-----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, OqiQbBXUDJtM4t+Rj7CdGK8mxLydACnHJnQSL3KGAcnUz3MB0B4TEOw7KMmnPght yie9xKQm196cDb13trnLQg== 0001010410-00-000038.txt : 20000524 0001010410-00-000038.hdr.sgml : 20000524 ACCESSION NUMBER: 0001010410-00-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000522 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: 641674 BUSINESS ADDRESS: STREET 1: 300 NORTH THIRD 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 MARCH 31, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ UNITED BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) 0-25976 --------------- SEC File Number PENNSYLVANIA 23-2802415 ------------------------------ --------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 300 NORTH THIRD STREET, PHILADELPHIA, PA 19106 ---------------------------------------- ------------ (Address of principal executive office) (Zip Code) (215) 829-2265 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A ---------------------------------------------------- (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 May 15, 2000, 1,028,793 shares were issued and outstanding and 500,000 authorized shares of Series Preferred Stock. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock") of which 143,150 shares were outstanding as of May 15, 2000. The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment on September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of May 15, 2000, 191,667 shares of Class B Common Stock were issued and outstanding. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. UNITED BANCSHARES, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31, 2000 1999 ---------- ----------- Assets Cash and due from banks 4,755,981 9,396,669 Interest bearing deposits with banks 369,600 365,547 Federal funds sold 4,869,000 7,158,000 ----------- ----------- Cash & cash equivalents 9,994,581 16,920,216 Investment securities: Held-to-maturity, at amortized cost 34,341,549 32,303,774 Available-for-sale, at market value 20,350,393 19,129,535 Loans, net of unearned discount 61,587,056 61,010,995 Less: allowance for loan losses (1,200,170) (1,566,642) ----------- ----------- Net loans 60,386,886 59,444,353 Bank premises & equipment, net 3,789,085 3,825,321 Accrued interest receivable 1,550,874 1,221,679 Other real estate owned 442,596 397,641 Core Deposit Intangible 2,387,647 2,428,524 Prepaid expenses and other assets 1,730,002 1,578,036 ----------- ----------- Total Assets 134,973,613 137,249,079 =========== =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 27,227,352 26,206,218 Demand deposits, interest bearing 27,662,685 29,119,779 Savings deposits 33,784,114 33,342,400 Time deposits, $100,000 and over 12,481,605 12,633,964 Time deposits 22,236,451 23,464,035 ----------- ----------- 123,392,207 124,766,396 Obligations under capital leases 1,437,025 1,444,607 Accrued interest payable 484,311 600,546 Accrued expenses and other liabilities 1,173,487 1,410,214 ----------- ----------- Total Liabilities 126,487,030 128,221,763 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 500,000 shrs auth., 1,432 1,432 143,150 issued and outstanding Common stock, $.01 par value; 2,000,000 shares authorized; 1,028,753 shares issued and outstanding at March 31 and December 31, 1999, respectively 10,288 10,288 Additional-paid-in-capital 13,870,169 13,870,169 Accumulated deficit (5,030,142) (4,658,391) Net unrealized gain on available-for-sale securities (365,164) (196,183) ----------- ----------- Total Shareholders' equity 8,486,584 9,027,315 ----------- ----------- 134,973,613 137,249,079 =========== ===========
3 UNITED BANCSHARES, INC. STATEMENT OF OPERATIONS (UNAUDITED)
Quarter ended Quarter ended March 31, March 31, 2000 1999 ------------ ------------ Interest Income: Interest and fees on loans $1,240,082 1,457,658 Interest on investment securities 908,624 420,520 Interest on Federal Funds sold 136,888 130,723 Interest on time deposits with other banks 4,053 4,304 ---------- ---------- Total interest income 2,289,647 2,013,205 Interest Expense: Interest on time deposits 434,762 425,255 Interest on demand deposits 200,352 142,924 Interest on savings deposits 136,276 95,883 Interest on borrowed funds 72,105 19,053 ---------- ---------- Total interest expense 843,495 683,115 Net interest income 1,446,152 1,330,090 Provision for loan losses 90,000 65,000 ---------- ---------- Net interest income less provision for loan losses 1,356,152 1,265,090 ---------- ---------- Non-interest income: Gain on sale of loans 0 3,888 Customer service fees 563,590 395,938 Other income 90,492 34,499 ---------- ---------- Total noninterest income 654,082 434,325 Non-interest expense Salaries, wages, and employee benefits 917,792 674,256 Occupancy and equipment 441,046 311,373 Office operations and supplies 225,549 127,437 Marketing and public relations 57,488 66,282 Professional services 168,138 72,793 Data processing 253,768 221,947 Deposit insurance assessments 17,110 21,110 Other non-interest expense 301,093 168,772 ---------- ---------- Total non-interest expense 2,381,985 1,663,970 ---------- ---------- Net income (loss) ($ 371,751) 35,445 ========== ========== Earnings per share-basic ($0.36) $0.04 Earnings per share-diluted ($0.36) $0.04 ========== ========== Weighted average number of shares 1,028,753 937,101 ========== ==========
4 United Bancshares, Inc. Statements of Cash Flows (Unaudited)
3 months ended 3 months ended March 31 March 31 2000 1999 -------- ---------- Cash flows from operating activities Net income (loss) ($ 371,751) 35,445 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 90,000 65,000 Gain on sale of loans 0 (3,888) Depreciation and amortization 248,213 139,390 Realized investment securities (gains) losses 0 0 Proceeds from sale of student loans 0 0 (Decrease) increase in accrued interest receivable and other assets (526,116) 583,306 (Decrease) increase in accrued interest payable and other liabilites (352,963) 144,376 ------------ ------------ Net cash provided by operating activities (912,617) 963,629 Cash flows from investing activities Purchase of investments -- Available-for-Sale (1,650,445) 0 Purchase of investments -- Held-to-Maturity (2,442,143) 0 Proceeds from maturity & principal reductions of investments -- Available-for-Sale 230,198 778,827 Proceeds from maturity & principal reductions of investments -- Held-to-Maturity 384,368 21,053,641 Net (increase) decrease in loans (1,032,533) 3,778,064 Purchase of premises and equipment (148,274) (21,982,333) Capital Leases 0 (106,502) ------------ ------------ Net cash provided by (used in) investing activities (4,638,829) 3,521,697 Cash flows from financing activities Net increase (decrease) in deposits (1,374,189) (3,798,074) Repayments on long term debt 0 (8,376) Reverse repurchase agreement 0 (1,557,755) Net proceeds from issuance of common stock 0 1,000,000 ------------ ------------ Net cash provided by (used in) financing activities (1,374,189) (4,364,205) Increase (decrease) in cash and cash equivalents (6,925,635) 121,122 Cash and cash equivalents at beginning of period 16,920,216 16,343,034 Cash and cash equivalents at end of period $ 9,994,581 $ 16,464,156 ============ ============ Supplemental disclosures of cash flow information Cash paid during the period for interest $ 799,660 $ 682,892 ============ ============
5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted in favor of the formation of a bank holding company, United Bancshares, Inc. (the Company). Accordingly, in October 1994 the Company became a bank holding company in conjunction with the issuance of its common shares in exchange for the common shares of the Bank. The financial statements are prepared on a consolidated basis to include the accounts of the Company and the Bank. The purpose of this discussion is to focus on information about the Bank's financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included in this annual report. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis. Selected Financial Data The following table sets forth selected financial data for the each of the following periods: (Thousands of dollars, Quarter Quarter except per share data) ended March ended March 31, 2000 31, 1999 ----------- ----------- Net interest income $ 1,356 $ 1,265 Provision for loan losses 90 65 Noninterest income 654 434 Noninterest expense 2,382 1,664 Net income (loss) ($ 372) $ 35 Earnings per share-basic ($ 0.36) $ .04 and diluted Balance sheet totals: March 31, December 31, 2000 1999 ----------- ----------- Total assets $ 134,974 $ 137,249 Loans, net $ 60,387 $ 59,444 Investment securities $ 54,692 $ 51,433 Deposits $ 123,392 $ 124,766 Shareholders' equity $ 8,487 $ 9,027 Ratios Return on assets (1.05)% (1.03)% Return on equity (17.36)% (12.71)% Equity to assets ratio 7.37% 8.08% Financial Condition Sources and Uses of Funds The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in the following table indicates how the Bank has managed these elements. Average funding sources increased approximately $1.4 million, or 1.28%, during the quarter ending March 31, 2000. Average funding uses decreased $6.4 million, or 4.91%, for the same quarter. 6 Sources and Uses of Funds Trends
March 31, 2000 December 31, 1999 Average Increase (Decrease) Average Balance Amount % Balance - -------------------------------------------------------------------------------------------------------- Funding uses: Loans $ 61,707 ($ 1,372) (2.18)% $ 63,079 Investment securities Held-to-maturity 32,685 (966) (2.87) 33,651 Available-for-sale 19,251 5,277 37.76 13,974 Federal funds sold 9,656 (9,305) (49.07) 18,961 -------- -------- -------- Total uses $123,299 ($ 6,366) $129,665 ======== ======== ======== Funding sources: Demand deposits Noninterest-bearing $ 30,892 ($ 1,000) (3.14)% $ 31,892 Interest-bearing 14,073 1,527 12.17 12,546 Savings deposits 32,015 158 .50 31,857 Time deposits 35,859 839 2.40 35,020 Other borrowed funds 1,369 (86) (5.91)% 1,455 -------- -------- -------- Total sources $114,208 $ 1,438 $112,770 ======== ======== ========
Loans Average loans decreased approximately $1.4 million, or 2.18%, during the quarter ended March 31, 2000. This decrease was primarily due to repayments in the automobile loan portfolio that was purchased in February 1999. Paydowns in this portfolio are averaging $800 thousand per month. In addition, prepayments in the mortgage loan portfolio continue as consumers rush to refinance existing loans or sell existing homes to purchase new homes in anticipation of further interest rate hikes. The following table shows the composition of the Bank's loan portfolio by type of loan. (Thousands of Dollars) March 31, December 31, 2000 1999 ------- ------- Commercial and industrial $14,659 $13,664 Commercial real estate 1,077 1,288 Consumer loans 19,786 19,822 Residential mortgages 26,065 26,237 ------- ------- Total Loans $61,587 $61,011 ======= ======= Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. The following Table presents an analysis of the allowance for loan losses. 7 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) Balance at January 1, 2000 $1,566 Charge-offs: Commercial and industrial 28 Commercial real estate 150 Residential mortgages 22 Consumer loans 273 ----- Total charge-offs 473 ===== Recoveries 17 Net charge-offs 456 Additions charged to operations 90 ----- Balance at March 31, 2000 1,200 ===== The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses. The allowance for loan losses as a percentage of total loans was 1.95% at March 31, 2000. At December 31, 1999, a provision of $330,000 was made to the allowance for loan losses for one community-related loan. In addition, the Bank revised its loan policy to increase its allowance for uncertainties in loans classified as "Satisfactory" and to charge-off all consumer loans greater than 120 days delinquent despite the level of collateral. It will perform post-charge-off collections to recover these charge-offs. A work-out attorney has been engaged to aggressively pursue collections. Management believes the level of the allowance for loan losses was adequate as of March 31, 2000. While management uses available information to recognize losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination. Nonperforming and nonaccrual Loans The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be "nonperforming" before the lapse of 90 days. The policy of the Bank is to charge-off unsecured loans after 90 days past due. Interest on "nonperforming" loans ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal of and interest on the loan appears to be available. At March 31, 2000, non-accrual loans were $2 million--approximately $409 thousand were residential mortgage loans; approximately $700 thousand related to one community development loan in the Bank's commercial loan portfolio; and, the remainder consisted primarily of loans with SBA guarantees. Management has hired a work-out attorney to develop "exit" strategies relative to the community development loan which may include such things as the sale of the project and/or proceeding to collect against the underlying collateral associated with this loan. There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. 8 The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. From time to time, the Bank purchases loans from other financial institutions. These loans are generally located in the Northeast corridor of the United States. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At March 31, 2000, approximately 28.3% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. From inception, the Bank has received support in the form of investments and deposits and has developed strong relationships with the Philadelphia region's religious community. Loans made to these organizations were primarily for expansion and repair of church facilities. At March 31, 2000, none of these loans were nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, decreased on average by $5 million, or 7.50%, during the quarter ended March 31, 2000. The decrease is due to the decline in average deposit levels during the quarter. On September 24, 1999, the Bank purchased branches with deposits totaling $31 million from First Union of which approximately $10 million ran off as anticipated. The Bank's investment portfolio primarily consists of mortgage-backed pass-through agency securities, U.S. Treasury securities, and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. The average duration of the portfolio is 5.23 years. Deposits On September 24, 1999, the Bank purchased four branches with total deposits of $31 million at a premium of $2.1 million, or 7%. As projected, there was a decline of approximately $10 million from September 1999 to March 31, 2000. The bulk of the acquired deposits are "core"--primarily checking and savings accounts. The Bank consolidated 2 of the acquired branches into its existing branch network and will consolidate the other 2 by September 1, 2000. Non-interest bearing demand deposits decreased on average by approximately $1 million, or 3.14%, during the quarter ended March 31, 2000. Interest bearing demand deposits increased on average by approximately $1.5 million, or 12.17%, during the same quarter. The increase was primarily an increase in the level of sweep deposit balances--balances swept from a noninterest-bearing checking account to an interest-bearing (NOW) account overnight. Other Borrowed Funds The level of other borrowed funds is dependent on many items such as capital adequacy, loan growth, deposit growth and interest rates paid on these funds. The Bank's borrowed funds principally consist of a $1.5 million capital lease obligation related to the Bank's lease of a building for its corporate offices in July 1999. 9 Commitments and Lines of Credit The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans, and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. The Bank's financial instrument commitments at March 31, 2000 are summarized below: Commitments to extend credit $6,802 Outstanding letter of credit $ 259 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Liquidity and Interest Rate Sensitivity Management The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rate. The Bank is required to maintain minimum levels of liquid assets as defined by FRB regulations. This requirement is evaluated in relation to the composition and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. As of March 31, 2000, management believes the Bank's liquidity is satisfactory and in compliance with the FRB regulations. The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $5.3 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large denomination time deposits as well as brokered deposits. 10 The following is a summary of the remaining maturities of time deposits of $100,000 or more outstanding at March 31, 2000: (Thousands of dollars) 3 months or less $ 2,461 Over 3 through 12 months 9,588 Over 1 through three years 303 Over three years 130 ------- Total $12,482 ======= Capital Resources Total shareholders' equity decreased approximately $540 thousand during the quarter ended March 31, 2000 primarily because of a $372 thousand loss incurred by the Bank during the quarter. As of March 31, 2000, the Bank has an outstanding equity investment commitment totaling $3 million from the U.S. Treasury Community Development Financial Institution Fund. The funding of this equity is contingent upon satisfactory compliance with the Written Agreement the Bank entered into with its primary regulators. (Refer to Regulatory Matters below) The Federal Reserve Bank's ("FRB") standards for measuring capital adequacy for U.S. Banking organizations requires that banks maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher risk will require more capital backing than assets with lower risk. In addition, banks are required to maintain capital to support, on a risk-adjusted basis, certain off-balance-sheet activities such as loan commitments. The FRB standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 consists of common shareholders' equity, non-cumulative and cumulative perpetual preferred stock, and minority interests less goodwill. Tier 2 capital consists of allowance for loan losses, hybrid capital instruments, term-subordinated debt, and intermediate-term preferred stock. Banks are required to meet a minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at least 4% Tier 1 capital and a Tier I Leverage ratio of at least 6%. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital. As indicated in the table below, the Bank's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) for sale to the public as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. The Company and the Bank do not anticipate paying dividends in the near future.
March 31, 2000 December 31, 1999 -------------- ----------------- Total Capital $ 8,832 $ 9,223 Less: Intangible Assets (2,388) (2,429) -------- -------- Tier 1 Capital 6,444 6,794 -------- -------- Tier 2 Capital 769 770 -------- -------- Total Qualifying Capital $ 7,213 $ 7,564 ======== ======== Risk Adjusted Total Assets (including off-balance sheet exposures) $ 60,571 $ 60,795 Tier 1 Risk-Based Capital Ratio 10.64% 11.18% Tier 2 Risk-Based Capital Ratio 11.91% 12.44% Leverage Ratio 4.64% 5.08%
The most recent notification dated February 10, 2000, from the Federal Reserve Bank categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. The Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. 11 Results of Operations Summary The Bank had a net loss of approximately $372 thousand ($.36 per common share) for the quarter ended March 31, 2000 compared to net income of $35 thousand ($.04 per common share) for the same quarter in 1999. The decline in earnings is primarily related to higher noninterest expense due to the operation of 8 branches compared to 6 in 1999, the lease of a new corporate headquarters in August 1999, and an increase in professional fees associated with the Bank's Written Agreement (refer to Regulatory Matters below). Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest earning assets and interest paid on interest-bearing liabilities, is a significant component of the earnings of the Bank. Changes in net interest income result primarily from increases or decreases in the average balances of interest earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income increased $76 thousand, or 9%, for the quarter ended March 31, 2000 compared to 1999. The increase was primarily attributable to an increase in average earning assets because of the acquisition of $31 million in deposits from First Union in September 1999. These deposits were deployed in investment securities to yield a minimum of 7%. Provision for Loan Losses The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The provision for loan losses charged against earnings for the quarter ending March 31, 2000 was $90 thousand compared to $65 thousand for the same quarter in 1999. Significant provisions in excess of $1 million were made for the year ended December 31, 1999 related to one community development loan and other loan policy changes which required increased provisions. Noninterest Income The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charge, overdrafts, account analysis, and other customer service fees. Customer service fees increased $168 thousand, or 42%, for the quarter primarily due to growth in fees on deposits because of an increase in the level of demand deposit accounts which result in more overdraft fees, activity service charges and low balance fees. In addition, the Bank increased its ATM surcharge fees for non-customers from $1.00 to $1.50 in April 1999 and installed three additional ATM machines. Salaries and benefits increased $244 thousand, or 36%, during the quarter ended March 31, 2000 compared to 1999. This increase is primarily attributable to raises for employees as well as filling unfilled staff positions and additional employees related to the acquisition of deposits/branches from First Union in September 1999. 12 Data processing expenses are a result of the management decision of the Bank to out source data processing to third party processors the bulk of its data processing. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, installment and student loan portfolios. Data processing expenses increased $31 thousand, or 14%, during the quarter ended March 31, 2000 compared to 1999. This increase is primarily attributable to the First Union acquisition-related growth in deposit levels for which the Bank pays an outside servicer to process transactions and provide statement rendering. The Bank continues to study methods by which it may reduce its data processing costs, including but not limited to a consolidation of servicers, in-house processing versus out-sourcing, and the possible re-negotiation of existing contracts with servicers. Occupancy expense increased approximately $130 thousand, or 42%, because of a lease the Bank entered into in July 1999 to house its corporate headquarters including its executive offices and other non-branch operating departments. The Bank currently leases 25,000 square feet at an average cost of $14.14 per foot. It has entered into subleases with two other affiliated entities for approximately 4,000 square feet. In accordance with Financial Accounting Standards Board Statement 13, this lease has been accounted for as a capital lease in the amount of $1,483,000 as the present value of future minimum lease payments exceeds 90% of the fair market value of the building. In addition, in conjunction with its acquisition of deposits from First Union, the Bank assumed the leases of four branches, two of which were in close proximity to its existing branches. Due to more favorable characteristics of these branches (i.e. visibility, drive-through, ATM's, etc.), the Bank relocated its branch operations to the acquired facilities. These facilities have higher rental rates. The Bank plans to consolidate two of the acquired branches with its existing branch network by September 2000. Professional Services increased approximately $95 thousand, or 131%, for the quarter ended March 31, 2000 compared to 1999. This increase is primarily attributable to consulting fees and legal fees related to the compliance with the Written Agreement the Bank entered into with its primary regulators (Refer to Regulatory Matters below). Office operations and supplies expense increased by $98 thousand, or 77%, for the quarter-ended march 31, 2000 compared to 1999. This increase was primarily a result the acquisition of branches from First Union and the relocation of corporate headquarters. In addition, the growth in the ATM network resulted in an increase in ATM-related supplies (i.e. ribbons, paper receipts, etc.). All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. 13 Regulatory Matters In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (Agreement) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The currents Agreement required the Bank to achieve a Tier 1 leverage ratio of 6.50% by June 30, 2000 and 7% at all times thereafter. To achieve this capital ratio Management has developed plans that include: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management has begun to address all matters outlined in the Agreement and expects to be in full compliance with its terms and conditions within the required timelines. Failure to comply could result in additional regulatory supervision and/or actions. The Bank continues to operate under a Supervisory Letter from its primary regulator. The Supervisory Letter, among other things, prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and the Company from issuing debt. Accounting for Derivative Instruments and Hedging Activity In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. Subsequent to this statement, SFAS No 137 was issued, which amended the effective date of SFAS No. 133 to be all fiscal years beginning after June 15, 2000. Based on the Company's minimal use of derivatives at the current time, management does not anticipate the adoption of SFAS No. 133 will have a significant impact on earnings or financial position of the Company. However, the impact from adopting SFAS No. 133 will depend on the nature and purpose of the derivative instruments in use by the Company at that time. Year 2000 The Bank was successfully prepared for the Year 2000 potential problems that could have resulted from computer programs being written using two digits rather than four to define the applicable year. This could have resulted in major system failures or miscalculations. The Company completed a comprehensive review of its computer systems, both internal and outsourced processing, to identify the systems that could be affected by the "Year 2000" issue. Where necessary, software and hardware were replaced/remediated. As a result, there were no reportable events or exceptions related to the Year 2000. However, while not expected, there can be no assurance that the Company will not experience any problems in the future. If any problems were to occur in the future, the Company will follow its contingency plan. 14 Cautionary Statement Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based upon various assumptions (some of which are beyond the control of the Bank and the Company), may be identified by reference to a future period, or periods, or by the use of forward-looking terminology such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, economic growth; governmental monetary policy, including interest rate policies of the FRB; sources and costs of funds; levels of interest rates; inflation rates; market capital spending; technological change; the state of the securities and capital markets; acquisition; consumer spending and savings; expense levels; tax, securities, and banking laws; and prospective legislation. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to prime or other short term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. At March 31, 2000, an asset sensitive position is maintained on a cumulative basis through 1 year of 4.98% that is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is primarily due to the high level of core deposits which have been placed in longer repricing intervals. Generally, because of the Bank's positive gap position in shorter time frames, the Bank can anticipate that decreases in market rates will have a negative impact on the net interest income, while increases will have the opposite effect. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a negative gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the Bank's net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance-sheet instruments. The calculated estimates of changes in market value of portfolio value at March 31, 2000 are as follows: 15 Market value of Changes in rate portfolio equity --------------- ---------------- (Dollars in thousands) +400 basis points $ (9,369) +300 basis points (5,765) +200 basis points (2,092) +100 basis points 1,680 Flat rate 5,532 -100 basis points 9,373 -200 basis points 12,944 -300 basis points 16,433 -400 basis points 19,991 The assumptions used in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Company's assets and liabilities, as well as the estimated effect of changes in interest rates on the market value of portfolio equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest-rate exposure is not considered to be significant and is within the Bank's policy limits at March 31, 2000. However, if significant interest rate risk arises, the Board of Directors and management may take (but are not limited to) one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit (CDs) and movement into money market deposit accounts and short-term CDs through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the Bank's balance sheet. 3. Restructure the Bank's investment portfolio. The Board of Directors has determined that active supervision of the interest-rate spread between yield on earnings assets and cost of funds will decrease the Bank's vulnerability to interest-rate cycles. 16 Item 3 PART II - OTHER INFORMATION Item 1. Legal Proceedings. A complaint has been filed by the investors of a depositor, Monument Financial Group, naming the Bank as a party. The complaint filed in the Court of Common Pleas of Philadelphia County. The investors allege that, as a result of the actions of the Bank in permitting the processing of certain checks in what plaintiffs assert was an improper manner, the depositor was unable to pay certain obligations to the plaintiffs. The complaint seeks damages in excess of $400,000. The Bank has defenses to the allegations raised in the complaint. Based upon these allegations, the Bank believes that it is not liable. In addition, the Bank has insurance that will cover any loss, including costs of defense, in excess of a $50,000 deductible. No other material claims have been instituted or threatened by or against Registrant or its affiliates other than in the ordinary course of business. Item 2. Working Capital Restrictions on Payment of Dividends. The holders of the Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking Code of 1965, funds available for cash dividend payments by a bank are restricted to accumulated net earnings and if the surplus of a Bank is less than the amount of its capital the Registrant shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of the Registrant for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the bank without prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania. Under the Federal Reserve Act, if a bank has sustained losses up to or exceeding its undivided profits, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Registrant's net profits for that year plus its retained net profits from the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. The Federal Deposit Insurance act generally prohibits all payments of dividends a bank which is in default of any assessment to the Federal Deposit Insurance Corporation. 17 Recent Sales of Securities There have been no sales of securities by the Registrant not reported in its 1999 From 10-K. Item 3. Defaults Upon Senior Securities. (a) There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any material default with respect to any indebtedness of the Registrant exceeding five percent of the total assets of the Registrant. (b) There have been no material arrearage or delinquencies as discussed in Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No obligations pursuant to those securities have become due. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) A list of the exhibits submitted with this Form 10-Q are as follows: (12) statement re: computation of earnings per share Copy of the Registrant's Call Report for the Period ending September 30, 1999. [Filed with Schedule SE] Lease between United Bank of Philadelphia and ECC Properties, LLC [Filed with Schedule SE] (27) financial data schedule Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANCSHARES, INC. Date: May __, 2000 /s/ Emma C. Chappell ------------------------------ Emma C. Chappell Chairman, President & CEO /s/ Brenda Hudson-Nelson ------------------------------ Brenda Hudson-Nelson Controller 18 EX-27 2 FDS FOR UNITED BANCSHARES, INC. 10-Q
9 1,000 3-mos dec-31-1999 jan-1-2000 mar-31-2000 4,756 370 4,869 0 20,350 34,341 20,350 61,587 (1,200) 134,974 123,392 0 3,095 0 0 1 10 8,475 134,974 1,240 909 137 2,290 771 843 1,446 90 0 2,382 (372) 0 0 0 (372) (.36) (.36) 0 1,958 3,837 0 0 1,566 473 17 1,200 1,200 0 0
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