-----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, MPfMFrKtDtZOhp7Uxe6yqFDKQwsBvCpLtH8kaPQh4Lamw4KFgVh72/AsxUaOo+Vo eLLqT91pIPEZOcDOKSvJbQ== 0001010410-99-000081.txt : 19990823 0001010410-99-000081.hdr.sgml : 19990823 ACCESSION NUMBER: 0001010410-99-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990820 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: 99697204 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 JUNE 30, 1999 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 August 15, 1999, 832,087 shares were issued and outstanding and 500,000 authorized shares of Series Preferred Stock. The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock") of which 143,150 shares were outstanding as of August 15, 1999. The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment on September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of August 15, 1999, 166,666 shares of Class B Common Stock were issued and outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. UNITED BANCSHARES, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31, 1999 1998 ------------------------------- Assets Cash and due from banks 7,149,013 3,675,010 Interest bearing deposits with banks 357,467 350,024 Federal funds sold 10,205,000 12,318,000 ----------- ----------- Cash & cash equivalents 17,711,480 16,343,034 Investment securities: Held-to-maturity, at amortized cost 13,986,010 8,049,875 Available-for-sale, at market value 6,693,419 35,146,148 Loans, net of unearned discount 66,713,100 57,950,133 Less: allowance for loan losses (762,705) (679,557) ----------- ----------- Net loans 65,950,395 57,270,576 Bank premises & equipment, net 1,471,136 1,565,131 Accrued interest receivable 2,370,752 1,749,623 Other real estate owned 365,847 262,368 Prepaid expenses and other assets 4,976,785 1,595,925 ----------- ----------- Total Assets 113,525,824 121,982,681 =========== =========== Liabilities & Shareholders' Equity Demand deposits, non-interest bearing 21,379,020 19,999,226 Demand deposits, interest bearing 21,733,891 29,114,484 Savings deposits 24,072,369 23,393,986 Time deposits, $100,000 and over 12,304,198 13,942,008 Time deposits 21,216,584 22,614,098 ----------- ----------- 100,706,062 109,063,802 Long-term debt 0 11,191 Securities sold to repurchase 0 1,557,755 Accrued interest payable 540,180 598,352 Accrued expenses and other liabilities 2,200,318 1,847,665 ----------- ----------- Total Liabilities 103,446,561 113,078,365 Shareholders' equity: Preferred Stock, Series A, non-cum., 6%, $.01 par value, 1,432 1,330 500,000 shrs auth., 143,150 and 132,999 issued and outstanding at June 30, 1999 and December 31, 1998, respectively Common stock, $.01 par value; 2,000,000 shares authorized; 998,753 and 913,490 shares issued and outstanding at June 30, 1999 9,977 9,134 and December 31, 1998, repectively. Additional-paid-in-capital 13,510,481 12,286,233 Accumulated deficit (3,418,249) (3,428,169) Net unrealized gain on available-for-sale securities (24,379) 35,788 ----------- ----------- Total Shareholders' equity 10,079,262 8,904,316 ----------- ----------- 113,525,823 121,982,681 =========== ===========
UNITED BANCSHARES, INC. STATEMENT OF OPERATIONS (UNAUDITED)
QUARTER ENDED QUARTER ENDED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 1998 1999 1998 ----------------------------------------------------------------------------------- Interest Income: Interest and fees on loans $ 1,476,083 1,642,184 2,933,741 3,245,515 Interest on investment securities $ 287,120 269,016 707,640 549,897 Interest on Federal Funds sold $ 92,249 184,846 222,972 319,402 Interest on time deposits with other banks $ 5,030 3,661 9,334 11,231 ----------- --------- --------- --------- Total interest income $ 1,860,482 2,099,707 3,873,687 4,126,045 Interest Expense: Interest on time deposits $ 403,920 483,238 829,175 980,570 Interest on demand deposits $ 125,896 153,111 268,820 304,776 Interest on savings deposits $ 101,467 115,265 197,350 226,244 Interest on borrowed funds $ 40 22,603 19,093 32,291 ----------- --------- --------- --------- Total interest expense $ 631,323 774,217 1,314,438 1,543,881 NET INTEREST INCOME $ 1,229,159 1,325,490 2,559,249 2,582,164 Provision for loan losses $ 75,000 40,000 140,000 65,500 ----------- --------- --------- --------- NET INTEREST INCOME LESS PROVISION FOR LOAN LOSSES $ 1,154,159 1,285,490 2,419,249 2,516,664 ----------- --------- --------- --------- Noninterest income: Gain on sale of loans $ 39,969 0 43,857 29,688 Customer service fees $ 430,159 342,574 826,097 636,370 Other income $ 28,025 42,052 62,524 68,887 ----------- --------- --------- --------- Total noninterest income $ 498,153 384,626 932,478 734,945 Non-interest expense Salaries, wages, and employee benefits $ 639,216 631,069 1,313,472 1,243,383 Occupancy and equipment $ 308,148 319,900 619,521 602,875 Office operations and supplies $ 133,881 101,815 261,318 235,222 Marketing and public relations $ 47,644 65,201 113,926 85,940 Professional services $ 70,415 61,262 143,208 121,185 Data processing $ 229,143 221,777 451,090 444,965 Other noninterest expense $ 248,793 249,132 438,675 473,880 ----------- --------- --------- --------- Total non-interest expense $ 1,677,240 1,650,156 3,341,210 3,207,450 ----------- --------- --------- --------- NET INCOME (LOSS) ($ 24,929) 19,960 10,517 44,159 =========== ========= ========= ========= EARNINGS PER SHARE-BASIC ($ 0.03) $ 0.11 $ 0.01 $ 0.05 EARNINGS PER SHARE-DILUTED ($ 0.03) $ 0.11 $ 0.01 $ 0.05 ----------- --------- --------- --------- Weighted average number of shares 978,730 816,355 978,730 823,695 =========== ========= ========= =========
United Bancshares, Inc. Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 ---- ---- Cash flows from operating activities Net income $ 10,517 44,159 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 140,000 65,500 Gain on sale of loans 43,857 29,688 Depreciation and amortization 398,487 301,356 Realized investment securities gains 0 1,201 Proceeds from sale of student loans 3,059,983 2,022,500 Increase (decrease) in accrued interest receivable and other assets (4,105,468) (401,719) Increase (decrease) in accrued interest payable and other liabilities 294,481 278,226 ------------ ------------ Net cash provided by operating activities (168,659) 2,340,911 Cash flows from investing activities Purchase of investments-Available-for-Sale (6,027,846) (9,752,787) Purchase of investments-Held-to-Maturity 28,452,729 (3,000,000) Proceeds from maturity & principal reductions of investments-Available-for-Sale 9,015,655 Proceeds from maturity & principal reductions of investments-Held-to-Maturity 4,527,847 Proceeds from sale of investment securities Available-for-Sale 0 3,425,663 Purchase of automobile loans (21,982,333) 0 Net (increase) decrease in loans 10,076,233 (3,425,663) Purchase of premises and equipment (289,161) (157,668) ------------ ------------ Net cash (used in) investing activities 10,229,622 (814,713) Cash flows from financing activities Net increase (decrease) in deposits (8,357,740) 7,838,486 Repayments on long term debt (11,191) (16,057) Other borrowed funds (1,557,755) 1,217,073 Proceeds from sale of common stock 234,158 64,620 Reverse repurchase agreement 1,000,000 482,518 ------------ ------------ Net cash provided by financing activities (8,692,578) 9,586,640 Increase in cash and cash equivalents 1,368,446 11,112,839 Cash and cash equivalents at beginning of period 16,343,034 12,759,696 Cash and cash equivalents at end of period 17,711,480 23,872,535 ============ ============ Supplemental disclosures of cash flow information Cash paid during the period for interest 906,211 991,159 ============ ============
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) June 30, 1999 June 30, 1998 - ---------------------- ------------- ------------- Net interest income $1,229 $1,285 Provision for loan losses 75 40 Noninterest income 498 385 Noninterest expense 1,677 1,650 Net income (loss) ($25) $20 Earnings per share-basic and diluted ($.03) $.05 Balance sheet totals: June 30, 1999 December 31, 1998 - --------------------- ------------- ----------------- Total assets $113,525 $121,983 Loans, net $ 65,950 $ 57,270 Investment securities $ 20,679 $ 43,196 Deposits $100,706 $109,064 Shareholders' equity $ 10,079 $ 8,904 Ratios Return on assets .01% .01% Return on equity .11% .14% Equity to assets ratio 8.34% 6.40% Financial Condition Sources and Uses of Funds The financial condition of the Bank 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 decreased approximately $9.9 million, or 8.91%, during the quarter ending June 30, 1999. Average funding uses also decreased $8.9 million, or 8.48%, for the same quarter. Sources and Uses of Funds Trends
June 30, 1999 March 31, 1999 Average Increase (Decrease) Average Balance Amount % Balance - -------------------------------------------------------------------------------------------------------- Funding uses: Loans $ 74,114 3,164 4.46% $ 70,950 Investment securities Held-to-maturity 10,090 (13,030) (56.36%) 23,120 Available-for-sale 7,822 2,809 56.03% 5,013 Federal funds sold 9,018 (2,825) (23.85%) 11,843 --------- --------- --------- Total uses $ 101,044 ($ 9,882) $ 110,926 ========= ========= ========= Funding sources: Demand deposits Noninterest-bearing $ 19,514 ($ 2,033) 9.44% $ 21,547 Interest-bearing 20,367 (3,008) (12.87%) 23,375 Savings deposits 21,191 (3,098) (12.75%) 24,289 Time deposits 35,287 766 2.22% 34,521 Other borrowed funds 1 (1,552) (99.94%) 1,553 --------- --------- --------- Total sources $ 96,360 ($ 8,925) $ 105,285 ========= ========= =========
Loans Average loans increased approximately $3.2 million, or 4.46%, during the quarter ended June 30, 1999. This increase was primarily due to the purchase of $21 million seasoned automobile loans from another financial institution in February 1999. These loans have an average remaining average life of approximately 3 years and have no history of delinquency. Automobile loans were strategically purchased to replace lower yielding/higher cost to service student loans that were sold in December 1998. The following table shows the composition of the loan portfolio of the Bank by type loan. (Thousands of Dollars) June 30, December 31, 1999 1998 ------- ------- Commercial and industrial $12,154 $13,643 Commercial real estate 1,527 1,518 Consumer loans 11,423 24,907 Residential mortgages 28,124 31,365 ------- ------- Total Loans $65,950 $57,950 ======= ======= Residential mortgage loans at June 30, 1999 comprise the greatest percentage of total loans representing approximately 43% of total loans. However, these loans continue to decline due to refinancings and payoffs/paydowns. 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 June 30, 1999 (Dollars in thousands) Balance at January 1 $ 680 ----- Charge-offs: Commercial and industrial -- Commercial real estate -- Residential mortgages -- Consumer loans (142) ----- (142) Recoveries 85 ----- Net charge-offs (57) Additions charged to operations 140 ----- Balance at December 31 $ 763 ===== Ratio of net charge-offs to average loans outstanding 0.08% ===== The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses. The allowance for loan losses as a percentage of total loans was 1.03% at June 30, 1999. 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. At June 30, 1999, charge-offs as a percentage of total loans represented .08%. Nonperforming and nonaccrual Loans The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be "nonperforming" before the lapse of 90 days. The policy of the Bank is to charge-off unsecured loans after 90 days past due. Interest on "nonperforming" loans ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on non-accrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal of and interest on the loan appears to be available. At June 30, 1999, non-accrual loans were $1.4 million. Approximately $520 thousand of the total nonaccrual loans were residential mortgages while the remainder consisted primarily of loans with SBA guarantees. There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the economy of the region. At June 30, 1999, approximately 33% of the commercial loan portfolio of the Bank were 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 religious community of the Philadelphia region. Loans made to these organizations were primarily for expansion and repair of church facilities. At June 30, 1999, none of these loans was nonperforming. Investment Securities and other short-term investments Investment securities, including Federal Funds Sold, decreased on average by $13 million, or 32.63%, during the quarter ended June 30, 1999. This decrease is due the use of funds from maturing securities to purchase $21 million in automobile loans in February 1999. The investment portfolio of the Bank 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 decreased on average by approximately $2 million, or 9.44%, during the quarter ended June 30, 1999. The decrease was primarily due to normal fluctuations in account balances for significant deposit relationships. The Bank continues to employ marketing/acquisition strategies to increase the level of core deposits to capitalize on the recent regional mega-bank mergers that have taken place within the last year. Interest bearing demand deposits decreased on average by approximately $3 million, or 12.87%, during the quarter ended June 30, 1999. The decrease was also due to normal fluctuations in account balances of significant accountholders. To build core balances, the Bank continues to market its "Prestige" premium checking product that was introduced in March 1998. This product offers such benefits as life insurance, discount shopping, etc. Time Deposits increased on average by $766 thousand, or 2.22%, during the quarter ended June 30, 1999. The Bank continues its strategy of building a low cost core deposit base by seeking deposits less than $100,000. It does not purchase brokered deposits. Other Borrowed Funds The average balance for other borrowed funds decreased $1.5 million, or 99.94%, during the quarter ended June 30, 1999. The significant decline is a result of the maturity of a reverse repurchase agreement in March 1999. 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 normal credit policies of the Bank. 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 June 30, 1999 are summarized below: Commitments to extend credit $6,044,000 Outstanding letter of credit $ 259,000 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 June 30, 1999, 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. At June 30, 1999, the average life of the investment portfolio was 4.28 years. Other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $5.8 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 June 30, 1999: (Thousands of dollars) 3 months or less $ 7,998 Over 3 through 12 months 3,982 Over 1 through five years 200 Over five years 124 Total $12,304 Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to prime or other short term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest sensitive than passbook savings accounts. The shorter term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. At June 30, 1999, a liability sensitive position is maintained on a cumulative basis through 1 year of -3.98% that is within the Bank's policy guidelines of +/- 15% on a cumulative 1-year basis. The current gap position is primarily due to the high 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. 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 June 30, 1999 are as follows: Market value of Percent of Changes in rate portfolio equity change --------------- ---------------- ------ (Dollars in thousands) +400 basis points $ 1,317 (84.75)% +300 basis points 3,033 (64.88) +200 basis points 4,814 (44.26) +100 basis points 6,888 (20.25) Flat rate 8,637 -- -100 basis points 10,580 22.49 -200 basis points 12,278 42.16 -300 basis points 13,896 60.88 -400 basis points 15,573 80.30 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 June 30, 1999. 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 $220 thousand during the quarter ended June 30, 1999. The increase during the quarter was primarily due to the sale of approximately $200,000 in Series A Preferred Stock. 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. June 30, December 31, 1999 1998 ---- ---- Tier 1 Capital $10,069 $ 8,823 Tier 2 Capital 763 679 ------- ------- Total Qualifying Capital $10,832 $ 9,502 ======= ======= Risk Adjusted Total Assets (including off-balance sheet exposures) $65,699 $54,373 Tier 1 Risk-Based Capital Ratio 15.32% 16.23% Tier 2 Risk-Based Capital Ratio 16.49% 17.48% Tier 1Leverage Ratio 8.94% 7.62% Results of Operations Summary The Bank had a net loss of approximately $25 thousand ($.03 per common share) for the quarter ended June 30, 1999 compared to net income of $20 thousand ($.05 per common share) for the same quarter in 1998. The decline in earnings is primarily attributable to increased provisions for loan losses related to one community development loan. Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest earning assets and interest paid on interest-bearing liabilities, is a significant component of the earnings of the Bank. Changes in net interest income result primarily from increases or decreases in the average balances of interest earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income increased $56 thousand, or 4.36%, for the quarter ended June 30, 1999 compared to 1998. The decrease was primarily attributable to a lower average loan balances compared to 1998 as well as an increase in interest-bearing deposit levels. 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 June 30, 1999 was $75 thousand compared to $40 thousand for the same quarter in 1998. The increase is due to a specific provision made for one community development loan in the commercial loan portfolio of the Bank. This loan, which has a total exposure of $700 thousand, is currently in noaccrual status and carries a 50% reserve. Management is working closely with the borrower to ensure completion of the development and full repayment of the loan. Noninterest Income The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charge, overdrafts, account analysis, and other customer service fees. Customer service fees increased $88 thousand, or 26%, during the quarter primarily attributable to growth in ATM surcharge fees---the Bank increased its fees for non-customers from $1.00 to $1.50 in April 1999 and continues to install new ATM machines throughout the region. Noninterest expense Salaries and benefits increased $8 thousand, or 1.26%, during the quarter ended June 30, 1999 compared to 1998. This increase is primarily attributable to annual raises for employees as well as filling unfilled staff positions. Data processing expenses represented .78% and .85% of the total average assets for the quarters ended June 30, 1999 and 1998, respectively. Data processing expenses are a result of the management decision of the Bank to out source data processing to third party processors the bulk of its data processing. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, installment and student loan portfolios. 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 Marketing and public relations expense decreased approximately $18 thousand for the quarter ended June 30, 1999 compared to the quarter ended June 30, 1998. The decrease was primarily related to the utilization of a strategic marketing plan during 1999 to generate business for less cost. Media utilized included radio, newspaper, and conventions. Professional Services increased approximately $8 thousand, or 13.1%, for the quarter ended June 30, 1999 compared to the quarter ended June 30, 1998. This increase is primarily attributable to consulting fees related to the Year 2000 Remediation Plan and Customer Awareness seminars. 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 June 30, 1999, 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 Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs or that of its vendor that have time-sensitive software may recognize the date using "00" as the year 1900 rather than the Year 2000. This could result in major system failure or miscalculations. The "Year 2000" potential problems create risk for the Company from unforeseen problems in its own computer system and from third parties such as other financial institutions, the federal government, federal agencies, vendors and customers. Failures of the Company's or third party's computer systems could have a material effect on the Company's abilities to conduct business, especially to process and account for the transfer of funds electronically Like many financial institutions, the Company relies upon computers for conducting its daily operations. Failure to resolve Year 2000 issues presents the following risks to the Company: (1) the Bank could lose customers to other financial institutions, resulting in loss revenue, if the Bank is unable to properly account for customer transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and correspondent institutions could fail to provide funds to the Bank which could materially impair the Bank's liquidity and affect the Bank's ability to fund loans and deposit withdrawals; (3) concern on the part of depositors that Year 2000 issues could impair access to their deposit account balances could result in the Bank experiencing deposit outflows prior to December 31, 1999; and (4) the bank could incur increased personnel costs if additional staff is required to perform functions that inoperative systems would have otherwise performed. Management believes that it is not possible to estimate the potential lost revenue due to the Year 2000 issue, as the extent and longevity of any potential problem cannot be predicted. The Company has conducted a comprehensive review of its computer systems, both internal and outsourced processing, to identify the systems that could be affected by the "Year 2000" issue and has developed a Year 2000 Plan to modify or replace the affected systems and test them for Year 2000 readiness. To date, the Company has taken the following actions to mitigate the potential effects of the Year 2000 issue: The Bank has upgraded all applicable computer systems (hardware and software) to be Year 2000 ready. Management has completed testing all systems to ensure Year 2000 Compliance. The Board of Directors has adopted a Year 2000 Plan that Management is currently implementing. The Plan address the overall status of the Year 2000 Project, details of the Company's contingency plan, describes mission critical systems and non-mission critical systems, identifies all third party vendors and applicable testing strategies and test dates. The Company has written a Year 2000 Business Resumption Plan that contains all mission critical systems and services. This Plan was completed by June 30, 1999. The Company has established a Year 2000 Committee consisting of members of senior management which currently meets at least monthly to discuss progress on the Year 2000 Plan, and A Year 2000 budget has been developed which estimates the cost associated with Year 2000 readiness. Current estimates of the cost to be incurred to prepare for the Year 2000 range from do not exceed $200,000. In conjunction with Year 2000 preparation, the Bank plans to make most hardware upgrades as a normal part of replacement of equipment--thereby minimizing cost. Cost estimates include primarily personnel and consulting time to ensure all business components/processes have been considered and tested for compliance. The Bank holds customer awareness seminars and has contacted its major loan and deposit customers to advise them to review their own systems for possible Year 2000 problems. In determining credit risk for existing customers as well as in making credit decisions for major borrowers, the Bank considers the impact of the Year 2000 issues. Income (Loss) Per Share During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Reporting Comprehensive Income In January 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive Income. This standard establishes new standards for reporting comprehensive income that includes net income as well as certain other items that result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. Disclosures about Segments of an Enterprise and Related Information In June 1997, the FASB issued SFAS No. 131, which is effective for all periods beginning after December 15, 1998. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic area in which they operate and their major customers. Management has determined that the Bank operates in one segment, namely community banking. PART II - OTHER INFORMATION Item 1. Legal Proceedings. A writ of summons was filed by Monument Financial Group, Inc. and Ronald Hatfield, respectively, an accountholder and its principal (collectively, the "Plaintiffs") to commence an action against the Bank in the Court of Common Pleas, Philadelphia County on June 29,1999. The suit involves the processing of transactions in alleged non-compliance with the deposit contract. This action by the Bank allegedly resulted in a loss to the Plaintiffs in an undetermined amount. Plaintiffs have not yet filed a complaint and have, therefore, not specified the alleged damages, but have indicated that the alleged damages are in excess of $50,000. The Bank cannot comment further on the litigation until a complaint is filed alleging a specific cause of action. No other material claims have been instituted or threatened by or against Registrant or its affiliates other than in the ordinary course of business. Item 2. Working Capital Restrictions on Payment of Dividends. The holders of the Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor under the laws of the Commonwealth of Pennsylvania. Under the Pennsylvania Banking Code of 1965, funds available for cash dividend payments by a bank are restricted to accumulated net earnings and if the surplus of a Bank is less than the amount of its capital the Registrant shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of the Registrant for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the bank without prior approval of the Secretary of Banking of the Commonwealth of Pennsylvania. Under the Federal Reserve Act, if a bank has sustained losses up to or exceeding its undivided profits, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such Bank's net profits less losses and bad debts. Cash dividends must be approved by the Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Registrant's net profits for that year plus its retained net profits from the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. The Federal Deposit Insurance act generally prohibits all payments of dividends a bank which is in default of any assessment to the Federal Deposit Insurance Corporation. Item 3. Defaults Upon Senior Securities. (a) There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any material default with respect to any indebtedness of the Registrant exceeding five percent of the total assets of the Registrant. (b) There have been no material arrearage or delinquencies as discussed in Item 3(a). Registrant has declared and issued a Series A Preferred Stock. No obligations pursuant to those securities have become due. Item 4. Submission of Matters to a Vote of Security Holders. (a) An annual meeting of the security holders of the Registrant was held on June 5, 1999. (b) Proxies for the annual meeting of the Registrant scheduled for June 5, 1999, (the "Annual Meeting") were solicited by proxy statement filed with the Commission. (c) The following matters were voted upon at the Annual Meeting: 1. ELECTION OF DIRECTORS The following individuals were elected as directors of the Registrant: S. Amos Brackeen Emma C. Chappell William B. Moore An affirmative vote of approximately 426,000 shares representing 99% of the votes cast and 51% of the shares entitled to vote were cast in favor of the election of these Board members. 2. INDEPENDENT AUDITORS The shareholders ratified the selection of Grant Thornton LLP as independent auditors to audit and certify consolidated financial statements of UBS for the year ending December 31, 1998 and to provide certain accounting services to UBS during 1999. Grant Thornton LLP has served in this capacity since October, 1997. An affirmative vote of approximately 415,000 shares representing 97% of the votes cast and 50% of the shares entitled to vote were cast in favor of this proposal. 3. RATIFICATION OF ESTABLISHMENT OF CLASS OF NON-VOTING COMMON STOCK. On September 30, 1998 the Articles of Incorporation of UBS were amended, by filing of Articles of Amendment with the Commonwealth of Pennsylvania on September 30, 1998. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. As of August 15, 1999, 166,666 shares of Class B Common Stock were issued and outstanding. The shareholders ratified the establishment of the Class B Common Stock by affirmative vote of approximately 402,000 shares representing 94% of the votes cast and 48% of the shares entitled to vote were cast in favor. 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 June 30, 1999. [Filed with Schedule SE] 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: August 20, 1999 /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-31-1999 JAN-1-1999 JUN-30-1999 7,149 357 10,205 0 13,986 0 6,693 66,713 (763) 113,526 100,706 0 2,740 0 0 1 10 10,092 113,526 1,476 287 92 1,860 631 0 1,229 75 0 1,667 (25) 0 0 0 (25) (.03) (.03) 7.97 1,450 2,223 0 0 680 (142) 85 763 763 0 0
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