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, 2000 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.
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(Exact name of registrant as specified in its charter)
0-25976
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SEC File Number
PENNSYLVANIA 23-2802415
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
300 NORTH THIRD STREET, PHILADELPHIA, PA 19106
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(Address of principal executive office) (Zip Code)
(215) 829-2265
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes _____ No _____
<PAGE>
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Registrant has two classes of capital stock authorized - 2,000,000 shares
of $.01 par value common stock, of which as of May 15, 2000, 1,028,793 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 May 15, 2000. 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 May
15, 2000, 191,667 shares of Class B Common Stock were issued and outstanding.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNITED BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -----------
Assets
<S> <C> <C>
Cash and due from banks 4,755,981 9,396,669
Interest bearing deposits with banks 369,600 365,547
Federal funds sold 4,869,000 7,158,000
----------- -----------
Cash & cash equivalents 9,994,581 16,920,216
Investment securities:
Held-to-maturity, at amortized cost 34,341,549 32,303,774
Available-for-sale, at market value 20,350,393 19,129,535
Loans, net of unearned discount 61,587,056 61,010,995
Less: allowance for loan losses (1,200,170) (1,566,642)
----------- -----------
Net loans 60,386,886 59,444,353
Bank premises & equipment, net 3,789,085 3,825,321
Accrued interest receivable 1,550,874 1,221,679
Other real estate owned 442,596 397,641
Core Deposit Intangible 2,387,647 2,428,524
Prepaid expenses and other assets 1,730,002 1,578,036
----------- -----------
Total Assets 134,973,613 137,249,079
=========== ===========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 27,227,352 26,206,218
Demand deposits, interest bearing 27,662,685 29,119,779
Savings deposits 33,784,114 33,342,400
Time deposits, $100,000 and over 12,481,605 12,633,964
Time deposits 22,236,451 23,464,035
----------- -----------
123,392,207 124,766,396
Obligations under capital leases 1,437,025 1,444,607
Accrued interest payable 484,311 600,546
Accrued expenses and other liabilities 1,173,487 1,410,214
----------- -----------
Total Liabilities 126,487,030 128,221,763
Shareholders' equity:
Preferred Stock, Series A, non-cum.,
6%, $.01 par value, 500,000 shrs auth., 1,432 1,432
143,150 issued and outstanding
Common stock, $.01 par value;
2,000,000 shares authorized;
1,028,753 shares issued and outstanding
at March 31 and December 31, 1999, respectively 10,288 10,288
Additional-paid-in-capital 13,870,169 13,870,169
Accumulated deficit (5,030,142) (4,658,391)
Net unrealized gain on
available-for-sale securities (365,164) (196,183)
----------- -----------
Total Shareholders' equity 8,486,584 9,027,315
----------- -----------
134,973,613 137,249,079
=========== ===========
</TABLE>
3
<PAGE>
UNITED BANCSHARES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,240,082 1,457,658
Interest on investment securities 908,624 420,520
Interest on Federal Funds sold 136,888 130,723
Interest on time deposits with other banks 4,053 4,304
---------- ----------
Total interest income 2,289,647 2,013,205
Interest Expense:
Interest on time deposits 434,762 425,255
Interest on demand deposits 200,352 142,924
Interest on savings deposits 136,276 95,883
Interest on borrowed funds 72,105 19,053
---------- ----------
Total interest expense 843,495 683,115
Net interest income 1,446,152 1,330,090
Provision for loan losses 90,000 65,000
---------- ----------
Net interest income less
provision for loan losses 1,356,152 1,265,090
---------- ----------
Non-interest income:
Gain on sale of loans 0 3,888
Customer service fees 563,590 395,938
Other income 90,492 34,499
---------- ----------
Total noninterest income 654,082 434,325
Non-interest expense
Salaries, wages, and employee benefits 917,792 674,256
Occupancy and equipment 441,046 311,373
Office operations and supplies 225,549 127,437
Marketing and public relations 57,488 66,282
Professional services 168,138 72,793
Data processing 253,768 221,947
Deposit insurance assessments 17,110 21,110
Other non-interest expense 301,093 168,772
---------- ----------
Total non-interest expense 2,381,985 1,663,970
---------- ----------
Net income (loss) ($ 371,751) 35,445
========== ==========
Earnings per share-basic ($0.36) $0.04
Earnings per share-diluted ($0.36) $0.04
========== ==========
Weighted average number of shares 1,028,753 937,101
========== ==========
</TABLE>
4
<PAGE>
United Bancshares, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
3 months ended 3 months ended
March 31 March 31
2000 1999
-------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($ 371,751) 35,445
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 90,000 65,000
Gain on sale of loans 0 (3,888)
Depreciation and amortization 248,213 139,390
Realized investment securities (gains) losses 0 0
Proceeds from sale of student loans 0 0
(Decrease) increase in accrued interest
receivable and other assets (526,116) 583,306
(Decrease) increase in accrued interest
payable and other liabilites (352,963) 144,376
------------ ------------
Net cash provided by operating activities (912,617) 963,629
Cash flows from investing activities
Purchase of investments -- Available-for-Sale (1,650,445) 0
Purchase of investments -- Held-to-Maturity (2,442,143) 0
Proceeds from maturity & principal
reductions of investments -- Available-for-Sale 230,198 778,827
Proceeds from maturity & principal
reductions of investments -- Held-to-Maturity 384,368 21,053,641
Net (increase) decrease in loans (1,032,533) 3,778,064
Purchase of premises and equipment (148,274) (21,982,333)
Capital Leases 0 (106,502)
------------ ------------
Net cash provided by (used in) investing activities (4,638,829) 3,521,697
Cash flows from financing activities
Net increase (decrease) in deposits (1,374,189) (3,798,074)
Repayments on long term debt 0 (8,376)
Reverse repurchase agreement 0 (1,557,755)
Net proceeds from issuance of common stock 0 1,000,000
------------ ------------
Net cash provided by (used in) financing activities (1,374,189) (4,364,205)
Increase (decrease) in cash and cash equivalents (6,925,635) 121,122
Cash and cash equivalents at beginning of period 16,920,216 16,343,034
Cash and cash equivalents at end of period $ 9,994,581 $ 16,464,156
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 799,660 $ 682,892
============ ============
</TABLE>
5
<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. 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 Quarter
except per share data) ended March ended March
31, 2000 31, 1999
----------- -----------
Net interest income $ 1,356 $ 1,265
Provision for loan losses 90 65
Noninterest income 654 434
Noninterest expense 2,382 1,664
Net income (loss) ($ 372) $ 35
Earnings per share-basic ($ 0.36) $ .04
and diluted
Balance sheet totals: March 31, December 31,
2000 1999
----------- -----------
Total assets $ 134,974 $ 137,249
Loans, net $ 60,387 $ 59,444
Investment securities $ 54,692 $ 51,433
Deposits $ 123,392 $ 124,766
Shareholders' equity $ 8,487 $ 9,027
Ratios
Return on assets (1.05)% (1.03)%
Return on equity (17.36)% (12.71)%
Equity to assets ratio 7.37% 8.08%
Financial Condition
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in the following
table indicates how the Bank has managed these elements. Average funding sources
increased approximately $1.4 million, or 1.28%, during the quarter ending March
31, 2000. Average funding uses decreased $6.4 million, or 4.91%, for the same
quarter.
6
<PAGE>
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Average Increase (Decrease) Average
Balance Amount % Balance
- --------------------------------------------------------------------------------------------------------
Funding uses:
<S> <C> <C> <C> <C>
Loans $ 61,707 ($ 1,372) (2.18)% $ 63,079
Investment securities
Held-to-maturity 32,685 (966) (2.87) 33,651
Available-for-sale 19,251 5,277 37.76 13,974
Federal funds sold 9,656 (9,305) (49.07) 18,961
-------- -------- --------
Total uses $123,299 ($ 6,366) $129,665
======== ======== ========
Funding sources:
Demand deposits
Noninterest-bearing $ 30,892 ($ 1,000) (3.14)% $ 31,892
Interest-bearing 14,073 1,527 12.17 12,546
Savings deposits 32,015 158 .50 31,857
Time deposits 35,859 839 2.40 35,020
Other borrowed funds 1,369 (86) (5.91)% 1,455
-------- -------- --------
Total sources $114,208 $ 1,438 $112,770
======== ======== ========
</TABLE>
Loans
Average loans decreased approximately $1.4 million, or 2.18%, during the
quarter ended March 31, 2000. This decrease was primarily due to repayments in
the automobile loan portfolio that was purchased in February 1999. Paydowns in
this portfolio are averaging $800 thousand per month. In addition, prepayments
in the mortgage loan portfolio continue as consumers rush to refinance existing
loans or sell existing homes to purchase new homes in anticipation of further
interest rate hikes.
The following table shows the composition of the Bank's loan portfolio by
type of loan.
(Thousands of Dollars)
March 31, December 31,
2000 1999
------- -------
Commercial and industrial $14,659 $13,664
Commercial real estate 1,077 1,288
Consumer loans 19,786 19,822
Residential mortgages 26,065 26,237
------- -------
Total Loans $61,587 $61,011
======= =======
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.
7
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
Balance at January 1, 2000 $1,566
Charge-offs:
Commercial and industrial 28
Commercial real estate 150
Residential mortgages 22
Consumer loans 273
-----
Total charge-offs 473
=====
Recoveries 17
Net charge-offs 456
Additions charged to operations 90
-----
Balance at March 31, 2000 1,200
=====
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 1.95% at
March 31, 2000. At December 31, 1999, a provision of $330,000 was made to the
allowance for loan losses for one community-related loan. In addition, the Bank
revised its loan policy to increase its allowance for uncertainties in loans
classified as "Satisfactory" and to charge-off all consumer loans greater than
120 days delinquent despite the level of collateral. It will perform
post-charge-off collections to recover these charge-offs. A work-out attorney
has been engaged to aggressively pursue collections. Management believes the
level of the allowance for loan losses was adequate as of March 31, 2000.
While management uses available information to recognize losses on loans,
future additions may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
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, 2000, non-accrual loans were $2 million--approximately $409 thousand
were residential mortgage loans; approximately $700 thousand related to one
community development loan in the Bank's commercial loan portfolio; and, the
remainder consisted primarily of loans with SBA guarantees. Management has hired
a work-out attorney to develop "exit" strategies relative to the community
development loan which may include such things as the sale of the project and/or
proceeding to collect against the underlying collateral associated with this
loan. 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.
8
<PAGE>
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. From time to time, the Bank purchases loans from other
financial institutions. These loans are generally located in the Northeast
corridor of the United States. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy.
At March 31, 2000, approximately 28.3% of the Bank's commercial loan
portfolio was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At March 31, 2000, none of these loans were
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, decreased on average
by $5 million, or 7.50%, during the quarter ended March 31, 2000. The decrease
is due to the decline in average deposit levels during the quarter. On September
24, 1999, the Bank purchased branches with deposits totaling $31 million from
First Union of which approximately $10 million ran off as anticipated.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities, U.S. Treasury securities, and other
government-sponsored agency securities. The Bank does not invest in high-risk
securities or complex structured notes. The average duration of the portfolio is
5.23 years.
Deposits
On September 24, 1999, the Bank purchased four branches with total deposits
of $31 million at a premium of $2.1 million, or 7%. As projected, there was a
decline of approximately $10 million from September 1999 to March 31, 2000. The
bulk of the acquired deposits are "core"--primarily checking and savings
accounts. The Bank consolidated 2 of the acquired branches into its existing
branch network and will consolidate the other 2 by September 1, 2000.
Non-interest bearing demand deposits decreased on average by approximately
$1 million, or 3.14%, during the quarter ended March 31, 2000. Interest bearing
demand deposits increased on average by approximately $1.5 million, or 12.17%,
during the same quarter. The increase was primarily an increase in the level of
sweep deposit balances--balances swept from a noninterest-bearing checking
account to an interest-bearing (NOW) account overnight.
Other Borrowed Funds
The level of other borrowed funds is dependent on many items such as
capital adequacy, loan growth, deposit growth and interest rates paid on these
funds. The Bank's borrowed funds principally consist of a $1.5 million capital
lease obligation related to the Bank's lease of a building for its corporate
offices in July 1999.
9
<PAGE>
Commitments and Lines of Credit
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, which are conditional commitments issued by the Bank to guarantee the
performance of an obligation of a customer to a third party. Both arrangements
have credit risk essentially the same as that involved in extending loans, and
are subject to the Bank's normal credit policies. Collateral may be obtained
based on management's assessment of the customer. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments is represented by the contractual amount of those instruments.
The Bank's financial instrument commitments at March 31, 2000 are
summarized below:
Commitments to extend credit $6,802
Outstanding letter of credit $ 259
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rate.
The Bank is required to maintain minimum levels of liquid assets as defined
by FRB regulations. This requirement is evaluated in relation to the composition
and stability of deposits; the degree and trend of reliance on short-term,
volatile sources of funds, including any undue reliance on particular segments
of the money market or brokered deposits; any difficulty in obtaining funds; and
the liquidity provided by securities and other assets. In addition,
consideration is given to the nature, volume and anticipated use of commitments;
the adequacy of liquidity and funding policies and practices, including the
provision for alternate sources of funds; and the nature and trend of
off-balance-sheet activities. As of March 31, 2000, 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. 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.
10
<PAGE>
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at March 31, 2000:
(Thousands of dollars)
3 months or less $ 2,461
Over 3 through 12 months 9,588
Over 1 through three years 303
Over three years 130
-------
Total $12,482
=======
Capital Resources
Total shareholders' equity decreased approximately $540 thousand during the
quarter ended March 31, 2000 primarily because of a $372 thousand loss incurred
by the Bank during the quarter. As of March 31, 2000, the Bank has an
outstanding equity investment commitment totaling $3 million from the U.S.
Treasury Community Development Financial Institution Fund. The funding of this
equity is contingent upon satisfactory compliance with the Written Agreement the
Bank entered into with its primary regulators. (Refer to Regulatory Matters
below)
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.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Total Capital $ 8,832 $ 9,223
Less: Intangible Assets (2,388) (2,429)
-------- --------
Tier 1 Capital 6,444 6,794
-------- --------
Tier 2 Capital 769 770
-------- --------
Total Qualifying Capital $ 7,213 $ 7,564
======== ========
Risk Adjusted Total Assets
(including off-balance
sheet exposures) $ 60,571 $ 60,795
Tier 1 Risk-Based Capital Ratio 10.64% 11.18%
Tier 2 Risk-Based Capital Ratio 11.91% 12.44%
Leverage Ratio 4.64% 5.08%
</TABLE>
The most recent notification dated February 10, 2000, from the Federal
Reserve Bank categorized the Bank as "adequately capitalized" under the
regulatory framework for prompt and corrective action. The Bank's growth,
continued losses and the additional provisions to the allowance for loans losses
may have an adverse effect on its capital ratios.
11
<PAGE>
Results of Operations
Summary
The Bank had a net loss of approximately $372 thousand ($.36 per common
share) for the quarter ended March 31, 2000 compared to net income of $35
thousand ($.04 per common share) for the same quarter in 1999. The decline in
earnings is primarily related to higher noninterest expense due to the operation
of 8 branches compared to 6 in 1999, the lease of a new corporate headquarters
in August 1999, and an increase in professional fees associated with the Bank's
Written Agreement (refer to Regulatory Matters below).
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 $76 thousand, or 9%, for the quarter ended
March 31, 2000 compared to 1999. The increase was primarily attributable to an
increase in average earning assets because of the acquisition of $31 million in
deposits from First Union in September 1999. These deposits were deployed in
investment securities to yield a minimum of 7%.
Provision for Loan Losses
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings for the quarter
ending March 31, 2000 was $90 thousand compared to $65 thousand for the same
quarter in 1999. Significant provisions in excess of $1 million were made for
the year ended December 31, 1999 related to one community development loan and
other loan policy changes which required increased provisions.
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 $168 thousand,
or 42%, for the quarter primarily due to growth in fees on deposits because of
an increase in the level of demand deposit accounts which result in more
overdraft fees, activity service charges and low balance fees. In addition, the
Bank increased its ATM surcharge fees for non-customers from $1.00 to $1.50 in
April 1999 and installed three additional ATM machines.
Salaries and benefits increased $244 thousand, or 36%, during the quarter
ended March 31, 2000 compared to 1999. This increase is primarily attributable
to raises for employees as well as filling unfilled staff positions and
additional employees related to the acquisition of deposits/branches from First
Union in September 1999.
12
<PAGE>
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. Data processing
expenses increased $31 thousand, or 14%, during the quarter ended March 31, 2000
compared to 1999. This increase is primarily attributable to the First Union
acquisition-related growth in deposit levels for which the Bank pays an outside
servicer to process transactions and provide statement rendering. The Bank
continues to study methods by which it may reduce its data processing costs,
including but not limited to a consolidation of servicers, in-house processing
versus out-sourcing, and the possible re-negotiation of existing contracts with
servicers.
Occupancy expense increased approximately $130 thousand, or 42%, because of
a lease the Bank entered into in July 1999 to house its corporate headquarters
including its executive offices and other non-branch operating departments. The
Bank currently leases 25,000 square feet at an average cost of $14.14 per foot.
It has entered into subleases with two other affiliated entities for
approximately 4,000 square feet. In accordance with Financial Accounting
Standards Board Statement 13, this lease has been accounted for as a capital
lease in the amount of $1,483,000 as the present value of future minimum lease
payments exceeds 90% of the fair market value of the building. In addition, in
conjunction with its acquisition of deposits from First Union, the Bank assumed
the leases of four branches, two of which were in close proximity to its
existing branches. Due to more favorable characteristics of these branches (i.e.
visibility, drive-through, ATM's, etc.), the Bank relocated its branch
operations to the acquired facilities. These facilities have higher rental
rates. The Bank plans to consolidate two of the acquired branches with its
existing branch network by September 2000.
Professional Services increased approximately $95 thousand, or 131%, for
the quarter ended March 31, 2000 compared to 1999. This increase is primarily
attributable to consulting fees and legal fees related to the compliance with
the Written Agreement the Bank entered into with its primary regulators (Refer
to Regulatory Matters below).
Office operations and supplies expense increased by $98 thousand, or 77%,
for the quarter-ended march 31, 2000 compared to 1999. This increase was
primarily a result the acquisition of branches from First Union and the
relocation of corporate headquarters. In addition, the growth in the ATM network
resulted in an increase in ATM-related supplies (i.e. ribbons, paper receipts,
etc.).
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.
13
<PAGE>
Regulatory Matters
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (Agreement) with its
primary regulators with regard to, among other things, achievement of
agreed-upon capital levels, implementation of a viable earnings/strategic plan,
adequate funding of the allowance for loan losses, the completion of a
management review and succession plan, and improvement in internal controls. The
currents Agreement required the Bank to achieve a Tier 1 leverage ratio of 6.50%
by June 30, 2000 and 7% at all times thereafter. To achieve this capital ratio
Management has developed plans that include: increasing profitability,
consolidating branches, and soliciting new and additional sources of capital.
Management has begun to address all matters outlined in the Agreement and
expects to be in full compliance with its terms and conditions within the
required timelines. Failure to comply could result in additional regulatory
supervision and/or actions.
The Bank continues to operate 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.
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. Subsequent
to this statement, SFAS No 137 was issued, which amended the effective date of
SFAS No. 133 to be all fiscal years beginning after June 15, 2000. Based on the
Company's minimal use of derivatives at the current time, management does not
anticipate the adoption of SFAS No. 133 will have a significant impact on
earnings or financial position of the Company. However, the impact from adopting
SFAS No. 133 will depend on the nature and purpose of the derivative instruments
in use by the Company at that time.
Year 2000
The Bank was successfully prepared for the Year 2000 potential problems
that could have resulted from computer programs being written using two digits
rather than four to define the applicable year. This could have resulted in
major system failures or miscalculations. The Company completed 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. Where
necessary, software and hardware were replaced/remediated. As a result, there
were no reportable events or exceptions related to the Year 2000. However, while
not expected, there can be no assurance that the Company will not experience any
problems in the future. If any problems were to occur in the future, the Company
will follow its contingency plan.
14
<PAGE>
Cautionary Statement
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based upon
various assumptions (some of which are beyond the control of the Bank and the
Company), may be identified by reference to a future period, or periods, or by
the use of forward-looking terminology such as "may," "will," "believe,"
"expect," "estimate," "anticipate," "continue," or similar terms or variations
on those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, economic growth;
governmental monetary policy, including interest rate policies of the FRB;
sources and costs of funds; levels of interest rates; inflation rates; market
capital spending; technological change; the state of the securities and capital
markets; acquisition; consumer spending and savings; expense levels; tax,
securities, and banking laws; and prospective legislation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which rates
change daily and loans which are tied to prime or other short term indices
differ considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap, or excess earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations.
At March 31, 2000, an asset sensitive position is maintained on a
cumulative basis through 1 year of 4.98% 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 level of core deposits which have been placed in
longer repricing intervals. Generally, because of the Bank's positive gap
position in shorter time frames, the Bank can anticipate that decreases in
market rates will have a negative impact on the net interest income, while
increases 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 March 31, 2000 are as follows:
15
<PAGE>
Market value of
Changes in rate portfolio equity
--------------- ----------------
(Dollars in thousands)
+400 basis points $ (9,369)
+300 basis points (5,765)
+200 basis points (2,092)
+100 basis points 1,680
Flat rate 5,532
-100 basis points 9,373
-200 basis points 12,944
-300 basis points 16,433
-400 basis points 19,991
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, 2000. 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.
16
<PAGE>
Item 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A complaint has been filed by the investors of a depositor, Monument
Financial Group, naming the Bank as a party. The complaint filed in the Court of
Common Pleas of Philadelphia County. The investors allege that, as a result of
the actions of the Bank in permitting the processing of certain checks in what
plaintiffs assert was an improper manner, the depositor was unable to pay
certain obligations to the plaintiffs. The complaint seeks damages in excess of
$400,000.
The Bank has defenses to the allegations raised in the complaint. Based
upon these allegations, the Bank believes that it is not liable. In addition,
the Bank has insurance that will cover any loss, including costs of defense, in
excess of a $50,000 deductible.
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.
17
<PAGE>
Recent Sales of Securities
There have been no sales of securities by the Registrant not reported in
its 1999 From 10-K.
Item 3. Defaults Upon Senior Securities.
(a) There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any material default with
respect to any indebtedness of the Registrant exceeding five percent of the
total assets of the Registrant.
(b) There have been no material arrearage or delinquencies as discussed in
Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No
obligations pursuant to those securities have become due.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders.
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:
(12) statement re: computation of earnings per share
Copy of the Registrant's Call Report for the Period
ending September 30, 1999. [Filed with Schedule SE]
Lease between United Bank of Philadelphia and ECC Properties, LLC
[Filed with Schedule SE]
(27) financial data schedule
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 __, 2000 /s/ Emma C. Chappell
------------------------------
Emma C. Chappell
Chairman, President & CEO
/s/ Brenda Hudson-Nelson
------------------------------
Brenda Hudson-Nelson
Controller
18
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<PERIOD-START> jan-1-2000
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