Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PA | ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PA | ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PA | ex31-1.htm |
EX-32.2 - EXHIBIT 32.2 - UNITED BANCSHARES INC /PA | ex32-2.htm |
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 SEPTEMBER 30, 2009
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.)
|
30 S. 15th Street, Suite
1200, Philadelphia, PA
|
19102
|
(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 the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one)
Large
accelerated filer___
|
Accelerated
filer___
|
Non-accelerated
filer_X_
|
Smaller
Reporting Company ___
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes_____ No_X__
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
1
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 _____ Not Applicable.
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.
United Bancshares, Inc. (sometimes
herein also referred to as the “Company” or “UBS”) has two classes of capital
stock authorized - 2,000,000 shares of $.01 par value Common Stock and a Series
Preferred Stock.
The Board of Directors designated a
subclass of the common stock, Class B Common Stock, by filing of Articles of
Amendment to its Articles of Incorporation on September 30,
1998. This Class B Common Stock has all of the rights and privileges
of Common Stock with the exception of voting rights. Of the 2,000,000
shares of authorized Common Stock, 250,000 have been designated Class B Common
Stock. There is no market for the Common Stock. As of
October 30, 2009, the aggregate number of the shares of the Registrant’s Common
Stock issued was 1,068,588 (including 191,667 Class B
non-voting). There are 33,500 shares of Common Stock held in treasury
stock at October 30, 2009.
The
Series Preferred Stock consists of 500,000 authorized shares of stock of which
250,000 have been designated as Series A Preferred stock of which 111,842 shares
are issued and outstanding and 31,308 shares are held in treasury stock as of
October 30, 2009.
2
FORM
10-Q
Index
Item No.
|
Page
|
PART
I-FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
4T.
|
Controls
and Procedures
|
PART
II-OTHER INFORMATION
1.
|
Legal
Proceedings
|
|
1A.
|
Risk
Factors
|
|
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
3.
|
Defaults
upon Senior Securities
|
|
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
5.
|
Other
Information
|
27
|
6.
|
Exhibits
|
3
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 2,535,955 | $ | 2,449,181 | ||||
Interest
bearing deposits with banks
|
301,657 | 296,290 | ||||||
Federal
funds sold
|
2,973,000 | 2,726,000 | ||||||
Cash
& cash equivalents
|
5,810,612 | 5,471,471 | ||||||
Investment
securities:
|
||||||||
Held-to-maturity,
at amortized cost(fair value of $10,026,593
|
9,878,227 | 9,896,965 | ||||||
and
$10,016,314 at September 30, 2009 and December 31, 2008,
respectively)
|
||||||||
Available-for-sale,
at fair value
|
2,196,701 | 2,665,151 | ||||||
Loans,
net of unearned discount
|
48,602,306 | 48,663,437 | ||||||
Less:
allowance for loan losses
|
(700,136 | ) | (586,673 | ) | ||||
Net
loans
|
47,902,170 | 48,076,764 | ||||||
Bank
premises & equipment, net
|
1,415,003 | 1,622,314 | ||||||
Accrued
interest receivable
|
473,753 | 421,132 | ||||||
Core
deposit intangible
|
714,487 | 848,046 | ||||||
Prepaid
expenses and other assets
|
405,950 | 433,369 | ||||||
Total
Assets
|
$ | 68,796,903 | $ | 69,435,212 | ||||
|
||||||||
Liabilities
& Shareholders' Equity
|
||||||||
Demand
deposits, non-interest bearing
|
$ | 12,934,964 | $ | 11,844,242 | ||||
Demand
deposits, interest bearing
|
11,391,204 | 11,290,173 | ||||||
Savings
deposits
|
15,462,451 | 16,667,815 | ||||||
Time
deposits, $100,000 and over
|
12,261,094 | 12,356,187 | ||||||
Time
deposits
|
8,562,376 | 8,745,854 | ||||||
|
60,612,090 | 60,904,271 | ||||||
Accrued
interest payable
|
82,148 | 126,794 | ||||||
Accrued
expenses and other liabilities
|
373,805 | 354,401 | ||||||
Total
Liabilities
|
61,068,043 | 61,385,466 | ||||||
Shareholders'
equity:
|
||||||||
Preferred
Stock, Series A, non-cumulative, 6%, $.01 par value,
|
1,368 | 1,368 | ||||||
500,000
shares authorized, 111,842 issued
|
||||||||
Common
stock, $.01 par value; 2,000,000 shares authorized;
|
||||||||
876,921
shares issued
|
8,769 | 8,769 | ||||||
Class
B Non-voting common stock; 250,000 shares authorized; $0.01 par
value;
|
||||||||
191,667
shares issued and outstanding
|
1,917 | 1,917 | ||||||
Treasury
Stock, 33,500 common shares and 31,308 shares preferred shares, at
cost
|
||||||||
Additional-paid-in-capital
|
14,749,852 | 14,749,852 | ||||||
Accumulated
deficit
|
(7,084,586 | ) | (6,735,664 | ) | ||||
Accumulated
other comprehensive income
|
51,539 | 23,506 | ||||||
Total
Shareholders' equity
|
7,728,859 | 8,049,746 | ||||||
|
$ | 68,796,903 | $ | 69,435,212 | ||||
See
Accompanying Notes to Consolidated Financial Statements which are an integral
part of the unaudited consolidated financial statements.
4
Consolidated Statements of
Operations—(unaudited)
|
Quarter
ended
|
Quarter
ended
|
Nine
months ended
|
Nine
months ended
|
||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
Income:
|
||||||||||||||||
Interest
and fees on loans
|
$ | 769,596 | $ | 859,632 | $ | 2,326,767 | $ | 2,528,326 | ||||||||
Interest
on investment securities
|
132,620 | 155,493 | 416,102 | 457,566 | ||||||||||||
Interest
on Federal Funds sold
|
2,601 | 24,757 | 6,944 | 123,611 | ||||||||||||
Interest
on time deposits with other banks
|
1,827 | 1,859 | 5,383 | 5,592 | ||||||||||||
Total
interest income
|
906,644 | 1,041,741 | 2,755,196 | 3,115,095 | ||||||||||||
Interest
Expense:
|
||||||||||||||||
Interest
on time deposits
|
83,878 | 131,885 | 287,175 | 438,948 | ||||||||||||
Interest
on demand deposits
|
20,083 | 27,525 | 70,341 | 93,762 | ||||||||||||
Interest
on savings deposits
|
7,018 | 20,825 | 28,106 | 83,636 | ||||||||||||
Total
interest expense
|
110,979 | 180,235 | 385,622 | 616,346 | ||||||||||||
Net
interest income
|
795,665 | 861,506 | 2,369,574 | 2,498,749 | ||||||||||||
Provision
for loan losses
|
145,000 | 278,000 | 205,000 | 293,000 | ||||||||||||
Net
interest income less provision for
|
||||||||||||||||
loan
losses
|
650,665 | 583,506 | 2,164,574 | 2,205,749 | ||||||||||||
Noninterest
income:
|
||||||||||||||||
Customer
service fees
|
127,421 | 133,496 | 363,571 | 423,235 | ||||||||||||
ATM
activity fees
|
107,105 | 125,529 | 338,286 | 338,016 | ||||||||||||
Loan
syndication fees
|
0 | 0 | 80,000 | 80,000 | ||||||||||||
Grants
|
165,500 | 0 | 165,500 | 0 | ||||||||||||
Other
income
|
16,834 | 17,315 | 59,273 | 54,431 | ||||||||||||
Total
noninterest income
|
416,860 | 276,340 | 1,006,630 | 895,682 | ||||||||||||
Non-interest
expense
|
||||||||||||||||
Salaries,
wages, and employee benefits
|
419,410 | 391,950 | 1,200,737 | 1,194,411 | ||||||||||||
Occupancy
and equipment
|
277,138 | 278,232 | 834,318 | 818,689 | ||||||||||||
Office
operations and supplies
|
86,730 | 81,535 | 227,512 | 252,176 | ||||||||||||
Marketing
and public relations
|
3,297 | 35,985 | 39,018 | 83,207 | ||||||||||||
Professional
services
|
64,481 | 62,500 | 190,140 | 168,748 | ||||||||||||
Data
processing
|
132,160 | 129,480 | 411,456 | 380,009 | ||||||||||||
Deposit
insurance assessments
|
18,000 | 42,000 | 46,000 | 120,193 | ||||||||||||
Other
noninterest expense
|
198,569 | 186,629 | 570,945 | 543,675 | ||||||||||||
Total
non-interest expense
|
1,199,785 | 1,208,311 | 3,520,126 | 3,561,108 | ||||||||||||
Net
loss
|
$ | (132,260 | ) | $ | (348,465 | ) | $ | (348,922 | ) | $ | (459,677 | ) | ||||
Loss
per share-basic
|
$ | (0.13 | ) | $ | (0.34 | ) | $ | (0.34 | ) | $ | (0.44 | ) | ||||
Loss
per share-diluted
|
$ | (0.13 | ) | $ | (0.34 | ) | $ | (0.34 | ) | $ | (0.44 | ) | ||||
Weighted
average number of shares
|
1,035,088 | 1,035,088 | 1,035,088 | 1,035,088 | ||||||||||||
Total
Comprehensive loss
|
$ | (124,572 | ) | $ | (343,250 | ) | $ | (320,889 | ) | $ | (449,085 | ) |
See
Accompanying Notes to Consolidated Financial Statements which are an integral
part of the unaudited consolidated financial statements.
5
Consolidated Statements of
Cash Flows--(unaudited)
|
Nine
Months
|
Nine
Months
|
||||||
September
30,
|
September
30,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (348,922 | ) | $ | (459,677 | ) | ||
Adjustments
to reconcile net income loss to net cash
|
||||||||
provided by operating activities:
|
||||||||
Provision for loan losses | 205,000 | 293,000 | ||||||
Depreciation and amortization | 431,581 | 356,005 | ||||||
Increase in accrued interest receivable, prepaid and other assets | (25,202 | ) | (54,296 | ) | ||||
(Decrease) increase in accrued interest payable, accrued expenses and other liabilites | (25,240 | ) | 162,432 | |||||
Net
cash provided by operating activities
|
237,217 | 297,465 | ||||||
Cash
flows from investing activities
|
||||||||
Purchase
of investments-Held-to-Maturity
|
(6,883,758 | ) | (5,253,199 | ) | ||||
Proceeds
from maturity & principal reductions of
investments-Available-for-Sale
|
492,619 | 454,765 | ||||||
Proceeds
from maturity & principal reductions of
investments-Held-to-Maturity
|
6,878,410 | 6,383,696 | ||||||
Net
decrease in loans
|
(130,406 | ) | (4,510,313 | ) | ||||
Purchase
of premises and equipment
|
(62,760 | ) | (840,539 | ) | ||||
Net
cash provided by (used in) investing activities
|
294,105 | (3,765,590 | ) | |||||
Cash
flows from financing activities
|
||||||||
Net
decrease in deposits
|
(292,181 | ) | (3,845,171 | ) | ||||
Net
cash used in financing activities
|
(292,181 | ) | (3,845,171 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
239,141 | (7,313,297 | ) | |||||
Cash
and cash equivalents at beginning of period
|
5,471,471 | 13,920,006 | ||||||
Cash
and cash equivalents at end of period
|
$ | 5,710,612 | $ | 6,606,709 | ||||
Supplemental
disclosures of cash flow information
|
||||||||
Cash
paid during the period for interest
|
$ | 430,268 | $ | 598,323 |
See
Accompanying Notes to Consolidated Financial Statements which are an integral
part of the unaudited consolidated financial statements.
6
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(unaudited)
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, 2008 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 September 30, 2009 and December 31, 2008 and the consolidated
results of its operations for the three and nine month periods ended September
30, 2009 and 2008, and its consolidated cash flows for the nine months ended
September 30, 2009 and 2008.
Accounting Standards
Codification.
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s
officially recognized source of authoritative U.S. generally accepted accounting
principles (GAAP) applicable to all public and non-public non-governmental
entities, superseding existing FASB, American Institute of Certified Public
Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.
Rules and interpretive releases of the SEC under the authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. All
other accounting literature is considered non-authoritative. The switch to the
ASC affects the way companies refer to U.S. GAAP in financial statements and
accounting policies. Citing particular content in the ASC involves specifying
the unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure.
Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from such estimates. An
estimate that is particularly susceptible to change in the near term is the
allowance for loan losses.
Commitments
In the
general course of business, there are various outstanding commitments to extend
credit, such as letters of credit and un-advanced loan commitments, which are
not reflected in the accompanying financial statements. Management does not
anticipate any material losses as a result of these commitments.
Contingencies
The
Company is from time to time a party to routine litigation in the normal course
of its business. Management does not believe that the resolution of this
litigation will have a material adverse effect on the financial condition or
results of operations of the Company. However, the ultimate outcome of any such
litigation, as with litigation generally, is inherently uncertain and it is
possible that some litigation matters may be resolved adversely to the
Company.
2. Comprehensive
Loss
Total
comprehensive loss includes net loss and other comprehensive income or loss that
is comprised of unrealized gains and losses on investment securities available
for sale, net of taxes. The Company’s total comprehensive loss for
the three months ended September 30, 2009 and 2008 was $124,572 and $343,250,
respectively. The Company’s total comprehensive loss for the nine months ended
September 30, 2009 and 2008 was $320,889 and $449,085, respectively The
difference between the Company’s net loss and total comprehensive income for
these periods relates to the change in net unrealized gains and losses on
investment securities available for sale during the applicable period of
time.
7
3.
Net Loss Per Share
The
calculation of net loss per share follows:
Nine
Months Ended September 30, 2009
|
Nine
Months Ended September 30, 2008
|
Quarter
Ended
September
30, 2009
|
Quarter
Ended
September
30, 2009
|
|||||||||||||
Basic:
|
||||||||||||||||
Net
loss available to common shareholders
|
$ | (348,922 | ) | $ | (459,677 | ) | $ | (132,260 | ) | $ | (348,465 | ) | ||||
Average
common shares outstanding-basic
|
1,035,088 | 1,035,088 | 1,035,088 | 1,035,088 | ||||||||||||
Net
loss per share-basic
|
$ | (0.34 | ) | $ | (0.44 | ) | $ | (0.13 | ) | $ | (0.34 | ) | ||||
Fully
Diluted:
|
||||||||||||||||
Average
common shares-fully diluted
|
1,035,088 | 1,035,088 | 1,035,088 | 1,035,088 | ||||||||||||
Net
loss per share-fully diluted
|
$ | (0.34 | ) | $ | (0.44 | ) | $ | (0.13 | ) | $ | (0.13 | ) |
The
preferred stock is non cumulative and the Company is restricted from paying
dividends. Therefore, no effect of the preferred stock is included in
the loss per share calculations.
4. New Authoritative Accounting
Guidance
As
discussed in Note 1 - Significant Accounting Policies, on July 1, 2009, the
Accounting Standards Codification became FASB’s officially recognized source of
authoritative U.S. generally accepted accounting principles applicable to all
public and non-public non-governmental entities, superseding existing FASB,
AICPA, EITF and related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to U.S.
GAAP in financial statements and accounting policies. Citing particular content
in the ASC involves specifying the unique numeric path to the content through
the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 320, “Investments -
Debt and Equity Securities.” New authoritative accounting guidance under
ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changes
existing guidance for determining whether an impairment is other than temporary
for debt securities and (ii) replaces the existing requirement that the
entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is
more likely than not it will not have to sell the security before recovery of
its cost basis. Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
Adoption of the new guidance, which became effective April 1, 2009, did not
significantly impact the Company’s financial statements.
FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.” New authoritative accounting guidance
under ASC Topic 820,”Fair Value Measurements and Disclosures,” affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active. ASC Topic 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. The Company adopted the new authoritative accounting guidance
under ASC Topic 820 during
8
the
second quarter of 2009. Adoption of the new guidance did not significantly
impact the Company’s financial statements.
Further
new authoritative accounting guidance (Accounting Standards Update
No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair
value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when
traded as an asset, (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (iii) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as an
income approach or market approach. The new authoritative accounting guidance
also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The forgoing new authoritative accounting guidance under ASC Topic
820 will be effective for the Company’s financial statements beginning
October 1, 2009 and is not expected to have a significant impact on the
Company’s financial statements.
FASB ASC Topic 825 “Financial
Instruments.” New authoritative accounting guidance under ASC Topic
825,”Financial Instruments,” requires an entity to provide disclosures about the
fair value of financial instruments in interim financial information and amends
prior guidance to require those disclosures in summarized financial information
at interim reporting periods. The new interim disclosures required under Topic
825 are included in Note 6 - Fair Value.
FASB ASC Topic 855, “Subsequent
Events.” New authoritative accounting
guidance under ASC Topic 855, “Subsequent Events,” establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or available to be issued. ASC
Topic 855 defines (i) the period after the balance sheet date during which
a reporting entity’s management should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and (iii) the disclosures an entity should make about events or
transactions that occurred after the balance sheet date. The new authoritative
accounting guidance under ASC Topic 855 became effective for the Company’s
financial statements for periods ending after June 15, 2009.
Management has evaluated subsequent events through November 16, 2009, the date
the financial statements were issued and has determined that no recognized or
non-recognized subsequent events warranted inclusion or disclosure in the
interim financial statements as of September 30, 2009.
5. Investment
Securities
The following is a summary of the Company's investment
portfolio as of September 30, 2009:
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Market
Value
|
|||||||||||||
Available-for-sale:
|
||||||||||||||||
U.S.
Government agency securities
|
$ | 250,000 | $ | 1,173 | - | $ | 251,173 | |||||||||
Mortgage-backed
securities
|
1,741,067 | 75,756 | (5 | ) | 1,816,818 | |||||||||||
Total
debt securities
|
$ | 1,991,067 | 76,930 | (5 | ) | 2,067,991 | ||||||||||
Investments
in mutual friends
|
128,710 |
|
|
128,710 | ||||||||||||
$ | 2,119,777 | 76,930 | (5 | ) | 2,196,701 | |||||||||||
Held-to-maturity:
|
||||||||||||||||
U.S.
Government agency securities
|
$ | 6,834,145 | $ | 25,651 | $ | (41,480 | ) | $ | 6,818,317 | |||||||
Mortgage-backed
securities
|
3,044,082 | 164,226 | (31 | ) | 3,208,276 | |||||||||||
Total
debt securities
|
$ | 9,878,227 | $ | 189,877 | $ | (41,511 | ) | $ | 10,026,593 |
9
The
amortized cost and fair value of debt securities classified as
available-for-sale and held-to-maturity, by contractual maturity, as of
September 30, 2009, are as follows:
Amortized
Cost
|
Fair
Value
|
|||||||
Available-for-Sale
|
||||||||
Due
within one year
|
$ | - | $ | - | ||||
Due
after one year through three years
|
- | - | ||||||
Due
after three years
|
250,000 | 251,173 | ||||||
Mortgage-backed
securities
|
1,741,067 | 1,816,818 | ||||||
Total
debt securities
|
$ | 1,991,067 | 2,067,991 | |||||
Investments
in mutual funds
|
$ | 128,710 | 128,710 | |||||
$ | 2,119,777 | $ | 2,196,701 |
Held-to-maturity
|
||||||||
Due
within one year through three years
|
$ | - | $ | - | ||||
Due
after three years
|
6,834,145 | 6,818,317 | ||||||
Mortgage-backed
securities
|
3,044,082 | 3,208,276 | ||||||
$ | 9,878,227 | $ | 10,026,593 |
Expected
maturities will differ from contractual maturities because the issuers of
certain debt securities have the right to call or prepay their obligations
without any penalties.
The
following table shows the gross unrealized losses and fair value of Bank's
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2009.
(in
000’s)
|
Less Than 12 Months
|
12 Months or
Greater
|
Total
|
|||||||||||||||||||||
Description of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
Available-for-sale:
|
||||||||||||||||||||||||
U.S.
government and agencies
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Residential
mortgage-backed securities
|
- | - | - | - | - | |||||||||||||||||||
Held-to-maturity:
|
||||||||||||||||||||||||
U.S.
government and agencies
|
$ | 2,832 | $ | (41 | ) | $ | - | $ | - | $ | 2,832 | $ | (41 | ) | ||||||||||
Residential
mortgage-backed securities
|
- | - | - | - | - | - |
U.S. Government and Agency
Obligations. Unrealized losses on the Company’s investments in direct
obligations of U.S. government agencies were caused by interest rate increases.
The contractual terms of those investments do not permit the issuer to settle
the securities at a price less than the amortized cost bases of the investments.
Because the Company does not intend to sell the investments and it is not more
likely than not that the Company will be required to sell the investments before
recovery of their amortized cost bases, which may be maturity, the Company does
not consider those investments to be other-than-temporarily impaired at
September 30, 2009.
Residential Federal Agency
Mortgage-Backed Securities. Unrealized
losses on the Company’s investment in federal agency mortgage-backed securities
may be caused by interest rate increases. The Company purchased those
investments at a discount relative to their face amount, and the contractual
cash flows of those investments are guaranteed by an agency of the U.S.
government. Accordingly, it is expected that the securities would not be settled
at a price less than the amortized cost bases of the Company’s investments.
Because the decline in fair market value is attributable to changes in interest
rates and not credit quality, and because the Company does not intend to sell
the investments and it is not more likely than not that the Company will be
required to sell the investments before recovery of their amortized cost bases,
which may be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at September 30, 2009.
10
As of
September 30, 2009, $2.8 million U.S. Agency securities are included in the
continuous loss position for less than 12 months. There were no
mortgage backed securities in a continuous unrealized loss position for more
than 12 months.
We have a
process in place to identify debt securities that could potentially have a
credit impairment that is other than temporary. This process involves
monitoring late payments, pricing levels, downgrades by rating agencies, key
financial ratios, financial statements, revenue forecasts and cash flow
projections as indicators of credit issues. On a quarterly basis, we
review all securities to determine whether an other-than-temporary decline in
value exists and whether losses should be recognized. We consider relevant facts
and circumstances in evaluating whether a credit or interest rate-related
impairment of a security is other than temporary. Relevant facts and
circumstances considered include: (1) the extent and length of time the
fair value has been below cost; (2) the reasons for the decline in value;
(3) the financial position and access to capital of the issuer, including
the current and future impact of any specific events and (4) for fixed
maturity securities, our intent to sell a security or whether it is more likely
than not we will be required to sell the security before the recovery of its
amortized cost which, in some cases, may extend to maturity and for equity
securities, our ability and intent to hold the security for a period of time
that allows for the recovery in value.
It is the
policy of the Company to purchase AAA rated securities. Management
has evaluated these securities based upon the considerations noted above, and
has determined that, as of September 30, 2009, no OTTI losses exist within the
Company’s investment securities portfolio.
6. Fair
Value
Fair
Value Measurement
The fair
value of an asset or liability is the price that would be received to sell that
asset or paid to transfer that liability in an orderly transaction occurring in
the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. In estimating fair value, the Company
utilizes valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. Such valuation techniques are
consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. FASB ASC
Topic 820 establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
Level
1
· Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
· Generally,
this includes debt and equity securities that are traded in an active exchange
market (i.e. New York Stock Exchange), as well as certain US Treasury and US
Government and agency mortgage-backed securities that are highly
liquid and are actively traded in over-the-counter markets.
Level
2
· Quoted
prices for similar assets or liabilities in active markets.
· Quoted
prices for identical or similar assets or liabilities in markets that are not
active.
· Inputs
other than quoted prices that are observable, either directly or indirectly, for
the term of the asset or liability (e.g., interest rates, yield curves, credit
risks, prepayment speeds or volatilities) or “market corroborated
inputs.”
· Generally,
this includes US Government and agency mortgage-backed securities, corporate
debt securities, and loans held for sale.
Level
3 Inputs
· Prices or
valuation techniques that require inputs that are both unobservable (i.e.
supported by little or no market activity) and that are significant to the fair
value of the assets or liabilities.
· These
assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value requires
significant management judgment or estimation.
These
levels are not necessarily an indication of the risks or liquidity associated
with these investments. The following is a description of the
valuation methodologies used for instruments measured at fair
value:
11
Fair
Value on a Recurring Basis
The table
below presents the balances of assets and liabilities on the consolidated
balance sheets at their fair value as of September 30, 2009 and December 31,
2008 by level within the fair value measurement hierarchy.
(in
000’s)
|
Fair
Value Measurements at Reporting Date Using:
|
|||
Assets/Liabilities
Measured
at
Fair Value at September
30,
2009
|
Quoted
Prices in
Active
markets for
Identical
Assets
(Level
1)
|
Significant
other
observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
Investment
securities
available-for-sale
|
$2,197
|
$2,197
|
-
|
|
(in
000’s)
|
Fair
Value Measurements at Reporting Date Using:
|
|||
Assets/Liabilities
Measured
at
Fair Value at December
31,
2008
|
Quoted
Prices in
Active
markets for
Identical
Assets
(Level
1)
|
Significant
other
observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
Investment
securities
available-for-sale
|
$2,665
|
|
$2,665
|
-
|
The fair
value of available for sale securities is the market value based on quoted
market prices, when available, or market prices provided by recognized broker
dealers (Level 1). If listed prices or quotes are not available, fair
value is based upon quoted market prices for similar or identical assets or
other observable inputs (Level 2) or externally developed models that use
unobservable inputs due to the limited market activity of the instrument (Level
3).
Fair
Value on a Nonrecurring Basis
Certain
assets and liabilities are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example,
when there is evidence of impairment). The following table presents
the assets and liabilities carried on the consolidated balance sheets by level
within the hierarchy as of September 30, 2009 and December 31, 2008, for which a
nonrecurring change in fair value has been recorded during the nine months ended
September 30, 2009
Carrying Value at
September 30, 2009:
(in
000’s)
|
Total
|
Quoted
Prices
in
Active
markets
for
Identical
Assets
(Level
1)
|
Significant
other
observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
Assets:
Impaired
Loans
|
$ | 3,374 | - | - | $ | 3,374 |
12
Carrying
Value at December 31, 2008:
(in
000’s)
|
Total
|
Quoted
Prices
in
Active
markets
for
Identical
Assets
(Level
1)
|
Significant
other observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
||||||||||||
Assets:
Impaired
Loans
|
$ | 2,531 | - | - | $ | 2,531 |
Fair
value of impaired loans is determined at the fair value of the collateral if the
loan is collateral dependent. Collateral values are determined by
appraisal, which may be discounted based upon management’s review and changes in
market conditions. The valuation allowance for impaired loans is
included in the allowance for loan losses in the consolidated balance
sheets. The valuation allowance for impaired loans at September
30, 2009 was $136,000. The valuation allowance for impaired loans at
September 30, 2008 was $285,000.
Fair
Value of Financial Instruments
FASB ASC Topic 825 requires disclosure of the fair value
of financial assets and financial liabilities, including those financial assets
and financial liabilities that are not measured and reported at fair value on a
recurring basis or non-recurring basis. Fair value information about
financial instruments is required to be disclosed, whether or not recognized in
the balance sheet, where it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flows or other valuation
techniques. Those techniques are significantly affected by
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are exempt from
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The
following methods and assumptions were used by the Bank in estimating its fair
value disclosures for financial instruments:
Cash and
cash equivalents: The carrying amounts reported in the balance sheet for cash
and cash equivalents approximate those assets’ fair values.
Investment
securities: Fair values for investment securities available for sale are as
described above. Investment securities held to maturity are based on
quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable
approximates fair market value.
Loans
(other than impaired loans): The fair value of loans was estimated using a
discounted cash flow analysis, which considered estimated prepayments,
amortizations, and non performance risk. Prepayments and discount
rates were based on current marketplace estimates and
pricing. Residential mortgage loans were discounted at the current
effective yield, including fees, of conventional loans, adjusted for their
maturities with a spread to the Treasury yield curve. The carrying
amount of accrued interest receivable approximates fair market
value.
Deposit
liabilities: The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and certain types of money market
accounts) are equal to the amounts payable on demand at the reporting date
(e.g., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate the fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation. The Treasury Yield Curve was utilized for discounting
cash flows as it approximates the average marketplace certificate of deposit
rates across the relevant maturity spectrum. The carrying value of
accrued interest payable approximates market value.
13
Commitments
to extend credit: The carrying amounts for commitments to extend credit
approximate fair value as such commitments are not substantially different from
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties.
The fair
value of assets and liabilities are described below:
September 30, 2009
|
||||||||
Carrying
amount
|
Fair
value
|
|||||||
(in 000’s) | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 5,811 | $ | 5,811 | ||||
Investment securities | 12,075 | 12,224 | ||||||
Loans, net of allowance for loan losses | 47,902 | 48,145 | ||||||
Interest receivable | 474 | 474 | ||||||
Liabilities: | ||||||||
Demand deposits | 24,326 | 24,326 | ||||||
Savings deposits | 15,462 | 15,462 | ||||||
Time deposits | 20,823 | 20,823 | ||||||
Interest payable | 82 | 82 | ||||||
7.
Critical Accounting Policies
Allowance
for Loan 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. The following table presents an
analysis of the allowance for loan losses.
(in
000’s)
|
Nine
months ended
September
30, 2009
|
Nine
months ended
September
30, 2008
|
Three
months ended
September
30, 2009
|
Three
months ended
September
30, 2008
|
||||||||||||
Balance
at beginning of period
|
$ | 587 | $ | 590 | $ | 632 | $ | 664 | ||||||||
Charge-offs:
|
||||||||||||||||
Commercial
loans
|
(84 | ) | (26 | ) | (62 | ) | - | |||||||||
Consumer
loans
|
(47 | ) | (43 | ) | (19 | ) | (4 | ) | ||||||||
Total
charge-offs
|
(131 | ) | (69 | ) | (81 | ) | (4 | ) | ||||||||
Recoveries
|
39 | 138 | 5 | 14 | ||||||||||||
Net
recoveries (charge-offs)
|
(92 | ) | 69 | (77 | ) | 11 | ||||||||||
Provision
for loan losses
|
205 | 293 | 145 | 278 | ||||||||||||
Balance
at end of period
|
$ | 700 | $ | 952 | $ | 700 | $ | 952 |
14
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 and interest on
the loan appears to be available and the loan is in the process of
collection.
(Dollars
in thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||
Nonperforming
loans:
|
||||||||
Commercial
|
$ | 2,083 | $ | 1,368 | ||||
Consumer
|
185 | 115 | ||||||
Residential
Real Estate
|
221 | 218 | ||||||
Total
|
$ | 2,489 | $ | 1,701 | ||||
Loan
>90 days and still accruing
|
||||||||
Commercial
|
$ | 360 | $ | 438 | ||||
Consumer
|
74 | - | ||||||
Total
|
$ | 434 | $ | 438 |
At
September 30, 2009, non accrual loans totaled approximately $2.5 million
compared to approximately $1.7 million at December 31, 2008. The increase is
primarily related to the addition of one large commercial real estate
relationship that totaled approximately $500,000 as well as several home equity
loans. Non-accrual loans primarily include loans with SBA guarantees
or strong loan-to-value ratios that help to mitigate potential
losses. Management is actively working with these borrowers to
develop suitable repayment plans.
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 net deferred tax asset has been recognized to offset the net
deferred tax assets related to cumulative temporary differences and tax loss
carryforwards. If management determines that the Company may be able
to realize all or part of the deferred tax asset in the future, an income tax
benefit may be required to increase the recorded value of the net deferred tax
asset to the expected realizable amount.
15
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Special
Cautionary Notice Regarding Forward-looking Statements
Certain
of the matters discussed in this document and the documents incorporated by
reference herein, 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,” “may,” and similar expressions are intended to
identify such forward-looking statements. These forward looking
statements include: (a) statements of goals, intentions and expectations; and
(b) statements regarding business prospects, asset quality, credit risk, reserve
adequacy and liquidity. 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) ,the war on terrorism and the U.S. Government’s
response to those events or the U.S. Government becoming involved in a conflict
in a foreign country including the war in Iraq; (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 its 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.
16
Overview
The
Company had a net loss of approximately $132,000 ($0.13 per common share) for
the quarter ended September 30, 2009 compared to a net loss of approximately
$348,000 ($0.34 per common share) for the quarter ended September 30,
2008. The Company had a net loss of approximately $349,000 ($0.34 per
common share) for the nine months ended September 30, 2009 compared to a net
loss of approximately $460,000 ($0.44 per common share) for the nine months
ended September 30, 2008. The reduction in the loss in 2009 is the result of
lower provisions for loan losses and an increase in noninterest income related
to a Bank Enterprise Award (BEA) grant awarded to the Bank from the U.S.
Treasury Department’s Community Development Financial Institution (“CDFI”)
Fund.
Although
the current recessionary economy continues to adversely affect the financial
services industry, creating margin compression, increased credit quality
challenges, and higher compliance costs, two core factors will directly impact
the ability of the Company to achieve and sustain profitability:
Proactive management of asset
quality to minimize credit losses. The Bank’s level of
noncurrent loans continues to trend upward. Although collection
strategies have been implemented to manage delinquencies and reverse this trend,
many borrowers have been adversely affected by the downturn in the economy that
has resulted in a reduction in their cashflow—the “trickle down” effect.
Management convenes regular asset quality meetings to review and proactively
manage these credits in an attempt to avoid further deterioration in credit
quality. Also, the Bank utilizes programs that provide credit enhancements (i.e.
Small Business Administration, Department of Transportation, etc.) for its new
originations to mitigate risk.
The ability to achieve core deposit
growth. Deposit
growth continues to be one of management’s primary challenges. This
challenge is compounded by competition from regional and money center banks as
well as the current low interest rate environment. Utilizing its
competitive advantage as a community development bank and increased FDIC limits,
management has identified and continues to call upon corporations in the region
to request core depository relationships to support its small business lending
strategies. Significant corporate relationships generally have long
lead times to move beyond the “introduction” phase to a full depository
relationship. Management believes that several relationships are close to making
commitments.
Selected
Financial Data
The
following table sets forth selected financial data for each of the following
periods:
(Thousands
of dollars, except per share data)
|
Quarter
ended
September
30, 2009
|
Quarter
ended
September
30, 2008
|
Nine
months ended September 30, 2009
|
Nine
months ended September 30, 2008
|
||||||||||||
Net
interest income
|
$ | 796 | $ | 862 | $ | 2,369 | $ | 2,499 | ||||||||
Provision
for loan losses
|
145 | 278 | 205 | 293 | ||||||||||||
Noninterest
income
|
417 | 276 | 1,007 | 895 | ||||||||||||
Noninterest
expense
|
1,200 | 1,208 | 3,520 | 3,561 | ||||||||||||
Net
loss
|
(132 | ) | (348 | ) | (349 | ) | (460 | ) | ||||||||
Loss
per share-basic and diluted
|
(0.13 | ) | (0.33 | ) | (0.34 | ) | (0.44 | ) | ||||||||
Balance
sheet totals:
|
September
30, 2009
|
December
31, 2008
|
||||||||||||||
Total
assets
|
$ | 68,797 | $ | 69,435 | ||||||||||||
Loans,
net
|
$ | 47,902 | $ | 48,077 | ||||||||||||
Investment
securities
|
$ | 12,075 | $ | 12,562 | ||||||||||||
Deposits
|
$ | 60,612 | $ | 60,904 | ||||||||||||
Shareholders'
equity
|
$ | 7,729 | $ | 8,050 | ||||||||||||
Ratios (annualized):
|
Quarter
ended
September
30, 2009
|
Quarter
ended
September
30, 2008
|
||||||||||||||
Loss
on assets
|
(0.67 | %) | (0.64 | %) | ||||||||||||
Loss
on equity
|
(5.94 | %) | (5.97 | %) |
17
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 uses increased approximately $1.1 million, or 1.67%, during the three
months ended September 30, 2009 compared to the three months ended June 30,
2009. Average funding sources increased $979,000, or 1.62%, during the three
months ended September 30, 2009 compared to the three months ended June 30,
2009. The increase is primarily a result of temporary increases in
deposit balances of several customers.
Sources
and Uses of Funds Trends
September 30, 2009
|
June 30, 2009
|
|||||||||||||||
(Thousands of Dollars, except
percentages)
|
Average
|
Increase (Decrease)
|
Average
|
|||||||||||||
Balance
|
Amount
|
%
|
Balance
|
|||||||||||||
Funding
uses:
|
||||||||||||||||
Loans
|
$ | 48,666 | $ | 9 | 0.02 | % | $ | 48,657 | ||||||||
Investment
securities
|
||||||||||||||||
Held-to-maturity
|
10,014 | 277 | 2.84 | 9,737 | ||||||||||||
Available-for-sale
|
2,229 | (233 | ) | (9.46 | ) | 2,462 | ||||||||||
Federal
funds sold
|
4,134 | 1,017 | 32.63 | 3,117 | ||||||||||||
Balances
with other banks
|
301 | 2 | 0.67 | 299 | ||||||||||||
Total uses
|
65,344 | 1,072 | 1.67 | % | 64,272 | |||||||||||
Funding
sources:
|
||||||||||||||||
Demand
deposits
|
||||||||||||||||
Noninterest-bearing
|
$ | 12,854 | $ | 30 | 0.23 | % | $ | 12,877 | ||||||||
Interest-bearing
|
12,123 | 1,442 | 13.50 | 10,628 | ||||||||||||
Savings
deposits
|
15,769 | (515 | ) | (3.16 | ) | 16,284 | ||||||||||
Time
deposits
|
20,765 | 22 | 0.11 | 20,743 | ||||||||||||
Total
sources
|
61,511 | $ | 979 | 1.62 | % | $ | 60,532 |
Loans
Average
loans increased $9,000, or .02%, during the quarter ended September 30,
2009. Commercial loan originations during the quarter totaled
$491,000 but were offset by loan payoffs/paydowns in the consumer and
residential mortgage loan portfolios. In the current recessionary
economic environment, the Bank continues to maintain more stringent underwriting
standards especially related to non-owner occupied real estate
lending. Management has shifted its focus to traditional small
business lending for which credit enhancements through the Small Business
Administration or other loan guaranty programs may be available. The
Bank is aligned with “feeder” entities (i.e. Philadelphia Industrial Development
Corporation, Department of Transportation, etc.) that have loan guaranty
programs.
The
Bank’s loan portfolio is concentrated in commercial loans that comprise $37.1
million, or 76%, of total loans at September 30, 2009. Approximately $16.8
million of these loans are secured by owner occupied commercial real estate that
may serve to minimize the risk of loss. The Bank continues to have a strong
niche in lending to religious organizations for which total loans at September
30, 2009 were $14.6 million, or 39.5%, of the commercial portfolio. In light of
the economic uncertainty and the potential “trickle down” effect that may impact
the level of tithes and offerings that provide cash flow for repayment,
management has heightened its monitoring of this concentration to proactively
identify and manage credit risk.
18
The
composition of the net loans is as follows:
(in
000’s)
|
September 30, 2009
|
December 31, 2008
|
||||||
Commercial
|
$ | 37,106,469 | $ | 36,484,378 | ||||
Consumer
|
5,831,345 | 6,068,238 | ||||||
Residential
|
5,664,492 | 6,110,821 | ||||||
Total
|
48,602,306 | 48,663,437 | ||||||
Less
allowance for loan losses
|
(700,136 | ) | (586,673 | ) | ||||
Net
loans
|
$ | 47,902,170 | $ | 48,076,764 |
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 allowance for loan losses as a percentage of total
loans was 1.44% at September 30, 2009 compared to 1.21% at December 31, 2008.
Provisions are made to the allowance for loan losses in accordance with a
detailed periodic analysis. This analysis includes specific reserves
allocated to impaired loans based on underlying recovery values as well as a
general reserve based on many qualitative factors including charge-off history,
delinquency trends, loan terms, regulatory environment, economic conditions,
concentrations of credit risk and other relevant data.
Loans
deemed “impaired” are those for which borrowers are no longer able to pay in
accordance with the terms of their loan agreements. The Bank’s source
of repayment is generally the net liquidation value of the underlying
collateral. The level of impaired loans increased to approximately
$3.4 million at September 30, 2009 compared to $2.5 million at December 31,
2008. The increase is primarily related to two commercial real estate
loans totaling $1 million. Specific reserves related to impaired
loans totaled $136,000 and $97,000, respectively, at September 30, 2009 and
December 31, 2008. Loans to religious organizations represented
$134,000 of total impaired loans. The Bank is working with a
collection attorney to assist with its recovery efforts on its impaired loans
including forbearance agreements, foreclosure and other collection
strategies. Based on a recent evaluation, the risk related to these
credits is mitigated by strong collateral positions in real estate or guarantees
of the SBA of approximately $425,000.
Impaired
Loans:
(in
000’s)
|
September
30, 2009
|
December
31, 2008
|
Commercial
|
$2,968
|
$2,241
|
Consumer
|
185
|
71
|
Residential
|
221
|
218
|
Total
|
$3,374
|
$2,531
|
Management
uses all available information to recognize losses on loans; however, future
additions may be necessary based on further deterioration 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. Although
management uses the best information available, the level of the allowance for
loan losses remains an estimate that is subject to significant judgment and
short-term change.
The
percentage of allowance to nonperforming loans at September 30, 2009 has
declined from 34.5% at December 31, 2008 to 28.1%. The increase in
non-performing loans during the nine months ended September 30, 2009 is
primarily the result of one significant commercial real estate relationship
totaling $500,000 which has a strong loan-to-value. Therefore, no
specific reserves were required to cover the risk of loss.
19
ANALYSIS
OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in
thousands)
|
September
30,
2009
|
December
31,
2008
|
Allowance
for loan losses
|
$700
|
$587
|
Total
Impaired Loans (includes non-accrual loans)
|
$3,374
|
$2,531
|
Total
non-accrual loans
|
$2,489
|
$1,701
|
Allowance
for loan losses as a percentage of:
|
||
Total
Loans
|
1.44%
|
1.21%
|
Total nonperforming
loans
|
28.1%
|
34.5%
|
Net(charge-offs)
recoveries as a percentage of average loans
|
(0.19%)
|
0.77%
|
There is
no other known information about possible credit problems other than those
classified as nonaccrual and/or impaired that causes management to be uncertain
as to the ability of any borrower to comply with present loan
terms.
Investment
Securities and Other Short-term Investments
Investment
securities decreased on average by $44,000, or 0.36%, during the quarter ended
September 30, 2009 from the quarter ending June 30, 2009. The yield
on the investment portfolio declined to 4.24% at September 30, 2009 compared to
4.70% at December 31, 2008 as a result of the call of higher yielding agency
securities during 2009 in the current low interest rate
environment. The duration of the portfolio remains relatively short
at 1.6 years. At
September 30, 2009, 60%, or $7 million, of the investment portfolio consisted of
callable agency securities for which the duration shortened as a result of a
high level of projected call activity in the current low interest rate
environment. The remainder of the portfolio consists of government
sponsored agency (GSA) mortgage-backed pass-through securities. These
securities do not have the same risk characteristics of pooled subprime
mortgages for which many financial institutions have experienced valuation
declines and losses. The payments of principal and interest on these
pools of GSA loans are guaranteed by these entities that bear the risk of
default. The Bank’s risk is prepayment risk when defaults accelerate
the repayment activity. These loans have longer-term contractual
maturities but are sometimes paid off/down before maturity or have repricing
characteristics that occur before final maturity. Paydown activity increased
during 2009 as a result of the current recession and low interest rate
environment that created mortgage refinancing options as well as a high level of
mortgage foreclosures. Management’s goal is to maintain a portfolio with a short
duration to allow for adequate cash flow to fund loan origination activity and
to manage interest rate risk.
Deposits
During
the quarter ended September 30, 2009, average deposits increased approximately
$979,000, or 1.62%, from the quarter
ending June 30, 2009. The most significant increase was in the Bank’s
average interest bearing checking accounts that rose by $1,442,000, or 13.50%,
primarily the result of one non-profit customer receiving its annual funding of
$2 million in July 2009. These funds are expected to decline to an
average of $400,000 by December 31, 2009. Management continues to
make a concerted effort to attract and retain core deposits from existing
commercial loan customers to further stabilize deposit
levels. Savings account balances for which the Bank once offered
premium interest rates declined by $515,000, or 3.16%, during the
quarter. With increased competition in the region as well as
declining interest rates, the Bank is no longer able to utilize rates to attract
deposits. Also, during the current recession, deposit attrition has occurred as
a result of increased liquidity needs of customers.
Management
continues to seek to distinguish the Bank as a community development bank
through which corporations in the region can work collaboratively to impact
community. Placing deposits in the Bank provides the necessary funds
for small business loans that improve the financial capacity of these businesses
and result in job creation. Therefore, management continues to focus
its marketing efforts on large corporations headquartered or doing business in
the region to drive deposit growth. Management has identified and been calling
directly on corporations in the region to request core depository relationships
to support its small business lending strategies. Significant corporate
relationships generally have long lead times to move beyond the “introduction”
phase to a full depository relationship.
Certificates
of deposit increased on average by $22,000, or 0.11%, from the quarter ended
June 30, 2009. While the Bank has $12.2 million in certificates of deposit with
balances of $100,000 or more, approximately $8 million, or 66%, of these
deposits are with governmental or quasi-governmental entities that have a long
history with the Bank and are considered stable. Based on discussions with these
entities, no further reduction in certificates held is anticipated.
20
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. Commitments to extend credit fluctuate with the completion and conversion
of construction lines of credit to permanent commercial mortgage loans and/or
the closing of loans approved but not funded from one period to
another.
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. The Bank's financial instrument commitments
at September 30, 2009 are summarized below:
Commitments
to extend credit
|
$8,321,000
|
There are
no outstanding letters of credit.
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'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 also sources of
liquidity. Approximately $10.6 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 September 30, 2009, the Bank had total short-term
liquidity, including cash and federal funds sold, of $5.8 million, or 8.45% of
total assets, compared to $5.5 million, or 7.88%, at December 31,
2008. The increase in short-term liquidity is the result of cashflow
from the Bank’s investment portfolio from called bonds and paydowns in the
mortgaged-backed securities portfolio. The portion of the Bank’s investment
portfolio classified as available-for-sale could also provide liquidity.
However, the majority of these securities are pledged as collateral for deposits
of governmental/quasi-governmental agencies as well as the Discount Window at
the Federal Reserve Bank. Therefore, they are restricted from use to
fund loans or to meet other liquidity requirements. To ensure the
ongoing adequacy of liquidity, the following strategies will be utilized in
order of priority, if necessary:
·
|
Seek
additional non-public deposits from existing private sector
customers
|
·
|
Sell
participations of existing commercial credits to other financial
institutions in the region
|
While
management continues to seek additional non-public core deposits to support
ongoing loan demand, liquidity levels have been adequate. As a
result, it was not necessary to sell loan participations to other institutions
during the quarter ended September 30, 2009.
The
Bank’s contingent funding sources include the Discount Window at the Federal
Reserve Bank for which it currently has $1.75 million in securities pledged that
result in borrowing capacity of $1.5 million. Liquidity will continue to be
closely monitored and managed to minimize risk and ensure that adequate funds
are available to meet daily customer requirements and loan demand.
21
Capital
Resources
Total
shareholders' equity declined approximately $321,000 compared to December 31,
2008 as a result of a net loss of approximately $349,000 during the nine months
ended September 30, 2009 offset by other comprehensive income of approximately
$28,000 from unrealized gains on investment securities classified as
available-for-sale. As reflected in the table below, the Company’s risk-based
capital ratios are above the minimum regulatory
requirements. Effective on November 12, 2008, the date the regulatory
order was removed (as more fully described in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, filed on March 31, 2009), the
Bank is deemed "well capitalized." The Company and the Bank do not
anticipate paying dividends in the near future because of regulatory imposed
dividend restrictions.
The
Company will seek to maintain the requisite minimum regulatory capital levels by
internal capital generation (retained earnings) and by monitoring its asset
growth. Management submitted applications for funding through US
Treasury programs available to CDFIs to support growth and provide a “cushion”
for unforeseen economic events that may negatively impact the Bank’s capital
position. In August 2009, the Bank received a notification of the
award of a $165,500 Bank Enterprise Award (“BEA”) grant from the US Treasury for
the purpose of small business lending in low and moderate income
communities.
Company
|
Company
|
|||||||
(thousands
of dollars, except percentages)
|
September
30,
2009
|
December
31,
2008
|
||||||
Total
Capital
|
$ | 7,729 | $ | 8,050 | ||||
Less:
Intangible Assets and accumulated other comprehensive gain
(loss)
|
(766 | ) | (872 | ) | ||||
Tier
1 Capital
|
6,963 | 7,178 | ||||||
Tier
2 Capital
|
598 | 587 | ||||||
Total
Qualifying Capital
|
$ | 7,561 | $ | 7,765 | ||||
Risk
Adjusted Total Assets (including off-
|
||||||||
Balance
sheet exposures)
|
$ | 47,837 | $ | 46,862 | ||||
Tier
1 Risk-Based Capital Ratio
|
14.56 | % | 15.32 | % | ||||
Tier
2 Risk-Based Capital Ratio
|
15.81 | % | 16.57 | % | ||||
Leverage
Ratio
|
9.91 | % | 10.27 | % |
Bank
|
Bank
|
|||||||
Total
Capital
|
$ | 7,550 | $ | 7,861 | ||||
Less:
Intangible Assets and accumulated other comprehensive gain
(loss)
|
(766 | ) | (872 | ) | ||||
Tier
1 Capital
|
6,784 | 6,989 | ||||||
Tier
2 Capital
|
598 | 587 | ||||||
Total
Qualifying Capital
|
$ | 7,382 | $ | 7,576 | ||||
Risk
Adjusted Total Assets (including off-
|
||||||||
Balance
sheet exposures)
|
$ | 47,837 | $ | 46,862 | ||||
Tier
1 Risk-Based Capital Ratio (Minimum Ratio-
6.00%)
|
14.18 | % | 14.91 | % | ||||
Tier
2 Risk-Based Capital Ratio (Minimum Ratio-
10.00%)
|
15.43 | % | 16.17 | % | ||||
Leverage
Ratio (Minimum
Ratio- 5. 00%)
|
9.76 | % | 10.00 | % |
Results
of Operations
Summary
The
Company had a net loss of approximately $132,000 ($0.13 per common share) for
the quarter ended September 30, 2009 compared to a net loss of approximately
$348,000 ($0.34 per common share) for the quarter ended September 30,
2008. The Bank had a net loss of approximately $349,000 ($0.34 per
common share) for the nine months ended September 30, 2009 compared to a net
loss of approximately $460,000 ($0.44 per common share) for the nine months
ended September 30, 2008. The loss in 2009 is attributable to a higher level of
non-accrual loans, lower interest rates and a reduction in earning assets that
resulted in a reduction in net interest income. The reduction in the loss in
2009 compared to the same period in 2008 is the result of lower provisions for
loan losses and an increase in noninterest income related to a grant awarded to
the Bank from the U.S. Treasury Department. A detailed explanation of
each component of earnings is included in the sections below.
22
Net
Interest Income
Average
Balances, Rates, and Interest Income and Expense Summary
Three months
ended
September
30, 2009
|
Three months
ended
September
30, 2008
|
|||||
(in
000’s)
|
Average
Balance
|
Interest
|
Yield/Rate
|
Average
Balance
|
Interest
|
Yield/Rate
|
Assets:
|
||||||
Interest-earning
assets:
|
||||||
Loans
|
$48,666
|
$770
|
6.33%
|
$49,443
|
$860
|
6.96%
|
Investment
securities-HTM
|
10,014
|
109
|
4.35
|
9,691
|
117
|
4.83
|
Investments
securities-AFS
|
2,229
|
23
|
4.13
|
3,081
|
38
|
4.93
|
Federal
funds sold
|
4,134
|
3
|
0.29
|
4,968
|
25
|
2.01
|
Interest
bearing deposits with other banks
|
301
|
2
|
2.66
|
294
|
2
|
2.72
|
Total
interest-earning assets
|
65,344
|
907
|
5.55
|
67,477
|
1,042
|
6.18
|
Interest-bearing
liabilities
|
||||||
Demand
deposits
|
12,123
|
20
|
0.66
|
11,761
|
27
|
0.92
|
Savings
deposits
|
15,769
|
7
|
0.18
|
17,641
|
21
|
0.48
|
Time
deposits
|
20,765
|
84
|
1.62
|
20,788
|
132
|
2.54
|
Total
interest-bearing liabilities
|
48,657
|
111
|
0.91
|
50,190
|
180
|
1.43
|
Net
interest earnings
|
$796
|
$862
|
||||
Net
yield on interest-earning assets
|
4.87%
|
5.11%
|
Nine months
ended
September
30, 2009
|
Nine months
ended
September
30, 2008
|
|||||
(in
000’s)
|
Average
Balance
|
Interest
|
Yield/Rate
|
Average
Balance
|
Interest
|
Yield/Rate
|
Assets:
|
||||||
Interest-earning
assets:
|
||||||
Loans
|
$48,112
|
$2,327
|
6.45%
|
$46,037
|
2,528
|
7.32%
|
Investment
securities-HTM
|
9,907
|
331
|
4.45
|
9,350
|
339
|
4.83
|
Investments
securities-AFS
|
2,501
|
85
|
4.53
|
3,113
|
118
|
5.05
|
Federal
funds sold
|
3,444
|
7
|
0.27
|
6,276
|
124
|
2.63
|
Interest
bearing deposits with other banks
|
299
|
5
|
2.23
|
292
|
6
|
2.74
|
Total
interest-earning assets
|
64,263
|
2,755
|
5.72
|
65,068
|
3,115
|
6.38
|
Interest-bearing
liabilities
|
||||||
Demand
deposits
|
11,304
|
71
|
0.84
|
10,892
|
93
|
1.14
|
Savings
deposits
|
16,180
|
28
|
0.23
|
18,284
|
84
|
0.61
|
Time
deposits
|
20,800
|
287
|
1.84
|
20,684
|
439
|
2.83
|
Total
interest-bearing liabilities
|
48,284
|
386
|
1.07
|
49,860
|
616
|
1.65
|
Net
interest earnings
|
2,369
|
2,499
|
||||
Net
yield on interest-earning assets
|
4.92%
|
5.12%
|
Net
interest income declined approximately $66,000, or 7.64%, for the quarter ended
September 30, 2009 compared to the quarter ended September 30, 2008 and declined
approximately $130,000, or 5.20%, for the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008. The yield on
earning assets for the quarter ended September 30, 2009 declined to 5.55% from
6.18% for the same three months in 2008 as a result of reductions in the prime
lending and Federal Funds Sold rates during 2008. While the yield on earning
assets decreased 63 basis points, the cost of interest-bearing liabilities
declined 52 basis points as a result of rate reductions made on the Bank’s
deposit products to follow market conditions. As a result, margin compression
was minimized to 11 basis points. The reduction in the Bank’s net interest
income during the three months and nine months ended September 30, 2009 compared
to 2008 is primarily related to an increase in the level of non-accrual loans
and reduction in interest earning assets. Management continues to
focus on reducing the level of nonaccrual loans and growing its core assets to
increase net interest income. In addition, rates on loan and deposit
products continue to be reviewed and modified to manage interest rate risk and
minimize margin compression.
23
Provision
for Loan Losses
Provisions
for loan losses were $145,000 for the quarter ended September 30, 2009 compared
to $278,000 for the same quarter in 2008. Provisions for loan losses
for the nine months ended September 30, 2009 totaled $205,000 compared to
$293,000 for the same period in 2008. The requirement for additional provisions
in 2008 was based on credit losses inherent in the loan portfolio and the review
and analysis of the loan portfolio in accordance with the Bank’s Allowance for
Loan Loss policies and procedures. (Refer to Allowance for Loan Losses
above for discussion and analysis of credit quality.)
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 fees, overdrafts, account analysis, ATM fees and
other customer service fees. Noninterest income increased
approximately $141,000, or 50.85%, for the quarter ended September 30, 2009,
compared to the same quarter in 2008. Noninterest income increased approximately
$111,000, or 12.39%, for the nine months ended September 30, 2009, compared to
2008. The increase was primarily related to a grant awarded to the
Bank by the US Treasury Department.
Customer
service fees decreased by approximately $6,000, or 4.55%, for the quarter ended
September 30, 2009, compared to 2008 and decreased approximately $60,000, or
14.10%, for the nine months ended September 30, 2009 compared to
2008. The decline was primarily a result of a reduction in overdraft
and other activity fees on deposit accounts.
ATM fees
decreased approximately $18,000, or 14.68%, for the three months ended September
30, 2009, compared to 2008 and were generally unchanged for the nine months
ended September 30, 2009 compared to 2008. Consistent with trends in the
industry, the Bank has experienced some reduction in ATM usage. In
July 2008, management imposed a 50% increase in its surcharge fee that offset a
reduction in volume; in an attempt to stabilize the profitability of the
network.
Methods to reduce cost and increase revenues associated with its ATM
network continue to be evaluated.
In
September 2009, the Bank received a $165,500 Bank Enterprise Award (“BEA”) grant
from the Community Development Financial Institutions Fund of the US Treasury
for small business lending activity. This grant was fully recognized
and is included as grant income for the quarter ended September 30, 2009 as a
result of funding in excess of $165,500 in loans in small business
loans.
Noninterest
Expense
Salaries
and benefits increased approximately $27,000, or 7.01%, for the three months
ended September 30, 2009 compared to 2008 and increased approximately $6,000, or
0.53%, for the nine months ended September 30, 2009 compared to
2008. The increase in 2009 is related to the hiring of two new
officers—Vice President/Business Development and Vice President/Commercial
Lending. Both of these positions were deemed critical to increasing the Bank’s
business development opportunities to achieve profitability. Management
continues to review the organizational structure to maximize efficiencies and
increase business development activity.
Occupancy
expense decreased approximately $1,100, or 0.39%, for the three months ended
September 30, 2009 compared to 2008 and increased approximately $16,000, or
1.91%, for the nine months ended September 30, 2009 compared to
2008. The decline during the quarter is primarily related to a
negotiated reduction in Use and Occupancy Tax the Bank pays to the City of
Philadelphia. The increase for the nine months ended is primarily
attributable to interior and exterior improvements that were completed at the
Bank’s West Philadelphia branch in December 2008 that resulted in increased
depreciation expense. In addition, in April 2008, the Bank began a
10-year lease for its new Progress Plaza branch office that resulted in
increased rent expense.
Office
operations and supplies expense increased approximately $5,000, or 6.37%, for
the three months ended September 30, 2009 compared to 2008 but decreased
approximately $25,000, or 9.78%, for the nine months ended September 30, 2009
compared to 2008. The decrease for the nine months is primarily
related to a reduction in courier expense as a result of the movement to a new
courier service for currency and coin delivery and a streamlined delivery
schedule. Management continues to review all office operations
expenses including supplies, storage, security, etc. to determine if additional
expense reductions can be made.
24
Marketing and public relations expense decreased approximately
$33,000, or 90.84%, for the three months ended September 30, 2009 compared to
2008 and decreased approximately $44,000, or 53.11%, for the nine months ended
September 30, 2009 compared to 2008. All formal marketing in radio
and print were curtailed during 2009 in favor of more direct outreach through
office receptions and direct calling by business development staff.
Professional
services expense increased approximately $2,000, or 3.17%, for the three months
ended September 30, 2009 compared to 2008 and increased approximately $21,000,
or 12.68%, for the nine months ended September 30, 2009 compared to
2008. The increase is primarily related a higher level of accounting
and audit fees as well as IT consulting fees.
Data
processing expenses increased approximately $3,000, or 2.07% for the three
months ended September 30, 2009 compared to 2008 and increased approximately
$31,000, or 8.28%, for the nine months ended September 30, 2009 compared to
2008. The increase relates to an annual increase of 6% by the Bank’s
core service provider. The increase is also related to the Bank’s ATM
processing expense—specifically, net interchange expense. More Bank
customers are using non-proprietary ATMs for which the Bank is charged a fee
versus non-customers using the Bank’s ATM network for which it receives a
fee. In September 2009, negotiations for contract extensions were
completed that will result in a reduction in processing fees. In
October 2009, the Bank converted to an electronic transmission of its items
processing by utilizing “Check 21” and branch capture processing that will
result in a reduction in its processing fees.
Federal
deposit insurance assessments decreased approximately $24,000, or 57.14%, for
the three months ended September 30, 2009 compared to 2008 and decreased
approximately $74,000, or 61.73%, for the nine months ended September 30, 2009
compared to 2008. Assessments are based on many factors including the Bank’s
deposit size and composition and its current regulatory ratings. The
reduction in 2009 resulted from an improvement in the Bank’s regulatory rating
in December 2008 as well as lower deposit levels. In February 2009,
the FDIC adopted new rules, including a special assessment to stabilize the
Deposit Insurance Fund that resulted in an additional accrual of $30,836 at June
30, 2009. However, because of the Bank’s improved regulatory rating,
this was more than offset by a decline in the Bank’s basic FDIC
assessment.
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.
Dividend
Restrictions
The
Company has never declared or paid any cash or stock dividends. The
Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may
be declared and paid only from accumulated net earnings and that, prior to the
declaration of any dividend, 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 ten percent (10%) of the net earnings of the
bank 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 fifty percent (50%) of the amount of its capital, no dividend may be
declared or paid by the Bank without the prior approval of the Pennsylvania
Department of Banking.
Under the
Federal Reserve Act, the Federal Reserve Board has the power to prohibit the
payment of cash dividends by a bank holding company if it determines that such a
payment would be an unsafe or unsound practice or constitutes a serious risk to
the financial soundness or stability of the subsidiary bank. As a
result of these laws and regulations, the Bank, and therefore the Company, whose
only source of income is dividends from the Bank, will be unable to pay any
dividends while an accumulated deficit exists. The Company does not
anticipate that dividends will be paid for the foreseeable future.
The FDIC
generally prohibits all payments of dividends by a bank that is in default of
any assessment to the FDIC.
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 critical 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.
25
At September 30, 2009, an asset sensitive position is maintained
on a cumulative basis through 1 year of 6.28% that is within the Bank’s policy
guidelines of +/- 15% on a cumulative 1-year basis. This position makes the
Bank’s net interest income more susceptible to declining interest
rates. However, with rates at historical lows, there is not a high
probability that rates will decline further.
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. A simulation model is 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 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. At September 30, 2009, the change in
the market value of equity in a +200 basis point interest rate change is -24.4%
approaching the Bank’s policy limit of 25%. During the quarter ended
September 30, 2009, the Bank moved into compliance with this measure as a result
of improvement in the shocked fair value of the loan portfolio in a rising rate
environment resulting from new loan originations and renewal activity with
variable rates or short terms. Management will work to further mitigate this
risk by originating more variable rate loans and/or purchasing floating rate
mortgage-backed securities. However, based on these models, with the exception
of the market value measure, interest-rate exposure is not considered
significant and is within the policy limits of the Bank on all measures at
September 30, 2009.
Item
4T. Controls and Procedures
As of the
end of the period covered by the 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 Rules 13a-15(e) and 15d-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
Securities and Exchange Commission filings.
As of the
date of this report, there have not been any changes in the Company’s internal
controls over financial reporting that have materially affected or are
reasonably likely to materially affect its internal controls over financial
reporting.
PART
II - OTHER INFORMATION
Item 1. Legal
Proceedings.
None.
Item 1A. Risk
Factors.
There
have not been any material changes to the risk factors disclosed in the
Company’s 2008 Annual Report on Form 10-K except as follows:
Changes in the economy could
have an adverse effect on the Company
Poor
economic conditions continue to create historic levels of financial institution
failures and increased unemployment rates. The business and earnings
of the Bank are directly affected by general conditions in the U.S. and in
particular, economic conditions in the Philadelphia region. These
conditions include legislative and regulatory changes, inflation, and changes in
government and monetary and fiscal policies, all of which are beyond the Bank’s
control. Further downturn in the economy could result in a decrease
in demand for the Bank’s products and services, an increase in loan
delinquencies and increases in problem assets. Real estate pledged as
collateral for loans made by the Bank may decline in value, reducing the value
of assets and collateral associated with the Bank’s existing
loans. These factors could result in an increase in the provision for
loan losses and decline in the Bank’s and Company’s net income.
26
The
ability to increase deposits to fund asset growth represents a potential
liquidity risk. The Company may need to reduce earning asset growth through the
reduction of current production, sale of assets and/or the sale of participation
interests in future and current loans. This could reduce net income
of the Company in the future.
The risk
factors disclosed in the Company’s 2008 Annual Report on Form 10-K and the risk
factors set forth above are not the only risks that we
face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.
None
Item 3. Defaults
Upon Senior Securities.
None
Item 4. Submission of
Matters to a Vote of Security Holders.
None
Item 5. Other
Information.
None
Item 6.
Exhibits.
a) Exhibits.
27
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:
November 16, 2009
|
/s/ Evelyn F. Smalls
|
Evelyn
F. Smalls
|
|
President
& Chief Executive Officer
|
|
Date:
November 16, 2009
|
/s/ Brenda M.
Hudson-Nelson
|
Brenda
Hudson-Nelson
|
|
Executive
Vice President/Chief Financial
Officer
|
28
Index to Exhibits-FORM
10-Q
29