-----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, L+SxOD0dZD9SZbyV7ZCMvSx1mYFLUaqT/2y04TBaI7BSaTUWn/Mi3j29DXxQPcfv fetadHxs02WDoBwHAu+XQw== 0001010410-97-000168.txt : 19971117 0001010410-97-000168.hdr.sgml : 19971117 ACCESSION NUMBER: 0001010410-97-000168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE 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-Q SEC ACT: SEC FILE NUMBER: 000-25976 FILM NUMBER: 97720927 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q (Mark One) _X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ UNITED BANCSHARES, INC. ----------------------- (Exact name of registrant as specified in its charter) 0-25976 ------- SEC File Number Pennsylvania 23-2802415 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 714 Market Street, Philadelphia, PA 19106 ----------------------------------- ----- (Address of principal executive office) (Zip Code) (215) 829-2265 -------------- (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes _X_ No____ Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No _____ Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Registrant has two classes of capital stock authorized - 2,000,000 shares of $.01 par value common stock, of which as of October 31, 1997, 816,355 shares were issued and outstanding and 500,000 authorized shares of Series Preferred Stock. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock") of which 93,150 shares were outstanding as of October 31, 1997. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. United Bancshares, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1997 1996 ---- ---- Assets Cash and due from banks 3,215,650 3,544,110 Interest bearing deposits with banks 331,182 320,202 Federal funds sold 11,266,000 5,380,000 ------------ ----------- Cash & cash equivalents 14,812,832 9,244,312 Investment securities: Held-to-maturity, at amortized cost 10,907,717 8,476,638 Available-for-sale, at market value 7,699,635 5,983,461 Loans held for sale, net of unearned discount 4,906,455 Loans, net of unearned discount 64,557,270 64,717,914 Less: allowance for loan losses (472,768) (527,507) ------------ ----------- Net loans 64,084,502 69,096,862 Bank premises & equipment, net 1,883,662 1,788,937 Accrued interest receivable 1,338,476 1,376,416 Deferred branch acquisition cost 95,433 154,475 Prepaid expenses and other assets 714,459 648,300 ============ =========== Total Assets 101,536,716 96,769,401 ============ =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 16,027,463 12,393,256 Demand deposits, interest bearing 15,896,831 13,126,327 Savings deposits 22,462,779 23,484,301 Time deposits, $100,000 and over 10,968,825 14,001,981 Time deposits 26,694,879 25,755,107 ------------ ----------- 92,050,777 88,760,971 Long-term debt 51,546 74,561 Reverse Repurchase Agreement 1,327,091 Accrued interest payable 528,190 525,161 Accrued expenses and other liabilities 558,468 650,040 ------------ ----------- Total Liabilities 94,516,071 90,010,733 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932 500,000 shrs auth., 93,150 issued and outstanding Common stock, $.01 par value; 2,000,000 shares authorized; 820,095 and 816,355 shares issued and outstanding 1997 & 1996, respectively 8,201 8,164 Additional-paid-in-capital 10,383,208 10,348,989 Accumulated deficit (3,465,506) (3,618,692) Net unrealized gain on available-for-sale securities 93,811 19,276 ------------ ----------- Total shareholders' equity 7,020,645 6,758,668 ============ =========== 101,536,716 96,769,401 ============ ===========
United Bancshares, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter ended Quarter ended Nine months ended Nine months ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Interest Income: Interest and fees on loans $1,522,981 $1,398,652 $4,429,595 $4,119,188 Interest on investment securities 293,227 332,502 749,333 751,888 Interest on Federal Funds sold 105,387 56,506 331,380 199,591 Interest on time deposits with other banks 5,614 5,606 21,210 15,306 ---------- ---------- ---------- ---------- Total interest income 1,927,208 1,793,266 5,531,517 5,085,973 Interest Expense: Interest on time deposits 462,499 406,587 1,392,692 1,234,147 Interest on demand deposits 98,714 76,297 266,841 221,089 Interest on savings deposits 115,067 128,631 345,873 380,778 Interest on borrowed funds 15,856 74,913 40,171 77,521 ---------- ---------- ---------- ---------- Total interest expense 692,136 686,428 2,045,577 1,913,535 ---------- ---------- ---------- ---------- Net interest income 1,235,072 1,106,838 3,485,940 3,172,438 Provision for loan losses 30,000 22,500 75,000 62,500 ---------- ---------- ---------- ---------- Net interest income less provision for loan losses 1,205,072 1,084,338 3,410,940 3,109,938 ---------- ---------- ---------- ---------- Noninterest income: Gain on sale of loans 66,106 7,852 186,968 8,140 Customer service fees 302,869 242,270 861,445 651,824 Gain on sale of investments 9,157 Other income 40,844 69,884 109,675 113,549 ---------- ---------- ---------- ---------- Total noninterest income 409,818 320,006 1,158,087 782,670 Non-interest expense Salaries, wages, and employee benefits 600,441 560,818 1,738,734 1,690,275 Occupancy and equipment 267,983 229,549 750,053 633,668 Office operations and supplies 120,313 133,374 366,303 371,892 Marketing and public relations 52,050 38,235 132,044 100,944 Professional services 80,714 53,523 260,843 151,562 Data processing 219,365 247,378 640,008 699,268 Other noninterest expense 209,777 633,082 527,259 969,387 ---------- ---------- ---------- ---------- Total non-interest expense 1,550,643 1,895,959 4,415,244 4,616,996 ========== ========== ========== ========== Net income (loss) $64,247 ($491,615) $153,783 ($724,388) ========== ========== ========== ========== Earnings (loss) per share $0.08 ($0.61) $0.19 ($0.89) ========== ========== ========== ========== Weighted average number of shares 820,095 809,422 820,095 809,422 ========== ========== ========== ==========
United Bancshares, Inc. STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended Nine months ended September 30, September 30, 1997 1996 ---- ---- Cash flows from operating activities Net income (loss) 153,783 (724,984) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 75,000 62,500 Gain (loss) on sale of loans 186,968 (8,140) Depreciation and amortization 403,366 349,836 Realized investment securities loss -- (9,157) Decrease in accrued interest receivable and other assets (28,219) (570,358) Increase (decrease) in accrued interest payable and other liabilities (88,544) 993,418 ----------- ----------- Net cash provided by operating activities 702,354 93,115 Cash flows from investing activities Purchase of investments-Available-for-Sale (3,737,744) (3,504,882) Purchase of investments-Held-to-Maturity (4,562,764) (6,095,331) Proceeds from maturity & principal reductions of investments-Available-for-Sale 1,558,368 1,782,588 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 2,632,719 5,112,809 Proceeds from sale of investment securities-Available-for-Sale -- 4,562,444 Proceeds from sale of loans 4,407,029 -- Net (increase) decrease in loans 343,364 (4,747,670) Purchase of premises and equipment (402,346) (275,099) ----------- ----------- Net cash provided by (used in) investing activities 238,624 (3,165,141) Cash flows from financing activities Net increase (decrease) in deposits 3,289,806 (556,643) Repayments on long term debt (23,015) (21,915) Reverse repurchase agreement 1,327,091 -- Net proceeds from issuance of common stock 33,659 125,260 ----------- ----------- Net cash provided by (used in) financing activities 4,627,541 (453,298) Increase (decrease) in cash and cash equivalents 5,568,519 (3,525,324) Cash and cash equivalents at beginning of period 9,244,312 10,010,743 Cash and cash equivalents at end of period 14,812,831 6,485,419 ============ =========== Supplemental disclosures of cash flow information Cash paid during the period for interest 2,034,530 1,938,666 ============ ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 report. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis. Selected Financial Data The following table sets forth selected financial data for the each of the following periods: (Thousands of dollars, except per share data) Quarter ended Quarter ended September 30, 1997 September 30, 1996 ------------------ ------------------ Net interest income $1,235 $1,107 Provision for loan losses 30 23 Noninterest income 410 320 Noninterest expense 1,551 1,895 Net income (loss) $65 $(492) Earnings (Loss) per share $.08 $(0.61) Balance sheet totals: September 30, 1997 December 31, 1996 ------------------ ----------------- Total assets $101,537 $96,769 Loans, net $ 64,085 $69,097 Investment securities $ 18,607 $14,460 Deposits $ 92,051 $88,761 Shareholders' equity $ 7,021 $ 6,759 Ratios Return on assets .15% (.89)% Return on equity 2.35% (12.02)% Equity to assets ratio 6.53% 7.45% Financial Condition Sources and Uses of Funds The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in the following table indicates how the Bank has managed these elements. Average funding uses increased approximately $942 thousand or .10% during the quarter ending September 30, 1997. Average funding sources increased $624 thousand for the same quarter. Sources and Uses of Funds Trends
September 30, 1997 June 30, 1997 ------------------ ------------- Average Increase (Decrease) Average Balance Amount % Balance ------- ------ ------ ------- Funding uses: Loans $68,750 ($ 240) (.35%) $68,990 Investment securities Held-to-maturity 10,837 868 8.71% 9,969 Available-for-sale 7,053 2,181 44.76% 4,872 Federal funds sold 7,692 (1,867) (19.53%) 9,559 ------- ------- ------- Total uses $94,332 $ 942 $93,282 ======= ======= ======= Funding sources: Demand deposits Noninterest-bearing $17,451 $ 2,340 15.49% $15,111 Interest-bearing 14,924 644 4.51% 14,280 Savings deposits 23,454 57 .25% 23,396 Time deposits 36,834 (2,328) (5.94%) 39,162 Other borrowed funds 1,487 89 (5.65%) 1,576 ------- ------- ------- Total sources $94,150 $ 624 $93,526 ======= ======= =======
Loans Average loans decreased approximately $240 thousand or .35% during the quarter ended September 30, 1997. This decrease was primarily due to the sale of approximately $4.5 million of student loans in September 1997. The proceeds will be used to purchase higher yielding/lower cost to service consumer loans. While there were new loan originations during the quarter, they we offset by paydowns/payoffs in the portfolio. The following table shows the composition of the Bank's loan portfolio by type loan. (Thousands of Dollars) September December 30, 1997 31, 1996 -------- -------- Commercial and industrial $11,688 $10,107 Commercial real estate 1,420 649 Consumer loans 15,984 17,240 Residential mortgages 35,464 36,622 Loans held-for-sale -- 4,906 ------- ------- Total Loans $64,556 $69,624 ======= ======= Residential mortgage loans at September 30, 1997 continue to comprise the greatest percentage of total loans ,representing approximately 55% of the total portfolio. These loans as a percentage of the total portfolio increased during the quarter as a result of the sale of student loans. However, as the Bank moves forward to purchase consumer loans and to originate more commercial loans (primarily SBA guaranteed), this concentration is expected to decrease. Nonperforming and nonaccrual Loans The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be "nonperforming" before the lapse of 90 days. The Bank's policy is to charge-off unsecured loans after 90 days past due. Interest on "nonperforming" loans ceases to accrue except for loans which are well collateralized and in the process of collection. When a loan is placed on non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal of and interest on the loan appears to be available. At September 30, 1997, non-accrual loans were $1 million. Approximately $649 thousand of the total nonaccrual loans were residential mortgages while $297 thousand had SBA guarantees. There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At September 30, 1997, approximately 32.75% 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 September 30, 1997, none of these loans were nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, increased on average by 4.84%, or $1.2 million, during the quarter ended September 30, 1997. The decrease is due to an increase in the Bank's deposits and the September 1997 sale of $4.5 million student loans for which the sale proceeds were temporarily placed in Federal Funds Sold. There are plans to use the loan sale proceeds and other excess liquidity to purchase consumer loans in November 1997. 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. Deposits Non-interest bearing demand deposits increased on average by approximately $2.3 million, or 15.49%, during the quarter ended September 30, 1997. The increase was primarily due to continuous corporate business development efforts which resulted in new large demand deposit accounts. In addition, continued enforcement of compensating balance arrangements with commercial loan borrowers has resulted in additional demand deposits. Other Borrowed Funds The average balance for other borrowed funds decreased $89 thousand, or 5.65%, from June 30, 1997 to September 30, 1997. The decrease is due to the rollover/reduction of a reverse repurchase agreement from $1.5 million to $1.3 million. The level of other borrowed funds is dependent on many items such as capital adequacy, loan growth, deposit growth and interest rates paid on these funds. Commitments and Lines of Credit The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans, and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. The Bank's financial instrument commitments at September 30, 1997 are summarized below: Commitments to extend credit $2,107,206 Outstanding letter of credit $ 109,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Liquidity and Interest Rate Sensitivity Management The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rate. The Bank is required to maintain minimum levels of liquid assets as defined by FRB regulations. This requirement is evaluated in relation to the composition and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. As of September 30, 1997, management believes the Bank's liquidity is satisfactory and in compliance with the FRB regulations. The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Securities maturing in one year or less amounted to $2.3 million at September 30, 1997, representing 12% of the investment portfolio. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $6.4 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large denomination time deposits as well as brokered deposits. The following is a summary of the remaining maturities of time deposits of $100,000 or more outstanding at September 30, 1997: (Thousands of dollars) ---------------------- 3 months or less $ 8,973 Over 3 through 12 months 4,240 Over 1 through five years 200 Over five years 111 ------- Total $13,524 ======= Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to prime or other short term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. The following table sets forth the maturity distribution of the Bank's interest-earning assets and interest-bearing liabilities at September 30, 1997, 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 September 30, 1997, a liability sensitive position is maintained on a cumulative basis through 1 year of -7.01% which is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is primarily due to the high concentration of fixed rate mortgage loans the Bank has in its loan portfolio but is somewhat mitigated by the Bank's high level of core deposits which have been placed in longer repricing intervals. 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 pushed out to longer repricing intervals versus immediate repricing timeframes making the analysis more reflective of the Bank's historical experience. 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. Interest Sensitivity Analysis Interest Rate Sensitivity Gaps As of September 30, 1997
More than More than More than More than More than 0 to 3 3 to 6 6 to 12 1 to 3 3 to 5 5 to 15 More than (Thousands of dollars) months months months years years years 15 years Cumulative ------ ------ ------ ----- ----- ----- -------- ---------- Interest-sensitive assets Time deposits -- 288 43 -- -- -- -- 327 Investment securities: Held-to-maturity 772 -- 2,297 2,501 1,499 3,347 493 10,966 Available-for-sale 4,928 2 649 398 1,402 -- 5,354 Federal funds sold 11,266 -- -- -- -- -- -- 7,845 Loans and leases 20,563 -- 1,408 1,714 1,154 3,243 35,467 67,323 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-sensitive assets 37,529 288 3,750 4,864 3,051 7,992 35,960 91,815 ------- ------- ------- ------- ------- ------- ------- ------- Cumulative totals 37,529 37,817 41,567 46,431 49,482 57,474 93,434 ------- ------- ------- ------- ------- ------- ------- Interest-sensitive liabilities Interest checking accounts 163 488 2,017 3,838 -- -- -- 4,971 Money market accounts 326 978 4,041 7,690 -- -- -- 12,865 Savings accounts 471 1,413 5,840 11,115 -- -- -- 19,519 Certificates of deposit less than $100,000 6,575 7,266 3,999 3,616 2,665 -- -- 38,365 Certificates of deposit more than $100,000 8,973 1,911 2,329 200 -- 111 -- ------- ------- ------- ------- ------- ------- ------- ------- Other borrowings -- -- 1,327 52 -- -- -- 1,581 ------- ------- ------- ------- ------- ------- ------- ------- Total Interest-sensitive liabilities 16,507 12,055 19,552 26,511 2,665 111 -- 77,301 ------- ------- ------- ------- ------- ------- ------- ------- Cumulative totals 16,507 28,563 48,115 74,626 77,291 77,402 77,402 ======= ======= ======= ======= ======= ======= ======= Interest sensitivity gap 21,022 (11,767) (15,802) (21,647) 386 7,881 35,960 ======= ======= ======= ======= ======= ======= ======= Cumulative gap 21,022 9,254 (6,548) (28,195) (27,809) (19,928) 16,032 ======= ======= ======= ======= ======= ======= ======= Cumulative gap/ total earning assets 22.5% 9.90% (7.01%) (30.18) (29.76) (21.33%) 17.16% ======= ======= ======= ======= ======= ======= ======= Interest sensitive assets to interest sensitive liabilities 2.27 .02 .19 .18 1.14 72.00 00 ======= ======= ======= ======= ======= ======= =======
In 1996, banking regulators issued a "Joint Agency Policy Statement: Interest Rate Risk" (FDICIA 305). The agencies agreed that the focus should be on the risk to both net interest income (or net income) as outlined in the table above in the traditional gap analysis and economic (or fair) value of equity. The premise is that changes in interest rates affect a bank's earnings by changing its net interest income and the level of other interest-sensitive income and operating expenses. However, changes in interest rates also affect the underlying economic value of the bank's assets, liabilities and off-balance-sheet instruments because the present value of future cash flows and, in some cases, cash flows themselves, change when interest rates change. The combined effects of the changes in these present values reflect the change in the bank's underlying economic value. At a minimum, this Policy Statement requires that policies and procedures be implemented to determine acceptable levels of interest rate risk exposure, given the Bank's profile and capital position and to monitor and control the Bank's overall interest-rate risk. The regulators did not quantify the impact on capital standards in their policy statement, but left it up to banks to determine their own limits, with a minimum requirement based on exposure to a +/- 200 basis point rate change. The Bank's policies and procedures conform with FDICIA 305 and indicate a limit of 20% as an acceptable fair value equity change in a +/- 200 basis point rate shock environment. Management performs a fair value simulation which demonstrates the fair value of equity increasing 5% if rates decrease 200 basis points and declining 10% if rates increase 200 basis points. This analysis confirms that the Bank has more exposure to increasing rates than to decreasing rates. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest-rate exposure is not considered to be significant and is within the Bank's policy limits at September 30, 1997. However, if significant interest rate risk arises, the Board of Directors and management may take (but are not limited to) one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit (CDs) and movement into money market deposit accounts and short-term CDs through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the Bank's balance sheet. 3. Restructure the Bank's investment portfolio. The Board of Directors has determined that active supervision of the interest-rate spread between yield on earnings assets and cost of funds will decrease the Bank's vulnerability to interest-rate cycles. Capital Resources Total shareholders' equity increased approximately $98 thousand during the quarter ended September 30, 1997. The increase during the quarter was due to internal capital generation in the form of net income of approximately $64 thousand and a $34 thousand increase in the unrealized gain on available-for-sale securities. The Federal Reserve Bank's ("FRB") standards for measuring capital adequacy for U.S. Banking organizations requires that banks maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher risk will require more capital backing than assets with lower risk. In addition, banks are required to maintain capital to support, on a risk-adjusted basis, certain off-balance-sheet activities such as loan commitments. The FRB standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 consists of common shareholders' equity, 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 I capital and a Tier I Leverage ratio of at least 6%. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital. As indicated in the table below, the Bank's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) for sale to the public as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. The Company and the Bank do not anticipate paying dividends in the near future. September 30, December 31, 1997 1996 ---- ---- Tier 1 Capital $ 6,801 $ 6,558 Tier 2 Capital 473 504 ------- ------- Total Qualifying Capital $ 7,274 $ 7,062 ======= ======= Risk Adjusted Total Assets (including off-balance sheet exposures) $44,540 $40,306 Tier 1 Risk-Based Capital Ratio 15.27% 16.27% Tier 2 Risk-Based Capital Ratio 16.33% 17.52% Leverage Ratio 6.70% 7.09% RESULTS OF OPERATIONS Summary The Bank had net income of approximately $64 thousand for the quarter ended September 30, 1997 compared to a loss of $492 thousand for the same quarter in 1996. The improvement in the Bank's earnings performance is primarily attributable to an increase in the Bank's net interest income, an increased level of other noninterest income and a reduction in noninterest expenses (from $1.9 million in 1996 to $1.5 million in 1997). Noninterest expense during the quarter ended September 30, 1996 included a one time FDIC SAIF Special Assessment of approximately $470,000. On a per common share basis, there was an improvement from ($.61) at September 30, 1996 to $.08 at September 30, 1997. Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest earning assets and interest paid on interest-bearing liabilities, is a significant component of the 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 was $1.235 million for the quarter ending September 30, 1997 compared to $1.106 million for the same quarter in 1996. The primary determinant of the increase was the increase in the Bank's average earning assets from $101.5 million at September 30, 1996 to $99.3 million at September 30, 1997. This growth in earning assets is primarily attributable to an increase in average demand deposit balances due to continued corporate business development efforts. The increase in volume of investable funds was primarily used to fund new loan originations and temporary investments in Federal Funds Sold. The Bank's net interest margin has remained relatively constant at approximately 5%. Provision for Loan Losses The Bank adopted Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," effective January 1, 1995. As a result of applying the new rules, certain impaired loans are reported at the present value of expected future cash flows using the loan's initial effective interest rate, or as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. The adoption of these standards did not have a material impact on the Bank's financial position or results of operations. The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The provision for loan losses charged against earnings for the quarter ending September 30, 1997 was $30 thousand, compared with $23 thousand for the quarter ended June 30, 1996. The increase in the provision for the quarter is primarily due to net charge-offs of approximately $61 thousand in the credit card portfolio. However, the composition of the loan portfolio with heavy concentration in residential mortgage loans, purchased or originated commercial SBA loans and student loans results in a portfolio with significantly lower credit risk characteristics due to collateral positions and government guarantees. Noninterest Income The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charge, overdrafts, account analysis, and other customer service fees. Deposit-related noninterest income increased from 1.13% of average total assets to .78% for the quarter ended September 30, 1996 compared to the quarter ended September 30, 1997. The increase is primarily attributable to a continued increase in transactional deposit accounts as a result of the significant corporate business development efforts. In addition, the Bank continues to strongly enforce compensating balance arrangements with its loan customers. In addition, during the quarter ended September 30, 1997, the Bank implemented a $5 surcharge on its "free" checking product if a $100 minimum is not maintained. Noninterest expense Salaries and benefits represented 1.71% and 1.70% of total average assets for the quarters ended September 30, 1997 and 1996, respectively. For the quarter ended September 30, 1997, staffing levels remained relatively constant with some planned attrition and management's concerted effort to minimize new hirings and control personnel expense. Data processing expenses represented .63% and .70% of the total average assets for the quarters ended September 30, 1997 and 1996, respectively. Data processing expenses are a result of the Bank's management decision to out source data processing to third party processors the bulk of its data processing. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, installment and student loan portfolios. The decline in data processing expenses compared to September 30, 1996 is due to the sale of student loans during the quarters ended March 31, 1997 and September 30, 1997 The Bank continues to study methods by which it may reduce its data processing costs, including but not limited to a consolidation of servicers, in-house processing versus out-sourcing, and the possible renegotiation of existing contracts with servicers. Occupancy expense increased approximately $38 thousand for the quarter ended September 30, 1996 compared to the quarter ended September 30, 1997. This increase is primarily attributable to annual escalations in lease payments and maintenance contracts to service the Bank's growing ATM network. All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. Regulatory Matters At September 30, 1997, 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. No material claims have been instituted or threatened by or against Registrant or its affiliates other than in the ordinary course of business. ITEM 2. WORKING CAPITAL RESTRICTIONS ON PAYMENT OF DIVIDENDS. The holders of the Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking Code of 1965, funds available for cash dividend payments by a bank are restricted to accumulated net earnings and if the surplus of a Bank is less than the amount of its capital the Registrant shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of the Registrant for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the bank without prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania. Under the Federal Reserve Act, if a bank has sustained losses up to or exceeding its undivided profits, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Registrant's net profits for that year plus its retained net profits from the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. The Federal Deposit Insurance act generally prohibits all payments of dividends a bank which is in default of any assessment to the Federal Deposit Insurance Corporation. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. (a) There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any material default with respect to any indebtedness of the Registrant exceeding five percent of the total assets of the Registrant. (b) There have been no material arrearage or delinquencies as discussed in Item 3(b). Registrant has declared and issued a Series A Preferred Stock. No obligations pursuant to those securities have become due. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders. ITEM 5. OTHER INFORMATION. BANCSHARES LIMITED OFFERING OF COMMON STOCK AND WARRANTS 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 were 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), will be issued at $12.00 per unit. The warrant exercise price was $8.00 per share for the 1996 Warrant, $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 September 30, 1995. A copy of the Offering Memorandum was filed with the Registrant's periodic report on Form 10-Q for the period ending June 30, 1995 and is incorporated by reference. Pursuant to the exercise of the 1996 Warrants, the Registrant has received offers to purchase an additional 6,942 shares of its common stock at $8.00 per share. These shares were sold pursuant to an exemption from registration contained in section 4(2) of the Act. Pursuant to the exercise of the 1997 Warrants, the Registrant has received offers to purchase an additional 3,667 shares of its common stock at $9.00 per share. These shares were sold pursuant to an exemption from registration contained in section 4(2) of the Act. No underwriters were used and no commission was paid as a result of any warrant exercise. 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. A copy of the Offering Memorandum was filed with the Registrant's periodic report on Form 10-Q for the period ending June 30, 1995 and is incorporated by reference. Beginning May 19, 1997, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock. No shares wer yet sold pursuant to this offering. The stock is offered pursuant to an exemption from registration contained in 4(2) and 3(a)(5) of the Act. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) A list of the exhibits submitted with this Form 10-Q are as follows: Copy of the Registrant's Call Report for the Period ending September 30, 1997 filed with Form SE. (b) Registrant's report on Form 8-K filed October 31, 1997 identifying the change in Registrant's certifying accountant is incorporated herein by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANCSHARES, INC. Date: November 13, 1997 /s/ Emma C. Chappell ------------------------- Emma C. Chappell Chairman, President & CEO EX-27 2 FDS FOR UNITED BANCSHARES, INC. 10-Q
9 1,000 3-MOS DEC-31-1997 JUL-1-1997 SEP-30-1997 3,216 331 11,266 0 7,700 10,908 10,951 64,557 (473) 101,537 92,051 0 2,465 0 0 1 8 7,012 101,537 1,523 293 111 1,927 676 16 1,235 30 0 1,551 64 64 0 0 64 .08 0 8.17 1,009 3,888 0 0 530 93 5 473 473 0 0
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