SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
-----------
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 JUNE 30, 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.
-----------------------
(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.)
300 NORTH THIRD STREET, PHILADELPHIA, PA 19106
---------------------------------------- ------------
(Address of principal executive office) (Zip Code)
(215) 829-2265
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 day. Yes _X_ No____
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes _____ No _____
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 July 31, 2000, 1,063,070 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 July 31, 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 July
31, 2000, 191,667 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,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 3,069,751 $ 9,396,669
Interest bearing deposits with banks 240,202 365,547
Federal funds sold 535,000 7,158,000
----------- -----------
Cash & cash equivalents 3,844,953 16,920,216
Investment securities:
Held-to-maturity, at amortized cost 24,150,532 32,303,774
Available-for-sale, at market value 20,359,991 19,129,535
Loans, net of unearned discount 52,540,301 61,010,995
Less: allowance for loan losses (706,375) (1,566,642)
----------- -----------
Net loans 51,833,926 59,444,353
Bank premises & equipment, net 3,638,330 3,825,321
Accrued interest receivable 1,296,572 1,221,679
Other real estate owned 21,842 397,641
Core Deposit Intangible 2,387,959 2,428,524
Prepaid expenses and other assets 719,651 1,578,036
------------ ------------
Total Assets $108,253,756 $137,249,079
============ ============
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 24,933,956 26,206,219
Demand deposits, interest bearing 21,257,902 29,119,779
Savings deposits 32,229,201 33,342,400
Time deposits, $100,000 and over 5,025,280 12,633,964
Time deposits 13,889,279 23,464,035
------------ ------------
97,335,618 124,766,397
Obligations under capital leases 1,429,057 1,444,607
Accrued interest payable 258,801 600,546
Accrued expenses and other liabilities 324,066 1,410,215
------------ ------------
Total Liabilities 99,347,542 128,221,764
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, 1,432 1,432
$.01 par value, 500,000 shrs auth.,
143,150 issued and outstanding
Common stock, $.01 par value;
2,000,000 shares authorized;
1,063,070 shares issued and outstanding
at June 30, 2000 and
1,028,753 at December 31, 1999 10,631 10,288
14,281,636 13,870,169
Additional-paid-in-capital
Accumulated deficit (5,018,196) (4,658,391)
Net unrealized loss on
available-for-sale securities (369,289) (196,183)
------------ ------------
Total Shareholders' equity 8,906,214 9,027,315
------------ ------------
$108,253,756 $137,249,079
============ ============
</TABLE>
2
<PAGE>
UNITED BANCSHARES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Quarter Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 1,240,569 $ 1,476,083 $ 2,480,651 $ 2,933,741
Interest on investment securities 928,351 287,120 1,836,975 707,640
Interest on Federal Funds sold 135,334 92,249 272,222 222,972
Interest on time deposits
with other banks 7,297 5,030 11,350 9,334
----------- ----------- ----------- -----------
Total interest income 2,311,551 1,860,482 4,601,198 3,873,687
Interest Expense:
Interest on time deposits 417,358 403,920 852,120 829,175
Interest on demand deposits 183,924 125,896 384,276 268,820
Interest on savings deposits 133,137 101,467 269,413 197,350
Interest on borrowed funds 71,720 40 143,825 19,093
----------- ----------- ----------- -----------
Total interest expense 806,139 631,323 1,649,634 1,314,438
Net interest income 1,505,412 1,229,159 2,951,564 2,559,249
Provision for loan losses 90,000 75,000 180,000 140,000
----------- ----------- ----------- -----------
Net interest income less
provision for loan losses 1,415,412 1,154,159 2,771,564 2,419,249
----------- ----------- ----------- -----------
Noninterest income:
Gain on sale of loans 17,783 39,969 17,783 43,857
Customer service fees 776,257 430,159 1,339,847 826,097
Realized loss on investments (127,463) 0 (127,463) 0
Other income 275,241 28,025 365,733 62,524
----------- ----------- ----------- -----------
Total noninterest income 941,818 498,153 1,595,900 932,478
Non-interest expense
Salaries, wages, and 793,443 639,216 1,711,236 1,313,472
employee benefits
Occupancy and equipment 458,687 308,148 899,733 619,521
Office operations and supplies 232,574 133,881 458,123 261,318
Professional services 196,595 70,415 364,733 143,208
Data processing 240,889 229,143 494,657 451,090
Deposit insurance assessments 15,237 0 32,347 0
Other noninterest expense 406,296 296,437 764,877 552,601
----------- ----------- ----------- -----------
Total non-interest expense 2,343,721 1,677,240 4,725,706 3,341,210
----------- ----------- ----------- -----------
Net income (loss) $ 13,509 ($ 24,929) ($ 358,242) $ 10,517
=========== =========== =========== ===========
Earnings per share-basic ($0.01) ($0.03) ($0.35) $0.01
Earnings per share-diluted ($0.01) ($0.03) ($0.35) $0.01
=========== =========== =========== ===========
Weighted average number of shares 1,034,630 978,730 1,034,630 810,729
=========== =========== =========== ===========
</TABLE>
3
<PAGE>
UNITED BANCSHARES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended Six Months ended
June 30, June 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($ 358,242) $ 10,517
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 180,000 140,000
Gain on sale of loans (17,783) (43,857)
Depreciation and amortization 505,860 398,487
Realized investment securities losses 127,463 0
Decrease (increase) in accrued interest receivable
and other assets 1,159,290 (4,105,468)
(Decrease) increase in accrued interest payable
and other liabilities (1,427,893) 294,481
------------ ------------
Net cash provided by operating activities 168,695 (3,305,840)
Cash flows from investing activities
Purchase of investments-Available-for-Sale (1,484,473) 0
Purchase of investments-Held-to-Maturity (2,636,746) (3,896,930)
Proceeds from maturity & principal reductions
of investments-Available-for-Sale 490,899 2,695,886
Proceeds from maturity & principal reductions
of investments-Held-to-Maturity 594,779 23,674,289
Proceeds from sale of investment securities 9,595,928 0
Purchase of automobile loans 0 (21,982,333)
Net decrease in loans 5,026,574 10,102,529
Sale of deposits (6,544,666) 0
Purchase of premises and equipment (233,586) (289,161)
Proceeds from sale of student loans 2,421,636 3,059,985
------------ ------------
Net cash provided by (used in) investing activities 7,230,345 13,364,265
Cash flows from financing activities
Net increase (decrease) in deposits (20,886,113) (8,357,740)
Obligations under capital leases 0 (11,191)
Reverse repurchase agreement 0 (1,557,755)
Net proceeds from issuance of common stock 411,810 234,168
------------ ------------
Net cash provided by (used in) financing activities (20,474,303) (8,692,518)
Increase (decrease) in cash and cash equivalents (13,075,263) 1,368,446
Cash and cash equivalents at beginning of period 16,920,216 16,343,034
Cash and cash equivalents at end of period 3,844,953 17,711,480
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 1,307,900 $ 906,211
============ ============
</TABLE>
4
<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:
<TABLE>
<CAPTION>
(Thousands of dollars, Quarter ended Quarter ended
except per share data) June 30, June 30,
2000 1999
------------- ------------
<S> <C> <C>
Net interest income $1,505 $1,229
Provision for loan losses 90 75
Noninterest income 942 498
Noninterest expense 2,344 1,677
Net income (loss) $13 ($25)
Earnings per share - basic $.01 ($.03)
and diluted
Balance sheet totals: June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Total assets $108,254 $137,249
Loans, net $ 51,834 $ 59,444
Investment securities $ 44,510 $ 51,433
Deposits $ 97,336 $124,766
Shareholders' equity $ 8,906 $ 9,027
Ratios
Return on assets (.26)% (1.03)%
Return on equity (4.17)% (12.71)%
Equity to assets ratio 6.28 % 8.08 %
</TABLE>
5
<PAGE>
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in the following
table indicates how the Bank has managed these elements. Average funding sources
decreased approximately $7 million, or 6.19%, during the quarter ending June 30,
2000. Average funding uses decreased $1.3 million, or 1.09%, for the same
quarter.
Sources and Uses of Funds Trends
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
------- Increase -------
Average (Decrease) Average
Balance Amount % Balance
-------- -------- ------ --------
<S> <C> <C> <C> <C>
Funding uses:
Loans $ 58,582 ($3,125) (5.06)% $ 61,707
Investment securities
Held-to-maturity 34,182 1,497 4.58 32,685
Available-for-sale 20,745 1,494 7.76 19,251
Federal funds sold 8,451 (1,205) (12.48) 9,656
-------- -------- --------
Total uses $121,960 ($1,339) $123,299
======== ======== ========
Funding sources:
Demand deposits
Noninterest-bearing $ 28,723 ($2,169) (7.02)% $ 30,892
Interest-bearing 13,312 (761) (5.41) 14,073
Savings deposits 29,884 (2,131) (6.66) 32,015
Time deposits 33,789 (2,070) (5.77) 35,859
Other borrowed funds 1,434 65 4.75 1,369
-------- -------- --------
Total sources $107,142 ($7,066) $114,208
======== ======== ========
</TABLE>
Loans
Average loans decreased approximately $3.1 million, or 5.06%, during the
quarter ended June 30, 2000. This decrease was primarily due to repayments in an
automobile loan portfolio purchased in February 1999. Paydowns in this portfolio
are averaging $500 thousand per month. In addition, in June 2000, the Bank sold
approximately $2.1 million in student loans as part of its ongoing strategy to
originate and sell these loans to generate gains and minimize its data
processing costs.
The following table shows the composition of the Bank's loan portfolio by
type of loan.
<TABLE>
<CAPTION>
June 30, December 31,
(Thousands of Dollars) 2000 1999
-------- --------
<S> <C> <C>
Commercial and industrial $13,438 $13,664
Commercial real estate 659 1,288
Consumer loans 13,613 19,822
Residential mortgages 24,830 26,237
------- -------
Total Loans $52,540 $61,011
</TABLE>
6
<PAGE>
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
(Dollars in thousands)
<TABLE>
<S> <C>
Balance at January 1, 2000 $1,566
Charge-offs:
Commercial and industrial 34
Commercial real estate 606
Residential mortgages 22
Consumer loans 464
------
Total charge-offs 1,126
Recoveries 86
Net charge-offs 1,040
Additions charged to operations 180
------
Balance at June 30, 2000 $ 706
</TABLE>
The amount charged to operations and the related balance in the allowance
for loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
The allowance for loan losses as a percentage of total loans was 1.34% at
June 30, 2000. Effective December 31, 1999, 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. During the 6 months ended June 30, 2000, the Bank
charged-off approximately $606 thousand related to one community development
loan. This loan had been fully reserved at December 31, 1999. The Bank will
perform post-charge-off collections to maximize its recovery on all charged-off
loans. 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 June 30, 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.
7
<PAGE>
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, 2000, non-accrual loans were approximately $1 million and consisted of
$260 thousand residential mortgage loans and $446 thousand 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. 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 June 30, 2000, approximately 32% of the Bank's commercial loan portfolio
was concentrated in loans made to religious organizations. From inception, the
Bank has received support in the form of investments and deposits and has
developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At June 30, 2000, none of these loans were
nonperforming.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average
by $1.8 million, or 2.9%, during the quarter ended June 30, 2000. This increase
was due to paydowns/sales in the loan portfolio that were re-deployed to
investment products.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities and other government-sponsored agency securities.
The Bank does not invest in high-risk securities or complex structured notes.
The average duration of the portfolio is 4.08 years.
Deposits
On September 24, 1999, the Bank purchased four branches with total deposits
of $31 million at a premium of $2.1 million, or 7%. The bulk of the acquired
deposits were "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 30, 2000.
Non-interest bearing demand deposits decreased on average by approximately
$2.2 million, or 7.02%, during the quarter ended June 30, 2000. Interest bearing
demand deposits decreased on average by approximately $761 thousand, or 5.41%,
during the same quarter. The decrease was primarily due to a lower level of
sweep deposit balances--balances swept from a noninterest-bearing checking
account to an interest-bearing (NOW) account overnight. In addition, effective
April 15, 2000, the Bank increased its deposit-related fees to be more in line
with its competitors in the marketplace. This action resulted in some customers
closing their accounts to avoid service charges.
8
<PAGE>
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 $1.4 million 10 year
capital lease obligation related to the Bank's lease of a building for its
corporate offices in July 1999.
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 June 30, 2000 are summarized
below:
Commitments to extend credit $7,294
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 June 30, 2000, management believes the
Bank's liquidity is satisfactory and in compliance with the FRB regulations.
9
<PAGE>
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 $5.2 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, 2000:
<TABLE>
<CAPTION>
(Thousands of dollars)
<S> <C>
3 months or less $ 764
Over 3 through 12 months 4,027
Over 1 through three years 234
Over three years --
------
Total $5,025
======
</TABLE>
The Bank's back-up liquidity resources include a Master Repurchase
Agreement with another financial institution for which securities are pledged
against borrowings and a borrowing agreement at the Discount Window of the
Federal Reserve Bank for emergency liquidity needs.
Capital Resources
Total shareholders' equity increased approximately $420 thousand during the
quarter ended June 30, 2000 primarily because of a $412 thousand capital
investment by the Bank's Board of Directors as well as $13 thousand net income
generated by the Bank during the quarter. 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.
10
<PAGE>
As indicated in the table below, the Company'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 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>
June 30, December 31,
2000 1999
------- -------
<S> <C> <C>
Total Capital $ 9,275 $ 9,223
Less: Intangible Assets (2,388) (2,429)
------- -------
Tier 1 Capital 6,887 6,794
------- -------
Tier 2 Capital 637 770
------- -------
Total Qualifying Capital $ 7,524 $ 7,564
======== =======
Risk Adjusted Total Assets
(including off-balance sheet exposures) $50,872 $60,795
Tier 1 Risk-Based Capital Ratio 13.54% 11.18%
Tier 2 Risk-Based Capital Ratio 14.79% 12.44%
Leverage Ratio 5.19% 5.08%
</TABLE>
The most recent notification dated July 13, 2000, from the Federal Reserve
Bank categorized the Bank as "adequately capitalized" under the regulatory
framework for prompt and corrective action. To improve its capital ratios to
acceptable levels as outlined in its Written Agreement with its regulators
(Refer to Regulatory Matters below) at June 30, 2000, the Bank raised $411
thousand in additional capital from its Board of Directors and reduced its asset
size by $23 million by selling certificates of deposit and reducing the level of
Jumbo certificates of deposit.
RESULTS OF OPERATIONS
Summary
The Bank had net income of approximately $13 thousand ($.01 per common
share) for the quarter ended June 30, 2000 compared to a net loss of $25
thousand ($.03 per common share) for the same quarter in 1999. The improvement
in earnings is primarily related to an increase in noninterest income as a
result of a gain on the sale of deposits and an increased level of fees on
deposits. These increases in income were offset by a higher level of 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 $276 thousand, or 22%, for the quarter ended
June 30, 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%.
11
<PAGE>
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 June 30, 2000 was $90 thousand compared to $75 thousand for the same
quarter in 1999. 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. The community development
loan was fully charged-off by June 30, 2000 with the exception of approximately
$114 thousand related to off-balance sheet risk associated with an outstanding
letter of credit. This amount remains fully reserved.
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 $346 thousand,
or 80%, for the quarter primarily due to growth in fees on deposits because of
an increase in minumum balance requirements and other deposit-related fee
increases that went into effect on April 15, 2000. In addition, there was an
increase in the level of demand deposit accounts. A higher level of demand
deposit accounts result in more overdraft fees, activity service charges and low
balance fees. The Bank also increased its ATM surcharge fees for non-customers
from $1.50 to $1.75 in June 2000.
To achieve capital ratios as set forth in its Written Agreement with
regulatory agencies, the Bank sold approximately $6.6 million in certificates of
deposit to other financial institutions to reduce its asset size. These
transactions resulted in a gain of $253 thousand. However, to fund the reduction
in asset size, the Bank sold investment securities at a loss of $127 thousand.
Salaries and benefits increased $154 thousand, or 24%, during the quarter
ended June 30, 2000 compared to 1999. This increase is primarily attributable to
raises and additional employees related to the acquisition of deposits/branches
from First Union in September 1999. However, in May 2000, the Bank began
strategic reductions in staff and job consolidations to reduce the level of
personnel expense. In addition, the planned closure of 3 branches in September
2000 will result in further reductions in this expense.
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 $12 thousand, or 5%, during the quarter ended June 30, 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.
12
<PAGE>
Occupancy expense increased approximately $151 thousand, or 49%, during the
quarter ended June 30, 2000 compared to 1999 primarily 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 and close a previously
existing branch by September 30, 2000.
Professional Services increased approximately $126 thousand, or 179%, for
the quarter ended June 30, 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). In addition, during the quarter ended June 30,
2000, the Bank settled a contract dispute with its MIS consultant for $65
thousand.
Office operations and supplies expense increased $99 thousand, or 74%,
during the quarter-ended June 30, 2000 compared to 1999. This increase was
primarily a result the acquisition of branches from First Union and the
relocation of corporate headquarters which results in increased operating costs.
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
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
current Agreement required the Bank to achieve a Tier 1 capital to asset ratio
of 6.50% by June 30, 2000 and 7% at all times thereafter. To achieve these
capital ratios, Management developed plans that included: increasing
profitability, consolidating branches, and soliciting new and additional sources
of capital. Management continues to address all matters outlined in the
Agreement. Its most recent notification from its regulators dated July 13, 2000,
indicates that it is "substantially" in compliance with the Agreement's terms
and conditions. 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. On April 1,
2000, the Company adopted SFAS No. 133. Concurrent with the adoption, the
Company reclassified approximately $6.1 million securities from held-to-maturity
to available-for-sale. Subsequent to the reclassification, the Company
transferred approximately $9.5 million from available-for-sale to trading. In
June 2000, the Company recorded a loss on the sale of these securities of $127
thousand. 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 any
continuing impact on earnings or financial position of the Company.
13
<PAGE>
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.
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 June 30, 2000, an asset sensitive position is maintained on a cumulative
basis through 1 year of 1.15% that is within the Bank's policy guidelines of +/-
15% on a cumulative 1-year basis. The current gap position is somewhat neutral
due to the Bank's high level of core deposits. 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.
14
<PAGE>
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
positive 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, 2000 are as follows:
<TABLE>
<CAPTION>
Market value of
Changes in rate portfolio equity
--------------- ----------------------
(Dollars in thousands)
<S> <C>
+400 basis points $(7,088)
+300 basis points (4,300)
+200 basis points (1,468)
+100 basis points 1,449
Flat rate 4,491
-100 basis points 7,525
-200 basis points 10,451
-300 basis points 13,134
-400 basis points 15,769
</TABLE>
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest sensitivity of the Company's assets and
liabilities, as well as the estimated effect of changes in interest rates on the
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest-rate
exposure is not considered to be significant and is within the Bank's policy
limits at June 30, 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
William Jairett, et al. v. First Montauk Securities Corp., et al.
-----------------------------------------------------------------
An action has been brought by the investors of a depositor, Monument
Financial Group, naming the Bank as a party. The complaint, filed in the United
States District Court for the Eastern District of Pennsylvania alleges 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.
Chappell v. United Bank of Philadelphia
---------------------------------------
Emma C. Chappell, former Chairman, President and CEO of the Registrant and
the Bank has filed an arbitration proceeding against the Bank and Registrant
with the American Arbitration Association. This action seeks alleged severance
compensation in excess of $250,000 arising from Ms. Chappell's termination as an
employee of the Bank and Registrant. The Registrant and the Bank have filed
substantial defenses and a counter-claim against Ms. Chappell for damages and
losses incurred by the Bank during the course of her employment. The Bank
believes that it has valid defenses to the claims raised by Ms. Chappell and
that it is, as a result, not liable in this action.
United Bank of Philadelphia v. ECC Properties, LLC and Emma C. Chappell
-----------------------------------------------------------------------
The Registrant and the Bank filed a complaint in the United States District
Court for the Eastern District of Pennsylvania alleging that, among other
things, Emma C. Chappell violated federal banking laws and fraudulently induced
the Bank to enter into a lease with ECC Properties, LLC, an entity formed and
controlled by Ms. Chappell to own and collect rent from the Bank for its office
space. The complaint seeks to set aside the lease and seeks damages related to
the fraudulent inducement and overpayments made by the Bank.
Rococo LLC v. United Bank of Philadelphia
-----------------------------------------
On May 15, 2000, the contractor of a borrower of the Bank filed a complaint
in the Court of Common Pleas of Delaware County. The complaint seeking damages
from the Borrower for alleged non-payment of construction invoices, also seeks
damages from the Bank of $98,964.18 alleging that the Bank acted in concert with
the borrower. The Bank has filed preliminary objections to the complaint. The
Bank has substantial defenses in this action and believes that it will not be
held liable.
No other material claims have been instituted or threatened by or against
Registrant or its affiliates other than in the ordinary course of business.
16
<PAGE>
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.
Recent Sales of Securities
34,317 shares of the Registrant's Common Stock were sold to various
directors of the Registrant at a purchase price of $12.00 per share. The
Registrant raised aggregate proceeds of $411,808 as a result of the sale.
This transaction was exempt from registration pursuant to Section 4(2) of
the Securities Exchange Act of 1933.
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.
On May 31, 2000 the Registrant solicited proxies for its annual meeting of
shareholders to be held on June 30, 2000. The matters on which proxies were
solicited were as follows: (i) election of directors; (ii) increase of
authorized shares of Class B Common Stock; and (iii) ratification and approval
of the Registrant's independent accountant. By action of the Board of Directors
of Registrant, the Annual Meeting was adjourned to October 27, 2000.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits submitted with this Form 10-Q are as follows:
3(I) Articles of Incorporation incorporated by reference to
Registrant's Form 10-K filed April 14, 2000.
3(II) Bylaws incorporated by reference to
Registrant's Form 10-K filed April 14, 2000.
22 Definitive Proxy Statement incorporated by reference to
Registrant's Definitive 14A filed June 5, 2000.
27 Financial Data Schedule
17
<PAGE>
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 18, 2000 /s/ Evelyn Smalls
-----------------
Evelyn Smalls
President
/s/ Brenda Hudson-Nelson
------------------------
Brenda Hudson-Nelson
Chief Financial Officer
18
