-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JfvUKFMo/Tp/lLitNu/8tIo5RrvE+nfBy2m/5YrS2uB1jjMos1W4CmdcfUhrifL7 DQ4/RoW8IZ/JFIz74U8mnw== 0000891554-99-000762.txt : 19990419 0000891554-99-000762.hdr.sgml : 19990419 ACCESSION NUMBER: 0000891554-99-000762 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCSHARES INC /PA CENTRAL INDEX KEY: 0000944792 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232802415 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-25976 FILM NUMBER: 99596314 BUSINESS ADDRESS: STREET 1: 714 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19106 BUSINESS PHONE: 2158292265 MAIL ADDRESS: STREET 1: 2300 PACKARD BLDG STREET 2: 111 S 15TH ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 10-K/A 1 AMENDMENT TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998. UNITED BANCSHARES, INC. (Exact name of registrant as specified in its charter) 0-25976 (Registrant's file number) Pennsylvania 23-2802415 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 714 Market Street, Philadelphia, PA 19106 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (215)829-2265 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the 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 12 months ( or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_] There is no market for the Common Stock. None of the shares of the Registrant's stock were sold within 60 days of the filing of this Form 10-K. As of March 15, 1999 the aggregate number of the shares of the Registrant's Common Stock outstanding was 913,490. Registrant also has 500,000 authorized shares of Series Preferred Stock. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock") of which 132,999 shares were outstanding as of March 31, 1999. The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment with the Commonwealth of Pennsylvania on September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of March 31, 1999, 166,666 shares of Class B Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference as filed with the Registrant's 1998 Form 10-K 1. Consolidated Statements of Operations for the years ended December 31, 1996. 2. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996. 3. Consolidated Statements of Cash Flows for the years ended December 31, 1996. 4. Articles of Incorporation of the Bank and UBS 5. Bylaws of the Bank and UBS 6. Voting Trust Agreements 7. Long Term Incentive Compensation Plan 8. Lease Agreements for the Bank's premises. 9. Employment Agreement among Registrant, the Bank and Dr. Emma C. Chappell PART I ITEM 1 BUSINESS United Bancshares, Inc. United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of 1956, as amended, on October 14, 1994. The Bank commenced operations on March 23, 1992. UBS provides banking services through the Bank. The principal executive offices of UBS and the Bank are located at 714 Market Street, Philadelphia, Pennsylvania 19106. The Registrant's telephone number is (215) 829-2265. As of March 31, 1999, UBS and the Bank had a total of 75 employees. 1 United Bank of Philadelphia The Bank, an African-American -controlled, state-chartered member bank of the Federal Reserve System is regulated by both the Federal Reserve Board and the Commonwealth of Pennsylvania Department of Banking (the "Department"). The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts all its banking activities through its six offices located as follows: (i) Main Branch 714 Market Street, Philadelphia, PA; (ii) Center City Branch Two Penn Center, Philadelphia, PA; (iii) West Philadelphia Branch 37th & Lancaster Avenues, Philadelphia, PA; (iv) Mount Airy Branch 1562 East Wadsworth Avenue, Philadelphia, PA; (v) Frankford Branch 4806 Frankford Avenue, Philadelphia, PA; and (vi) West Girard Branch 2820 West Girard Avenue, Philadelphia, PA. Through these locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 1998, the Bank had total deposits aggregating approximately $57.2 million and had total net loans outstanding of approximately $109 million. Although the Bank's primary service area for Community Reinvestment Act purposes is Philadelphia County, it also services, generally, the Delaware Valley, which consists of portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties in New Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on 1990 census data, 204 or 58% of these are designated as low to moderate-income tracts while 105 or 30% are characterized both as low to moderate-income and minority tracts. The Bank's primary service area consists of a population of 1,577,815, which includes a minority population of 752,309. The Bank engages in the commercial banking business, serving the banking needs of its customers with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts. The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products are offered to the businesses and consumers in the Bank's service area, including commercial loans, mortgage loans, student loans, home improvement loans, auto loans, personal loans, home equity loans and home equity lines of credit. At March 31, 1999 the Bank's maximum legal lending limit was approximately $1,838,000 per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the loan portfolio. The Bank has established relationships with correspondent banks to participate in loans that exceed the Bank's internal policies or legal lending limits. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participants on occasion. However, the Bank maintains no credit that exceeds its legal lending limit. The Bank also offers commercial and retail products. In the area of commercial loans, the Bank has flexibility to develop loan arrangements targeted at a customer's objectives. Typically, these loans are term loans or revolving credit arrangements with interest rate, collateral and repayments terms, varying based upon the type of credit, and various factors used to evaluate risk. The Bank participates in the government-sponsored Small Business Administration ("SBA") lending program and when the Bank deems it appropriate, obtains SBA guarantees for up to 90% of the loan amount. This guaranty effectively reduces the Bank's exposure to loss in its commercial loan portfolio. Commercial loans are typically made of the basis of cash flow to support repayment with secondary reliance placed on the underlying collateral. The Bank's consumer loan program includes installment loans for home improvement and the purchase of consumer goods and automobiles, student loans, home equity and VISA secured and unsecured revolving lines of credit, and checking overdraft protection. The Bank also offers residential mortgage loans to its customers. The Bank's concentration in the retail area is in the category of student loans where it can minimize its risk of non-payment with government guaranties. In addition, the Bank offers safe deposit boxes, travelers' checks, money orders, direct deposit of payroll and Social Security checks, wire transfers and access to regional and national automated teller networks as well as international and trust services through correspondent institutions. The management and Board of the Bank are very active in their respective communities, allowing the Bank to closely 2 monitor the needs of individuals and businesses in the communities in which it operates. The Bank continually focuses on developing programs to serve those needs. To this end, the Bank has been instrumental in establishing Philadelphia United Community Development Corporation ("Philadelphia United"). Philadelphia United is a non-profit corporation incorporated in the Commonwealth of Pennsylvania. In 1997, the Bank received certification as a Community Development Financial Institution from the Department of Treasury Community Development Financial Institution ("CDFI") Fund. Additionally, the CDFI Fund has agreed to provide Philadelphia United with $500 thousand for the purpose of carrying out community development efforts. The Bank has also implemented programs aimed at counseling individuals and businesses on financial responsibility and credit repair. Much of this education and training service provided by the Bank has been assumed by Philadelphia United. Philadelphia United's programs will give individuals and businesses, located primarily in Philadelphia's enterprise zones, access to sophisticated planning skills and abilities. Competition There is substantial competition among financial institutions in the Bank's service area. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers. To date, the Bank has attracted, and believes it will continue to attract its customers from the deposit base of such existing banks and financial institutions largely due to the Bank's mission to service groups of people who have traditionally been under-served and by its devotion to personalized customer service. The Bank's strategy has been, and will continue to be, to emphasize personalized services with special sensitivity to the needs of Blacks, Hispanics and women and to offer competitive rates to borrowers and depositors. In order to compete, the Bank relies upon personal contacts by the officers, directors, advisory board and employees of the Bank to establish and maintain relationships with Bank customers. The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses. In the event there are customers whose loan demands exceed the Bank's lending limit, the Bank will seek to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Bank will also assist those customers requiring other services not offered by the Bank to obtain such services from its correspondent banks. Registrant believes that a portion of the Bank's customer base is derived from customers who were dissatisfied with the level of service provided at larger financial institutions. While some of such customers have followed officers of those institutions who were hired by the Bank, others were attracted to the Bank by calling programs of its officers and referrals from other customers. The Bank has sought, in the past, and intends to continue in the future, to hire customer contact officers who have good relationships with desirable customers. These personal relationships, provision of a high level of customer services, and referrals from satisfied customers, form the basis of the Bank's competitive approach, as opposed to advertising, rate competition or the development of proprietary banking products, services or programs. In the past, the principal competition for deposits and loans have been other depository institutions. However, now the Bank also competes with other financial intermediaries such as brokerage houses offering investment vehicles to the general public. Other entities, both public and private, seeking to raise capital through the issuance and sale of debt or equity securities are also competitors with banks and savings and loan associations in the acquisition of deposits. In order to address the risk of deposit reduction due to investment in non-bank alternatives, the Bank has established a relationship with American Express Financial Advisors ("AEFA"). AEFA provides the Bank with two certified financial advisors who consult with the Bank's customers wishing to consider alternative investments. These advisors maintain their offices in the Main Branch and Wadsworth Branch of the Bank. The Bank receives compensation from AEFA for each securities purchase made through these advisors, thus yielding additional fee income. 3 ITEM 2 - Properties Main Branch The Bank's principal office is located on the first floor of a multi-tenant retail and commercial office building in Center City, Philadelphia, Pennsylvania located at 714 Market Street, Philadelphia, PA 19106. The Bank occupies approximately 5,700 square feet of space pursuant to a lease which expires on February 28, 2002. The lease has renewal options for two five-year periods and is subject to escalation clauses. The space is occupied by UBS, the Bank. Philadelphia United subleases a portion of this facility from the Bank. The first floor contains a banking lobby, the vault, customer service area, executive and administrative offices, as well as the Bank's compliance and marketing groups. The Bank's finance, branch administrative and operations functions are located on the second floor of the same building, where the Bank leases an additional space on a month-to-month basis. The aggregate monthly rent for this location is 8,629.39. Mt. Airy Branch North Philadelphia Branch The Bank operates a branch at 1562 East Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased from the Federal Deposit Insurance Corporation ("FDIC") at a monthly rental of $1675.00. Center City Branch The Bank operates a branch location at Two Penn Center, 15th Street and JFK Boulevard, Philadelphia, PA. The Bank leases approximately 4,769 square feet at its Two Penn Center location. The space includes lobby, teller area, customer service area, primary lending area and administrative offices, as well as a vault. The aggregate monthly rent for this location is $13,114.75. Frankford Branch In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. The main floor of the facility houses teller and customer service areas. The basement houses administrative offices. West Girard Branch In 1994, the Bank purchased a branch facility at 2820 West Girard Avenue. The facility is comprised of a teller area, customer service area, lobby, vault and administrative offices. West Philadelphia Branch On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster Avenue from PNC Bank. The facility is comprised of approximately 3,000 square feet. The main floor houses teller and customer service areas, a drive-up teller facility and automated teller machine. The basement provides storage for the facility. The aggregate monthly rental is approximately $2,500.00 exclusive of taxes, insurance, utilities and janitorial service. ITEM 3 - Legal Proceedings Other than the following, no material claims have been instituted or threatened by or against UBS or its affiliates other than in the normal course of business. 4 ITEM 4 - Submission of Matters to Vote of Security Holders Not Applicable. No matters were submitted to a vote of Registrant's security holders since the Registrant's last periodic filing. PART II ITEM 5 - Market for the Registrant's Common Stock. Common Stock As of March 31, 1999 there were 3,177 shareholders of record of UBS's Common Stock. The Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. Prior to December 31, 1993, the Bank conducted a limited offering (the "Offering") pursuant to a registration exemption provided in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Securities Act"). The price-per-share during the Offering was $12.00. Prior to the Offering, the Bank conducted an initial offering of the Common Stock (the "Initial Offering") at $10.00 per share pursuant to the same registration exemption. Beginning April 24, 1995, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock and 750,000 warrants to purchase a share of the common stock. 18,465 shares and 55,395 warrants have been sold pursuant to this offering. Each unit, consisting of one share of common stock and three warrants to purchase one share of common stock in each of three subsequent years (total 3 shares), were issued at $12.00 per unit. The warrant exercise price was $8.00 per share for the 1996 Warrant was $9.00 per share for the 1997 Warrant, and will be $10.00 per share for the 1998 Warrant. The exercise price of the warrants may be adjusted to avoid dilution of warrant holders. The units were offered pursuant to an exemption from registration contained in section 4(2) and 3(a)(5) of the Act. No underwriters were used and no commissions were paid as a result of this offering. The offering closed on December 31, 1995. In December 1995, the Registrant sold 41,666 shares of Registrant's common stock in an offering exempt from registration pursuant to section 4(2) of the Act at a purchase price of $12.00 per share. This sale was accomplished pursuant to a commitment to purchase these securities issued in December 1994. Beginning May 10, 1996, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock. 6,934 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption from registration contained in 4(2) and 3(a)(5) of the Act. During 1996, the Registrant received, $55,536 and issued 6,942 shares as a result of warrant exercises by shareholders to purchase common stock at a price of $8.00 per share. Beginning May 19, 1997, Registrant commenced an offering solely to existing stockholders of 250,000 shares of its common stock, initially on a pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act. During 1997, the Registrant received $34,710 and issued 3,856 shares as a result of exercise of the 1997 warrants at $9.00 per share. During 1998, Registrant received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per share and sold 6,492 shares of common stock as a result to its offering solely to stockholders of record. This offering was exempt pursuant to an exemption from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March 31, 1999, there were no warrants outstanding to purchase common stock of the Bank. Class B Common Stock On September 30, 1998, the Registrant filed Articles of Amendment to its Articles of Incorporation with the Secretary of State of the Commonwealth of Pennsylvania. The filing amended the Articles of Incorporation of the Registrant to designate a sub-class of ist Common Stock as Class B Common Stock. Pursuant to the terms of the amendment, holders of the Class B Common Stock have all rights of Common Stockholders, with the exception of voting rights. Effective October 9, 1999, the Registrant sold 83,333 shares of its Class B Common Stock to First Union Corporation ("First Union") for a purchase price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Securities Exchange Act of 1933 (the "Act Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B Common Stock to First Union for a purchase 5 price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Securities Exchange Act of 1933 (the "Act"). Series A Preferred Stock Registrant has engaged in the sale of Series A Preferred Stock which has the characteristics identified in the UBS Articles of Incorporation incorporated by reference as an Exhibit hereto pursuant to an exemption from registration contained in Section 4(2) of the Securities Act. On July 23, 1998, the Registrant sold 39,849 shares of its Series A Preferred Stock to the Federal National Mortgage Association at a purchase price of $20 per share. Dividends Registrant has not, during the three most recent fiscal periods declared or paid any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent of the net earnings of the bank 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 the prior approval of the Pennsylvania Department of Banking. Under the Federal Reserve Act, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, 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 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 Bank'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. As a result of this regulation, the Bank, and therefore the Registrant, will most likely be unable to pay any dividends while an accumulated deficit exists. The Registrant does not anticipate that dividends will be paid for the forseeable future. The Federal Deposit Insurance Act generally prohibits all payments of dividends by a bank which is in default of any assessment to the FDIC. 6 ITEM 6 - SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA
Year ended December 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------------------------- (Dollars in thousands, except per share data) Net interest income $ 5,241 $ 4,744 $ 4,259 $ 4,012 $ 3,766 Provision for loan losses 351 97 85 78 385 Noninterest income 1,816 1,517 1,118 741 940 Noninterest expense 6,696 5,983 6,123 5,454 5,068 Net income (loss) 10 181 (832) (779) (747) Net income (loss) per share - basic/diluted .01 0.22 (1.03) (1.04) (1.01) Balance sheet totals: Total assets $121,983 $108,914 $ 96,769 $ 92,635 $ 95,255 Net loans 57,271 73,694 69,097 61,696 63,043 Investment securities 43,196 18,253 14,460 16,739 18,944 Deposits 109,063 99,427 88,761 84,228 87,451 Shareholders' equity 8,904 7,059 6,759 7,470 6,799 Ratios: Equity to assets 6.40% 6.61% 7.45 % 7.36 % 6.54 % Return on assets .01% 0.18% (0.89)% (0.87)% (0.83)% Return on equity .14% 2.69% (12.02)% (11.83)% (12.69)%
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted in favor of the formation of a bank holding company, United Bancshares, Inc. (the Company). Accordingly, in October 1994 the Company became a bank holding company in conjunction with the issuance of its common shares in exchange for the common shares of the Bank. Since 1994, the financial statements are prepared on a consolidated basis to include the accounts of the Company and the Bank. Financial data for prior periods are presented for the Bank only. 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. This discussion and analysis should be read in conjunction with the financial statements presented elsewhere in this report. RESULTS OF OPERATIONS Summary The Company recorded net income of $10,000 ($.01 per share) for 1998 compared to net income of $181,000 ($0.22 per share) in 1997 and a loss of $832,000 ($1.03 per share) in 1996. The decline in earnings during 1998 is primarily attributable to an increase in the provision for loan losses. A more detailed explanation for each component of earnings is included in the sections below. Management continues to recognize the need to grow the Bank's deposit level to generate operating economies of scale and net interest income to cover the cost of operations. During 1998, average-earning assets increased 7 approximately $9.6 million, or 10.1%, while the net yield on average interest earning assets increased slightly to 5.03%. The result was an increase of $497,000 in net interest income from 1997 to 1998 The allowance for loan losses as a percentage of total loans increased from 0.63% in 1997 to 1.17% in 1998. This increase is primarily attributable to a specific provision of approximately $200,000 for one commercial loan as well as a $16 million decline in total loans outstanding at year-end. TABLE 1 - AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY
December 31, ------------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------------- --------------------------- ------------------- Average Yield/ Average Yield/ Average Yield/ balance Interest rate balance Interest rate balance Interest rate ------- -------- ------ -------- -------- ------ ------- -------- ------ (Dollars in thousands) Assets: Interest-earning assets: Loans 71,338 6,270 8.79% $ 68,887 $5,913 8.58% $65,243 $5,567 8.53% Investment securities held-to-maturity 11,436 746 6.52 10,222 659 6.45 8,110 502 6.19 Investment securities available-for-sale 8,392 557 6.63 6,252 434 6.94 8,319 495 5.95 Federal funds sold 12,959 688 5.31 9,187 483 5.26 4,350 225 5.17 -------- -------- ------ ------- -------- ------ Total interest-earning assets 104,125 8,261 7.93 94,548 7,489 7.92 86,022 6,789 7.89 Noninterest-earning assets: Cash and due from banks 4,646 4,271 3,671 Premises and equipment, net 1,760 1,846 1,657 Other assets 3,576 1,564 2,129 Less allowance for loan losses (565) (468) (506) ------- -------- ------- Total 113,542 $101,761 $92,973 ======= ======== ======= Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits 22,622 620 2.74% $ 14,812 379 2.56% $13,072 294 2.25% Savings deposits 23,283 428 1.84 23,277 459 1.97 24,046 506 2.10 Time deposits 37,365 1899 5.08 37,627 1,852 4.92 34,806 1,651 4.74 Other borrowed funds 1,521 73 4.85 1,262 55 4.36 1,821 79 4.34 -------- -------- ------ ------- -------- ------ Total interest-bearing liabilities 84,791 3,020 3.56 76,978 2,745 3.57 73,745 2,530 3.43 Noninterest-bearing liabilities: Demand deposits 19,740 15,905 11,197 Other 1,747 2,153 1,107 Shareholders' equity 7,264 6,725 6,924 ------- -------- ------- Total 113,542 $101,761 $92,973 ======= ======== ======= Net interest earnings 5,241 $4,744 $4,259 Net yield on interest-earning assets 5.03% 5.01% 4.95%
For purposes of computing the average balance, loans are not reduced for nonperforming loans. 8 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 (b) interest paid on interest-bearing liabilities, is a significant component of the Bank's earnings. 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 for 1998 totaled $5.2 million, an increase of $497,000, or 10.5%, compared to 1997. Net interest income in 1997 totaled $4.7 million, an increase of $485,000, or 11.4%, compared to 1996. TABLE 2 - RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
1998 compared to 1997 1997 compared to 1996 --------------------------- --------------------------- Increase (decrease) due to Increase (decrease) due to --------------------------- --------------------------- Volume Rate Net Volume Rate Net ----- ----- ----- ----- ----- ----- (Dollars in thousands) Interest earned on: Loans .................... $ 221 $ 136 $ 357 $ 245 $ 101 $ 346 Investment securities held-to-maturity ....... 81 6 87 136 21 157 Investment securities available-for-sale ..... 175 (52) 123 (144) 83 (61) Federal funds sold ....... 203 2 205 254 4 258 ----- ----- ----- ----- ----- ----- Total interest-earning assets ............. 680 92 772 491 209 700 ----- ----- ----- ----- ----- ----- Interest paid on: Demand deposits .......... 218 23 241 76 9 85 Savings deposits ......... 2 (33) (31) 13 (60) (47) Time deposits ............ (9) 56 47 68 133 201 Other borrowed funds ..... 9 9 18 (98) 74 (24) ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities ........ 220 55 275 59 156 215 ----- ----- ----- ----- ----- ----- Net interest income .. $ 460 $ 37 $ 497 $ 432 $ 53 $ 485 ===== ===== ===== ===== ===== =====
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of consolidated assets and liabilities. In 1998, there was an increase in net interest income of $460,000 due to changes in volume and an increase of $37,000 due to changes in rate. In 1997, there was an increase in net interest income of $432,000 due to changes in volume and a decrease of $53,000 due to changes in rate. 9 Average earning assets increased from $94.5 million in 1997 to $104.1 million in 1998 and from $86 million in 1996 to $94.5 million in 1997. This growth in earning assets is primarily attributed to an increase in average interest-bearing demand deposit balances. In December 1997, the Bank implemented a new deposit transfer ("sweep") product for its nonprofit and municipal customers which provides for the overnight transfer of available funds from a noninterest-bearing account to an interest-bearing account. In addition, new "Prestige" checking products were developed in April 1998. These products offer premiums such as life insurance, discount shopping, premium certificate of deposit rates, etc. While benefiting customers, these products also serve as means of generating low cost funds for the Bank as well as a source of service charge income from monthly membership, low balance and overdraft fees. The Bank's net interest margin increased slightly to 5.03% in 1998 and 1997 compared to 4.95% in 1996. The prime rate increased 50 basis points during 1998 from 8.25% to 8.75%, the Bank did not experience a similar increase in yield on its loan portfolio. This is because much of the Bank's loan portfolio is fixed rate in nature and not related to prime. During 1998, the average federal funds rate increased slightly to 5.31% compared to 5.26% in 1997 and 5.17% in 1996. During 1998, the average investment in federal funds increased by $3.8 million as a result of an increased level of deposits in the Bank's "sweep" checking account which represent high balance short-term deposits. In addition, during 1998, the Bank experienced high levels of payoffs/paydowns in its mortgage and purchased automobile loan portfolios. Funds were temporarily placed in federal funds sold until other loans were originated and/or purchased. The yield on the investment portfolio decreased 6 basis points to 6.57% in 1998 compared to 6.63% in 1997 and 6.07% in 1996. The decline in yield during 1998 was due to call options in certain higher yielding Government Agency securities that were exercised during year. The Bank was not able to place the proceeds from these premature maturities into securities with comparable yields due to a lower rate environment. The cost of interest-bearing deposits remained relatively unchanged at 3.56% in 1998 compared to 3.57% in 1997 and 3.41% in 1996. During 1998 and 1997, interest rates paid on deposits remained relatively constant. The increase during 1997 was primarily related to the introduction of a fourth tier for balances in excess of $250,000 on the Bank's Business Money Market Account, which earns a higher interest rate. This product was designed to attract customers with larger deposit balances. 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 and allowance for loan losses charged against earnings in 1998 was $350,500 compared to $97,000 in 1997 and $85,000 in 1996. The increase in 1998 is primarily related to one community development construction loan for which there was a specific provision allocated of $200,000. In addition, during 1998, there was an increased level of loans for which there was no related government guaranteeCpurchased automobile loans and commercial loans. Also, although the Bank has not charged-off loans in its residential mortgage loan portfolio, there was an increased level of delinquencies/classifications. As a result of the increased credit risk in the portfolio, a higher level of loan loss provision was made. Management believes the level of the allowance for loan losses was adequate as of December 31, 1998. 10 Noninterest Income Noninterest income increased $299,000 in 1998 compared to 1997. The increase was primarily related to an increased level of fees on deposits as a result of the elimination of the Bank's "free checking" product and the introduction of a new premium checking product--"Prestige checking". This new product offers premiums such as discount shopping, bonus certificate of deposit rates, insurance, etc. to customers but also has a minimum balance and monthly membership fee requirements. In addition, the Bank's ATM fees increased $142,000 during 1998 as a result of increased volume at its machines as well as growth in the ATM network from 26 to 28 machines. Finally, the Bank sold loans approximately $13.2 million in loans during 1998 for a gain of $200,000. Noninterest income increased $399,000 in 1997 compared to 1996. The increase was primarily a result of increased ATM surcharge fees ($418,000 in 1997 compared to $150,000 in 1996) due to a full year of ATM surcharge fees compared to two quarters in 1996, an increase in the ATM surcharge from $0.90 per transaction in 1996 to $1.00 in 1997, and growth in the ATM network from 15 to 23 machines. In addition, continued growth in the number of demand deposit accounts to which activity charges apply and the implementation of a low-balance charge on "free checking" accounts when the balance falls below $100 resulted in a $113,000 increase in demand deposit-related fee income--including overdraft fees, low balance fees, and activity charges. Finally, during 1997, the Bank sold approximately $9.7 million student loans for a gain of $187,000. Noninterest Expense Noninterest expense increased $713,000, or 11.9%, in 1998 to $6.7 million compared to $6 million in 1997 and $6.1 million in 1996. Salaries and benefits increased $158,000, or 6%, in 1998 compared to an increase of $142,000, or 6.3%, in 1997. In addition to normal salary adjustments, the increase during 1998 came as a result of an increase in staffing levels to handle increased work volumes due to growth in the Bank's deposit levels during the year. In addition, during 1997 the chief executive officer's employment contract was amended to provide her with a defined contribution retirement plan, which resulted in a $48,000 expense for both 1998 and 1997. Also, during 1998, the chief executive officer received incentive compensation totaling approximately $28,000. Occupancy and equipment expense increased approximately $260,000, or 26%, during 1998 compared to an increase of $117,000, or 13%, during 1997. The increase during 1998 was primarily attributable to annual escalations in lease payments, a July 1998 expiration of a "free rent" agreement with the RTC on the Bank's Wadsworth Avenue branch, and increased maintenance cost to service the Bank's growing ATM network. The Bank negotiated a month-to-month extension of its lease with the Federal Deposit Insurance Corporation (previously RTC) for $1,875 per month. Purchase of this branch is currently under consideration. Upon appropriate evaluation and review of the current appraised value, a decision will be made as to whether the Bank continues to lease or purchase the branch. Data processing expenses increased by $25,000, or 3%, during 1998 compared to $32,000, or 4%, in 1997. The bulk of the Bank's data processing is outsourced to third-party processors. These expenses are reflective of the high level of low-balance accounts being serviced for which the Bank is charged a per-account charge by processors. The increase during 1998 was primarily attributable to growth in deposit levels as well as increased charges by vendors. 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 outsourcing, and the possible renegotiation of existing contracts with servicers. In an effort to reduce these costs during 1998, the Bank continues to sell its student loan portfolio and replace it with commercial and other consumer loans with lower servicing costs. Marketing and public relations expense increased by $49,000, or 28%, in 1998 compared to an increase of $36,000, or 28%, in 1997. The increase in 1998 was primarily related to the introduction of the new "Prestige checking" product for which the Bank pays an outside vendor to provide premiums (i.e. life insurance, discount 11 shopping, etc.). Federal deposit insurance premiums were $82,000 in 1998 compared to $66,000 in 1997 and $616,000 in 1996. FDIC insurance premiums are applied to all financial institutions based on a risk-based premium assessment system. Under this system, bank strength is based on three factors: 1) asset quality, 2) capital strength, and 3) management. Premium assessments are then assigned based on the institution's overall rating, with the stronger institutions paying lower rates. During 1996, there was a one-time SAIF Special Assessment of approximately $485,000 resulting from legislation passed by Congress on September 30, 1996 to recapitalize the SAIF. As a result, commercial banks, like United Bank, which were members of the BIF and owned SAIF-assessable deposits, were required to pay a one-time assessment of 65.7 basis points of total SAIF-assessable deposits on November 27, 1996. Because the Bank acquired deposits of failed savings and loan institutions from the RTC in 1993 and 1994, approximately $71 million of its deposits are considered SAIF-assessable. Almost immediately following the acquisitions, a significant amount of acquired RTC savings and loan deposits ran off, leaving a balance of less than $20 million. However, the legislation did not make any provision for deposit runoff. The assessment during 1998 and 1997 was based on 1.29 basis points for BIF-assessable deposits and 6.28 basis points for SAIF-assessable deposits. 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. 12 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 Table 3 indicates how the Bank has managed these elements. Average funding uses increased approximately $9.6 million, or 10.12%, in 1998 compared to $8.5 million, or 9.98%, in 1997. TABLE 3 - SOURCES AND USES OF FUNDS TRENDS
1998 1997 1996 ------------------------------- ------------------------------- ------- Increase Increase Average (decrease) Average (decrease) Average balance amount Percent balance amount Percent balance -------- ------- ----- ------- ------- ----- ------- (Dollars in thousands) Funding uses: Loans $ 71,338 $ 2,451 3.56% $68,887 $ 3,644 5.59% $65,243 Investment securities: Held-to-maturity 11,436 1,214 11.88 10,222 2,112 26.04 8,110 Available-for-sale 8,392 2,140 34.23 6,252 (2,067) (24.85) 8,319 Federal funds sold 12,959 3,772 41.06 9,187 4,837 111.20 4,350 -------- ------- ------- ------- ------- Total uses $104,125 $ 9,577 $94,548 $ 8,526 $86,022 ======== ======= ======= ======= ======= Funding sources: Demand deposits: Noninterest-bearing $ 19,740 $ 3,835 24.11% $15,905 $ 4,708 42.05% $11,197 Interest-bearing 22,622 7,810 52.73 14,812 1,740 13.31 13,072 Savings deposits 23,283 6 .03 23,277 (769) (3.20) 24,046 Time deposits 37,365 (262) (.70) 37,627 2,821 8.11 34,806 Other borrowed funds 1,521 259 20.52 1,262 (559) (30.70) 1,821 -------- ------- ------- ------- ------- Total sources $104,531 $11,648 $92,883 $ 7,941 $84,942 ======== ======= ======= ======= =======
*Includes held-to-maturity and available-for-sale securities Investment Securities and other Short-Term Investments The Bank's investment portfolio is classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are carried at amortized cost and are those securities the Bank has both the intent and ability to hold to maturity. Investments classified as available-for-sale are those investments the Bank intends to hold for an indefinite amount of time, but not necessarily to maturity, and are carried at fair value, with the unrealized holding gains and losses reported as a component of shareholders' equity on the balance sheet. Average investment securities and federal funds sold, in the aggregate, increased by $7.1 million, or 27.8%, in 1998 compared to an increase of $4.9 million, or 23.5%, in 1997. The increase during 1998 is a result of 12.4% deposit growth and the temporary investment of the proceeds from loan sales and paydowns/payoffs in the mortgage and purchased automobile loan portfolios in federal funds sold until loans were originated and/or purchased. 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. As reflected in Table 4, the assumed average maturity of the investment portfolio was 3.59 years at year-end 13 1998. Approximately 18.3% of the portfolio consists of mortgage-backed pass-through securities that have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. The Bank has attempted to minimize the repayment risk (risk of very fast or very slow repayment) associated with these types of securities by investing primarily in a number of seasoned mortgage pools for which there is a repayment history. This history better enables the Bank to project the repayment speeds of these pools. In addition, the Bank has minimized the interest rate risk associated with these mortgage-backed securities by investing in a variety of pools, many of which have variable rates with indices that track closely with the current interest rate environment. TABLE 4 - ANALYSIS OF INVESTMENT SECURITIES
Within After one but After five but After one year within five years within ten years ten years --------------- ---------------- ------------------ ----------------- ----- Amount Yield Amount Yield Amount Yield Amount Yield Total ------ ----- ------ ----- ------ ----- ------ ----- ----- (Dollars in thousands) U.S. Treasury $ 1,000 5.45% $ -- --% $ 1,000 Other government securities 17,957 5.03 6,756 6.05% 9,176 6.50% 33,938 Mutual funds 90 5.57 320 6.00 90 Other investments 320 Mortgage-backed securities 7,898 ------- ------ ------ ---- ------- Total securities $19,047 $6,756 $9,496 $ -- $43,196 ======= ====== ====== ==== ======= Average maturity years 3.59
The above table sets forth the maturities of investment securities at December 31, 1998 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Loans Average loans increased approximately $2.4 million, or 3.56%, in 1998 compared to an increase of $3.6 million, or 5.59%, in 1997. The increase during 1998 was primarily due to an increase in commercial loan originations and the purchase of approximately $8 million in seasoned automobile loans in November 1997 and $4.5 million in April 1998. During 1998, the Bank sold $13.1 million ($2 million in March 1998 and $11.1 million in December 1998) in student loans in an effort to reduce data processing costs and to improve the overall yield on the loan portfolio by shifting the funds into higher-yielding commercial and consumer loans. In addition, during 1998 mortgage loans continue to decline as a result of payoff/paydowns and refinancings due to the low mortgage rate environment. The Bank's policy is to make its loans and commitments in the market area it serves. However, from time-to-time, the Bank has purchased a significant portion of its loan portfolio to adequately match its level of deposits and to improve the net interest margin. The Bank continues to originate loans and a strong pipeline of loans located within the Philadelphia region. 14 TABLE 5 - LOANS OUTSTANDING, NET OF UNEARNED INCOME
December 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------------------------- (Dollars in thousands) Commercial and industrial $13,643 $12,095 $10,107 $ 8,021 $ 3,037 Commercial real estate 1,518 1,515 649 627 1,608 Consumer loans 11,424 22,611 17,340 16,254 9,503 Residential mortgages 31,365 35,962 36,622 37,271 39,398 Loans held-for-sale -- 1,979 4,906 -- 10,223 ------- ------- ------- ------- ------- Total loans $57,950 $74,162 $69,624 $62,173 $63,769 ======= ======= ======= ======= =======
TABLE 6 - LOAN MATURITIES AND INTEREST SENSITIVITY
Within After one but After one year within five years ten years Total -------- ----------------- --------- ----- (Dollars in thousands) Commercial and industrial $ 4,163 $ 3,720 $ 5,760 $13,643 Commercial real estate 614 355 549 1,518 Consumer loans 1,117 7,417 2,890 11,424 Residential mortgages 31,365 31,365 -------- ------- ------- ------- Total loans $ 5,894 $11,492 $40,564 $57,950 ======== ======= ======= ======= Loans maturing after one year with: Fixed interest rates $ 40,995 ======== Variable interest rates $ 11,061 ========
Nonperforming Loans Table 7 reflects the Bank's nonperforming loans for the last five years. 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 Bank's policy 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 nonaccrual, 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. 15 TABLE 7 - NONPERFORMING LOANS 1998 1997 1996 1995 1994 -------------------------------------------- (Dollars in thousands) Nonaccrual loans $1,720 $1,179 $800 $949 $572 Interest income included in net income for the year 37 14 6 23 -- Interest income that would have been recorded under original terms 189 112 45 37 41 Loans past due 90 days and still accruing 125 306 408 10 -- There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At December 31, 1998, approximately 33% 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 December 31, 1998, none of these loans were nonperforming. During 1998, nonaccrual loans increased to $1.7 million, up from $1.2 million at December 31, 1997. The increase in the level of nonaccrual loans during 1998 is primarily attributable to one community development construction loan and the aging of the residential mortgage loan portfolios the Bank acquired in 1993 and 1994. At December 31, 1998, approximately $501,000 of the total nonaccrual loans were residential mortgages. The underlying collateral minimizes the risk of loss associated with these loans. Loans past due 90 days and still accruing consist primarily of student loans for which there is a 98% guarantee of principal and interest. 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. Table 9 presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and consequently may be reallocated in the future to reflect then-current conditions. 16 TABLE 8 B ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
1998 1997 1996 1995 ------------------- ------------------- ------------------- ------------------- Percent Percent Percent Percent of loans of loans of loans of loans in each in each in each in each category to category to category to category to Amount total loans Amount total loans Amount total loans Amount total loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Commercial and industrial $272 23.54% $144 16.31% $222 14.52% $113 12.90% Commercial real estate 132 2.62 13 2.04 13 0.93 13 1.01 Residential mortgages 55 19.71 180 48.49 245 52.60 246 59.95 Consumer loans 188 54.12 97 33.16 44 31.95 65 26.14 Unallocated 32 -- 34 -- 4 -- 39 -- ---- ------ ---- ------ ---- ------ ---- ------ $679 100% $468 100.00% $528 100.00% $476 100.00% ==== ====== ==== ====== ==== ====== ==== ======
Management believes that the allowance for loan losses is adequate. 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. TABLE 9 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Year ended December 31, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------------- (Dollars in thousands) Balance at January 1 $ 468 $ 528 $ 476 $ 726 $ 629 ----- ------- -------- --------- --------- Charge-offs: Commercial and industrial (66) (17) (195) (298) Commercial real estate - - - - Residential mortgages (9) - - - Consumer loans (180) (160) (25) (5) (44) ----- ------- -------- --------- --------- (180) (235) (42) (200) (342) Recoveries - consumer loans 41 78 9 6 3 ----- ------- -------- --------- --------- Net charge-offs (139) (157) (33) (194) (339) Additions charged to operations 350 97 85 78 385 Allowance allocated to acquired loans -- -- -- 185 Allowance previously allocated to sold loans -- -- -- (134) (134) ----- ------- -------- --------- --------- Balance at December 31 $ 679 $ 468 $ 528 $ 476 $ 726 ===== ======= ======== ========= ========= Ratio of net charge-offs to average loans outstanding .19% 0.23% 0.05% 0.34% 0.63% ===== ======= ======== ========= =========
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. 17 Deposits Average deposits grew approximately $11.4 million, or 12.4%, in 1998 compared to growth of $8.5 million, or 10.2%, in 1997. Sweep deposit accounts were introduced in late 1997 as a vehicle to attract larger deposits by sweeping funds out of noninterest-bearing demand deposit accounts and investing them overnight in interest-bearing deposit accounts. At December 31, 1998, there were $10 million in such accounts. In addition, in 1998, non-interest bearing deposits increased on average by $3.8 million as a result of the introduction of the new "Prestige checking" product. TABLE 10 - DEPOSITS BY CLASS AND RATE 1998 1997 1996 ------------ -------------- -------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (Dollars in thousands) Noninterest-bearing demand deposits $19,740 --% $15,905 --% $11,197 --% Interest-bearing demand deposits 22,622 2.74 14,812 2.56 13,072 2.25 Savings deposits 23,283 1.84 23,277 1.97 24,046 2.10 Time deposits 37,365 5.08 37,627 4.92 34,806 4.74 Other Borrowed Funds The average balance for other borrowed funds increased $259,000, or 20.52%, in 1998 compared to a decrease of $559,000, or 30.70%, in 1997. The increase in other borrowed funds during 1998 was due to higher-balance reverse repurchase agreements the Bank entered into in 1998 compared to 1997. The level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. 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 enhance consistent growth of net interest income through periods of changing interest rates. The Bank is required to maintain minimum levels of liquid assets as defined by Federal Reserve Board (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 December 31, 1998, management believes the Bank's liquidity is satisfactory and in compliance with FRB regulations The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Securities maturing in one year or less amounted to $19 million at December 31, 1998, representing 44% of the investment portfolio. Other types of assets such as federal funds sold, 18 as well as maturing loans, are sources of liquidity. Approximately $5.9 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. Table 11 provides a breakdown of the maturity of deposits of $100,000 or more. TABLE 11 - MATURITY OF DEPOSITS OF $100,000 OR MORE (Dollars in thousands) 3 months or less $ 10,591 Over 3 through 6 months 2,892 Over 6 months through 1 year Over 1 through five years 459 Over five years - -------- Total $ 13,942 ======== 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 that 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 interest-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. Table 12 sets forth the earliest repricing distribution of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 1998, the Bank's interest rate sensitivity gap ratio (i.e. excess of interest rate-sensitive assets over interest rate-sensitive liabilities, divided by total assets) and the Bank's cumulative interest rate sensitivity gap ratio. For purposes of the table, except for savings deposits, an asset or liability is considered rate-sensitive within a specified period when it matures or could be repriced within such period or repriced within such period in accordance with its contractual terms. At December 31, 1998, a liability sensitive position is maintained on a cumulative basis through one year of -12.24% that is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. The current gap position is primarily due to the high concentration of fixed-rate mortgage loans the Bank has in its loan portfolio but is somewhat mitigated by the Bank's high level of core deposits that have been placed in longer repricing intervals. Generally, because of the Bank's negative gap position in shorter time frames, the Bank can anticipate that increases in market rates will have a negative impact on the net interest income, while decreases will have the opposite effect. For purposes of the gap analysis, such deposits (savings, MMA, NOW) which do not have definitive maturity dates and do not readily react to changes in interest rates have been placed in longer repricing intervals versus immediate repricing time frames, making the analysis more reflective of the Bank's historical experience. 19 TABLE 12 - INTEREST SENSITIVITY ANALYSIS Interest rate sensitivity gaps
as of December 31, 1998 ----------------------------------------------------------------------------- Over Over 1 year Over 3 months 3 through 12 through 3 through Over five or less months 3 years 5 years years Cumulative ------- ------- ------- ------- ------- -------- (Dollars in thousands) Interest-sensitive assets: Interest-bearing deposits with banks $ 350 $ $ $ $ $ 350 Investment securities: Held-to-maturity 18,957 198 250 5,015 10,726 35,146 Available-for-sale 4,133 2,006 1,911 8,050 Federal funds sold 12,318 12,318 Loans 12,842 2,099 6,947 3,905 32,157 57,950 ------- ------- ------- ------- ------- -------- Total interest-sensitive assets 48,600 2,297 7,197 10,926 44,794 $113,814 ------- ------- ------- ------- ------- ======== Cumulative totals 48,600 50,897 58,094 69,020 113,814 ------- ------- ------- ------- ------- Interest-sensitive liabilities: Interest checking accounts 19,593 9,521 $ 29,114 Savings accounts 13,866 9,527 23,393 Certificates less than $100,000 6,072 10,247 3,710 2,585 22,614 Certificates of $100,000 or more 10,591 2,892 339 120 13,942 Other Borrowed Funds 1,558 11 1,569 ------- ------- ------- ------- ------- -------- Total interest-sensitive liabilities 51,680 13,150 23,097 2,705 -- $ 90,632 ------- ------- ------- ------- ------- ======== Cumulative totals $51,680 $64,830 $87,927 $90,632 $90,632 ======= ======= ======= ======= ======= Interest sensitivity gap ($3,080) ($10,853) $(15,900) $8,221 $44,794 ======= ======= ======= ======= ======= Cumulative gap ($3,080) ($13,933) ($29,833) ($21,612) $23,182 ======= ======= ======= ======= ======= Cumulative gap/total earning Assets 2.71% (12.24%) (26.21%) 18.98% 20.37% ======= ======= ======= ======= ======= Interest-sensitive assets to interest-sensitive liabilities 94.04% 17.46% 31.15% 403.91% --% ======= ======= ======= ======= =======
Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management's estimates. 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 20 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 forecast 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 December 31, 1998 are as follows: Market value of Percent of Changes in rate portfolio equity change (Dollars in thousands) +400 basis points ($19,251) (764)% +300 basis points (13,714) (573) +200 basis points (8,176) (382) +100 basis points (2,640) (191) Flat rate 2,898 -- -100 basis points 8,436 191 -200 basis points 13,972 382 -300 basis points 19,510 573 -400 basis points 25,048 764 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 significant and is within the Bank's policy limits at December 31, 1998. 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 and movement into money market deposit accounts and short-term certificates of deposit 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 earning assets and cost of funds will decrease the Bank's vulnerability to interest rate cycles. Capital Resources Total shareholders' equity increased $1.9 million in 1998 compared to an increase of approximately $300,000 in 1997. The increase in 1998 is a result of retained earnings ($10,000), sale of common stock ($1.1 million), and the sale of preferred stock ($796,000). The FRB standards for measuring capital adequacy for U.S. Banking organizations require 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, 21 noncumulative 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 Table 13, 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 13 - CAPITAL RATIOS 1998 1997 1995 -------------------------------- (Dollars in thousands) Tier 1 capital $ 8,823 $ 6,891 $ 6,558 Tier 2 capital 679 468 504 ------- ------- ------- Total qualifying capital $ 9,502 $ 7,359 $ 7,062 ======= ======= ======= Risk-adjusted total assets (including off- balance-sheet exposures) $54,373 $51,868 $40,306 ======= ======= ======= Tier 1 risk-based capital ratio 16.23% 13.29% 16.27% Total (Tier I and II) risk-based capital ratio 17.48% 14.19% 17.52% Tier 1 leverage ratio 7.62% 6.59% 7.09% Regulatory Matters At December 31, 1998, the Bank is operating under a Supervisory Letter from its primary regulator. The Supervisory Letter, among other things, prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and the Company from issuing debt. Income (Loss) Per Share During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Reporting Comprehensive Income In January 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive Income. This standard establishes new standards for reporting comprehensive income which includes net income as well as certain other items which result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. 22 Disclosures About Segments of an Enterprise and Related Information In June 1997, the FASB issued SFAS No. 131, which is effective for all periods beginning after December 15, 1998. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic area in which they operate, and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements. Management has determined that the Bank operates in one segment, namely community banking. 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. 23 Year 2000 The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs or that of its vendor that have time-sensitive software may recognize the date using "00" as the year 1900 rather than the Year 2000. This could result in major system failure or miscalculations. The "Year 2000" potential problems create risk for the Company from unforeseen problems in its own computer system and from third parties such as other financial institutions, the federal government, federal agencies, vendors and customers. Failures of the Company's or third party's computer systems could have a material effect on the Company's abilities to conduct business, especially to process and account for the transfer of funds electronically Like many financial institutions, the Company relies upon computers for conducting its daily operations. Failure to resolve Year 2000 issues presents the following risks to the Company: (1) the Bank could lose customers to other financial institutions, resulting in loss revenue, if the Bank is unable to properly account for customer transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and correspondent institutions could fail to provide funds to the Bank which could materially impair the Bank's liquidity and affect the Bank's ability to fund loans and deposit withdrawals; (3) concern on the part of depositors that Year 2000 issues could impair access to their deposit account balances could result in the Bank experiencing deposit outflows prior to December 31, 1999; and (4) the bank could incur increased personnel costs if additional staff is required to perform functions that inoperative systems would have otherwise performed. Management believes that it is not possible to estimate the potential lost revenue due to the Year 2000 issue, as the extent and longevity of any potential problem cannot be predicted. The Company has conducted a comprehensive review of its computer systems, both internal and outsourced processing, to identify the systems that could be affected by the "Year 2000" issue and has developed a Year 2000 Plan to modify or replace the affected systems and test them for Year 2000 readiness, To date, the Company has taken the following actions to mitigate the potential effects of the Year 2000 issue: o The Bank has upgraded all applicable computer systems (hardware and software) to be Year 2000 ready. Management is currently testing all systems to ensure Year 2000 Compliance and is developing an implementation plan to resolve the issue. o The Board of Directors has adopted a Year 2000 Plan that Management is currently implementing. The Plan address the overall status of the Year 2000 Project, details of the Company's contingency plan, describes mission critical systems and non-mission critical systems, identifies all third party vendors and applicable testing strategies and test dates. The Company has also written a Year 2000 Business Resumption Plan that contains all mission critical systems and services. o The Company has established a Year 2000 Committee consisting of members of senior management which currently meets at least monthly to discuss progress on the Year 2000 Plan, and o A Year 2000 budget has been developed which estimates the cost associated with Year 2000 readiness. Current estimates of the cost to be incurred to prepare for the Year 2000 range from do not exceed $200,000. In conjunction with Year 2000 preparation, the Bank plans to make most hardware upgrades as a normal part of replacement of equipment--thereby minimizing cost. Cost estimates include primarily personnel and consulting time to ensure all business components/processes have been considered and tested for compliance. o The Bank holds customer awareness seminars and has contacted its major loan and deposit customers to advise them to review their own systems for possible Year 2000 problems. In determining credit risk for existing customers as well as in making credit decisions for major borrowers, the Bank considers the impact of the Year 2000 issues. 24 ITEM 8 - FINANCIAL STATEMENTS Report of Independent Certified Public Accountants Shareholders and Board of Directors United Bancshares, Inc. We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Philadelphia, Pennsylvania April 9, 1999 25 United Bancshares, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 1998 1997 ------------- ------------- ASSETS Cash and due from banks $ 3,675,010 $ 4,604,408 Interest-bearing deposits with banks 350,024 334,288 Federal funds sold 12,318,000 7,821,000 ------------- ------------- Cash and cash equivalents 16,343,034 12,759,696 Investment securities: Available-for-sale, at market value 8,049,875 7,398,607 Held-to-maturity, at amortized cost (market value of $35,203,274 in 1998) 35,146,148 10,854,711 Loans held-for-sale (market value of $2,008,865 in 1997) 1,979,177 Loans, net of unearned discount of $301,540 and $361,350 in 1998 and 1997, respectively 57,950,133 72,183,255 Less allowance for loan losses (679,557) (468,806) ------------- ------------- Net loans 57,270,576 73,693,626 Bank premises and equipment, net 1,565,131 1,862,647 Accrued interest receivable 1,749,623 1,439,587 Foreclosed real estate 262,368 165,188 Deferred branch acquisition costs 75,753 Prepaid expenses and other assets 1,595,926 664,475 ------------- ------------- $ 121,982,681 $ 108,914,290 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits, noninterest-bearing $ 19,999,226 $ 17,697,901 Demand deposits, interest-bearing 29,114,084 20,922,107 Savings deposits 23,393,986 22,925,881 Time deposits, $100,000 and over 13,942,008 13,852,356 Time deposits 22,614,098 24,028,818 ------------- ------------- 109,063,402 99,427,063 Long-term debt 11,191 43,688 Securities sold to repurchase 1,557,755 1,341,053 Accrued interest payable 598,352 541,225 Accrued expenses and other liabilities 1,847,665 502,406 ------------- ------------- Total liabilities 113,078,365 101,855,435 ------------- ------------- Shareholders' equity: Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 132,999 and 93,150 issued and outstanding in 1998 and 1997 1,330 932 Common stock, $0.01 par value; 2,000,000 shares authorized; 913,490 and 823,695 issued and outstanding in 1998 and 1997, respectively 9,134 8,236 Additional paid-in-capital 12,286,233 10,425,626 Accumulated deficit (3,428,169) (3,438,102) Accumulated other comprehensive income 35,788 62,163 ------------- ------------- Total shareholders' equity 8,904,316 7,058,855 ------------- ------------- $ 121,982,681 $ 108,914,290 ============= =============
The accompanying notes are an integral part of these statements. 26 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Interest income: Interest and fees on loans $ 6,270,323 $ 5,912,901 $ 5,566,650 Interest on investment securities 1,275,542 1,067,762 977,117 Interest on federal funds sold 688,285 482,856 224,594 Interest on time deposits with other banks 26,329 25,333 20,519 ----------- ----------- ----------- Total interest income 8,260,479 7,488,852 6,788,880 ----------- ----------- ----------- Interest expense: Interest on time deposits 1,898,967 1,852,080 1,650,740 Interest on demand deposits 619,921 379,397 294,363 Interest on savings deposits 427,682 459,035 506,458 Interest on borrowed funds 73,265 54,841 78,629 ----------- ----------- ----------- Total interest expense 3,019,835 2,745,353 2,530,190 ----------- ----------- ----------- Net interest income 5,240,644 4,743,499 4,258,690 Provision for loan losses 350,500 97,500 85,000 ----------- ----------- ----------- Net interest income after provision for loan losses 4,890,144 4,645,999 4,173,690 ----------- ----------- ----------- Noninterest income: Gain on sale of loans 201,664 187,471 11,188 Customer service fees 1,457,508 1,181,082 907,557 Resolution Trust Corporation fee -- -- 90,000 Gain on sale of investments 1,201 -- 9,157 Other income 155,663 148,867 99,820 ----------- ----------- ----------- Total noninterest income 1,816,036 1,517,420 1,117,722 ----------- ----------- ----------- Noninterest expense: Salaries, wages, and employee benefits 2,555,774 2,397,861 2,255,079 Occupancy and equipment 1,275,902 1,015,419 898,464 Office operations and supplies 525,771 522,525 509,158 Marketing and public relations 221,348 172,326 136,352 Professional services 232,793 274,999 266,955 Data processing 868,665 844,009 811,531 Deposit insurance assessments 82,389 66,274 616,025 Other operating 933,605 689,416 629,603 ----------- ----------- ----------- Total noninterest expense 6,696,247 5,982,829 6,123,167 ----------- ----------- ----------- Net income (loss) $ 9,933 $ 180,590 $ (831,755) =========== =========== =========== Net income (loss) per common share -- basic/diluted $ .01 $ 0.22 $ (1.03) =========== =========== =========== Weighted average number of common shares 845,902 818,240 810,729 =========== =========== ===========
The accompanying notes are an integral part of these statements. 27 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1998, 1997 and 1996
Series A Accumulated Total preferred stock Common stock Additional other share- ---------------- ---------------- paid-in Accumulated comprehensive holders' Comprehensive Shares Amount Shares Amount capital deficit income (loss) equity income (loss) ------ ------ ------ ------ ------- ------- ------------- ------ ------------- Balance at January 1, 1996 93,150 $ 932 802,480 $8,024 $10,210,580 $(2,786,937) $37,236 $7,469,835 $ -- Proceeds from issuance of common stock -- -- 13,875 139 138,409 -- -- 138,548 Unrealized losses on investment securities -- -- -- -- -- -- (17,960) (17,960) (17,960) Net loss -- -- -- -- -- (831,755) -- (831,755) (831,755) ------- ------ ------- ------ ----------- ----------- ------- ---------- -------- Balance at December 31, 1996 93,150 932 816,355 8,163 10,348,989 (3,618,692) 19,276 6,758,668 $849,715 Proceeds from issuance of common stock -- -- 7,340 73 76,637 -- -- 76,710 Unrealized gains on investment securities -- -- -- -- -- -- 42,887 42,887 42,887 Net income -- -- -- -- -- 180,590 -- 180,590 0,590 ------- ------ ------- ------ ----------- ----------- ------- ---------- -------- Balance at December 31, 1997 93,150 932 823,695 8,236 10,425,626 (3,438,102) 62,163 7,058,855 $223,477 Proceeds from issuance of referred stock 39,849 398 796,582 796,980 Proceeds from issuance of common stock 89,795 898 1,064,025 1,064,923 Unrealized losses on investment securities (26,375) (26,375) (26,375) Net income -- -- -- -- -- 9,933 -- 9,933 9,933 ------- ------ ------- ------ ----------- ----------- ------- ---------- -------- Balance at December 31, 1998 132,999 $1,330 913,490 $9,134 $12,286,233 $3,428,169) $35,788 $8,904,316 ($16,442) ======= ====== ======= ====== =========== ========== ======= ========== ========
The accompanying notes are an integral part of this statement. 28 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 9,933 $ 180,590 $ (831,755) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 350,500 97,500 85,000 Gain on sale of loans (201,664) (187,471) (11,188) Depreciation and amortization 584,744 542,193 512,045 Realized investment securities gains -- -- (9,157) (Increase) decrease in accrued interest receivable and other assets (1,345,070) (244,534) (570,347) (Decrease) increase in accrued interest payable and other liabilities 1,402,386 (131,570) 341,790 ------------ ------------ ------------ Net cash provided by (used in) operating activities 800,829 256,708 (483,612) ------------ ------------ ------------ Cash flows from investing activities: Purchase of available-for-sale investments (11,708,818) (3,738,899) (4,154,304) Purchase of held-to-maturity investments (33,748,996) (6,094,788) (6,095,331) Proceeds from maturity and principal reductions of available-for-sale investments 11,057,565 1,856,565 2,218,412 Proceeds from maturity and principal reductions of held-to-maturity investments 9,429,511 4,185,109 5,692,377 Proceeds from sale of available-for-sale investments -- -- 4,562,444 Proceeds from sale of student loans 12,846,705 9,677,111 -- Net decrease (increase) in loans 8,276,373 (4,512,352) (7,474,235) Purchase of residential mortgage loans -- (1,623,782) -- Purchase of automobile loans (4,848,864) (8,047,769) -- Purchase of premises and equipment (203,413) (495,501) (489,100) ------------ ------------ ------------ Net cash (used in) provided by investing activities (8,899,937) (8,794,306) (5,739,737) ------------ ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits 9,636,339 10,666,092 4,532,967 Repayments on long-term debt (32,497) (30,873) (29,401) Reverse repurchase agreement 216,702 1,341,053 -- Net proceeds from issuance of common stock 1,064,922 76,710 138,548 Net proceeds from issuance of preferred stock 796,980 -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 11,682,446 12,052,982 4,642,114 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 3,583,338 3,515,384 (1,581,235) Cash and cash equivalents at beginning of year 12,759,696 9,244,312 10,825,547 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 16,343,034 $ 12,759,696 $ 9,244,312 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,960,086 $ 2,726,349 $ 2,502,283 ============ ============ ============
The accompanying notes are an integral part of these statements. 29 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of United Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank of Philadelphia (the Bank). All significant intercompany transactions and balances have been eliminated. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold on an overnight basis. Securities Held-to-Maturity Bonds, notes, and debentures for which the Bank has both the positive intent and ability to hold are classified as held-to-maturity and carried at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities Available-for-Sale Available-for-sale securities consist of bonds, notes and debentures, and certain equity securities for which the Bank does not have positive intent to hold to maturity. These securities are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity net of related income tax effects. Gains and losses on the sale of available-for-sale securities are determined by the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans Loans are stated at the amount of unpaid principal, reduced by net unearned discount and an allowance for loan losses. Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding and accretion of discount. It is the Bank's policy to discontinue the accrual of interest income when a default of principal or interest exists for a period of 90 days except when, in management's judgment, the collection of principal and interest is reasonably anticipated or adequate collateral exists (including a loan impaired under SFAS No. 114). Interest received on nonaccrual loans is either applied against principal or reported as interest income according to management's judgment as to collectibility of principal. When interest accruals are discontinued, interest credited to income is reversed and the loan is classified as nonperforming. 30 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Unearned discount is amortized over the weighted average maturity of the mortgage loan portfolio. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts over the contractual life of the loan. Loans Held-for-Sale Loans held-for-sale are carried at the aggregate of lower of cost or market value. For purchased loans, the discount remaining after the loan loss allocation is being amortized over the remaining life of the purchased loans using the interest method. Allowance for Loan Losses The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," effective January 1, 1995. Under SFAS No. 114, the allowance for loan losses related to "impaired loans" is based on the discounted cash flows using the impaired loans' initial effective interest rate as the discount rate, or the fair value of the collateral for collateral-dependent loans. A loan is impaired when it meets the criteria to be placed on nonaccrual status. Loans which are evaluated for impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis and include only commercial nonaccrual loans. Large groups of smaller, homogeneous loans, such as credit cards, student loans, residential mortgages, and other student loans, are evaluated collectively for impairment. The adoption of these standards did not have any impact on the Bank's financial position or results of operations. The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the loan portfolio. The allowance is increased by provisions charged to operating expenses and reduced by charge-offs net of recoveries. Management's determination of the adequacy of the allowance is based on continuous credit reviews of the loan portfolio, consideration of the current economic conditions, review of specific problem loans, and other relevant factors. This evaluation is subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed over the shorter of the related lease term or the useful life of the assets. Income Taxes The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 31 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income (Loss) Per Share During 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share." SFAS No. 128 eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Off-Balance-Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Financial Instruments The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. The adoption of SFAS No. 133 is not anticipated to have a material impact on the Bank's financial position or results of operations. Loans held-for-sale: Fair values are estimated using quoted rates based upon secondary market sources for similar loans. 32 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments and amortizations. Prepayments and discount rates were based on current marketplace estimates and pricing. Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve. Deposit liabilities: The fair values disclosed for demand deposits (e.g. interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation. The Treasury yield curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum. Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less the cost to sell. Revenue and expenses from operations and changes in valuation allowance are charged to operations. The historical average holding period for such properties is 24 months. Management's Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In 1998, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Bank's operating segments. Management has determined the Bank operates in one business segment, community banking. Reclassifications Certain reclassifications have been made to the 1997 financial statements to conform to the 1998 presentation. 33 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Comprehensive Income In January 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive Income. This standard establishes new standards for reporting comprehensive income which includes net income as well as certain other items which result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income is as follows:
December 31, 1998 ----------------------------------- Net of Before tax Tax tax amount expense amount -------- ------- -------- Unrealized gains on securities Unrealized holding losses arising during period $(39,963) $13,588 ($26,375) Less reclassification adjustment for gains realized in net income -- -- -- -------- ------- -------- Other comprehensive income (loss), net $(39,963) $13,588 ($26,375) ======== ======= ======== December 31, 1997 ----------------------------------- Net of Before tax Tax tax amount expense amount -------- ------- -------- Unrealized gains on securities Unrealized holding losses arising during period $ 72,284 $29,397 $42,887 Less reclassification adjustment for gains realized in net income -- -- -- -------- ------- ------- Other comprehensive income (loss), net $ 72,284 $29,397 $42,887 ======== ======= =======
Organizational Costs The American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP)98-5, Reporting on Costs of Start-up Activities. SOP 98-5 requires that costs of start-up activities, as defined, including organizational costs, be expensed as incurred. This statement is effective for fiscal years beginning after December 15, 1998. Upon adoption, the application of this statement is reported as the cumulative effect of a change in accounting principle. 34 2. CASH AND DUE FROM BANK BALANCES The Bank maintains various deposit accounts of $726,000 with other banks to meet normal funds transaction requirements and to compensate other banks for certain correspondent services. The withdrawal or usage restrictions of these balances did not have a significant impact on the operations of the Bank as of December 31, 1998. 3. INVESTMENTS The amortized cost, gross unrealized holding gains and losses, and estimated market value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 1998 and 1997 are as follows:
1998 ----------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- ----------- ----------- ----------- Available-for-sale: Other Government Securities 2,248,700 5,840 -- 2,254,540 Mortgage-backed securities 5,337,225 48,383 5,385,608 ----------- ----------- ----------- ----------- Total debt securities 7,585,925 54,223 -- 7,640,148 Investments in mutual funds 89,527 -- -- 89,527 Other investments 320,200 -- -- 320,200 ----------- ----------- ----------- ----------- $ 7,995,652 $ 54,223 $ -- $ 8,049,875 =========== =========== =========== =========== Held-to-maturity: U.S. Treasury securities $ 1,000,141 $ 1,109 $ -- $ 1,001,250 Other Government securities 31,633,770 50,483 -- 31,684,253 Mortgage-backed securities 2,512,237 5,534 -- 2,517,771 ----------- ----------- ----------- ----------- $35,146,148 $ 57,126 $ -- $35,203,274 =========== =========== =========== ===========
35 3. INVESTMENTS - Continued
1997 ----------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- ----------- ----------- ----------- Available-for-sale: U.S. Treasury securities $ 649,186 $ 814 $ -- $ 650,000 Mortgage-backed securities 6,250,234 93,372 -- 6,343,606 ----------- ----------- ----------- ----------- Total debt securities 6,899,420 94,186 -- 6,993,606 Investments in mutual funds 84,801 -- -- 84,801 Other investments 320,200 -- -- 320,200 ----------- ----------- ----------- ----------- $ 7,304,421 $ 94,186 $ -- $ 7,398,607 =========== =========== =========== =========== Held-to-maturity: U.S. Treasury securities $ 3,298,383 $ 3,035 $ -- $ 3,301,418 Other Government securities 6,346,155 52,520 -- 6,398,675 Mortgage-backed securities 1,210,173 4,500 -- 1,214,673 ----------- ----------- ----------- ----------- $10,854,711 $ 60,055 $ -- $10,914,766 =========== =========== =========== ===========
Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 1998 were as follows. Expected maturities may differ from contractual maturities. Amortized Market cost value ----------- ----------- Available-for-sale: Due after three years through five years $ 1,998,700 $ 2,006,235 Due after five years through fifteen years 250,000 248,305 Mortgage-backed securities 5,337,225 5,385,608 ----------- ----------- Total debt securities 7,585,925 7,640,148 Investments in mutual funds 89,527 89,527 Other investments 320,200 320,200 ----------- ----------- $ 7,995,652 $ 8,049,875 =========== =========== Held-to-maturity: Due in three months or less $18,955,560 $18,940,538 Due after three months through one year -- -- Due after one year through three years 250,125 250,157 Due after three years through five years 4,499,844 4,524,345 Due after five years through fifteen years 8,928,382 8,970,463 ----------- ----------- Due after fifteen years -- -- ----------- ----------- Total debt securities 32,633,911 32,685,503 Mortgage-backed securities 2,512,237 2,517,771 ----------- ----------- $35,146,148 $35,203,274 =========== =========== 36 There were no sales of investments during 1998 and 1997. The proceeds from sales of investments in debt securities during 1996 were $4,571,601. Gross gains of $9,157 were realized on those sales. As of December 31, 1998 and 1997, investment securities with a book value of $11,703,948 and $11,122,211, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows: 1998 1997 ------------ ------------ Commercial and industrial $ 13,643,535 $ 12,095,471 Commercial real estate 1,517,979 1,515,146 Residential mortgages 31,364,864 35,961,372 Consumer loans 11,423,755 24,590,443 ------------ ------------ Total loans 57,950,133 74,162,432 Less allowance for loan losses (679,557) (468,806) ------------ ------------ Net loans $ 57,270,576 $ 73,693,626 ============ ============ Student loans held-for-sale at December 31, 1997 totaled $1,979,177 and are carried at the lower of cost or market. As of December 31, 1998 and 1997, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of approximately $1,148,000 and $886,000, respectively. During 1998, new loans to such related parties amounted to $467,500 and repayments amounted to $276,127. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other nonrelated party transactions. Nonaccrual loans totaled approximately $1,720,000 and $1,179,000 as of December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, unamortized deferred fees and costs totaled $177,847 and $149,396, respectively. Loans having a carrying value of $127,800 and $100,000 were transferred to foreclosed real estate in 1998 and 1997, respectively. 37 Changes in the allowance for possible loan losses are as follows: 1998 1997 1996 --------- --------- --------- Balance, beginning of year $ 468,806 $ 527,507 $ 476,132 Provision 350,500 97,500 85,000 Charge-offs (180,727) (234,638) (42,271) Recoveries 40,978 78,437 8,646 --------- --------- --------- $ 679,557 $ 468,806 $ 527,507 ========= ========= ========= At December 31, 1998 and 1997, the recorded investment in loans that were on a nonaccrual basis and were considered to be impaired under SFAS No. 114 was $845,500 and $208,000, respectively. At December 31, 1998 and 1997, the related allowance for loan losses was $183,000 and $0, respectively. At December 31, 1998 and 1997, impaired loans of $208,000 are SBA guaranteed and do not have an allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 1998 and 1997 was approximately $526,000 and $208,000, respectively. For the years ended December 31, 1998 and 1997, the Bank recognized interest income on those impaired loans of $36,800 and $0, respectively. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. During 1998, approximately 33% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. 5. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation are as follows: Estimated useful life 1998 1997 ----------- ----------- ----------- Buildings and leasehold improvements 10-15 years $ 1,343,898 1,295,948 Furniture and equipment 3-7 years 2,183,743 2,028,280 ----------- ----------- 3,527,641 3,324,228 Less accumulated depreciation (1,962,510) (1,461,581) ----------- ----------- $ 1,565,131 $ 1,862,647 =========== =========== 38 5. BANK PREMISES AND EQUIPMENT--Continued The Bank leases various premises under noncancellable agreements which expire through the year 2006 and require minimum annual rentals. The minimum rental commitments under these leases are as follows: 1999 $ 301,830 2000 302,980 2001 302,921 2002 219,548 2003 193,002 Thereafter 106,115 ---------- $1,426,396 ========== In conjunction with the branch acquisitions from the Resolution Trust Corporation, the Bank operated three branches under a five-year free-rent agreement. In November 1996, the Bank closed two of these branches and terminated the related leases. The Bank operated one branch under a free-rent agreement for which the related lease expired on July 30, 1998. Upon expiration, the Bank had the option to purchase the building at a price equivalent to 93% of the appraised value. The Bank deferred the decision to purchase the building and entered into a month-to-month lease with the FDIC at a monthly rate of $1,875. The total rental expense included in the statement of operations for the years ended December 31, 1998, 1997, and 1996 was approximately $323,330, $288,959 and $244,000, respectively. 6. LONG-TERM DEBT The Bank has a loan from PIDC-Local Development Corporation (PIDC) which financed the acquisition of furniture and fixtures. The loan bears interest at 5% per annum. Principal and interest are paid in equal monthly payments of $2,827. The loan is secured by furniture, fixtures, and equipment of the Bank, and is further collateralized by the assignment of a $50,000 Certificate of Deposit with PNC Bank to PIDC. Scheduled repayment of the loan is as follows: 1999 $ 11,191 ========== 7. DEPOSITS The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was $13,942,008 and $13,852,356 at December 31, 1998 and 1997, respectively. 39 At December 31, 1998, the scheduled maturities of certificates of deposit are as follows (dollars in thousands): 1999 $ 29,802 2000 2,490 2001 1,559 2002 960 2003 1,416 Thereafter 329 ---------- $ 36,556 ========== 8. REVERSE REPURCHASE AGREEMENTS The Bank enters into sales of securities under agreements to repurchase identical securities or reverse repurchase agreements. The amounts advanced to the Bank under these agreements represent short-term loans and would be reflected as a payable in the balance sheet. The securities underlying the agreements are book-entry securities maintained at the Federal Reserve Bank of Philadelphia. The average balance of reverse purchase agreements entered into during 1998 was $1.5 million, and the maximum amount outstanding at any month-end during 1998 was $1.5 million. 9. CAPITAL STOCK OFFERINGS On September 30, 1998,the Company designated a sub-class of its Common Stock as Class B. Pursuant to the terms of the amendment, holders of the Class B Common Stock have all rights of Common Stockholders, with the exception of voting rights. On October 9, 1998, the Company sold 83,333 shares of Class B Common Stock to one shareholder for a purchase price of $12 per share. In April 1997, the Bank began its fifth offering of a maximum 250,000 shares of common stock at a price of $12 per share ($0.01 par value). As of December 31, 1997, the Bank had received $42,600 and had issued 3,550 shares of common stock from this offering. This offering was limited to existing shareholders of record as of April 20, 1997. The offering terminated on December 31, 1997. In May 1996, the Bank began its fourth offering of a maximum 250,000 shares of common stock at a price of $12 per share ($0.01 par value). As of December 31, 1996, the Bank had received $83,012 and had issued 6,934 shares of common stock from this offering. This offering was limited to existing shareholders of record as of April 20, 1996. The offering terminated on December 31, 1996. During 1996, the Bank received $55,536 and issued 6,942 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $8.00 per share. During 1997, the Bank received $34,110 and issued 3,790 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $9.00 per share. As of December 31, 1997, 7,733 warrants remained outstanding. 40 9. CAPITAL STOCK OFFERINGS--continued During 1998, the Bank received $64,922 and issued 6,492 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $10.00 per share. As of December 31, 1998, no warrants remain outstanding. In July 1998, the Company began a limited offering of its Series A Preferred Stock (noncumulative, 6%, $0.01 par value) to FannieMae Corporation. The nonvoting preferred stock was offered at a price of $20 per share, in an amount for which the aggregate purchase price does not exceed the lesser of (1) 9.99% of the total equity of the Company or (2) $880,000. During 1998, the Company received $796,980 and issued 39,849 shares of preferred stock from this offering. Upon the declaration of a common dividend, each of the Series A preferred shares will be accorded a non-cumulative dividend preference equal to 6% of the purchase price of the stock per annum prior to the payment of any dividend on account of any other class or series of the Company. No dividends have been declared or paid. 10. INCOME TAXES The Bank accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." At December 31, 1998, the Bank has net operating loss carryforwards of approximately $2,656,446 for income tax purposes that begins to expire in 2007. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. For financial reporting purposes, a valuation allowance of $1,120,565 and $1,094,889 as of December 31, 1998 and 1997, respectively, has been recognized to offset the deferred tax assets related to the cumulative temporary differences and the tax loss carryforwards. Significant components of the Bank's deferred tax assets are as follows:
1998 1997 ----------- ----------- Deferred tax assets: Provision for loan losses 164,653 40,607 Unrealized gains on investment securities (18,435) (32,023) Depreciation 42,725 32,818 Net operating loss carryforwards 903,192 977,558 Other 28,430 11,883 Valuation allowance for deferred tax assets (1,120,565) (1,030,843) ----------- ----------- Net deferred tax assets $ -- $ -- =========== ===========
41 10. INCOME TAXES--Continued
1998 1997 1996 --------- --------- --------- Effective rate reconciliation: Tax at statutory rate $ 2,314 $ 61,400 $(282,797) Nondeductible expenses 17,634 11,849 5,828 (Utilization of) increase in net operating loss (19,948) (73,249) 276,969 --------- --------- --------- Total tax expense $ -- $ -- $ -- ========= ========= =========
11. FINANCIAL INSTRUMENT COMMITMENTS 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. Summaries of the Bank's financial instrument commitments are as follows: 1998 1997 ---------- ---------- Commitments to extend credit $7,269,229 $2,950,271 Outstanding letters of credit 259,000 105,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. 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. 12. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value information about financial instruments is required to be disclosed, whether or not recognized in the balance sheet, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. 42 12. FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank.
1998 1997 ------------------- ------------------- Carrying Fair Carrying Fair amount value amount value ------- ------- ------- ------- (Dollars in thousands) Assets: Cash and cash equivalents $16,343 $16,343 $12,760 $12,760 Investment securities 43,196 43,253 18,253 18,313 Loans held-for-sale -- -- 1,979 2,009 Loans, net of allowance for loan losses 57,271 56,577 71,715 71,595
1998 1997 ------------------- ------------------- Carrying Fair Carrying Fair amount value amount value ------- ------- ------- ------- (Dollars in thousands) Liabilities: Demand deposits 49,114 49,114 38,620 38,620 Savings deposits 23,394 23,394 22,926 22,926 Time deposits 36,556 36,352 37,881 37,884 Off Balance Sheet: Commitments to extend credit 7,172 -- 2,950 -- Outstanding letters of credit 259 -- 105 --
13. EMPLOYEE COMPENSATION The Bank entered into a five-year employment agreement with its chief executive officer covering such items as salaries, bonuses, and benefits. The agreement expires in 2000 and provides for guaranteed minimum annual compensation of $150,000 over the term of the contract. The contract, entered into on September 13, 1993 and amended January 1, 1994, also granted the chief executive officer the option to acquire up to 4% of the Bank's stock as of December 31, 1993 at $8.54 per share, which was the book value at the date of grant. The contract, as amended on January 1, 1997, also provides for a minimum contribution of $58,200 per year to the chief executive officer's retirement benefit. The Company made no stock-based compensation awards to any employee during 1998 or 1997. 14. DEFERRED BRANCH ACQUISITION COST The Bank incurred approximately $149,000 and $224,000 in 1994 and 1993, respectively, in consulting and other costs directly related to these branch acquisitions which have been deferred and are being amortized over five years. Amortization totaled $ 78,700 for each of the years ended December 31, 1998, 1997, and 1996. 43 15. RESOLUTION TRUST CORPORATION FEE Pursuant to the acquisition of the Ukrainian branch in June 1994, the Bank was granted an option to purchase residential real estate loans from the Resolution Trust Corporation (RTC) equal to the amount of deposits acquired in the branch acquisition. However, the Bank found the pricing methodology used by the RTC to be unacceptable. The RTC then offered the Bank two options: (1) to exercise its right to purchase the loans using the current loan pricing or (2) to receive a fee equivalent to the accrued interest on the balance of the offered loan portfolio for which the interest accrual period began 45 days after the date of the branch acquisition and to waive its right to purchase loans from the RTC. Under protest, the Bank agreed to option (2) which required it to waive its right to purchase loans from the RTC. Also under protest, the Bank accepted the accrued interest as calculated by the RTC of approximately $303,000. The Bank disputed the RTC's calculation of accrued interest. During 1996, as a result of litigation, the Bank received a settlement for $90,000. 16. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY CONDENSED BALANCE SHEETS December 31, ---------------------- 1998 1997 -------- -------- (Dollars in thousands) Assets: Due from banks (subsidiary) $ 265 $ 186 Investment in United Bank of Philadelphia 8,639 6,873 -------- -------- Total assets $ 8,904 $ 7,059 ======== ======== Shareholders' equity: Series A preferred stock $ 1 $ 1 Common stock 9 8 Additional paid-in-capital 12,286 10,426 Accumulated deficit (3,428) (3,438) Net unrealized holding gains on securities available-for-sale 36 62 -------- -------- Total shareholders' equity $ 8,904 $ 7,059 ======== ======== 44 16. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY- Continued CONDENSED STATEMENTS OF OPERATIONS Year ended December 31, ------------------------- 1998 1997 1996 ----- ----- ----- (Dollars in thousands) Equity in net income (loss) of subsidiary $ 10 $ 181 $(832) ----- ----- ----- Net income (loss) $ 10 $ 181 $(832) ===== ===== ===== CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- (Dollars in thousands) Cash flows from operating activities: Net income (loss) $ 10 $ 181 $ (832) Equity in net income (loss) of subsidiary (10) (181) 832 ------- ------- ------- Net cash provided by operating activities -- -- -- ------- ------- ------- Cash flows from investing activities: Investment in subsidiary (1,783) (76) (139) ------- ------- ------- Net cash used in investing activities (1,783) (76) (139) ------- ------- ------- Cash flows from financing activities: Issuance of preferred stock 797 -- -- Issuance of common stock 1,065 76 139 ------- ------- ------- Net cash provided by financing activities 1,862 76 139 ------- ------- ------- Net increase in cash and cash equivalents 79 -- -- Cash and cash equivalents at beginning of year 186 186 186 ------- ------- ------- Cash and cash equivalents at end of year $ 265 $ 186 $ 186 ======= ======= =======
18. REGULATORY MATTERS The Bank engages in the commercial banking business, with a particular focus on serving Blacks, Hispanics and women, and is subject to substantial competition from financial institutions in the Bank's service area. As a bank holding company and a banking subsidiary, the Company and the Bank, respectively, are subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and are required to maintain capital requirements established by those regulators. Prompt corrective actions may be taken by those 45 18. REGULATORY MATTERS--Continued regulators against banks that do not meet minimum capital requirements. Prompt corrective actions range from restriction or prohibition of certain activities to the appointment of a receiver or conservator of an institution's net assets. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. The most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as "well capitalized" under the regulatory framework for prompt and corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events at December 31, 1998 that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are as follows:
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ---------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1998: Total capital to risk- weighted assets: Consolidated $9,502 17.48% $4,350 8.00% $5,437 10.00% Bank 9,236 16.99 4,350 8.00 5,437 10.00 Tier 1 capital to risk- weighted assets: Consolidated 8,823 16.23 2,175 4.00 3,262 6.00 Bank 8,557 15.74 2,175 4.00 3,262 6.00 Tier 1 capital to average assets: Consolidated 8,823 7.67 4,603 4.00 5,754 5.00 Bank 8,557 7.44 4,592 4.00 5,740 5.00
46 18. REGULATORY MATTERS - Continued
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ---------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1997: Total capital to risk- weighted assets: Consolidated $7,359 14.19% $4,149 >/=8.00% $5,187 >/=10.00% Bank 7,173 13.83 4,149 >/=8.00 5,187 >/=10.00 Tier 1 capital to risk- weighted assets: Consolidated 6,891 13.29 2,075 >/=4.00 3,112 >/=6.00 Bank 6,705 12.93 2,075 >/=4.00 3,112 >/=6.00 Tier 1 capital to average assets: Consolidated 6,891 6.59 4,183 >/=4.00 5,229 >/=5.00 Bank 6,705 6.41 4,176 >/=4.00 5,220 >/=5.00
In May 1995, as a result of a regulatory examination completed in February 1995, the Bank entered into a Memorandum of Understanding with its primary regulator with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings plan, and addressing interest rate sensitivity risks through the development of systems for monitoring the risks. Effective July 26, 1996, the Memorandum of Understanding was terminated as a result of the Bank's full compliance with its terms as determined in an examination completed as of March 31, 1996 and noted improvements in the Bank's policies and procedures, internal controls, and capital position. Beginning in 1996, the Bank has operated under a Supervisory Letter from its primary regulator. The Supervisory Letter prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and Company from issuing long-term debt. 19. DEPOSIT INSURANCE ASSESSMENTS Deposits of the Bank are insured by the FDIC. On September 30, 1996, Congress passed a bill to recapitalize the Savings Insurance Fund (SAIF) of the FDIC. As a result, commercial banks, like United Bank, which were members of the Bank Insurance Fund (BIF), which owned SAIF-assessable deposits, were required to pay on November 27, 1996, a one-time assessment of 65.7 basis points of total SAIF-assessable deposits. Because the Bank acquired deposits of failed savings and loan institutions from the RTC in 1993 and 1994, approximately $71 million of its deposits are considered SAIF-assessable. As a result, the Bank had to pay a one-time SAIF Special Assessment of approximately $485,000. The Bank filed an appeal of this because management believes a significant portion of its deposits are misclassified under the SAIF, as at the time of acquisition of branches from the RTC it had over $30 million in deposits accumulated and insurable under the BIF. Furthermore, since its acquisition of deposits, a significant amount of acquired RTC savings and loan deposits have run off and been replaced with commercial deposits. Currently, the law does not make any provision for deposit runoff or for appeals on this basis. To date, the Bank has been unsuccessful in its appeal efforts. 47 20. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company. 21. EARNINGS PER SHARE COMPUTATION In accordance with SFAS No. 128, income (loss) per share is calculated as follows:
Year ended December 31, 1998 ---------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net income $ 9,933 ========= Basic loss per share Income available to stockholders $ 9,933 845,902 $ .01 ========= ======= ====== Year ended December 31, 1997 ---------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net income $ 180,590 ========= Basic EPS Income available to stockholders $ 180,590 818,240 $ 0.22 ========= ======= ====== Effect of dilutive securities Warrants -- 7,733 --------- ------- Diluted EPS Income available to common stockholders plus assumed conversions $ 180,590 825,973 $ 0.22 ========= ======= ====== Year ended December 31, 1996 ---------------------------------------- Loss Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net loss $(831,755) ========= Basic loss per share Loss available to stockholders $(831,755) 810,729 $(1.03) ========= ======= ======
48 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Directors of the Registrant.
PRINCIPAL OCCUPATION AND YEAR FIRST TERM NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE - ---- --- ------------------- --------------- ----------- James F. Bodine ... 77 Retired as Managing 1993 2002 Partner, Urban Affairs Partnership Phila., PA. S. Amos Brackeen ... 80 Founder and Pastor, 1993 1999 Philippian Baptist Church of Phila., PA. Emma C. Chappell .. 54 Chairman of 1993 1999 The Board, President and CEO of Registrant and United Bank of Philadelphia Luis A. Cortes, Jr.. 41 Executive Director 1993 2000 of the Hispanic Clergy of Philadelphia & Vicinity. Kemel G. Dawkins ... 75 President, Kemrodco 1993 2001 Development and Construction Company, Inc., President, Kem-Her Construction Company Inc., Phila., PA.
49 L. Armstead Edwards ... 56 Treasurer, 1993 2000 United Bancshares, Inc. Owner and President, P.A.Z., Inc., Philadelphia., PA Marionette Y. 54 Partner, 1996 2000 Frazier ... John Frazier, Inc. Philadelphia, PA William C. Green ... 74 Co-founder, Ivy Leaf 1993 2002 Middle School, Philadelphia, PA Angela M. Huggins ... 58 President and CEO 1993 2001 RMS Technologies Inc. Foundation William B. Moore ... 56 Secretary, United Bancshares, Inc. Pastor, Tenth Memorial 1993 1999 Baptist Church, Philadelphia, PA Ernest L. Wright ... 70 Founder, President and 1993 2000 CEO of Ernest L. Wright Construction Company Phila., PA
50 (b) Executive Officers of Registrant. NAME AGE OFFICE Emma C. Chappell (1).......... 54 Chairman, President and Chief Executive Officer James F. Bodine .............. 77 Vice Chairman Reverend William B. Moore ....................... 56 Secretary L. Armstead Edwards .......... 56 Treasurer (1) Dr. Chappell is the only Executive Officer of the Registrant compensated for her services as such. Dr. Chappell serves as Chairman, President and Chief Executive Officer of the Bank pursuant to a written employment agreement entered into September 13, 1993 and amended as of January 1, 1994 by and among Dr. Chappell, the Bank and United Bancshares, Inc. This employment agreement provides for an employment term ending December 31, 2000 and further provides that Dr. Chappell will receive a guaranteed annual base salary of $150,000. A copy of this employment was filed with Registrant's 1998 Form 10-K and is incorporated herein by reference. The employment agreement was amended effective January 1, 1997 to revise the defined benefit nature of the retirement benefit identified in the contract to a defined contribution retirement obligation. (c) Family Relationships. No family relationships between any director, executive officer or person nominated or chosen by the Bank to become a director or executive officer. (d) Other There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years. 51 ITEM 11 - EXECUTIVE COMPENSATION. COMPENSATION TABLE Name of Individual or Number Capacities in in Group Which Served 1998 Salary 1998 Cash Bonus 1998 Options - --------------------- ----------- --------------- ------------ Emma C. Chairman, President $162,000 $18,000 29,694(1) Chappell Chief Executive Officer 1997 Salary 1997 Cash Bonus ----------- --------------- $162,000 $0 1996 Salary 1996 Cash Bonus ----------- --------------- $162,000 $0 (1) These options to purchase the Registrant's Common Stock at $8.54 per share were issued in December 1998 to replace options that expired in 1998. The options have a five year term. Directors of the Bank are compensated for each meeting attended in the amount of three hundred dollars fifty ($350) per Board meeting attended and one hundred fifty dollars ($150) for each committee meeting attended. Directors who are also salaried officers of the Bank receive no remuneration for their services as Directors. During the year ended December 31, 1996, the Bank paid Directors' fees to its "non-interested" Directors totaling $39,100. UBS has paid no director fees since its inception. 52 Dr. Emma C. Chappell, Chairman of the Board and Chief Executive Officer of the Bank and Registrant since its formation, receives a minimum annual salary of $150,000. A copy of the employment agreement entered into among Dr. Chappell, the Bank and UBS is incorporated hereing by reference. One hundred thousand shares of the Bank's Common Stock are subject to a Long Term Incentive Compensation Plan (the "Plan") under which options to purchase the Bank's Common Stock may be granted to key employees of a price not less than the fair market value thereof at the date of the grant ("Options"), and Common Stock may be awarded as Restricted Stock, subject for a period of time to substantial risk of forfeiture and restrictions on disposition as determined by the Compensation Committee as of the date of the grant ("Restricted Stock"). Pursuant to the Plan, options are granted in tandem with Stock Appreciation Rights allowing the holder of an Option to surrender the Option and receive an amount equal to the appreciation in market value of a fixed number of shares of Common Stock from the date of the grant of the Option ("SARs"). SARs may be payable in Common Stock or cash or a combination of both. The Plan also allows the Compensation Committee to grant Performance Shares, which are contingent rights to receive, when certain performance criteria have been attained, amounts of Common Stock and cash determined by the Compensation Committee for such an award. Such rights are subject to forfeiture or reduction if performance goals specified are not met during the performance period. No such options, restricted stock or SARs were granted for 1998 performance. No deferred compensation, incentive compensation or any further compensation pursuant to any plan has been paid by the Bank, or will be paid by the Bank based on services rendered to the Bank to the date of this filing. At its annual meeting held May 6, 1994, the shareholders of the Registrant approved the establishment of an Employee Stock Ownership Plan ("ESOP"). The ESOP has not been formally activated by the Registrant. No purchases have been made pursuant to the ESOP. 53 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Shareholders Owning in Excess of Five Percent of Registrant's Common Stock Amount of UBS Beneficial Percentage Shareholders Ownership Common Stock - ------------ --------- ------------ First Union Corporation 133,333 14.60% Broad and Chestnut Streets Philadelphia, PA 19101 Greater Philadelphia Urban Affairs Coalition 47,500 5.20% 121 North Broad Street Philadelphia, PA 19107 Philadelphia Municipal 71,667 7.84% Retirement System 2000 Two Penn Center Philadelphia, PA 19102 Directors and Officers of the Bank Shares of Registrant's Common Stock Beneficially Name Owned Percentage - ---- --------- ------------ James F. Bodine 10,833 1.19% S. Amos Brackeen 5,000 .56% Emma C. Chappell(1) 7,000 .77% Luis A. Cortes, Jr. 500 .05% Kemel G. Dawkins 8,333 .91% L. Armstead Edwards 10,833 1.19% Marionette Y. Frazier 9,350 1.02% William C. Green (2) 13,833 1.51% Angela M. Huggins 4,200 .46% William B. Moore 1,000 .11% Ernest L. Wright 5,000 .55% ------ ----- TOTAL 75,882 8.31% ====== ===== 54 (1) Dr. Chappell also acts as Trustee of a voting trust agreement pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS with Dr. Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. Dr. Chappell acts as Trustee of a voting trust agreement pursuant to which NationsBank Corporation deposited 33,500 shares of Common Stock of UBS with Dr. Chappell as Trustee, to be voted by Dr. Chappell pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. Dr. Chappell also owns options to purchase up to 29,694 shares of the common stock of UBS at a purchase price of $8.54 per share . This option was awarded on September 15, 1993 and remains in effect for a term of five years from that date. (2) Owned jointly with Liller B. Green, his wife. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. UNITED BANK OF PHILADELPHIA United Bank of Philadelphia ("UBP") is a Pennsylvania bank subsidiary of Registrant. The Directors of UBP are as follows: PRINCIPAL OCCUPATION YEAR FIRST NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR - ---- --- ------------------- --------------- James F. Bodine ... 77 Retired as Managing 1992 Partner, Urban Affairs Partnership Phila., PA. S. Amos Brackeen ... 80 Founder and Pastor, 1992 Philippian Baptist Church of Phila., PA. Emma C. Chappell ... 54 Founder, Chairman of 1992 the Board, President and CEO of the Bank and Registrant. Luis A. Cortes, Jr... 41 Executive Director 1992 of the Hispanic Clergy of Philadelphia & Vicinity. Kemel G. Dawkins ... 75 President, Kemrodco 1992 Development and Construction Company, Inc., President, Kem-Her Construction Company Inc., Phila., PA. 55 L. Armstead Edwards ... 56 Owner and President, 1992 P.A.Z., Inc., Philadelphia., PA Marionette Y. 54 Partner 1996 Frazier ... John Frazier, Inc. Philadelphia, PA William C. Green .... 74 Co-Founder, Ivy Leaf 1992 Middle School, Philadelphia, PA Angela M. Huggins ... 58 President and CEO 1992 RMS Technologies, Inc. Foundation Moorestown, NJ William B. Moore ... 56 Pastor, Tenth Memorial 1992 Baptist Church, Philadelphia, PA Ernest L. Wright ... 70 Founder, President and 1992 CEO of Ernest L. Wright Construction Company, Phila., PA Each of these officers and directors are officers and directors of the Registrant. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements: December 31, 1998 Report of Independent Auditors, April 9, 1999 Consolidated Balance Sheets at December 31, 1998. Consolidated Statements of Operations for the years ended December 31, 1998. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998. Consolidated Statements of Cash Flows for the years ended December 31, 1998. 56 Notes to Consolidated Financial Statements. Reports on Form 8-K Not Applicable. SIGNATURES UNITED BANCSHARES, INC. BY: ------------------------------- Emma C. Chappell, Chairman, President & CEO - ---------------------------------- James F. Bodine - ---------------------------------- S. Amos Brackeen - ---------------------------------- Emma C. Chappell - ---------------------------------- Luis A. Cortes, Jr. - ---------------------------------- Kemel G. Dawkins - ---------------------------------- L. Armstead Edwards - ---------------------------------- Marionette Y. Frazier - ---------------------------------- William C. Green - ---------------------------------- Angela M. Huggins - ---------------------------------- William B. Moore - ---------------------------------- Ernest L. Wright 57 -----END PRIVACY-ENHANCED MESSAGE-----