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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, 2003 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
----------------------
Commission File Number
Pennsylvania 23-2802415
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North 3rd Street, Philadelphia, PA 19106
-------------------------------------- -------------
(Address of principal executive office) (Zip Code)
(215) 351-4600
----------------------------------------------------
(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____
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b2 of the Act) Yes_____ No___X___
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 and 500,000 shares of Series A Preferred Stock. 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. This
Class of stock has all of the rights and privileges of Common Stock with the
exception of voting. Of the 2,000,000 shares of Common Stock authorized, 250,000
have been designated Class B Common Stock. As of August 8, 2003 1,067,082
(including 191,667 Class B Non voting) shares were issued and outstanding and
33,500 shares were held as Treasury Stock.
The Board of Directors of United Bancshares, Inc. authorized 500,000 shares
of one series of the Series A Preferred Stock of which 143,150 shares were
outstanding and 6,308 shares were held as Treasury Stock as of August 8, 2003.
FORM 10-Q
Index
Item No. Page
- -------- ----
PART I
1. Financial Statements................................................ 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 8
3. Quantitative and Qualitative Disclosures about Market Risk......... 23
4. Controls and Procedures ........................................... 25
PART II
1. Legal Proceedings.................................................. 26
2. Restrictions on the Payment of Dividends........................... 26
3. Defaults upon Senior Securities.................................... 26
4 Submission of Matters to a Vote of Security Holders................ 27
5. Other Information.................................................. 27
6. Exhibits and Reports on Form 8K.................................... 27
3
Item 1. Financial Statements
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
2003 2002
---------- ----------
Assets
Cash and due from banks 4,609,423 4,541,667
Interest bearing deposits with banks 869,799 865,421
Federal funds sold 9,649,000 10,122,000
---------- ----------
Cash & cash equivalents 15,128,222 15,529,088
Investment securities:
Held-to-maturity, at amortized cost,
market value of $6,414,699 at June 30, 2003
and $7,442,870 at December 31, 2002 6,230,601 7,183,403
Available-for-sale, at market value 10,121,291 14,334,360
Loans, net of unearned discount 47,880,510 44,133,190
Less: allowance for loan losses (684,309) (674,550)
---------- ----------
Net loans 47,196,201 43,458,640
Bank premises & equipment, net 2,583,710 2,612,608
Accrued interest receivable 490,858 555,006
Core deposit intangible 1,827,474 1,937,221
Prepaid expenses and other assets 573,529 433,793
---------- ----------
Total Assets 84,151,886 86,044,119
========== ==========
Liabilities & Shareholders' Equity
Demand deposits, non-interest bearing 20,371,635 20,453,455
Demand deposits, interest bearing 11,616,233 12,837,464
Savings deposits 20,522,006 20,494,208
Time deposits, $100,000 and over 11,335,598 10,882,722
Time deposits 11,686,072 12,261,455
---------- ----------
Total Deposits 75,531,545 76,929,304
Obligations under capital leases 0 0
Accrued interest payable 84,683 156,219
Accrued expenses and other liabilities 473,900 458,455
---------- ----------
Total Liabilities 76,090,127 77,543,978
Shareholders' equity:
Preferred Stock, Series A, non-cum., 6%, $.01 par value,
500,000 shrs auth., 143,150 issued and outstanding 1,432 1,432
Common stock, $.01 par value; 2,000,000 shares authorized;
1,068,588 shares issued and outstanding at June 30, 2003
and 1,102,088 at December 31, 2002, respectively 10,686 11,021
Treasury Stock, 33,500 shares at June 30, 2003
and 6,308 shares preferred stock, series A 0 0
Additional-paid-in-capital 14,749,789 14,749,454
Accumulated deficit (6,879,058) (6,499,197)
Net unrealized gain on available-for-sale securities 178,909 237,432
---------- ----------
Total Shareholders' equity 8,061,758 8,500,141
---------- ----------
84,151,886 86,044,119
=========== ===========
See Accompanying Notes
4
Statements of Operations
(unaudited)
Quarter ended Quarter ended Six months ended Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest Income:
Interest and fees on loans 732,451 727,947 1,456,167 1,465,629
Interest on investment securities 206,851 389,423 465,830 778,784
Interest on Federal Funds sold 43,579 50,717 65,328 97,591
Interest on time deposits with other banks 6,750 1,477 10,955 3,167
----------- ----------- ----------- -----------
Total interest income 989,631 1,169,564 1,998,280 2,345,171
Interest Expense:
Interest on time deposits 101,701 171,835 203,020 376,837
Interest on demand deposits 22,598 27,792 46,258 55,027
Interest on savings deposits 24,652 32,768 53,332 65,925
----------- ----------- ----------- -----------
Total interest expense 148,950 232,395 302,610 497,789
Net interest income 840,680 937,169 1,695,670 1,847,382
Provision for loan losses 60,000 37,500 120,000 75,000
----------- ----------- ----------- -----------
Net interest income less provision for
loan losses 780,680 899,669 1,575,670 1,772,382
----------- ----------- ----------- -----------
Noninterest income:
Customer service fees 393,827 485,648 831,469 973,634
Realized gain (loss) on investments 0 0 0 25,789
Other income 15,874 58,881 40,402 76,391
----------- ----------- ----------- -----------
Total noninterest income 409,701 544,529 871,871 1,075,814
Non-interest expense
Salaries, wages, and employee benefits 544,135 615,639 1,127,279 1,242,822
Occupancy and equipment 318,558 322,997 607,503 703,145
Office operations and supplies 111,873 111,282 224,317 215,247
Marketing and public relations 29,377 14,331 43,718 26,864
Professional services 51,590 54,458 103,534 112,616
Data processing 159,627 139,878 316,586 306,588
Deposit insurance assessments 8,504 9,072 17,183 18,594
Other noninterest expense 199,655 241,911 387,282 501,905
----------- ----------- ----------- -----------
Total non-interest expense 1,423,319 1,509,568 2,827,404 3,127,781
----------- ----------- ----------- -----------
Net income (loss) ($ 232,937) ($ 65,370) ($ 379,861) ($ 279,585)
=========== =========== =========== ===========
Loss per share-basic ($0.21) ($0.06) ($0.34) ($0.25)
Loss per share-diluted ($0.21) ($0.06) ($0.34) ($0.25)
----------- ----------- ----------- -----------
Weighted average number of shares 1,101,628 1,099,497 1,101,628 1,099,497
=========== =========== =========== ===========
See Accompanying Notes
5
Statement of Cash Flows
(unaudited)
Six Months Ended Six Months Ended
June 2003 June 2002
------------ ------------
Cash flows from operating activities
Net loss ($ 379,861) ($ 279,584)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses 120,000 75,000
Gain on sale of fixed assets 0 (39,753)
Depreciation and amortization 326,751 366,474
Decrease (increase) in accrued interest receivable and other assets (55,933) 47,028
Increase (decrease) in accrued interest payable and other liabilities (56,091) 39,969
------------ ------------
Net cash used in operating activities (45,135) 209,134
Cash flows from investing activities
Purchase of investments-Available-for-Sale (1,500,647) (7,791,039)
Purchase of investments-Held-to Maturity (1,500,000) (500,000)
Proceeds from maturity & principal reductions of investments-Available-for-Sale 5,679,631 5,782,223
Proceeds from maturity & principal reductions of investments-Held-to-Maturity 2,458,281 1,890,674
Proceeds from sale of investments-Available-for-Sale 0 1,091,063
Net (increase) decrease in loans (3,857,561) 1,395,402
Purchase of premises and equipment (237,674) (121,304)
Sale of premises and equipment 0 110,000
------------ ------------
Net cash provided by investing activities 1,042,029 1,857,018
Cash flows from financing activities
Net increase (decrease) in deposits (1,397,760) (929,536)
------------ ------------
Net cash used in financing activities (1,397,760) (929,536)
Increase in cash and cash equivalents (400,866) 1,136,616
Cash and cash equivalents at beginning of period 15,529,088 13,781,978
Cash and cash equivalents at end of period 15,128,222 14,918,594
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest 231,074 397,414
============ ============
6
See Accompanying Notes
NOTES TO FINANCIAL STATEMENTS
1. General
United Bancshares, Inc. (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956. The Company's principal activity is
the ownership and management of its wholly owned subsidiary, United Bank of
Philadelphia (the "Bank").
During interim periods, the Company follows the accounting policies set forth in
its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2002 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the Company's consolidated financial
position as of June 30, 2003 and December 31, 2002 and the consolidated results
of its operations for the six month period ended June 30, 2003 and 2002, and its
consolidated stockholders' equity for the six month period ended June 30, 2003,
and its consolidated cash flows for the six month period ended June 30, 2003 and
2002.
2. Stock-based Compensation
At June 30, 2003, the Bank had one stock-based employee compensation plan. The
Bank accounts for that plan under the recognition and measurement principles of
APB 25, "Accounting for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation costs is reflected in net income, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant.
The following table provides the disclosures required by SFAS No. 148 and
illustrates the effect on net income and earnings per share if the Corporation
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
(in 000's)
June 30, 2003 December 31, 2002
------------- -----------------
Net income (in thousands) As reported ($ 380) $( 217)
Stock-based compensation
costs determined under fair
value method for all awards $ -- $ --
------- ------
Pro forma ($ 380) ($ 217)
Earnings per share (Basic) As reported ($0.31) ($0.20)
Pro forma ($0.34) ($0.20)
Earnings per share (Diluted) As reported ($0.34) ($0.20)
Pro forma ($0.34) ($0.20)
There were no options granted in 2003 and 2002.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Because the Company is a bank holding company for the Bank, the financial
statements in this report 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 quarterly report. This discussion and analysis should be read
in conjunction with the financial statements presented elsewhere in this report.
Critical Accounting Policies
Allowance for Credit Losses
The Bank considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The balance in the allowance for loan losses is determined
based on management's review and evaluation of the loan portfolio in relation to
past loss experience, the size and composition of the portfolio, current
economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from management's estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. For
financial reporting purposes, a valuation allowance of 100% of the deferred tax
asset has been recognized to offset the deferred tax assets related to
cumulative temporary differences and tax loss carryforwards. If management
determines that the Bank may be able to realize all or part of the deferred tax
asset in the future, a credit to income tax expense may be required to increase
the recorded value of net deferred tax asset to the expected realizable amount.
Selected Financial Data
The following table sets forth selected financial data for the each of the
following periods:
(Thousands of dollars, except per share data)
Quarter ended Quarter ended
June 30, 2003 June 30, 2002
------------- -------------
Net interest income $ 841 $ 937
Provision for loan losses 60 37
Noninterest income 410 545
Noninterest expense 1,423 1,510
Net income (loss) (233) (65)
Earnings (loss) per share-basic and diluted ($0.21) ($0.06)
8
June 30, 2003 December 31, 2002
------------- -----------------
Balance sheet totals:
Total assets $ 84,152 $86,044
Loans, net $ 47,196 $43,459
Investment securities $ 16,352 $21,518
Deposits $ 75,532 $76,929
Shareholders' equity $ 8,062 $ 8,500
Ratios
Return on assets(1) (0.46)% (0.25)%
Return on equity(1) (4.50)% (2.55)%
Equity to assets ratio 7.69% 7.45%
- ----------
(1) Not annualized
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
increased approximately $4.0 million, or 5.57%, during the quarter ending June
30, 2003. Average funding uses decreased $3.6 million, or 5.08%, for the same
quarter.
Sources and Uses of Funds Trends
June 30, 2003 March 31, 2003
------------- --------------
(Thousands of Dollars, Average Increase (Decrease) Average
except percentages) ------- ------------------- -------
Balance Amount % Balance
------- ------ ------ -------
Funding uses:
Loans $ 42,625 ($ 701) (1.62%) $ 43,326
Investment securities
Held-to-maturity 6,167 (709) (10.31) 6,876
Available-for-sale 10,719 (2,316) (17.77) 13,035
Federal funds sold 14,226 7,291 105.13 6,935
-------- ------ --------
Total uses $ 73,737 ($3,565) $ 70,172
======== ======= ========
Funding sources:
Demand deposits
Noninterest-bearing $ 19,928 $ 92 0.46% $ 19,836
Interest-bearing 11,969 (67) (0.56) 12,036
Savings deposits 20,706 376 1.85 20,330
Time deposits 23,099 3,596 18.44 19,503
-------- ------ --------
Total sources $ 75,702 $3,997 $ 71,705
======== ====== ========
Loans
Average loans declined approximately $701 thousand, or 1.62%, during the quarter
ended June 30, 2003. The Bank continues to experience repayments in its
residential mortgage loan portfolio as consumers refinance existing loans or
sell their homes to purchase new homes to take advantage of the historically low
interest rate environment. In June 2003, the Bank purchased approximately $4.8
million five year hybrid adjustable rate residential mortgage loans to
supplement the declining portfolio. In addition, during the quarter, the Bank
equipped itself to become a competitive player in the mortgage loan origination
market to reduce the level of payoffs and to generate a new source of fee
income.
The Bank continues to cultivate relationships with other financial institutions
in the region with which it participates in loans as a strategy to stabilize and
grow its commercial loan portfolio. This strategy will be utilized as a low cost
means to build the Bank's pool of earning assets while it enhances its own
business development capacity. During the quarter ended June 30, 2003, the Bank
booked $1.5 million in new loan participations. Most of these participations are
secured by commercial real estate.
9
The Bank's loan-to-deposit ratio at June 30, 2003 was 63.39%, compared to 56.15%
at March 31, 2003. The increase during the quarter is due to the purchase of
residential mortgage loans and commercial loan participations. The target
loan-to-deposit ratio is 75%. This level would allow the Bank to optimize
interest income on earning assets while maintaining adequate liquidity.
Management will continue to implement loan growth strategies including the
purchase of additional commercial loan participations and the origination of
small business loans, mortgage loans and consumer loans including home equity,
automobile, student and credit card loans.
Because of the purchase of loan participations, the Bank's loan portfolio is
heavily concentrated in commercial real estate loans that now comprise $12.5
million, or 26.15%, of total loans. The purchase of $4.8 million residential
mortgage loans in June 2003 resulted in an increase in this component of the
portfolio from $13.6 million at December 31, 2002 to $16.6 million, or 34.68% of
the portfolio, at June 30, 2003. The following table shows the composition of
the loan portfolio of the Bank by type of loan.
(Thousands of Dollars)
June 30, December 31,
2003 2002
-------- -------
Commercial and industrial $10,389 $10,855
Commercial real estate 12,537 11,898
Consumer loans 8,387 7,820
Residential mortgages 16,629 13,560
-------- -------
Total Loans $47,942 $44,133
======== =======
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation of the
loan portfolio, the diversification and size of the portfolio, and adequacy of
collateral. The following factors are considered in determining the adequacy of
the allowance for loan losses: levels and trends in delinquencies and impaired
loans; levels of and trends in charge-offs and recoveries; trends in volumes and
terms of loans, effects of any changes in risk selection and underwriting
standards, and other changes in lending policies, procedures and practices;
experience, ability, and depth of lending management and relevant staff;
national and local economic conditions; industry conditions; and effects of
changes in credit concentrations. The following Table presents an analysis of
the allowance for loan losses.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
Balance at January 1, 2003 $ 675
-----
Charge-offs:
Commercial loans (89)
Consumer loans (47)
Total charge-offs (136)
=====
Recoveries 25
Net (charge-offs) recoveries (111)
Additions charged to operations 120
-----
Balance at June 30, 2003 684
=====
10
The allowance for loan losses as a percentage of total loans was 1.42% at June
30, 2003 compared to 1.71% at March 31, 2003. The decline in this ratio is due
to the addition of $4.8 million residential mortgage loans in June 2003 for
which required reserves were minimal because of the strong collateral position
associated with these loans. In addition, during the quarter ended June 30,
2003, the Bank charged off $89 thousand commercial loans for which
collectability was unlikely.
The economy has been in recession for the last two years. Although, some sectors
of the economy now seem poised for growth, economic uncertainty continues.
Because the impact on the borrowers may lag the current economic conditions, the
Bank proactively monitors its credit quality while working with borrowers in an
effort to identify and control credit risk.
At June 30, 2003, the Bank's classified loans totaled $1.9 million, or 3.99% of
total loans. Specific reserves of $601 thousand have been allocated to these
loans. Approximately $357 thousand was allocated to one loan for which full
collectibility is uncertain. (Refer to Nonperforming and Nonaccrual Loans below
for further discussion on this loan.)
While management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
Management believes the level of the allowance for loan losses is adequate as of
June 30, 2003.
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, 2003, non-accrual loans were approximately $1.7 million compared to $2
million at March 31, 2003. A significant amount of the non-accrual loans
primarily relate to one borrower with loans totaling $1.3 million (discussed
below) that were placed on non-accrual in January 2003. Approximately $797
thousand of the Bank's non-accrual loans are guaranteed by the Small Business
Administration.
11
The Bank has one borrower in the telecommunications industry with loans totaling
approximately $1.3 million that is experiencing severe financial difficulty.
Guarantees from the Small Business Administration (SBA) reduce the Bank's
exposure to approximately $714 thousand. A specific reserve of $357 thousand has
been allocated to this loan to cover potential losses. Management continues to
work closely with this borrower to develop a work-out plan to minimize the risk
of loss. This loan has been modified to provide for a moratorium on principal
payments until January 2004.
There is no other 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. From time to time, the Bank purchases loans from other
financial institutions. These loans are generally located in the Northeast
corridor of the United States. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy.
At June 30, 2003, approximately 15% 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.
Investment Securities and other short-term investments
Investment securities, including Federal Funds Sold, increased on average by
$4.3 million, or 15.89%, during the quarter ended June 30, 2003. This increase
is due to the replacement of a $5 million certificate of deposit by a local
municipality. The certificate of deposit matured in January 2003 and was
re-deposited in March 2003--resulting in a decline in investable funds during
the quarter ending March 31, 2003. Prior to this maturity, this certificate had
continuously renewed for more than 8 years. Based on discussions with the
depositor, management does not anticipate that the certificate will be removed
again in the near future.
The Bank's current investment portfolio primarily consists of mortgage-backed
pass-through agency securities, and other government-sponsored agency
securities. The Bank does not invest in high-risk securities or complex
structured notes. The yield on the portfolio is 4.99% at June 30, 2003 compared
with 5.45% at March 31, 2003. The average duration of the portfolio is 2.6
years. In the current low interest rate environment, the duration of the
investment portfolio is significantly shortened because of the level of fixed
rate mortgage backed securities that comprised 45.9% of the total portfolio at
June 30, 2003. Because customers are more likely to refinance in a low interest
rate environment, the prepayment speed increases on this component of the
portfolio. The constant one year prepayment rate (CPR) at June 30, 2003 was
42.79 that translates into 43% of the mortgage pool repaying on an annual basis.
This results in more liquidity and a lower yield on the investment portfolio.
12
In addition, approximately $2 million in other securities were called during the
quarter. The result is more liquidity and a further reduction in yield on the
portfolio. The average yield of called securities was 6%. As a result of calls
over the last two years, callable agencies now comprise only 14.3% of the
investment portfolio.
The Bank will continue to take steps to reduce the impact of the high level of
optionality in the portfolio by identifying replacement loans or securities that
diversify risk and provide some level of monthly cashflow to be reinvested in
the future rising rate environments. The Bank has implemented a strategy to
invest funds in hybrid mortgage-backed securities that are fixed for three to
ten years and then become adjustable with the current market conditions. These
securities have average current yields of at least 4.00% and estimated durations
of 5 years with monthly cashflow.
Deposits
The Bank has a stable core deposit base representing 82% of total deposits.
During the quarter ended June 30, 2003, average deposits increased $4 million,
or 5.57%. The average level of time deposits increased approximately $3.6
million during the quarter as a result of the replacement of one $5 million
deposit by a local municipality. This deposit was removed in January 2003 and
re-deposited in March 2003. Based on management's discussions with this
customer, the deposit is not expected to be removed in the near future.
Significant deposit growth is not projected because of the Bank's mandatory
capital requirements outlined in its Written Agreement with its regulators (See
Regulatory Matters below). Therefore, aggressive deposit retention or new
business development strategies have not been implemented.
Other Borrowed Funds
The Bank did not borrow funds during the quarter ended June 30, 2003. Generally,
the level of other borrowed funds is dependent on many items such as loan
growth, deposit growth, customer collateral/security requirements and interest
rates paid for these funds. The Bank's liquidity has been enhanced by loan
paydowns/payoffs and called investment securities--thereby, eliminating the
need to borrow.
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.
13
The Bank's financial instrument commitments at June 30, 2003 are summarized
below:
Commitments to extend credit $9,489,000
Outstanding letter of credit $ 57,000
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. Management believes the Bank has adequate
liquidity to support the funding of unused commitments.
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
rates.
The Bank is required to maintain minimum levels of liquid assets as defined by
Federal Reserve Board (the "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 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, 2003, management believes the
Bank's liquidity is satisfactory and in compliance with the FRB regulations
The Bank's principal sources of asset liquidity include investment securities
consisting principally of U.S. Government and agency issues, particularly those
of shorter maturities, and mortgage-backed securities with monthly repayments of
principal and interest. Other types of assets such as federal funds sold, as
well as maturing loans, are sources of liquidity. Approximately $9 million in
loans are scheduled to mature within one year.
By policy, the Bank's minimum level of liquidity is 6.00% of total assets. At
June 30, 2003, the Bank has total short-term liquidity, including cash and
federal funds sold, of $14 million, or 16.7% of total assets. Additional
liquidity of approximately $10.1 million is provided by the Bank's investment
portfolio classified as available-for-sale.
14
The Bank's overall liquidity continues to be enhanced by a significant level of
core deposits which management has determined are less sensitive to interest
rate movements. The Bank continues to avoid reliance on large denomination time
deposits. The Bank has one $5 million deposit with a government agency that
matures in December 2003. While this is a short-term renewal, based on
discussions with the customer, management does not anticipate the removal of
this deposit in the near future.
The following is a summary of the remaining maturities of time deposits of
$100,000 or more outstanding at June 30, 2003:
(Thousands of dollars)
3 months or less $ 2,655
Over 3 through 12 months 7,232
Over 1 through three years 1,449
Over three years --
-------
Total $11,336
=======
Capital Resources
Total shareholders' equity decreased approximately $438 thousand during the
quarter ended June 30, 2003. The decrease in equity was primarily due to a net
loss of $379 thousand during the quarter and a $59 thousand decrease in other
comprehensive income (FAS 115 unrealized gains on available-for-sale securities)
because of interest rate changes that reduced the value of the investment
portfolio.
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 Company's and the Bank's risk-based capital
ratios are above the minimum requirements. (Refer to Regulatory Matters below
for Written Agreement requirements). Management continues the objective of
increasing capital by offering additional stock (preferred and common) for sale
to knowledgeable investors on a limited offering basis. However, the focus
continues to be on 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.
15
Company Company
June 30, December 31,
2003 2002
---- ----
Total Capital $ 8,062 $ 8,263
Less: Intangible Asset/Net unrealized
gains (losses) on available for sale
portfolio (2,026) (1,937)
------ ------
Tier 1 Capital 6,036 6,326
------ ------
Tier 2 Capital 538 528
------ ------
Total Qualifying Capital $6,574 $6,854
====== ======
Risk Adjusted Total Assets
(including off-Balance sheet exposures) $42,918 $42,104
Tier 1 Risk-Based Capital Ratio 14.06% 15.02%
Tier 2 Risk-Based Capital Ratio 15.32% 16.28%
Leverage Ratio 7.36% 7.46%
Bank Bank
June 30, December 31,
2003 2002
------- -------
Total Capital $ 7,773 $ 7,974
Less: Intangible Asset/Net unrealized
gains (losses) on available for sale
portfolio (2,026) (1,937)
------- -------
Tier 1 Capital 5,747 6,037
------- -------
Tier 2 Capital 538 528
------- -------
Total Qualifying Capital $ 6,285 $ 6,565
======= =======
Risk Adjusted Total Assets
(including off-Balance sheet exposures) $42,918 $42,104
Tier 1 Risk-Based Capital Ratio 13.39% 14.34%
Tier 2 Risk-Based Capital Ratio 14.64% 15.59%
Leverage Ratio 7.01% 7.12%
Results of Operations
Summary
The Bank had a net loss of approximately $234 thousand ($0.21 per common share)
for the quarter ended June 30, 2003 compared to a net loss of $66 thousand
($0.06 per common share) for the quarter ended June 30, 2002. The financial
results for the quarter ended June 30, 2003 were negatively impacted by the
continued low interest rate environment and competitive market pressures causing
the net interest margin and noninterest income to decline.
Revenue enhancement strategies have been implemented to generate expanded
opportunities for fee income through the marketing of consumer loan products
including residential mortgages, home equity, automobile, student, and credit
card loans, and the installation of additional high volume automated teller
machines (ATMs). However, A greater impact on profitability is expected to be
realized with increased loan originations that build the Bank's loan-to-deposit
ratio. Increased loan volume will result in a higher net interest margin and
therefore increased revenues. To this end, management is focused on the
implementation of business development strategies to increase the level of loans
outstanding. Business development officers have been hired and a residential
mortgage origination infrastructure has been put into place. In June 2003, the
Bank purchased $4.8 million residential mortgage loans to increase the net
interest income until the Bank's originations increase in volume.
16
In addition, to build momentum around business development and to generate
interest and enthusiasm in the marketplace, management embarked on a re-branding
campaign for the Bank. The campaign focuses on a re-introduction of the Bank and
emphasizes its commitment to the community. This campaign includes among other
things, in-branch marketing of the Bank's products and services, direct mail
advertising/solicitation, and the use of newspaper and television media . A
major emphasis has been placed on mortgage loan origination and the Bank's new
division, United Wealth Management Services, as a lead-in to cross-sell the
Bank's other products and services.
A more detailed explanation for each component of earnings is included in the
sections below.
Net Interest Income
Net interest income is an effective measure of how well management has balanced
the Bank's interest rate sensitive assets and liabilities. Net interest income,
the difference between (a) interest and fees on interest earning assets and
interest paid on interest-bearing liabilities, is a significant component of the
earnings of the Bank. Changes in net interest income result primarily from
increases or decreases in the average balances of interest earning assets, the
availability of particular sources of funds and changes in prevailing interest
rates.
Net interest income declined $96 thousand, or 10.30% for the quarter ending June
30, 2003 compared to the quarter ending June 30, 2002. Much of this decline was
experienced in the investment portfolio. The average balance of investment
securities declined from $25.3 million at June 30, 2002 to $16.9 million at June
30, 2003, while the average yield decreased from 6.06% to 4.99% for the same
period. During 2002, approximately $10.8 million higher yielding agency
securities were called. In the current historically low interest rate
environment, these funds were placed in lower yielding mortgage-backed
securities or Federal Funds Sold. Strategies continue to be implemented to shift
low yielding earning assets to higher yielding loan participations and
investment securities.
The Bank's cost of funds declined to .71% for the quarter ending June 30, 2003
compared to .75% for the same quarter in 2002. Consistent with current market
conditions, the Bank reduced the rates it pays on many of its interest-bearing
products. Because most of the Bank's deposits are considered core, they were not
sensitive to declining rates.
The net interest margin of the Bank was 4.51% at June 30, 2003 compared to 4.97%
at June 30, 2002. Management actively manages its exposure to interest rate
changes. While the prime rate decreased 200 basis points over the last year, the
Bank did not experience a similar decline in yield on its earning assets. This
is because much of the Bank's loan portfolio is fixed rate in nature and not
related to prime. In addition, 60% of the Bank's investment portfolio is fixed
rate. These characteristics of the Bank's earning assets coupled with the Bank's
significant level of core deposits resulted in less impact on the Bank's net
interest margin during the declining rate environment.
17
Provision for Loan Losses
The provision is based on management's estimate of the amount needed to maintain
an adequate allowance for loan losses. This estimate is based on the review of
the loan portfolio, the level of net credit losses, past loan loss experience,
the general economic outlook and other factors management feels are appropriate.
The provision for loan losses charged against earnings for the quarter ending
June 30, 2003 was $60 thousand compared to $37 thousand for the same quarter in
2002. This increase in the provision was necessary because of an increase in
classified loans for which specific reserves were provided. (Refer to Allowance
for Loan Losses above for discussion on classified loans and specific reserves.)
Management continues to closely monitor the portfolio for signs of weakness and
will proactively make provisions to cover potential losses.
During the current unstable economic environment, the Bank monitors its credit
quality very closely by working with borrowers in an effort to identify and
control credit risk. Systematic provisions are made to the allowance to cover
potential losses related to the Bank's classified loans. Management believes the
level of the allowance for loan losses is adequate as of June 30, 2003.
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. Noninterest income for the quarter ended June 30, 2003
declined $135 thousand, or 24.76%, compared to the quarter ended June 30, 2002.
During 2002, the Bank recognized a non-recurring gain of approximately $40
thousand on the sale of its Frankford branch office, which accounts for a
portion of the decrease.
A large component of noninterest income, customer service fees, declined $92
thousand, or 18.91%, for the quarter ended June 30, 2003 compared to 2002. The
decline was primarily because of a reduction in activity fees and dormancy fees
on deposit accounts. More customers are avoiding service charges by keeping
appropriate minimum balances. In addition, to avoid he necessity to escheat the
balances of inactive customer accounts, the Bank made an extensive effort to
contact these customers to re-activate their accounts. This resulted in a
reduction in activity/dormant account service charges.
In addition, surcharge income on ATM's has declined. Some of the Bank's ATMs
have experienced a drop in volume as competitors place machines in close
proximity to existing high volume ATMs of the Bank. Management continues the
process of identifying potentially high volume locations to place machines.
18
Noninterest Expense
Salaries and benefits decreased $71 thousand, or 11.61%, during the quarter
ended June 30, 2003 compared to 2002. In April 2002, as part of its Profit
Restoration Plan, the Bank made strategic reductions in staff, job
consolidations, and reduced salaries for certain employees to lower the level of
personnel expense. Management continues its review to ensure the Bank is
operating with the most efficient organizational structure.
Data processing expenses are a result of the management decision of the Bank to
outsource a majority of its data processing operations to third party
processors. Such expenses are reflective of the high level of accounts being
serviced for which the Bank is charged a per account charge by processors. In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, installment and student loan portfolios.
Data processing expenses increased approximately $20 thousand, or 14.12%, during
the quarter ended June 30, 2003 compared to 2002. This increase is related to
increased service activities provided by the Bank's new core data processor,
FISERV. These services including statement rendering and research (imaging),
were previously performed in-house. In November 2002, the Bank converted its
core data processing to FISERV to achieve cost savings and create efficiencies
to allow for further reductions in personnel expense. 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 loan servicing options and
the re-negotiation of existing contracts with servicers.
Occupancy expense decreased approximately $4 thousand, or 1.37%, during the
quarter ended June 30, 2003 compared to 2002. The decrease is primarily
attributable to the sale of the Bank's former Frankford branch in June 2002. In
addition, many of the fixed assets initially acquired in 1992 when the Bank
first opened for business were fully depreciated in 2002 (10 year life). This
results in a reduction in monthly depreciation expense.
Professional services expense decreased approximately $3 thousand, or 5.27%, for
the quarter ended June 30, 2003 compared to 2002. This decrease is primarily
related to the final resolution of outstanding legal matters with W.T.
Development and Monument Financial during 2002. Management continues to seek
methods to further reduce this cost.
Office operations and supplies expense remained relatively unchanged for the
quarter ended June 30, 2003 compared to 2002. In conjunction with the Bank's
earnings enhancement/profit restoration plan, management continues to tightly
control all operating expenses.
Federal deposit insurance premiums decreased by $1 thousand, or 6.26%, for the
quarter ended June 30, 2003 compared to 2002. FDIC insurance premiums are
applied to all financial institutions based on a risk based premium assessment
system. Under this system, bank strength is based on three factors: 1) asset
quality, 2) capital strength, and 3) management. Premium assessments are then
assigned based on the institution's overall rating, with the stronger
institutions paying lower rates. The Bank's assessment was based on 1.96 basis
points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings
Insurance Fund) assessable deposits. The decrease during 2003, is a result of a
reduction in the Bank's level of deposits as well as improvement in the Bank's
risk rating.
19
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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS No. 148") in December 2002. SFAS
No. 148 amends the disclosure and certain transition provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation". The new disclosure provisions are effective for financial
statements for fiscal years ending after December 15, 2002 and for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002.
Regulatory Matters
In February 2000, as a result of a regulatory examination completed in December
1999, the Bank entered into a Written Agreement (herein sometimes referred to as
the Agreement) with its primary regulators with regard to, among other things,
achievement of agreed-upon capital levels, implementation of a viable
earnings/strategic plan, adequate funding of the allowance for loan losses, the
completion of a management review and succession plan, and improvement in
internal controls. The Agreement requires the Bank to increase its capital ratio
to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31,
2000, the Bank had met the required ratios by implementing strategies that
included: reducing expenses, consolidating branches, and soliciting new and
additional sources of capital. Management continues to address all matters
outlined in the Agreement. Management believes that the Bank is "substantially"
in compliance with the Agreement's terms and conditions. Failure to comply could
result in additional regulatory supervision and/or actions.
As of December 31, 2001, the Bank's tier one leverage capital ratio fell to
6.80%, below the 7% minimum capital ratio required by the Agreement. However,
at December 31, 2002, the tier one leverage ratio had improved to 7.12% as a
result of the smaller average asset size of the Bank. At June 30, 2003, this
ratio (currently 7.01%) continues to be above the required minimum due to the
lower average asset size. Management continues to review and revise its capital
plan to address the development of new equity--internal (retained earnings) and
external (private limited sales of investment securities).
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
20
The FASB issued SFAS No.150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. As a result,
management does not anticipate the adoption of SFAS No. 150 to have a material
impact on the Company's financial position or results of operations.
The Company adopted FASB Interpretation ("FIN") 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain non-financial contractual obligation.
The Company previously did not record a liability when guaranteeing obligations
unless it became probable that the Company would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002. At June 30, 2003, the Company was
contingently liable on financial and performance standby letters of credit
totaling $57,000, none of which were originated in the first six months of this
year. The Company's commitments under standby letters of credit expire at
various dates through June 2004. The Bank generally holds collateral and/or
obtains personal guarantees supporting these commitments. In the event that the
Bank is required to fulfill its contingent liability under a standby letter of
credit, it could liquidate the collateral held, if any, and enforce the personal
guarantee(s) held, if any, to recover all or a portion of the amount paid under
the letter of credit.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations. The Company
does not anticipate FIN 46 to have a material impact on its consolidated
financial position and results of operations.
21
Cautionary Notice Regarding Forward Looking Statements
Certain of the matters discussed in this document including matters discussed
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" may constitute forward looking statements for the
purposes of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended, and may involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of United Bancshares, Inc ("UBS") to be materially different from
future results, performance or achievements expressed or implied by such forward
looking statements. The words "expect," "anticipate," "intended," "plan,"
"believe," "seek," "estimate," and similar expressions are intended to identify
such forward-looking statements. UBS' actual results may differ materially from
the results anticipated by the forward-looking statements due to a variety of
factors, including without limitation: (a) the effects of future economic
conditions on UBS and its customers including economic factors which affect
consumer confidence in the securities markets, wealth creation, investment and
consumer saving patterns; (b) UBS interest rate risk exposure and credit risk;
(c) changes in the securities markets with respect to the market values of
financial assets and the stability of particular securities markets; (d)
governmental monetary and fiscal policies, as well as legislation and regulatory
changes; (e) changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral and securities, as well as
interest-rate risks; (f) changes in accounting requirements or interpretations;
(g) the effects of competition from other commercial banks, thrifts, mortgage
companies, consumer finance companies, credit unions securities brokerage firms,
insurance company's, money-market and mutual funds and other financial
institutions operating in the UBS' trade market area and elsewhere including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet; (h) any extraordinary events (such as the
September 11, 2001 events and the U.S. Government's response to those events or
the U.S. Government becoming involved in a conflict in a foreign country; (i)
the failure of assumptions underlying the establishment of reserves for loan
losses and estimates in the value of collateral, and various financial assets
and liabilities and technological changes being more difficult or expensive than
anticipated; (j) UBS' success in generating new business in its existing
markets, as well as its success in identifying and penetrating targeted markets
and generating a profit in those markets in a reasonable time; (k) UBS' timely
development of competitive new products and services in a changing environment
and the acceptance of such products and services by customers; and (l) UBS'
success in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to UBS are expressly
qualified in their entirety by use of the foregoing cautionary statements. All
forward-looking statements included in this Report are based upon information
presently available, and UBS assumes no obligation to update any forward-looking
statement.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to prime or other short term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap, or excess earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations.
At June 30, 2003, an asset sensitive position is maintained on a cumulative
basis through 1 year of 3.61% that is within the Bank's policy guidelines of +/-
15% on a cumulative 1-year basis. The current gap position is primarily due to
high level of funds in short-term investments (i.e. Federal Funds Sold) and the
level of callable agency securities which are subject to be called in the
current declining rate environment. This position is somewhat mitigated by the
high concentration of fixed rate mortgage loans the Bank has in its loan
portfolio and the significant level of core deposits which have been placed in
longer repricing intervals. Generally, because of the positive gap position of
the Bank in shorter time frames, the Bank can anticipate that increases in
market rates will have a positive 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, although the Bank currently has a positive
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 net income of
the Bank. This model produces an interest rate exposure report that forecast
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 equity at
June 30, 2003 are as follows:
23
Market value Market value of equity
Changes in rate of equity as a % of MV of Assets
------------------- ------------ ----------------------
(Dollars in thousands)
+400 basis points 1,553 2.05%
+300 basis points 3,131 4.02
+200 basis points 4,405 5.53
+100 basis points 5,768 7.07
Flat rate 7,166 8.58
-100 basis points 8,624 10.08
-200 basis points 9,958 11.38
-300 basis points 10,850 12.20
-400 basis points 11,883 13.13
The market value of equity may be impacted by the composition of the Bank's
assets and liabilities. A shift in the level of variable versus fixed rate
assets will create swings in the market value of equity. The Bank's market value
of equity declines in a rising rate environment because of the high level of
fixed rate loans the it has in its portfolio.
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 Board of Directors of the Bank and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest-rate
exposure is not considered significant and is within the policy limits of the
Bank at June 30, 2003. 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 balance sheet of the Bank.
3. Restructure the investment portfolio of the Bank.
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 vulnerability of the Bank to interest-rate cycles.
24
Item 4 Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer, Evelyn F. Smalls,
and Chief Financial Officer, Brenda M. Hudson-Nelson, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 15(e). Based upon the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
As of the date of this report, there have not been any significant changes in
the Company's internal controls or in any other factors that could significantly
affect those controls subsequent to the date of the evaluation.
25
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. 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 therefore
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 bank shall, until surplus is equal to such
amount, transfer to surplus an amount which is at least 10% of its net earnings
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 Bank'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
by 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.
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Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits.
Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 is the Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.2 is the Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter ended June
30, 2003.
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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 14, 2003 /s/ Evelyn Smalls
-------------------------------
Evelyn F. Smalls
President & CEO
/s/ Brenda Hudson-Nelson
-------------------------------
Brenda M. Hudson-Nelson
EVP/Chief Financial Officer
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