99.94%, during the quarter ended June 30, 1999. The significant decline is a
result of the maturity of a reverse repurchase agreement in March 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 June 30, 1999 are summarized
below:
Commitments to extend credit $6,044,000
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.
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 June 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. At June 30, 1999, the average life
of the investment portfolio was 4.28 years. Other types of assets such as
federal funds sold, as well as maturing loans, are sources of liquidity.
Approximately $5.8 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 June 30, 1999:
(Thousands of
dollars)
3 months or less $ 7,998
Over 3 through 12 months 3,982
Over 1 through five years 200
Over five years 124
Total $12,304
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 June 30, 1999, a liability sensitive position is maintained on a
cumulative basis through 1 year of -3.98% 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.
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 June 30, 1999 are as follows:
Market value of Percent of
Changes in rate portfolio equity change
--------------- ---------------- ------
(Dollars in thousands)
+400 basis points $ 1,317 (84.75)%
+300 basis points 3,033 (64.88)
+200 basis points 4,814 (44.26)
+100 basis points 6,888 (20.25)
Flat rate 8,637 --
-100 basis points 10,580 22.49
-200 basis points 12,278 42.16
-300 basis points 13,896 60.88
-400 basis points 15,573 80.30
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 June 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.
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 $220 thousand during the
quarter ended June 30, 1999. The increase during the quarter was primarily due
to the sale of approximately $200,000 in Series A Preferred Stock.
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.
June 30, December 31,
1999 1998
---- ----
Tier 1 Capital $10,069 $ 8,823
Tier 2 Capital 763 679
------- -------
Total Qualifying Capital $10,832 $ 9,502
======= =======
Risk Adjusted Total Assets
(including off-balance sheet exposures) $65,699 $54,373
Tier 1 Risk-Based Capital Ratio 15.32% 16.23%
Tier 2 Risk-Based Capital Ratio 16.49% 17.48%
Tier 1Leverage Ratio 8.94% 7.62%
Results of Operations
Summary
The Bank had a net loss of approximately $25 thousand ($.03 per common
share) for the quarter ended June 30, 1999 compared to net income of $20
thousand ($.05 per common share) for the same quarter in 1998. The decline in
earnings is primarily attributable to increased provisions for loan losses
related to one community development loan.
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 $56 thousand, or 4.36%, for the quarter ended
June 30, 1999 compared to 1998. The decrease was primarily attributable to a
lower average loan balances compared to 1998 as well as an increase in
interest-bearing deposit levels.
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 June 30, 1999 was $75 thousand compared to $40 thousand for the
same quarter in 1998. The increase is 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 noaccrual
status and carries a 50% reserve. Management is working closely with the
borrower to ensure completion of the development and full repayment of the 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 $88 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.
Noninterest expense
Salaries and benefits increased $8 thousand, or 1.26%, during the quarter
ended June 30, 1999 compared to 1998. This increase is primarily attributable to
annual raises for employees as well as filling unfilled staff positions.
Data processing expenses represented .78% and .85% of the total average
assets for the quarters ended June 30, 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
Marketing and public relations expense decreased approximately $18 thousand
for the quarter ended June 30, 1999 compared to the quarter ended June 30, 1998.
The decrease was primarily related to the utilization of a strategic marketing
plan during 1999 to generate business for less cost. Media utilized included
radio, newspaper, and conventions.
Professional Services increased approximately $8 thousand, or 13.1%, for
the quarter ended June 30, 1999 compared to the quarter ended June 30, 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 June 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
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:
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.
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 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.
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.
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. The suit involves the processing of
transactions in alleged non-compliance with the deposit contract. This action by
the Bank allegedly resulted in a loss to the Plaintiffs in an undetermined
amount. Plaintiffs have not yet filed a complaint and have, therefore, not
specified the alleged damages, but have indicated that the alleged damages are
in excess of $50,000. The Bank cannot comment further on the litigation until a
complaint is filed alleging a specific cause of action.
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
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.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) An annual meeting of the security holders of the Registrant was held on
June 5, 1999.
(b) Proxies for the annual meeting of the Registrant scheduled for June 5,
1999, (the "Annual Meeting") were solicited by proxy statement filed with the
Commission.
(c) The following matters were voted upon at the Annual Meeting:
1. ELECTION OF DIRECTORS
The following individuals were elected as directors of the Registrant:
S. Amos Brackeen
Emma C. Chappell
William B. Moore
An affirmative vote of approximately 426,000 shares representing 99% of the
votes cast and 51% of the shares entitled to vote were cast in favor of the
election of these Board members.
2. INDEPENDENT AUDITORS
The shareholders ratified the selection of Grant Thornton LLP as
independent auditors to audit and certify consolidated financial statements of
UBS for the year ending December 31, 1998 and to provide certain accounting
services to UBS during 1999. Grant Thornton LLP has served in this capacity
since October, 1997.
An affirmative vote of approximately 415,000 shares representing 97% of the
votes cast and 50% of the shares entitled to vote were cast in favor of this
proposal.
3. RATIFICATION OF ESTABLISHMENT OF CLASS OF
NON-VOTING COMMON STOCK.
On September 30, 1998 the Articles of Incorporation of UBS were amended, by
filing of Articles of Amendment with the Commonwealth of Pennsylvania on
September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000
have been designated Class B Common Stock. As of August 15, 1999, 166,666 shares
of Class B Common Stock were issued and outstanding.
The shareholders ratified the establishment of the Class B Common Stock by
affirmative vote of approximately 402,000 shares representing 94% of the votes
cast and 48% of the shares entitled to vote were cast in favor.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits submitted with this Form 10-Q
are as follows:
Copy of the Registrant's Call Report for the Period
ending June 30, 1999. [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: August 20, 1999 /S/ EMMA C. CHAPPELL
------------------------
Emma C. Chappell
Chairman, President & CEO
/S/ BRENDA HUDSON-NELSON
------------------------
Brenda Hudson-Nelson
Controller
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,149
<INT-BEARING-DEPOSITS> 357
<FED-FUNDS-SOLD> 10,205
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,986
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 6,693
<LOANS> 66,713
<ALLOWANCE> (763)
<TOTAL-ASSETS> 113,526
<DEPOSITS> 100,706
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,740
<LONG-TERM> 0
0
1
<COMMON> 10
<OTHER-SE> 10,092
<TOTAL-LIABILITIES-AND-EQUITY> 113,526
<INTEREST-LOAN> 1,476
<INTEREST-INVEST> 287
<INTEREST-OTHER> 92
<INTEREST-TOTAL> 1,860
<INTEREST-DEPOSIT> 631
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,229
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,667
<INCOME-PRETAX> (25)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
<YIELD-ACTUAL> 7.97
<LOANS-NON> 1,450
<LOANS-PAST> 2,223
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 680
<CHARGE-OFFS> (142)
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 763
<ALLOWANCE-DOMESTIC> 763
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
