-----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, RFGjmRezY8ka6IrO6C/Eyd30jnNBO2uwp9kPCpok0z87FFiDFyGWIZRULzZE/jIp zckkjStiCXk95JOX0xUmJw== 0001010410-97-000087.txt : 19970520 0001010410-97-000087.hdr.sgml : 19970520 ACCESSION NUMBER: 0001010410-97-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 23280415 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25976 FILM NUMBER: 97609758 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 MARCH 31, 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 April 30, 1997, 818,555 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 April 30, 1997. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. United Bancshares, Inc. Statements of Condition (unaudited)
March 31, December 31, 1997 1996 ---- ---- Assets Cash and due from banks 5,570,512 3,544,110 Interest bearing deposits with banks 323,822 320,202 Federal funds sold 9,172,000 5,380,000 ----------- ---------- Cash & cash equivalents 15,066,334 9,244,312 Investment securities: Held-to-maturity, at amortized cost 9,959,417 8,476,638 Available-for-sale, at market value 5,010,840 5,983,461 Loans held for sale, net of unearned discount 0 4,906,455 Loans, net of unearned discount 67,335,345 64,717,914 Less: allowance for loan losses (551,291) (527,507) ----------- ---------- Net loans 66,784,054 69,096,862 Bank premises & equipment, net 1,876,336 1,788,937 Accrued interest receivable 1,339,510 1,376,416 Deferred branch acquisition cost 134,795 154,475 Prepaid expenses and other assets 702,907 648,300 ----------- ---------- Total Assets 100,874,193 96,769,401 =========== ========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 13,941,269 12,393,256 Demand deposits, interest bearing 14,678,354 13,126,327 Savings deposits 23,442,902 23,484,301 Time deposits, $100,000 and over 13,986,579 14,001,981 Time deposits 25,219,788 25,755,107 ----------- ---------- 91,268,892 88,760,971 Long-term debt 66,851 74,561 Reverse Repurchase Agreement 1,506,732 0 Accrued interest payable 507,764 525,161 Accrued expenses and other liabilities 704,935 650,040 ----------- ---------- Total Liabilities 94,055,174 90,010,733 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932 500,000 shrs auth., 80,650 & 93,150 issued & o/s '95 & '96 respectively Common stock, $.01 par value; 2,000,000 shares authorized; 816,355 issued and outstanding 8,164 8,164 Additional-paid-in-capital 10,349,585 10,348,989 Accumulated deficit (3,554,650) (3,618,692) Net unrealized gain on AFS securities 14,989 19,276 ----------- ---------- Total shareholders' equity 6,819,019 6,758,668 ----------- ---------- 100,874,193 96,769,401 =========== ==========
United Bancshares Statements of Operations (unaudited)
Quarter ended Quarter ended March 31, March 31, 1997 1996 ---- ---- Interest Income: Interest and fees on loans 1,439,992 $ 1,354,882 Interest on investment securities 218,753 217,598 Interest on Federal Funds sold 89,751 60,703 Interest on time deposits with other banks 6,172 4,923 --------- --------- Total interest income 1,754,668 1,638,106 Interest Expense: Interest on time deposits 464,816 421,024 Interest on demand deposits 76,400 71,017 Interest on savings deposits 115,803 124,538 Interest on borrowed funds 7,588 1,334 --------- --------- Total interest expense 664,607 617,914 Net interest income 1,090,061 1,020,192 Provision for loan losses 22,500 17,500 --------- --------- Net interest income less provision for loan losses 1,067,561 1,002,692 --------- --------- Noninterest income: Gain on sale of loans 115,652 288 Customer service fees 264,114 180,506 Gain (loss) on sale of investments 0 9,157 Other income 25,197 15,477 --------- --------- Total noninterest income 404,963 205,428 Non-interest expense Salaries, wages, and employee benefits 573,018 568,349 Occupancy and equipment 244,951 199,544 Office operations & supplies 118,448 112,705 Marketing & public relations 22,988 16,116 Professional services 86,766 49,894 Data processing 206,502 209,453 Other noninterest expense 155,213 164,566 --------- --------- Total non-interest expense 1,407,885 1,320,627 --------- --------- Net income (loss) 64,639 $ (112,507) ========= ========= Earnings (loss) per share $0.08 $(0.14) ========= ========= Weighted average number of shares 816,355 802,480 ========= =========
United Bancshares, Inc. Statements of Cash Flows (unaudited)
Three months ended Three months ended March 31, March 31, 1997 1996 ----------------------------------------- Cash flows from operating activities Net income (loss) 64,638 (113,103) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 22,500 17,500 Gain on sale of loans 115,652 (289) Depreciation and amortization 141,694 108,729 Realized investment securities gains -- (9,157) Increase in accrued interest receivable and other assets (17,701) (22,356) Increase (decrease) in accrued interest payable and other liabilities 37,498 (17,370) ---------- --------- Net cash provided by (used in) operating activities 364,281 (36,045) Cash flows from investing activities Purchase of investments-Available-for-Sale (1,052) (4,602,815) Purchase of investments-Held-to-Maturity (2,499,219) -- Proceeds from maturity & principal reductions of investments-Available-for-Sale 946,256 606,577 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 1,020,338 2,004,622 Proceeds from sale of investment securities-Available-for-Sale -- 4,562,444 Proceeds from sale of loans 5,110,843 -- Net increase in loans (2,936,187) (1,708,088) Purchase of premises and equipment (190,181) (153,586) ---------- --------- Net cash provided by (used in) investing activities 1,450,799 709,153 Cash flows from financing activities Net increase (decrease) in deposits 2,507,921 (2,342,765) Repayments on long term debt (7,710) (7,231) Reverse repurchase agreement 1,506,732 -- ---------- --------- Net cash provided by (used in) financing activities 4,006,943 (2,349,996) Increase (decrease) in cash and cash equivalents 5,822,022 (1,676,888) Cash and cash equivalents at beginning of period 9,244,312 10,825,547 Cash and cash equivalents at end of period 15,066,334 9,148,659 ---------- --------- Supplemental disclosures of cash flow information Cash paid during the period for interest 676,231 612,921 ---------- ---------
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, Quarter ended Quarter ended except per share data) March 31, 1997 March 31, 1996 -------------- -------------- Net interest income $1,090 $1,020 Provision for loan losses 23 18 Noninterest income 405 205 Noninterest expense 1,408 1,321 Net income (loss) $65 $(113) Earnings (Loss) per share $.08 $(0.14) Balance sheet totals: March 31, 1997 December 31, 1996 ------------- ----------------- Total assets $100,874 $96,769 Loans, net $66,784 $69,097 Investment securities $14,970 $14,460 Deposits $91,269 $88,761 Shareholders' equity $6,819 $6,759 Ratios Return on assets .07% (.89)% Return on equity .99% (12.02)% Equity to assets ratio 6.57% 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 $7.3 million or 7.78% during the quarter ending March 31, 1997. Average funding sources decreased less than $1 thousand for the same quarter. Sources and Uses of Funds Trends
March 31, 1997 -------------- December 31, 1996 Increase (Decrease) ----------------- Average ------------------- Average Balance Amount % Balance ------- ------ ----- ------- Funding uses: Loans $68,657 $4,414 6.24% $65,243 Investment securities Held-to-maturity 8,993 883 (17.12%) 8,110 Available-for-sale 5,566 (2,753) (9.06%) 8,319 Federal funds sold 9,065 4,715 39.75% 4,350 ------- ------ ------- Total uses $93,282 $7,260 $86,022 ======= ====== ======= Funding sources: Demand deposits Noninterest-bearing $12,693 $1,496 19.36% $11,197 Interest-bearing 12,598 (474) 4.47% 13,072 Savings deposits 23,389 (657) 2.08% 24,046 Time deposits 35,302 496 (.90%) 34,806 Other borrowed funds 736 (1,085) (14.12%) 1,821 ------- ------ ------- Total sources $84,717 $ (225) $84,942 ======= ====== =======
Loans Average loans increased approximately $4.4 million or 6.24% during the quarter ended March 31, 1997. This increase was primarily due the origination of approximately $1.5 million in commercial loans during the quarter. Student loan fundings also increased by approximately $1 million during the quarter. However, in February 1997, the Bank sold approximately $4.9 million of its student loan proceeds and will use the proceeds to fund higher yielding commercial loans. Residential mortgage loans have remained relatively constant with new originations covering pay-offs/paydowns. The following table shows the composition of the Bank's loan portfolio by type loan. (Thousands of Dollars) March 31, December 31, 1997 1996 ---- ---- Commercial and industrial $10,485 $10,107 Commercial real estate 1,526 649 Consumer loans 18,740 17,240 Residential mortgages 36,584 36,622 Loans held-for-sale -- 4,906 ------- ------- Total Loans $67,335 $69,624 ======= ======= Residential mortgage loans at March 31, 1997 comprise the greatest percentage of total loans representing approximately 54.3% of total loans However, these loans as a percentage of the total portfolio continue to decline as mortgage loan balances remain relatively constant while other loan categories such as commercial loans (primarily SBA guaranteed) and consumer loans (primarily student loans) continue to increase. 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 March 31, 1997, non-accrual loans were $915 thousand. Approximately $462 thousand of the total nonaccrual loans were residential mortgages while the remainder consisted primarily of loans with SBA loans. 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 March 31, 1997, approximately 29% 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, 1997, none of these loans were nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, increased on average by 12.0% or $2.8 million during the quarter ended March 31, 1997. The increase is due to approximately $5 million student loan sale proceeds which were temporarily invested in Federal Funds Sold but will be used to fund the origination of higher yielding commercial loans. 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 $1.5 million or 13.36% during the quarter ended March 31, 1997. The increase was primarily due to increased balances in two successful demand deposit product offerings which began in 1995--the "free" checking and "entrepreneurial-25" checking. In addition, stricter 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 $1.1 million, or 59.58%, from December 31, 1996 to March 31, 1997. The decrease is due to a $10 million reverse repurchase agreement the Bank entered into in 1996 versus a $1.5 million reverse repurchase agreement the Bank entered into in February 1997. 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 March 31, 1997 are summarized below: Commitments to extend credit $5,820,000 Outstanding letter of credit $ 125,000 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 March 31, 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 $3.9 million at March 31, 1997, representing 23.84% of the investment portfolio. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $4.1 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 March 31, 1997: (Thousands of dollars) ---------------------- 3 months or less $ 6,507 Over 3 through 12 months 7,048 Over 1 through five years 219 Over five years 213 ------- Total $13,987 ======= 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 March 31, 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 March 31, 1997, a liability sensitive position is maintained on a cumulative basis through 1 year of -7.54% 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 March 31, 1997 More than More than More than More than 0 to 3 3 to 6 6 to 12 1 to 5 than 5 (Thousands of dollars) months months months years years Cumulative - ---------------------- ------ ------ ------ ----- ----- ---------- Interest-sensitive assets Time deposits -- 42 282 -- -- 324 Investment securities: Held-to-maturity 851 501 997 5,494 2,097 9,960 Available-for-sale 3,099 652 862 4,694 Federal funds sold 9,172 -- -- -- -- 9,172 Fixed rate loans 293 317 286 3,092 35,750 39,738 Floating rate loans 22,338 -- 4,274 70 -- 26,682 ------- ------- ------- ------- ------- ------- Total interest-sensitive assets 35,853 860 5,839 9,308 38,709 90,570 ------- ------- ------- ------- ------- ------- Cumulative totals 35,853 36,713 42,552 51,861 90,570 ------- ------- ------- ------- ------- Interest-sensitive liabilities Interest checking accounts 127 382 1,579 3,005 -- 5,093 Money market accounts 340 1,021 4,220 8,031 -- 13,612 Savings accounts 485 1,456 6,019 11,455 -- 19,416 Certificates less than $100,000 13,400 6,323 5,472 6,531 -- 25,219 Certificates more than $100,000 3,520 5,407 1,641 219 213 13,987 Other borrowings -- -- 1,507 67 -- -- ------- ------- ------- ------- ------- ------- Total Interest- sensitive liabilities 11,358 14,589 20,438 29,308 213 78,901 ------- ------- ------- ------- ------- ------- Cumulative totals 11,358 28,942 49,380 78,688 78,901 ======= ======= ======= ======= ======= Interest sensitivity gap 22,790 (13,729) (14,598) (20,000) 38,496 ======= ======= ======= ======= ======= Cumulative gap 22,790 7,771 (6,827) (26,827) 11,669 ======= ======= ======= ======= ======= Cumulative gap/total earning assets 23.74% 8.58% (7.54%) (29.62%) 12.88% ====== ===== ======= ======== ====== Interest sensitive assets to interest sensitive liabilities 2.50 .06 .29 .32 181.73 ==== === === === ======
In June 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 has revised its policies and procedures to conform with FDICIA 305 and has established a policy limit of +/- 3% 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 .75% if rates decrease 200 basis points and declining 1.70% 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 March 31, 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 $61 thousand during the quarter ended March 31, 1997. The increase during the quarter was due to internal capital generation in the form of net income of approximately $65 thousand. 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 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, December 31, 1997 1996 ---- ---- Tier 1 Capital $6,640 $6,558 Tier 2 Capital 551 504 ------ ------ Total Qualifying Capital $7,191 $7,062 ====== ====== Risk Adjusted Total Assets (including off-balance sheet exposures) $42,601 $40,306 Tier 1 Risk-Based Capital Ratio 15.59% 16.27% Tier 2 Risk-Based Capital Ratio 16.88% 17.52% Leverage Ratio 6.66% 7.09% Results of Operations Summary The Bank had net income of approximately $65,000 for the quarter ended March 31, 1997 compared to a loss of $112,500 for the same quarter in 1996. The improvement in the Bank's earnings performance is primarily attributable to a $110,000 gain on the sale of $4.9 million student loans in February 1997, an increase in the Bank's net interest margin, and an increased level of other noninterest income -- from $204 thousand in 1996 to $289 thousand in 1997. Customer service fees accounted for most of this increase as the number of transactional accounts increased significantly during 1996 as a result of new checking account products and compensating balance requirements. Also, during September 1996, the Bank implemented a surcharge for all non-customer use of its Automated Teller Machines (ATMs). On a per common share basis, there was an improvement from ($.14) at March 31, 1996 to $.08 at March 31, 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 $1.090 million for the quarter ending March 31, 1997 compared to $1.020 million for the same quarter in 1996. The primary determinants of the increase was the increase in the Bank's average earning assets from $83.6 million at March 31, 1996 to $93.2 million at March 31, 1997. This growth in earning assets is primarily attributable to an increase in average demand deposit balances due to continued growth in new checking account products--"free" checking and "entrepreneurial-25" checking. These products provide a low-cost/minimum balance option for personal and small business customers who have relatively low-volume activity in their checking accounts. While benefiting customers, these products also serve as means of generating noninterest-bearing funds for the Bank as well as a source of service charge income from overdraft fees. The increase in volume of investable funds was primarily used to fund new loan originations and Federal Funds Sold temporary investments. 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 March 31, 1997 was $23 thousand compared to $18 thousand for the same quarter in 1996. The increase is due to the increase in the average balance of loans outstanding. However, the gradual change in the composition of the loan portfolio during 1995 and 1996 from residential mortgage loans to purchased or originated commercial SBA loans and student loans resulted in a portfolio with significantly lower credit risk characteristics due to the related 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 .81% of average total assets to 1.05% for the quarter ended March 31, 1996 compared to the quarter ended March 31, 1997. The increase is primarily attributable to an increase in transactional deposit accounts as a result of the continued success of product offerings which were introduced in 1995--"free" checking" and "entrepreneurial-25" checking. In addition, in 1996 the Bank strongly enforced compensating balance arrangements with its loan customers. Also contributing to the increase was the implementation of a surcharge for all noncustomer use of the Bank's Automated Teller Machines (ATMs) in September 1996 and an expanded ATM network from 5 machines in 1995 to 15 machines in 1996. During the 4th quarter of 1996, the Bank entered into an agreement with a growing retail corporation which provides for the placement of ATM machines in its retail stores. During the quarter ended March 31, 1996 noninterest income also included a gain on the sale of student loans. In February 1997, the Bank sold approximately $4.9 million of its student loan portfolio for a net gain of $110 thousand. Noninterest expense Salaries and benefits represented 41% and 43% of the total noninterest expense for the quarters ended March 31, 1997 and 1996, respectively. For the quarter ended March 31, 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 14.6% and 15.8% of the total noninterest expense for the quarters ended March 31, 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 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 $45 thousand for the quarter ended March 31, 1996 compared to the quarter ended March 31, 1997. This increase is primarily attributable to annual escalations in lease payments and a new maintenance contract entered into to service the Bank's growing ATM network. In addition, in July 1996, the Bank entered into a lease for a new branch it opened in West Philadelphia. 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 March 31, 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 long-term 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. (a) An annual meeting of the security holders of the Registrant is scheduled to be held on May 19, 1997. (b) Proxies for the annual meeting of the Registrant scheduled for May 19, 1997, (the "Annual Meeting") were solicited by proxy statement filed with the Commission on April 21, 1997. (c) The following matters are to be voted upon at the Annual Meeting: 1. ELECTION OF DIRECTORS The following individuals are proposed to be elected as directors of the Registrant: Luis A. Cortes, Jr. Angela M. Huggins Kemel G. Dawkins Elmer Young, Jr. 2. INDEPENDENT ACCOUNTANT The matter of ratification of independent accountants is to be submitted to the shareholders at the Annual Meeting. The Board of Directors selected Ernst & Young, LLP as independent accountants to audit and certify financial statements of the Bank and the Registrant for the year ending December 31, 1996 and to provide certain accounting services to the Bank during the 1997 fiscal year. Ernst & Young, LLP has served in this capacity since the Bank's inception. In connection with the audit function, Ernst & Young, LLP also reviewed the Registrant's annual report to shareholders and filings with the Securities and Exchange Commission. Neither Ernst & Young, LLP nor any of its partners has any direct or material indirect financial interest in the Bank. 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 and additional 2,200 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. Item 6. Exhibits and Reports on Form 8-K. The following amendments are filed in paper format on Form SE (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 March 31, 1997. (b) No reports on Form 8-K have been filed during the quarter for which this Form 10-Q is filed. 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 ___, 1997 /s/ Emma C. Chappell ------------------------- Emma C. Chappell Chairman, President & CEO EX-27 2
9 3-MOS DEC-31-1997 MAR-31-1997 5,570,512 323,822 9,172,000 0 5,010,840 9,959,417 9,867,391 67,335,305 (551,291) 100,874,193 91,268,892 0 2,719,431 66,851 0 0 932 8,163 100,874,193 1,439,992 218,753 95,923 1,754,668 657,019 664,607 1,090,061 22,500 0 1,407,885 64,639 64,639 0 0 64,639 .08 .08 7.86 915,000 500,000 0 0 527,508 213 1,497 551,292 551,292 0 0
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