-----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, Un/VjaOP1qRuACyDZNMqTNvrCiRYfYPHO8m0iG07Gx3hVIUmLkzgwK6FVwxx7YUf RDz5mGRmhuDVscZaterHWg== 0001010410-98-000097.txt : 19980522 0001010410-98-000097.hdr.sgml : 19980522 ACCESSION NUMBER: 0001010410-98-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980521 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCSHARES INC /PA CENTRAL INDEX KEY: 0000944792 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232802415 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25976 FILM NUMBER: 98629868 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, 1998 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 March 31, 1998, 823,695 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 March 31, 1998. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. United Bancshares, Inc. Consolidated Balance Sheets (unaudited)
March 31, December 31, 1998 1997 ----------- ----------- Assets Cash and due from banks 6,113,365 4,604,408 Interest bearing deposits with banks 337,868 334,288 Federal funds sold 4,837,000 7,821,000 ----------- ----------- Cash & cash equivalents 11,288,233 12,759,696 Investment securities: Held-to-maturity, at amortized cost 9,905,653 10,854,711 Available-for-sale, at market value 14,998,891 7,398,607 Loans held for sale, net of unearned discount 0 1,979,177 Loans, net of unearned discount 72,216,308 72,183,255 Less: allowance for loan losses (480,931) (468,806) ----------- ----------- Net loans 71,735,377 73,693,626 Bank premises & equipment, net 1,842,149 1,862,647 Accrued interest receivable 1,517,348 1,439,587 Deferred branch acquisition cost 56,072 75,753 Other real estate owned 159,317 165,188 Prepaid expenses and other assets 632,846 664,475 ----------- ----------- Total Assets 112,135,885 108,914,290 =========== =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 17,473,254 17,697,901 Demand deposits, interest bearing 20,898,425 20,922,107 Savings deposits 23,351,932 22,925,881 Time deposits, $100,000 and over 15,927,414 13,852,356 Time deposits 23,846,800 24,028,818 ----------- ----------- 101,497,825 99,427,063 Long-term debt 35,731 43,688 Securities sold to repurchase 1,801,432 1,341,053 Accrued interest payable 559,143 541,225 Accrued expenses and other liabilities 1,158,549 502,406 ----------- ----------- Total Liabilities 105,052,680 101,855,435 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 932 932 500,000 shrs auth., 93,150 issued and outstanding Common stock, $.01 par value; 2,000,000 shares authorized; 823,695 shares issued and outstanding at March 31, 1998 and December 31, 1997 8,237 8,237 Additional-paid-in-capital 10,426,222 10,426,222 Accumulated deficit (3,414,505) (3,438,699) Net unrealized gain on available-for-sale securities 62,319 62,163 ----------- ----------- Total Shareholders' equity 7,083,204 7,058,855 =========== =========== 112,135,885 108,914,290 =========== ===========
United Bancshares, Inc. Statements of Operations (unaudited) Quarter ended Quarter ended March 31, March 31, 1998 1997 ---- ---- Interest Income: Interest and fees on loans $1,603,331 1,439,992 Interest on investment securities 280,881 218,753 Interest on Federal Funds sold 134,556 89,751 Interest on time deposits with other banks 7,570 6,172 ----------- ---------- Total interest income 2,026,338 1,754,668 Interest Expense: Interest on time deposits 497,332 464,816 Interest on demand deposits 151,665 76,400 Interest on savings deposits 110,979 115,803 Interest on borrowed funds 9,688 7,588 ----------- ---------- Total interest expense 769,664 664,607 ----------- ---------- Net interest income 1,256,674 1,090,061 Provision for loan losses 25,500 22,500 ----------- ---------- Net interest income less provision for loan losses 1,231,174 1,067,561 ----------- ---------- Noninterest income: Gain on sale of loans 29,688 115,652 Customer service fees 293,796 264,114 Other income 26,835 25,197 ----------- ---------- Total noninterest income 350,319 404,963 Non-interest expense Salaries, wages, and employee benefits 612,314 573,018 Occupancy and equipment 282,975 244,951 Office operations and supplies 133,407 118,448 Marketing and public relations 20,739 22,988 Professional services 59,923 86,766 Data processing 223,188 206,502 Deposit insurance assessments 19,208 17,545 Other noninterest expense 205,540 137,668 ----------- ---------- Total non-interest expense 1,557,294 1,407,886 Net income $ 24,199 $ 64,638 =========== ========== Earnings per share-basic $ 0.03 $ 0.08 ----------- ---------- Weighted average number of shares 823,695 816,355 =========== ========== United Bancshares, Inc. Statements of Cashflows (Unaudited)
Quarter ended Quarter ended March 31, March 31, 1998 1997 ---- ---- Cash flows from operating activities Net income 24,199 64,638 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 25,500 22,500 Gain on sale of loans (29,688) 115,652 Depreciation and amortization 145,104 141,694 Proceeds from sale of student loans 2,022,500 5,110,843 Increase (decrease) in accrued interest receivable and other assets (40,260) (17,701) Increase in accrued interest payable and other liabilites 674,061 37,498 ---------- ---------- Net cash provided by operating activities 2,821,416 5,475,124 Cash flows from investing activities Purchase of investments-Available-for-Sale (7,997,940) (1,052) Purchase of investments-Held-to-Maturity (1,500,000) (2,499,219) Proceeds from maturity & principal reductions of investments-Available-for-Sale 393,852 946,256 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 2,448,248 1,020,338 Net (increase) in loans (60,063) (2,936,187) Purchase of premises and equipment (100,159) (190,181) ---------- ---------- Net cash provided by (used in) investing activities (6,816,062) (3,660,045) Cash flows from financing activities Net increase (decrease) in deposits 2,070,762 2,507,921 Repayments on long term debt (7,957) (7,710) Reverse repurchase agreement 460,379 1,506,732 ---------- ---------- Net cash provided by financing activities 2,523,184 4,006,943 (Decrease) increase in cash and cash equivalents (1,471,462) 5,822,022 Cash and cash equivalents at beginning of period 12,759,696 9,244,312 Cash and cash equivalents at end of period 11,288,234 15,066,334 ========== ========== Supplemental disclosures of cash flow information Cash paid during the period for interest 746,805 676,231 Write-down of cumulative effect of change in method of accounting for invesment securities -- ========== ==========
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. Since 1994, 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 ENDED QUARTER ENDED except per share data) MARCH 31, 1998 MARCH 31, 1997 -------------- ----------------- Net interest income $1,231 $1,090 Provision for loan losses 26 23 Noninterest income 350 405 Noninterest expense 1,557 1,408 Net income (loss) $ 24 $ 65 Earnings per share - basic $.03 $.08 Balance sheet totals: MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- Total assets $112,136 $108,914 Loans, net $ 71,735 $ 73,693 Investment securities $ 24,905 $ 18,253 Deposits $101,498 $ 99,427 Shareholders' equity $ 7,114 $ 7,091 Ratios Return on assets .07% .18% Return on equity .99% 2.69% Equity to assets ratio 6.57% 6.61% 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 $8.8 million, or 9.51%, during the quarter ending March 31, 1998. Average funding uses increased $9.9 million, or 10.45%, for the same quarter. Sources and Uses of Funds Trends DECEMBER 31, MARCH 31, 1998 INCREASE 1997 AVERAGE (DECREASE) AVERAGE BALANCE AMOUNT % BALANCE ------- ------ ----- ------- Funding uses: Loans $75,416 $6,529 9.48% $68,887 Investment securities Held-to-maturity 10,184 (38) (.37%) 10,222 7,251 999 15.98% 6,252 Available-for-sale Federal funds sold 11,583 2,396 26.08% 9,187 -------- ----- ------- Total uses $104,435 $9,887 $94,548 ======== ====== ======= Funding sources: Demand deposits Noninterest-bearing $18,678 $2,773 17.43% $15,905 Interest-bearing 24,764 9,952 67.19% 14,812 Savings deposits 19,507 (3,770) (16.20%) 23,277 Time deposits 37,811 183 .49% 37,627 Other borrowed funds 957 (305) (24.19%) 1,262 ------- ------ ------- Total sources $101,716 $8,833 $92,883 ======== ====== ======= Loans Average loans increased approximately $6.5 million, or 9.48% during the quarter ended March 31, 1998. This increase was primarily due to the purchase of $8 million automobile loans at the end of November 1997. These loans were strategically purchased to replace lower yielding/higher cost to service student loans which were sold in September 1997. During 1998, the Bank continues to employ this strategy. In March 1998, it sold approximately $2 million student loans and in April 1998 purchased approximately $5 million additional automobile loans. The automobile loans were purchased from another financial institution and were selected based on the fact that they were seasoned (remaining average life of approximately 2 years) and had no history of delinquency. The following table shows the composition of the Bank's loan portfolio by type loan. (Thousands of Dollars) MARCH 31, DECEMBER 31, 1998 1997 ---- ---- Commercial and industrial $12,709 $12,095 Commercial real estate 2,097 1,515 Consumer loans 22,521 24,590 Residential mortgages 34,889 35,961 Loans held-for-sale -- 1,979 ------- ------- Total Loans $72,216 $74,162 ======= ======= Residential mortgage loans at March 31, 1998 comprise the greatest percentage of total loans representing approximately 48.3% of total loans. However, these loans as a percentage of the total portfolio continue to decline due to refinancing and paydowns while other loan categories such as commercial loans and consumer loans continue to increase. Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. The following Table presents an analysis of the allowance for loan losses. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES QUARTER ENDED (Dollars in thousands) MARCH 31, 1998 - ---------------------- -------------- Balance at January 1 $ 468 ------- Charge-offs: Commercial and industrial -- Commercial real estate -- Residential mortgages -- Consumer loans (21) ------ (21) Recoveries - consumer loans 8 ------ Net charge-offs (13) Additions charged to operations 26 ------ Balance at December 31 $ 481 ====== Ratio of net charge-offs to average loans outstanding 0.02% ====== 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 .67% at March 31, 1998. In evaluating the adequacy of the allowance for loan loss, only the net exposure (un-guaranteed portion) should be considered. As a result of the loan portfolio composition (primarily residential mortgage loans, Small Business Administration (SBA) guaranteed loans, and guaranteed student loans), less than 25% of the loan portfolio represents some level of risk--no guarantee features, significant collateral, or proven track record of repayment. In addition, the Bank has an excellent collection record. During the quarter ending March 31, 1998, charge-offs as a percentage of average loans represented .02%. 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, 1998, non-accrual loans were $1.2 million. Approximately $847 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, 1998, approximately 31.4% 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, 1998, none of these loans were nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, increased on average by $3.4 million, or 13.08%, during the quarter ended March 31, 1998. The increase is due the growth in average deposit levels and the temporary deployment of the proceeds from the sale of $2 million in student loans in Federal Funds Sold until automobile loans were purchased in April 1998. The Bank's investment portfolio primarily consists of mortgage-backed pass-through agency securities, U.S. Treasury securities, and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. Deposits Non-interest bearing demand deposits increased on average by approximately $2.7 million, or 17.43%, during the quarter ended March 31, 1998. The increase was primarily due to increased balances in small business checking (specifically, the "Entrepreneurial-25" checking product which was designed for small start-up businesses). In addition, the Bank experienced growth in its "Church-affiliated" checking balances due to its alliance with several religious organizations in the region. Finally, the Bank continues to strictly enforce its compensating balance arrangements with commercial loan borrowers. Interest bearing demand deposits increased on average by approximately $9.9 million, or 67.19%, during the quarter ended March 31, 1998. The increase was primarily due to the introduction of sweep deposit accounts in December 1997 as a vehicle to attract larger deposits by sweeping funds out of noninterest-bearing demand deposit accounts and investing them overnight in interest-bearing deposit accounts. Other Borrowed Funds The average balance for other borrowed funds decreased $305 thousand, or 24.19%, during the quarter ended March 31, 1998. The decrease is due to the maturity of a $1.3 million reverse repurchase agreement in February 1998 which was not rolled over until the late March 1998. 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, 1998 are summarized below: Commitments to extend credit $2,700,000 Outstanding letter of credit $ 100,000 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, 1998, 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 $10.6 million at March 31, 1998, representing 44% of the investment portfolio. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $3.6 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, 1998: (Thousands of dollars) 3 months or less $ 6,707 Over 3 through 12 months 8,806 Over 1 through five years 300 Over five years 114 ------- Total $15,927 ======= 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, 1998 and 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). 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, 1998, a liability sensitive position is maintained on a cumulative basis through 1 year of -5.67% 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. 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, 1998
MORE THAN 0 TO 3 3 TO 12 3 TO 5 5-15 MORE THAN (THOUSANDS OF DOLLARS) MONTHS MONTHS 1-3 YEARS YEARS YEARS 15 YEARS CUMULATIVE - ---------------------- ------ ------ --------- ----- ----- -------- ---------- INTEREST-SENSITIVE ASSETS Time deposits 338 -- -- -- 338 Investment securities: U.S. Government 8,997 1,651 500 1,749 4,497 312 17,706 Mortgage-backed 5,058 735 899 413 7,105 Federal funds sold 4,837 -- -- -- -- 4,837 Real Estate Loans 4,017 1,001 2,126 1,915 14,764 13,906 37,730 All Other Loans 21,948 1,425 6,900 1,190 1,767 1,256 34,486 ------ ------- ------ ----- ------ ------ ------- Total interest- sensitive assets 45,195 4,077 9,526 5,589 21,927 15,887 102,202 ------ ------- ------ ----- ------ ------ ------- INTEREST-SENSITIVE LIABILITIES Interest checking accounts 8,814 -- 1,516 -- -- 10,330 Money market accounts 5,986 -- 8,250 -- -- 14,236 Savings accounts 14,541 -- 5,142 -- -- 19,683 Certificates less than $100,000 7,648 10,011 3,492 2,696 -- 23,847 Certificates more than $100,000 6,707 8,806 300 114 -- 15,927 Other borrowings 1,801 36 -- -- -- 1,837 ------ ------- ------ ----- ------ ------- Total Interest- sensitive liabilities 45,498 18,853 18,699 2,810 -- 85,860 ------ ------- ------ ----- ------ ------- Interest sensitivity gap (302) (14,766) (9,173) 2,779 21,927 15,887 16,342 ------ ------- ------ ----- ------ ------ ------- Average 12 month Gap % Earning Assets (5.67) =======
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, 1998 are as follows: MARKET VALUE OF PERCENT OF CHANGES IN RATE PORTFOLIO EQUITY CHANGE --------------- ---------------- ------ (Dollars in thousands) +400 basis points $ 87,941 (20.88)% +300 basis points 93,743 (15.66) +200 basis points 99,545 (10.44) +100 basis points 105,347 (5.22) Flat rate 111,149 -- -100 basis points 116,951 5.22 -200 basis points 122,753 10.44 -300 basis points 128,555 15.66 -400 basis points 134,357 20.88 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, 1998. However, if significant interest rate risk arises, the Board of Directors and management may take (but are not limited to) one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit (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 $24 thousand during the quarter ended March 31, 1998. The increase during the quarter was due to internal capital generation in the form of net income of approximately $24 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, 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, DECEMBER 31, 1998 1997 ---- ---- Tier 1 Capital $6,935 $6,891 Tier 2 Capital 481 468 ------ ------- Total Qualifying Capital $7,416 $7,359 ====== ====== Risk Adjusted Total Assets (including off-balance sheet exposures) $51,029 $51,868 Tier 1 Risk-Based Capital Ratio 13.59% 13.29% Tier 2 Risk-Based Capital Ratio 14.53% 14.19% Leverage Ratio 6.26% 6.59% RESULTS OF OPERATIONS Summary The Bank had net income of approximately $24 thousand ($.03 per common share) for the quarter ended March 31, 1998 compared to a profit of $65 thousand ($.08 per common share) for the same quarter in 1997. Net income for the quarter ending March 31, 1997 included a $110 thousand gain on the sale of $4.9 million student loans. For the quarter ending March 31, 1998, the Bank sold approximately $2 million student loans for a gain of $30 thousand. Excluding gains on sales of loans, there was a $45 thousand improvement in the Bank's operating performance during the quarter ended March 31, 1998 compared to the same quarter in 1997. This improvement is primarily a result of an increase in the Bank's earning assets(more loans), an increase in the net interest margin, and an increased level of customer service fees--$294 thousand in 1998 compared to $264 thousand in 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 $1.3 million for the quarter ending March 31, 1998 compared to $1.1 million for the same quarter in 1997. The primary determinants of the increase was the increase in the Bank's average earning assets from $93.2 million at March 31, 1997 to $105 million at March 31, 1998. This growth in earning assets is primarily attributable to an increase in average demand deposit balances (both interest and non-interest bearing) as outlined in the above sections. 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. Also contributing to the increase in the net interest income was an increase in the Bank's net interest margin from 4.66% to 4.81% as a result of growth in the loan portfolio--specifically, purchased automobile loans which have an average yield of approximately 10%. 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, 1998 was $26 thousand compared to $23 thousand for the same quarter in 1997. The increase is due to the increase in the average balance of loans outstanding and the sale of student loans which have a 98% government guarantee compared to purchased automobile loans. Noninterest Income The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charge, overdrafts, account analysis, and other customer service fees. Deposit-related noninterest income increased from 1.05% of average total assets to 1.12% for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1998. The increase is primarily attributable to an increase in ATM surcharge fees ($120 thousand for the quarter ending March 31, 1998 compared to $94 thousand for the same quarter in 1997) due to growth in the ATM network from 15 to 28 machines. In addition, continued growth in the number of demand deposit accounts to which activity charges apply and the implementation of a low-balance charge on "free checking" accounts when the balance falls below $100 resulted in a $5 thousand increase in demand deposit-related fee income--including overdraft fees, low balance fees, and activity charges. Noninterest expense Salaries and benefits represented 2.22% and 2.30% of average assets for the quarters ended March 31, 1998 and 1997, respectively. For the quarter ended March 31, 1998, staffing levels remained relatively constant with some planned attrition and management's concerted effort to minimize new hiring and control personnel expense while average earning assets increased by 10.45%. Data processing expenses represented .81% and .83% of the total average assets for the quarters ended March 31, 1998 and 1997, 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 re-negotiation of existing contracts with servicers. In an effort to reduce these costs, the Bank has systematically and strategically sold portions of its student loan portfolio and replaced it with commercial and other consumer loans with lower servicing costs Occupancy expense increased approximately $38 thousand for the quarter ended March 31, 1998 compared to the quarter ended March 31, 1997. This increase is primarily attributable to annual escalations in lease payments and maintenance contracts required to service the Bank's growing ATM network. All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. REGULATORY MATTERS At March 31, 1998, the Bank is operating under a Supervisory Letter from its primary regulator. The Supervisory Letter, among other things, prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and the Company from issuing debt. YEAR 2000 The Company has conducted a comprehensive review of its computer systems, both internal and out-sourced processing, to identify the systems that could be affected by the "Year 2000" issue and has developed an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs or that of its vendors that have time sensitive software may recognize the a date using "00" as the year 1900 rather than the Year 2000. This could result in major system failure or miscalculations. To date, the Company has completed its assessment phase of the Year 2000 problem. It has received confirmations from its primary computer software and processing vendors that they are addressing the Year 2000 issue. Current estimates of the cost to be incurred to prepare for the Year 2000 range from $50,000 to $100,000. In conjunction with Year 2000 preparation, the Bank plans to make most hardware upgrades as a normal part of replacement of equipment--thereby minimizing cost. Cost estimates include primarily personnel and consulting time to ensure all business components/processes have been considered and tested for compliance. In addition, the Bank has contacted its major loan customers to advise them to review their own systems for possible Year 2000 problems. In making credit decisions for major borrowers, the Bank will consider the impact of the Year 2000 issues. The "Year 2000" potential problems create risk for the Company from unforeseen problems in its own computer systems and from third parties; such as other financial institutions, the Federal government, Federal agencies, vendors and customers. Failures of the Company's or third parties' computer systems could have a material effect on the Company's abilities to conduct business and especially to process and account for the transfer of funds electronically. During June 1998, the Company will begin its testing and renovation phases to ensure that all in-house processing, servicers, vendors and loan customers which have indicated compliance are in fact compliant. This phase will also include the development of contingency plans in the event that primary processors do not meet the Year 2000 compliance deadlines. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, which is effective for all periods beginning after December 15, 1997. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic area in which they operate, and their major customers. The Company has not identified any segments which require disclosure. 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. The Registrant has solicited proxies with respect to the Annual Meeting of its stockholders scheduled for May 22, 1998 by proxy statement filed with the Commission. The following matters are scheduled to be voted upon at the Annual Meeting: 1. ELECTION OF DIRECTORS The following individuals are scheduled for re-election as directors of the Registrant: James F. Bodine Verdaynea F. Eason William C. Green 2. INDEPENDENT ACCOUNTANT The shareholders are scheduled to vote on the ratification of Grant Thornton, LLP as the independent accountant for the Registrant. No further matters have been submitted to a vote of the Registrant's securityholders 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: Copy of the Registrant's Call Report for the Period ending March 31, 1998. 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 21, 1998 /S/ EMMA C.CHAPPELL ------------------------ Emma C. Chappell Chairman, President & CEO /S/ BRENDA HUDSON-NELSON ------------------------ Brenda Hudson-Nelson Controller EX-27 2 FDS FOR UNITED BANCSHARES, INC. 10-Q
9 1,000 3-MOS DEC-31-1998 JAN-1-1998 MAR-31-1998 6,113 338 4,837 0 14,999 14,999 12,216 72,216 (481) 112,136 101,498 0 3,550 0 0 1 8 7,074 112,136 1,603 281 142 2,026 759 10 1,257 26 0 1,557 24 0 0 0 24 .03 .03 7.98 1,247 3,496 0 0 468 21 8 481 481 0 0
-----END PRIVACY-ENHANCED MESSAGE-----