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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997.
UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
0-25976
(Registrant's file number)
Pennsylvania 23-2802415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
714 Market Street, Philadelphia, PA 19106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (215)829-2265
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the 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 12 months ( or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K |_|
1
There is no market for the Common Stock. None of the shares of the
Registrant's stock were sold within 60 days of the filing of this Form 10-K. As
of March 15, 1998 the aggregate number of the shares of the Registrant's Common
Stock outstanding was 823,695.
Registrant also has a class of series preferred stock authorized. The Board
of the Registrant has designated one series of non-voting preferred stock as
Series A Preferred Stock. As of March 15, 1998, the aggregate number of shares
of the Registrant's Series A Preferred Stock outstanding was 93,150.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by referenced:
1. Registrant's filing on Form 8-K dated October 30, 1997.
PART I
ITEM 1 BUSINESS
United Bancshares, Inc.
United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for
United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of
the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the
Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of
1956, as amended, on October 14, 1994.
The Bank commenced operations on March 23, 1992. UBS provides banking
services through the Bank. The principal executive offices of UBS and the Bank
are located at 714 Market Street, Philadelphia, Pennsylvania 19106. The
Registrant's telephone number is (215) 829-2265.
As of March 15, 1998, UBS and the Bank had a total of 73 employees.
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United Bank of Philadelphia
The Bank, an African-American -controlled, state-chartered member bank of
the Federal Reserve System is regulated by both the Federal Reserve Board and
the Commonwealth of Pennsylvania Department of Banking (the "Department"). The
deposits held by the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC").
The Bank conducts all its banking activities through its six offices
located as follows: (i) Main Branch 714 Market Street, Philadelphia, PA; (ii)
Center City Branch Two Penn Center, Philadelphia, PA; (iii) West Philadelphia
Branch 37th & Lancaster Avenues, Philadelphia, PA; (iv) Mount Airy Branch 1562
East Wadsworth Avenue, Philadelphia, PA; (v) Frankford Branch 4806 Frankford
Avenue, Philadelphia, PA; and (vi) West Girard Branch 2820 West Girard Avenue,
Philadelphia, PA. Through these locations, the Bank offers a broad range of
commercial and consumer banking services. At December 31, 1997, the Bank had
total deposits aggregating approximately $91.6 million and had total net loans
outstanding of approximately $74.2 million. Although the Bank's primary service
area for Community Reinvestment Act purposes is Philadelphia County, it also
services, generally, the Delaware Valley, which consists of portions of
Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle
County in Delaware; and Camden, Burlington, and Gloucester Counties in New
Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on
1990 census data, 204 or 58% of these are designated as low to moderate-income
tracts while 105 or 30% are characterized both as low to moderate-income and
minority tracts. The Bank's primary service area consists of a population of
1,577,815, which includes a minority population of 752,309.
The Bank engages in the commercial banking business, serving the banking
needs of its customers with a particular focus on, and sensitivity to, groups
that have been traditionally under-served, including Blacks, Hispanics and
women. The Bank offers a wide range of deposit products, including checking
accounts, interest-bearing NOW accounts, money market accounts, certificates of
deposit, savings accounts and Individual Retirement Accounts.
The focus of the Bank's lending activities is on the origination of
commercial, comsumer and residential loans. A broad range of credit products are
offered to the businesses and consumers in the Bank's service area, including
commercial loans, mortgage loans, student loans, home improvement loans, auto
loans, personal loans, home equity loans and home equity lines of credit. At
March 31, 1998 the Bank's maximum legal lending limit was approximately
$1,035,000 per borrower. However, the Bank's internal Loan Policy limits the
Bank's lending to $500,000 per borrower in order to diversify the loan
portfolio. The Bank
3
has established relationships with correspondent banks to participate in loans
that exceed the Bank's internal policies or legal lending limits. The Board of
Directors of the Bank maintains the ability to waive its internal lending limit
upon consideration of a loan. The Board of Directors has exercised this power
with respect to several loans and participants. However, the Bank maintains no
credit that exceeds its legal lending limit.
The Bank also offers commercial and retail products. In the area of
commercial loans, the Bank has flexibility to develop loan arrangements
targetted at a customer's objectives. Typically, these loans are term loans or
revolving credit arrangements with interest rate, collateral and repayments
terms, varying based upon the type of credit, and various factors used to
evaluate risk. The Bank participates in the government-sponsored Small Business
Administration ("SBA") lending program and when the Bank deems it appropriate,
obtains SBA guarantees for up to 90% of the loan amount. This guaranty
effectively reduces the Bank's exposure to loss in its commercial loan
portfolio. Commercial loans are typically made of the basis of cash flow to
support repayment with secondary reliance placed on the underlying collateral.
The Bank's consumer loan program includes installment loans for home
improvement and the purchase of consumer goods and automobiles, student loans,
home equity and VISA secured and unsecured revolving lines of credit, and
checking overdraft protection. The Bank also offers residential mortgage loans
to its customers. The Bank's concentration in the retail area is in the category
of student loans where it can minimize its risk of non-payment with government
guarantees.
In addition, the Bank offers safe deposit boxes, travelers' checks, money
orders, direct deposit of payroll and Social Security checks, wire transfers and
access to regional and national automated teller networks as well as
international and trust services through correspondent institutions.
The management and Board of the Bank are very active in their respective
communities, allowing the Bank to closely monitor the needs of individuals and
businesses in the communities in which it operates. The Bank continually focuses
on developing programs to serve those needs. To this end, the Bank has been
instrumental in establishing Philadelphia United Community Development
Corporation ("Philadelphia United"). Philadelphia United is a non-profit
corporation incorported in the Commonwealth of Pennsylvania. In 1997, the Bank
received the commitment of the Community Development Financial Institution
("CDFI") Fund, to provide $500 thousand to the Bank for the purpose of carrying
out community developmenht efforts. The Bank intends to assign these funds to
Philadelphia United. The
4
Bank has also implemented programs aimed at counseling individuals and
businesses on financial responsibility and credit repair. The program will give
individuals and businesses, located primarily in Philadelphia's enterprise
zones, access to sophisticated planning stalls and abilities. The Bank believes
that Philadelphia United will contribute significantly to the Bank's pipeline
for loans and depository accounts as the non-profit aid in the stabilization and
completion of development projects
Competition
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with local, regional and national commercial
banks, as well as savings banks and savings and loan associations. Many of these
banks and financial institutions have an amount of capital that allows them to
do more advertising and promotion and to provide a greater range of services to
customers. To date, the Bank has attracted, and believes it will continue to
attract its customers from the deposit base of such existing banks and financial
institutions largely due to the Bank's mission to service groups of people who
have traditionally been under-served and by its devotion to personalized
customer service. The Bank's strategy has been, and will continue to be, to
emphasize personalized services with special sensitivity to the needs of Blacks,
Hispanics and women and to offer competitive rates to borrowers and depositors.
In order to compete, the Bank relies upon personal contacts by the
officers, directors, advisory board and employees of the Bank to establish and
maintain relationships with Bank customers. The Bank focuses its efforts on the
needs of individuals and small and medium-sized businesses. In the event there
are customers whose loan demands exceed the Bank's lending limit, the Bank will
seek to arrange for such loans on a participation basis with other financial
institutions and intermediaries. The Bank will also assist those customers
requiring other services not offered by the Bank to obtain such services from
its correspondent banks.
Registrant believes that a portion of the Bank's customer base is derived
from customers who were dissatisfied with the level of service provided at
larger financial institutions. While some of such customers have followed
officers of those institutions who were hired by the Bank, others were attracted
to the Bank by calling programs of its officers and referrals from other
customers. The Bank has sought, in the past, and intends to continue in the
future, to hire customer contact officers who have good relationships with
desirable customers. These personal relationships, provision of a high level of
customer services, and referrals from satisfied customers, form the basis of the
Bank's competitive approach, as
5
opposed to advertising, rate competition or the development of proprietary
banking products, services or programs.
In the past, the principal competition for deposits and loans have been
other depository institutions. However, now the Bank also competes with other
financial intermediaries such as brokerage houses offering investment vehicles
to the general public. Other entities, both public and private, seeking to raise
capital through the issuance and sale of debt or equity securities are also
competitors with banks and savings and loan associations in the acquisition of
deposits. In order to address the risk of deposit reduction due to investment in
non-bank alternatives, the Bank has established a relationship with American
Express Financial Advisors ("AEFA"). AEFA provides the Bank with two certified
financial advisors who consult with the Bank's customers wishing to consider
altnerative investments. These advisors maintain their offices in the Main
Branch and Wadsworth Branch of the Bank. The Bank receives compensation from
AEFA for each securities purchase made through these advisors, thus yielding
additional fee income.
6
ITEM 2 - Properties
Main Branch
The Bank's principal office is located on the first floor of a multi-tenant
retail and commercial office building in Center City, Philadelphia, Pennsylvania
located at 714 Market Street, Philadelphia, PA 19106. The Bank occupies
approximately 5,700 square feet of space pursuant to a lease which expires on
February 28, 2002. The lease has renewal options for two five-year periods and
is subject to escalation clauses. The space is occupied by UBS, the Bank and
Philadelphia United. The first floor contains a banking lobby, the vault,
customer service area, executive and administrative offices, as well as the
Bank's compliance and marketing groups. The Bank's finance, branch
administrative and operations functions are located on the second floor of the
same building, where the Bank leases an additional space on a month-to-month
basis. The aggregate monthly rent for this location is $8,350.
Mt. Airy Branch
North Philadelphia Branch
Pursuant to a 1993 acquisition of Chase Federal Savings and Loan
Association ("Chase") the Bank acquired a branch at 1562 East Wadsworth Avenue,
in the Mt. Airy section of Philadelphia. The Bank is provided the branch office
location on Wadsworth Avenue on a rent-free basis until June, 1998.
Center City Branch
In August 1993, the Bank acquired the deposits of certain branches of Home
Unity Federal Savings and Loan ("Home Unity"). Pursuant to the Home Unity
acquisition, the Bank established locations at Two Penn Center, Philadelphia, PA
and 4806 Frankford Avenue, Philadelphia, PA. The Bank leases approximately 4,769
square feet at its Two Penn Center location. The space includes lobby, teller
area, customer service area, primary lending area and administrative offices, as
well as a vault. The aggregate monthly rent for this location is $11,293.
Frankford Branch
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. The
main floor of the facility houses teller and customer service areas. The
basement houses administrative offices.
7
West Girard Branch
In 1994, the Bank purchased a branch facility at 2820 West Girard Avenue.
The facility is comprised of a teller area, customer service area, lobby, vault
and administrative offices.
West Philadelphia Branch
On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster
Avenue from PNC Bank. The facility is comprised of approximately 3,000 square
feet. The main floor houses teller and customer service areas, a drive-up teller
facility and automated teller machine. The basement provides storage for the
facility. The aggregate monthly rental is approximately $1,891, exclusive of
taxes, insurance, utilities and janitorial service.
ITEM 3 - Legal Proceedings
No material claims have been instituted or threatened by or against UBS or
its affiliates other than in the normal course of business.
On May 31, 1997, a case was brought in the United States Court for the Eastern
District of Pennsylvania by an individual relating to a fraud perpetrated by an
individual named Michael Anthony Andrews. Plantiff purports to assert claims
against the Bank based upon the Bank's acceptance of certain checks written by
the Plaintiff for deposit in the Defendant Andrews' account. SEI Corp. was named
as an additional defendant. The suit alleges that the plaintiff invested funds
with the Defendant Andrews upon the belief that he was an employee of SEI Corp.
Mr. Edwards established an account at the bank in the name of SEI and deposited
the Plaintiff's funds. These funds have since been withdrawn from the account,
or other wise depleted. The suit seeks damages in the amount of approximately
$95,000 although the amount of the checks written by Plaintiff and deposited in
the account subject to controversy totaled $18,000. Management believes that the
suit is without merit, since the Bank adhered to reasonable and customary
procedures. As a result, Management believes the likelihood of success of the
Plaintiff with respect to the bank is minimal. A summary judgement motion has
been filed on behalf of the Bank. The motion is presently pending.
8
ITEM 4 - Submission of Matters to Vote of Security Holders
Not Applicable. No matters were submitted to a vote of Registrant's
security holders since the Registrant's last periodic filing.
PART II
ITEM 5 - Market for the Registrant's Common Stock.
As of March 15, 1998 there were 3,159 shareholders of record of UBS's
Common Stock.
The Common Stock is not traded on any national exchange or otherwise traded
in any recognizable market. Prior to December 31, 1993, the Bank conducted a
limited offering (the "Offering") pursuant to a registration exemption provided
in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Securities
Act"). The price-per-share during the Offering was $12.00. Prior to the
Offering, the Bank conducted an initial offering of the Common Stock (the
"Initial Offering") at $10.00 per share pursuant to the same registration
exemption. Registrant has engaged in the sale of Series A Preferred Stock which
has the characteristics identified in the UBS Articles of Incorporation attached
as an Exhibit hereto pursuant to an exemption from registration contained in
Section 4(2) of the Securities Act.
Beginning April 24, 1995, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock and 750,000 warrants
to purchase a share of the common stock. 18,465 shares and 55,395 warrants have
been sold pursuant to this offering. Each unit, consisting of one share of
common stock and three warrants to purchase one share of common stock in each of
three subsequent years (total 3 shares), were issued at $12.00 per unit. The
warrant exercise price was $8.00 per share for the 1996 Warrant was $9.00 per
share for the 1997 Warrant, and will be $10.00 per share for the 1998 Warrant.
The exercise price of the warrants may be adjusted to avoid dilution of warrant
holders. The units were offered pursuant to an exemption from registration
contained in section 4(2) and 3(a)(5) of the Act. No underwriters were used and
no commissions were paid as a result of this offering. The offering closed on
December 31, 1995. In December 1995, the Registrant sold 41,666 shares of
Registrant's common stock in an offering exempt from registration pursuant to
section 4(2) of the Act at a purchase price of $12.00 per share. This sale was
accomplished pursuant to a commitment to purchase these securities issued in
December 1994.
Beginning May 10, 1996, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock. 6,934 shares were
sold pursuant to this
9
offering. The stock was offered pursuant to an exemption from registration
contained in 4(2) and 3(a)(5) of the Act. During 1996, the Registrant received,
$55,536 and issued 6,942 shares as a result of warrant exercises by shareholders
to purchase common stock at a price of $8.00 per share. Beginning May 19, 1997,
Registrant commenced an offering solely to existing stockholders of 250,000
shares of its common stock, initially on a pro-rata basis. 3,550 shares were
sold pursuant to this offering. The stock was offered pursuant to an exemption
contained in 4(2) and 3(a)(5) of the Act. During 1997, the Registrant received
$34,710 and issued 3,856 shares as a result of exercise of the 1997 warrants at
$9.00 per share. As of December 31, 1997, there were 7,733 warrants outstanding
to purchase common stock of the Bank at $10.00 per share. No other warrants
remain outstanding.
Registrant has not, during the three most recent fiscal periods 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 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 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, if a bank has sustained losses equal to or
exceeding its undivided profits then on hand, 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 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. As a result of this regulation, the
Bank, and therefore the Registrant, will most likely be unable to pay any
dividends while an accumulated deficit exists. The Registrant does not
anticipate that dividends will be paid for the forseeable future.
The Federal Deposit Insurance Act generally prohibits all payments of
dividends by a bank which is in default of any assessment to the FDIC.
10
ITEM 6 - SELECTED FINANCIAL DATA
Selected Financial Data
================================================================================================
SELECTED FINANCIAL DATA
Year ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net interest income .............. $ 4,744 $ 4,259 $ 4,012 $ 3,766 $ 988
Provision for loan losses ........ 97 85 78 385 110
Noninterest income ............... 1,517 1,118 741 940 3,105
Noninterest expense .............. 5,983 6,123 5,454 5,068 3,121
Net income (loss) ................ 181 (832) (779) (747) 862
Net income (loss) per share--basic 0.22 (1.03) (1.04) (1.01) 1.26
Balance sheet totals:
Total assets ................... $108,914 $ 96,769 $ 92,635 $ 95,255 $ 77,081
Net loans ...................... 73,694 69,097 61,696 63,043 48,919
Investment securities .......... 18,253 14,460 16,739 18,944 20,296
Deposits ....................... 99,427 88,761 84,228 87,451 68,981
Shareholders' equity ........... 7,059 6,759 7,470 6,799 6,343
Ratios:
Equity to assets ............. 6.61% 7.45% 7.36% 6.54% 9.02%
Return on assets ............. 0.18% (0.89)% (0.87)% (0.83)% 1.76%
Return on equity ............. 2.69% (12.02)% (11.83)% (12.69)% 19.53%
=================================================================================================
11
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In April 1993, the shareholders of United Bank of Philadelphia (the Bank)
voted in favor of the formation of a bank holding company, United Bancshares,
Inc. (the Company). Accordingly, in October 1994 the Company became a bank
holding company in conjunction with the issuance of its common shares in
exchange for the common shares of the Bank. Since 1994, the financial statements
are prepared on a consolidated basis to include the accounts of the Company and
the Bank. Financial data for prior periods are presented for the Bank only.
The purpose of this discussion is to focus on information about the Bank's
financial condition and results of operations which is not otherwise apparent
from the consolidated financial statements included in this annual report. This
discussion and analysis should be read in conjunction with the financial
statements presented elsewhere in this report.
RESULTS OF OPERATIONS
Summary
The Company recorded net income of $181,000 ($0.22 per share) for 1997
compared to a loss of $832,000 ($1.03 per share) in 1996 and a loss of $779,000
($1.04 per share) in 1995. In 1996, the Company incurred a one-time Federal
Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF)
Special Assessment of approximately $485,000 resulting from legislation passed
by Congress on September 30, 1996 to recapitalize the SAIF. Excluding the SAIF
Special Assessment, the Bank's loss for 1996 would have been approximately
$347,000. The improvement in earnings during 1997 is primarily attributable to
an increase in earning assets funded by a higher level of noninterest-bearing
accounts, an increase in deposit-related fee income (including ATM surcharge
fees) and a reduction in noninterest expense. A more detailed explanation for
each contribution to the improvement in earnings is included in the sections
below.
Management continues to recognize the need to grow the Bank's deposit level
to generate operating economies of scale and net interest income to cover the
cost of operations. During 1997, average earning assets increased approximately
$8.5 million, or 9.9%, while the net yield on average interest-earning assets
increased from 4.95% to 5.01%. The result was an increase of $485,000 in net
interest income from 1996 to 1997.
Management considers the Bank's loan portfolio to be of high quality with
nonperforming assets representing 0.17% of average loans. Although the allowance
for loan losses as a percentage of total loans declined from 0.76% in 1996 to
0.63% in 1997, an evaluation of the portfolio, net of residential mortgage
loans, indicates that approximately $14.5 million, or 38%, of the "non-mortgage"
portfolio is cash and/or government-guaranteed. Therefore, in evaluating the
adequacy of the allowance for loan loss, only the net exposure (unguaranteed
portion) should be considered. As a result of the loan portfolio composition
(primarily residential mortgage loans, Small Business Administration (SBA)
guaranteed loans, and guaranteed student loans), only $15 million of the
portfolio represents some level of risk--no guarantee features, significant
collateral, or proven track record of repayment. The Bank has an excellent
charge-off history. In fact, most of the charge-offs the Bank experienced in
1997 were related to the unguaranteed portion of SBA loans which had been fully
reserved at December 31, 1996. If these specific reserves were excluded from the
December 31, 1996 allowance, the percent of reserve to total loans would have
been 0.67%--slightly higher than 0.63% in 1997.
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===================================================================================================================================
TABLE 1--AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
balance Interest rate balance Interest rate balance Interest rate
--------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans..................................... $68,887 $5,913 8.58% $65,243 $5,567 8.53% $57,491 $5,158 8.97%
Investment securities held-to-maturity.... 10,222 659 6.45 8,110 502 6.19 10,306 512 4.97
Investment securities available-for-sale.. 6,252 434 6.94 8,319 495 5.95 8,474 491 5.79
Federal funds sold........................ 9,187 483 5.26 4,350 225 5.17 6,966 393 5.64
--------------------------------------------------------------------------------------
Total interest-earning assets........... 94,548 7,489 7.92 86,022 6,789 7.89 83,237 6,554 7.87
Noninterest-earning assets:
Cash and due from banks................... 4,271 3,671 3,293
Premises and equipment, net............... 1,846 1,657 1,570
Other assets.............................. 1,564 2,129 1,921
Less allowance for loan losses............ (468) (506) (580)
--------------------------------------------------------------------------------------
Total................................... $101,761 $92,973 $89,441
===================================================================================================================================
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits........................... $14,812 $ 379 2.56% $13,072 294 2.25% $11,777 $ 293 2.49%
Savings deposits.......................... 23,277 459 1.97 24,046 506 2.10 23,505 521 2.22
Time deposits............................. 37,627 1,852 4.92 34,806 1,651 4.74 37,907 1,722 4.54
Other borrowed funds...................... 1,262 55 4.36 1,821 79 4.34 118 6 5.08
--------------------------------------------------------------------------------------
Total interest-bearing liabilities...... 76,978 2,745 3.57 73,745 2,530 3.43 73,307 2,542 3.47
Noninterest-bearing liabilities:
Demand deposits........................... 15,905 11,197 7,777
Other..................................... 2,153 1,107 1,772
Shareholders' equity........................ 6,725 6,924 6,585
--------------------------------------------------------------------------------------
Total................................... $101,761 $92,973 $89,441
===================================================================================================================================
Net interest earnings....................... $4,744 $4,259 $4,012
Net yield on interest-earning assets........ 5.01% 4.95% 4.82%
For purposes of computing the average balance, loans are not reduced for nonperforming loans.
===================================================================================================================================
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 (b) interest paid on interest-bearing liabilities, is a significant
component of the Bank's earnings. Changes in net interest income result
primarily from increases or decreases in the average balances of
interest-earning assets, the availability of particular sources of funds and
changes in prevailing interest rates.
Net interest income for 1997 totaled $4.7 million, an increase of $485,000, or
11.4%, compared to 1996. Net interest income in 1996 totaled $4.3 million, an
increase of $247,000, or 6.2%, compared to 1995.
13
====================================================================================================================================
TABLE 2--RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
1997 compared to 1996 1996 compared to 1995
------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------------------------------------------
(Dollars in thousands)
Interest earned on:
Loans .............................................. $ 245 $ 101 $ 346 $ 581 $(172) $ 409
Investment securities held-to-maturity ............. 136 21 157 (136) 126 (10)
Investment securities available-for-sale ........... (144) 83 (61) (10) 14 4
Federal funds sold ................................. 254 4 258 (135) (33) (168)
------------------------------------------------------------------------
Total interest-earning assets .................... 491 209 700 300 (65) 235
========================================================================
Interest paid on:
Demand deposits .................................... 76 9 85 29 (28) 1
Savings deposits ................................... 13 (60) (47) 12 (27) (15)
Time deposits ...................................... 68 133 201 (147) 76 (71)
Other borrowed funds ............................... (98) 74 (24) 72 1 73
------------------------------------------------------------------------
Total interest-bearing liabilities ............... 59 156 215 (34) 22 (12)
========================================================================
Net interest income .............................. $ 432 $ 53 $ 485 $ 334 $ (87) $ 247
====================================================================================================================================
Changes in interest income or expense not arising solely as a result of
volume or rate variances (are allocated to rate variances) due to the interest
sensitivity of consolidated assets and liabilities.
In 1997, there was an increase in net interest income of $432,000 due to
changes in volume and an increase of $53,000 due to changes in rate. In 1996,
there was an increase in net interest income of $334,000 due to changes in
volume and a decrease of $87,000 due to changes in rate.
Average earning assets increased from $86 million in 1996 to $94.5 million
in 1997 and from $83.2 million in 1995 to $86 million in 1996. This growth in
earning assets is primarily attributed to an increase in average demand deposit
balances due to continued growth in new checking account products--"free"
checking and "entrepreneurial-25" checking which were introduced in 1995. These
products provide a low-cost/ minimum balance option for personal and small
business customers who have relatively low-volume activity in their checking
accounts. While benefiting customers, these products also serve as means of
generating noninterest-bearing funds for the Bank as well as a source of service
charge income from overdraft fees. In addition, during 1997 the Bank implemented
a new deposit transfer ("sweep") product for its nonprofit and municipal
customers which provides for the overnight transfer of available funds from a
noninterest-bearing account to an interest-bearing account.
The Bank's net interest margin was 5.01% in 1997 compared to 4.95% in 1996
and 4.82% in 1995. The primary determinant of the increase in 1997 was
commercial loan growth coupled by the sale of lower-yielding student loans and
an increase in noninterest-bearing demand deposit accounts. The prime rate
increased 25 basis points during the year from 8.25% to 8.50%. Average loans
increased $3.6 million during 1997 and produced a yield of 8.58% compared to
8.53% in 1996 and 8.83% in 1995.
The decrease in yield during 1996 was primarily attributed to a reduction
in prime rate and the significant increase in student loan originations during
the year which carry with them a lower yield than commercial and/or installment
loans. However, the increase in volume in 1996 more than compensated for the
decline in yield--producing a $409,000 net increase in interest on loans.
The increase in yield in 1995 was primarily a result of a change in
composition of the loan portfolio. At December 31, 1994, residential mortgage
loans made up 77.81%, or $49.6 million, of the loan portfolio compared to
59.95%, or $37.3 million, at December 31, 1995. As residential mortgage loans
were sold or paid down, they were replaced with higher-yielding commercial SBA
loans and student loans.
During 1997, the average federal funds rate increased slightly to 5.26%
compared to 5.17% in 1996 and 5.64% in 1995. During 1997, the average investment
in federal funds increased by $4.8 million as a result of the temporary
investment of the proceeds from the sale of approximately $9.7 million in
student loans in federal funds sold until other loans could be originated and/or
purchased.
The yield on the investment portfolio increased 56 basis points to 6.63% in
1997 compared to 6.07% in 1996 and 5.34% in 1995 due to the longer contractual
maturity structure, imbedded call options, and rate adjustment intervals
characteristic of the portfolio.
The cost of interest-bearing deposits increased to 3.57% in 1997 compared
to 3.41% in 1996 and 3.47% in 1995. During 1996 and 1995, interest rates paid on
deposits remained relatively constant. The increase during 1997 is primarily
related to the introduction of a fourth tier for balances in excess of $250,000
on the Bank's Business Money Market Account which earns a higher interest rate.
This product was designed to attract customers with larger deposit balances.
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 port folio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
14
The provision and allowance for loan losses charged against earnings in
1997 was $97,000 compared to $85,000 in 1996 and $78,000 in 1995. The gradual
change in the composition of the loan portfolio from residential mortgage loans
to purchased or originated commercial SBA loans and student loans results in a
portfolio with significantly lower credit risk characteristics due to the
related government guarantees. Historically, the Bank has not charged-off loans
in it residential mortgage loan portfolio. Management believes the current level
of the allowance is adequate and anticipates future provisions for loan losses
will be consistent with 1997.
Noninterest Income
Noninterest income increased $399,000 during 1997. The increase was
primarily a result of increased ATM surcharge fees ($418,000 in 1997 compared to
$150,000 in 1996) due to a full year of ATM surcharge fees compared to two
quarters in 1996, an increase in the ATM surcharge from $0.90 per transaction in
1996 to $1.00 in 1997, and growth in the ATM network from 15 to 26 machines. In
addition, continued growth in the number of demand deposit accounts to which
activity charges apply and the implementation of a low-balance charge on "free
checking" accounts when the balance falls below $100 resulted in a $113,000
increase in demand deposit-related fee income--including overdraft fees, low
balance fees, and activity charges. Finally, during 1997, the Bank sold
approximately $9.7 million student loans for a gain of $187,000.
Noninterest income increased $376,000 during 1996 compared to 1995. The
increase was primarily attributable to an increase in transactional deposit
accounts from an average of $19.6 million in 1995 to $24.3 million in 1996 as a
result of the continued success of product offerings which were introduced in
1995--"free checking" and "entrepreneurial-25" checking. Deposit-related
noninterest income increased to 0.98% of average total assets in 1996 from 0.73%
in 1995 and 0.61% in 1994. In addition, in 1996 the Bank strongly enforced
compensating balance arrangements with its loan customers. Also contributing to
the increase was the implementation of a surcharge for all noncustomer use of
the Bank's ATMs in September 1996 and an expanded ATM network from five machines
in 1995 to 15 machines in 1996. During 1996, the Bank entered into an agreement
with a growing retail corporation which provides for the placement of ATMs in
its retail stores. Finally, during 1996 the Bank received a $90,000 one-time
settlement from the Resolution Trust Corporation (RTC) related to accrued
interest on loans it was to acquire.
There were no sales of securities during 1997. Securities gains totaled
$9,000 in 1996. There were no sales of securities during 1995.
Noninterest Expense
Excluding the one-time SAIF Special Assessment in 1996 of $485,000,
noninterest expense increased $345,000, or 6.1%, in 1997 to $6 million compared
to $5.6 million in 1996 and $5.4 million in 1995.
Salaries and benefits increased $142,000, or 6.3%, in 1997 compared to a
decrease of $23,000, or 1%, in 1996. In addition to normal salary adjustments,
the increase during 1997 came as a result of an increase to a full complement of
staff to handle increased work volumes due to growth in the Bank's deposit
levels during the year. In addition, during 1997 the chief executive officer's
employment contract was amended to provide her with a defined contribution
retirement plan which resulted in an additional $47,000 expense. During 1996,
the Bank closed two branches and opened one. However, staffing levels remained
relatively constant with some planned attrition and management's concerted
effort to minimize new hirings and control personnel expense.
Occupancy and equipment expense increased approximately $117,000, or 13%,
during 1997 compared to an increase of $79,000 during 1996. The increase during
1997 was primarily attributable to annual escalations in lease payments, a full
year of lease payments for the Bank's West Philadelphia branch which opened in
July 1996, and maintenance contracts to service the Bank's growing ATM network.
In November 1996, the Bank closed two branches it had acquired from the RTC in
1993 and 1994 under free-rent agreements. These branches were closed due to the
significant level of deposit runoff which occurred almost immediately following
the acquisition which rendered them unprofitable to continue to operate.
Remaining deposits of these branches were transferred to other branches. While
the closed branches were leased under free-rent agreements, significant repairs
and maintenance costs and other operational costs were incurred while they were
open.
Data processing expenses increased by $32,000, or 4%, during 1997 compared
to an increase of $191,000, or 30.7%, in 1996. The bulk of the Bank's data
processing is outsourced to third-party processors. These expenses are
reflective of the high level of low-balance accounts being serviced for which
the Bank is charged a per-account charge by processors. The increase during 1996
was primarily attributable to growth in the student loan portfolio for which the
Bank pays an outside vendor to service based on average outstanding balances.
The Bank continues to study methods by which it may reduce its data processing
costs, including, but not limited to, a consolidation of servicers, in-house
processing versus outsourcing, and the possible renegotiation of existing
contracts with servicers. In an effort to reduce these costs during 1997, the
Bank sold $9.7 million of its student loan portfolio and replaced it with
commercial and other consumer loans with lower servicing costs.
Federal deposit insurance premiums were $66,000 in 1997 compared to
$616,000 in 1996 and $200,000 in 1995. 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. During 1996, there was a one-time SAIF Special Assessment of
approximately $485,000 resulting from legislation passed by Congress on
September 30, 1996 to recapitalize the SAIF. As a result, commercial banks, like
United Bank, which were members of the BIF and owned SAIF-assessable deposits,
were required to pay a one-time assessment of 65.7 basis points of total
SAIF-assessable deposits on November 27, 1996. Because the Bank acquired
deposits of failed savings and loan institutions from the RTC in 1993 and 1994,
approximately $71 million of its deposits are considered SAIF-assessable. Almost
immediately following the acquisitions, a significant amount of acquired RTC
savings and loan deposits ran off, leaving a balance of less
15
than $20 million. However, the legislation did not make any provision for
deposit runoff. The assessment during 1997 was based on 1.29 basis points for
BIF-assessable deposits and 6.28 basis points for SAIF-assessable deposits.
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.
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 3
indicates how the Bank has managed these elements. Average funding uses
increased approximately $8.5 million, or 9.98%, in 1997 compared to $2.8
million, or 3.4%, in 1996.
====================================================================================================================================
TABLE 3--SOURCES AND USES OF FUNDS TRENDS
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase
Average (decrease) Average (decrease) Average
balance amount Percent balance amount Percent balance
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Funding uses:
Loans ............................... $ 68,887 $ 3,644 5.59% $ 65,243 $ 7,752 13.48% $ 57,491
Investment securities:
Held-to-maturity .................. 10,222 2,112 26.04 8,110 (2,196) (21.31) 10,306
Available-for-sale ................ 6,252 (2,067) (24.85) 8,319 (155) (1.83) 8,474
Federal funds sold .................. 9,187 4,837 111.20 4,350 (2,616) (37.55) 6,966
-------------------------------------------------------------------------------------------
Total uses ........................ $ 94,548 $ 8,526 $ 86,022 $ 2,785 $ 83,237
===========================================================================================
Funding sources:
Demand deposits:
Noninterest-bearing ............... $ 15,905 $ 4,708 42.05% $ 11,197 $ 3,420 43.98% $ 7,777
Interest-bearing .................. 14,812 1,740 13.31 13,072 1,295 11.00 11,777
Savings deposits .................... 23,277 (769) (3.20) 24,046 541 2.30 23,505
Time deposits ....................... 37,627 2,821 8.11 34,806 (3,101) (8.18) 37,907
Other borrowed funds ................ 1,262 (559) (30.70) 1,821 1,703 1,443.22 118
-------------------------------------------------------------------------------------------
Total sources ..................... $ 92,883 $ 7,941 $ 84,942 $ 3,858 $ 81,084
===========================================================================================
*Includes held-to-maturity and available-for-sale securities.
====================================================================================================================================
Investment Securities and other Short-Term Investments
The Bank's investment portfolio is classified as either held-to-maturity or
available-for-sale. Investments classified as held-to-maturity are carried at
amortized cost and are those securities the Bank has both the intent and ability
to hold to maturity. Investments classified as available-for-sale are those
investments the Bank intends to hold for an indefinite amount of time, but not
necessarily to maturity, and are carried at fair value, with the unrealized
holding gains and losses reported as a component of shareholders' equity on the
balance sheet.
Average investment securities and federal funds sold, in the aggregate,
increased by $4.9 million, or 23.5%, in 1997 compared to a decrease of $5.0
million, or 19%, in 1996. The increase during 1997 is a result of 10.2% deposit
growth and the temporary investment of $9.7 million student loan sale proceeds
in federal funds sold until loans were originated and/or purchased. The decline
in investments and federal funds during 1996 was attributed to a shift in
investable funds to higher-yielding loans to enhance the Bank's net interest
margin.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities, U.S. Treasury securities, and other
government-sponsored agency securities. The Bank does not invest in high-risk
securities or complex structured notes.
As reflected in Table 4, the assumed average maturity of the investment
portfolio was 2.65 years at year-end 1997. Approxi mately 41% of the portfolio
consists of mortgage-backed pass-through securities which have longer-term
contractual maturities but are sometimes paid off/down before maturity or have
repricing characteristics that occur before final maturity. The Bank has
attempted to minimize the repayment risk (risk of very fast or very slow
repayment) associated with these types of securities by investing primarily in a
number of seasoned mortgage pools for which there is a repayment history. This
history better enables the Bank to project the repayment speeds of these pools.
In addition, the Bank has minimized the interest rate risk associated with these
mortgage-backed securities by investing in a variety of pools, many of which
have variable rates with indices that track closely with the current interest
rate environment.
16
====================================================================================================================================
TABLE 4--ANALYSIS OF INVESTMENT SECURITIES
Within After one but After five but After
one year within five years within ten years ten years
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury .................... $ 2,948 5.45% $ 1,000 5.84% $ -- --% $ -- --% $ 3,948
Other government securities ...... -- -- 2,499 6.64 3,847 7.14 -- -- 6,346
Other investments ................ -- -- -- -- -- -- 320 6.00 320
Mutual funds ..................... 85 5.57 -- -- -- -- -- -- 85
Mortgage-backed securities ....... -- -- -- -- -- -- -- -- 7,554
-----------------------------------------------------------------------------------------------
Total securities ............... $ 3,033 $ 3,499 $ 3,847 $ 320 $18,253
===============================================================================================
Average maturity ................. 2.65 years
The above table sets forth the maturities of investment securities at December 31, 1997 and the weighted average yields of such
securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security).
====================================================================================================================================
Loans
Average loans increased approximately $3.6 million, or 5.59%, in 1997
compared to an increase of $7.8 million, or 13.48%, in 1996. The increase during
1997 was primarily due to an increase in commercial loan originations and the
purchase of approximately $8 million in seasoned automobile loans. During 1997,
the Bank sold $9.7 million student loans in an effort to reduce data processing
costs and to improve the overall yield on the loan portfolio by shifting the
funds into higher-yielding commercial and consumer loans. In addition, during
1997 mortgage loans continue to decline as a result of payoff/paydowns and
refinancings due to the low mortgage rate environment.
The Bank's policy is to make its loans and commitments in the market area
it serves. However, due to the relatively slow loan demand in 1994 and 1995, the
Bank purchased a significant portion of its loan portfolio to adequately match
its level of deposits and to improve the net interest margin. In subsequent
years, the Bank has had originations and a strong pipeline of loans located
within the Philadelphia region.
====================================================================================================================================
TABLE 5--LOANS OUTSTANDING, NET OF UNEARNED INCOME
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial and industrial ..................... $12,095 $10,107 $ 8,021 $ 3,037 $ 2,729
Commercial real estate ........................ 1,515 649 627 1,608 1,735
Consumer loans ................................ 22,611 17,340 16,254 9,503 3,275
Residential mortgages ......................... 35,962 36,622 37,271 39,398 28,691
Loans held-for-sale ........................... 1,979 4,906 -- 10,223 13,118
---------------------------------------------------------------------------
Total loans ................................. $74,162 $69,624 $62,173 $63,769 $49,548
===========================================================================
====================================================================================================================================
====================================================================================================================================
TABLE 6--LOAN MATURITIES AND INTEREST SENSITIVITY
Within After one but After
one year within five years ten years Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial and industrial .................................. $ 3,696 $ 2,478 $ 5,921 $12,095
Commercial real estate ..................................... 941 528 46 1,515
Consumer loans ............................................. 1,802 20,496 2,292 24,590
Residential mortgages ...................................... -- -- 35,962 35,962
-------------------------------------------------------------
Total loans .............................................. $ 6,439 $23,502 $44,221 $74,162
=======
Loans maturing after one year with:
Fixed interest rates ..................................... $44,934
=======
Variable interest rates .................................. $22,789
=======
====================================================================================================================================
17
Nonperforming Loans
Table 7 reflects the Bank's nonperforming loans for the last five years.
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 non performing
before the lapse of 90 days. The Bank's policy is to charge off unsecured loans
after 90 days past due. Interest on nonperforming loans ceases to accrue except
for loans which are well-collateralized and in the process of collection. When a
loan is placed on nonaccrual, 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.
====================================================================================================================================
TABLE 7--NONPERFORMING LOANS
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nonaccrual loans ............................................................ $1,179 $ 800 $ 949 $ 572 $ 500
Interest income included in net income for the year ......................... 14 6 23 -- --
Interest income that would have been recorded under original terms .......... 112 45 37 41 6
Loans past due 90 days and still accruing ................................... 306 408 10 -- --
====================================================================================================================================
There is no known information about possible credit problems other than
those classified as nonaccrual that causes management to be uncertain as to the
ability of any borrower to comply with present loan terms.
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the region's economy.
At December 31, 1997, approximately 34% of the Bank's commercial loan
portfolio was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At December 31, 1997, none of these loans were
nonperforming.
During 1997, nonaccrual loans increased to $1.2 million, up from $800,000
at December 31, 1996. The level of non accrual loans during 1997 and 1996 is
primarily attributable to the aging of the residential mortgage loan portfolios
the Bank acquired in 1993 and 1994. At December 31, 1997 and 1996, approximately
$895,000 and $327,000, respectively, of the total nonaccrual loans were
residential mortgages, while the remaining balance consisted primarily of loans
with SBA guarantees of principal. The underlying collateral and guarantees
minimize the risk of loss associated with these loans. Loans past due 90 days
and still accruing consist primarily of student loans for which there is a 98%
guarantee of principal and interest.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation
of the loan portfolio, assessment of economic conditions, the diversification
and size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount and quality of nonperforming loans. Table 9 presents
the allocation of loan losses by major category for the past five years. The
specific allocations in any particular category may prove to be excessive or
inadequate and consequently may be re-allocated in the future to reflect
then-current conditions.
During 1997, the Bank charged off $77,000 (net) of its delinquent credit
card portfolio. In September 1996, the Bank changed credit card processors.
Subsequently, it was determined that certain accounts had been "re-aged" by the
former processor. Upon identification of these accounts in 1997, they were
charged off.
====================================================================================================================================
TABLE 8--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
of loans of loans of loans of loans
in each in each in each in each
category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans
---------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial and industrial ................. $144 16.31% $222 14.52% $113 12.90% $226 4.76%
Commercial real estate .................... 13 2.04 13 0.93 13 1.01 30 2.52
Residential mortgages ..................... 180 48.49 245 52.60 246 59.95 429 77.82
Consumer loans ............................ 97 33.16 44 31.95 65 26.14 41 14.90
Unallocated ............................... 34 -- 4 -- 39 -- -- --
--------------------------------------------------------------------------------------
$468 100.00% $528 100.00% $476 100.00% $726 100.00%
======================================================================================
====================================================================================================================================
18
Management believes that the allowance for loan losses is adequate. 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.
====================================================================================================================================
TABLE 9--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Year ended December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at January 1 .............................................. $ 528 $ 476 $ 726 $ 629 $ 191
---------------------------------------------------------
Charge-offs:
Commercial and industrial ....................................... (66) (17) (195) (298) (77)
Commercial real estate .......................................... -- -- -- -- --
Residential mortgages ........................................... (9) -- -- -- --
Consumer loans .................................................. (160) (25) (5) (44) (21)
---------------------------------------------------------
(235) (42) (200) (342) (98)
Recoveries--consumer loans ........................................ 78 9 6 3 --
---------------------------------------------------------
Net charge-offs ................................................... (157) (33) (194) (339) (98)
Additions charged to operations ................................... 97 85 78 385 110
Allowance allocated to acquired loans ............................. -- -- -- 185 426
Allowance previously allocated to sold loans ...................... -- -- (134) (134) --
---------------------------------------------------------
Balance at December 31 ............................................ $ 468 $ 528 $ 476 $ 726 $ 629
=========================================================
Ratio of net charge-offs to average loans outstanding ............. 0.23% 0.05% 0.34% 0.63% 1.2%
=========================================================
The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of
the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic
conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses.
====================================================================================================================================
Deposits
Average deposits, including noninterest-bearing deposits, grew
approximately $8.5 million, or 10.2%, in 1997 compared to $2.2 million, or 2.6%,
in 1996. Beginning in 1995, the Bank strategically planned to counterbalance the
impact of its prior years' deposit acquisitions from the RTC that were
concentrated in the areas of savings and time deposits which are typical of
savings and loan institutions. While these deposits served as an addition to the
Bank's core deposit base, they also had the effect of increasing the Bank's cost
of funds as noninterest-bearing deposits were minimal. In 1995, the Bank
designed two new demand deposit products ("free" checking and
"entrepreneurial-25" checking) to meet the needs of the community and to
generate additional low-cost deposits. As a result, during 1997 and 1996,
noninterest-bearing deposits grew approximately $6.9 million and $3.8 million,
respectively. In addition, sweep deposit accounts were introduced in 1997 as a
vehicle to attract larger deposits by sweeping funds out of noninterest-bearing
demand deposit accounts and investing them overnight in interest-bearing deposit
accounts. At December 31, 1997, there were $5.4 million in such accounts.
====================================================================================================================================
TABLE 10--DEPOSITS BY CLASS AND RATE
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing demand deposits ............... $15,905 0 % $11,197 0 % $ 7,777 0 %
Interest-bearing demand deposits .................. 14,812 2.56 13,072 2.25 11,777 2.49
Savings deposits .................................. 23,277 1.97 24,046 2.10 23,505 2.22
Time deposits ..................................... 37,627 4.92 34,806 4.74 37,907 4.54
====================================================================================================================================
19
Other Borrowed Funds
The average balance for other borrowed funds decreased $559,000, or 30.70%,
in 1997 compared to 1996 and increased $1.7 million, or 1,443.22%, in 1996
compared to 1995. The decrease in other borrowed funds during 1997 was due to
lower-balance reverse repurchase agreements the Bank entered into in 1997
compared to 1996. 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.
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 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 (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 reli ance
on particular segments of the money market or brokered deposits; any difficulty
in obtaining funds; and the liquidity provided by securities and other assets.
In addition, consideration is given to the nature, volume and anticipated use of
commitments; the adequacy of liquidity and funding policies and practices,
including the provision for alternate sources of funds; and the nature and trend
of off-balance-sheet activities. As of December 31, 1997, management believes
the Bank's liquidity is satisfactory and in compliance with FRB regulations.
The Bank's principal sources of asset liquidity include investment
securities consisting principally of U.S. Govern ment and agency issues,
particularly those of shorter maturities, and mortgage-backed securities with
monthly repayments of principal and interest. Securities maturing in one year or
less amounted to $3 million at December 31, 1997, representing 16.6% of the
investment portfolio. Other types of assets such as federal funds sold, as well
as maturing loans, are sources of liquidity. Approximately $6.4 million in loans
are scheduled to mature within one year.
The Bank's overall liquidity has been enhanced by a significant level of core
deposits which management has determined are less sensitive to interest rate
movements. The Bank has avoided reliance on large-denomination time deposits as
well as brokered deposits. Table 11 provides a breakdown of the maturity of
deposits of $100,000 or more.
================================================================================
TABLE 11--MATURITY OF DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
3 months or less.......................................... $ 9,498
Over 3 through 6 months................................... 1,582
Over 6 months through 1 year.............................. 2,259
Over 1 through five years................................. 400
Over five years........................................... 113
-------
Total................................................... $13,852
=======
================================================================================
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 interest-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. Table 12 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 1997, the Bank's interest rate
sensitivity gap ratio (i.e. excess of interest rate-sensitive assets over
interest rate-sensitive liabilities, divided by total assets) and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table,
except for savings deposits, an asset or liability is considered rate-sensitive
within a specified period when it matures or could be repriced within such
period or repriced within such period in accordance with its contractual terms.
At December 31, 1997, a liability sensitive position is maintained on a
cumulative basis through one year of -2.59% which is within the Bank's policy
guidelines of +/-15% on a cumulative one-year basis. The current gap position is
primarily due to the high concentration of fixed-rate mortgage loans the Bank
has in its loan portfolio but is somewhat mitigated by the Bank's high level of
core deposits which have been placed in longer repricing intervals. Generally,
because of the Bank's negative gap position in shorter time frames, the Bank can
anticipate that increases in market rates will have a negative impact on the net
interest income, while decreases will have the opposite effect.
For purposes of the gap analysis, such deposits (savings, MMA, NOW) which
do not have definitive maturity dates and do not readily react to changes in
interest rates have been placed in longer repricing intervals versus immediate
repricing time frames, making the analysis more reflective of the Bank's
historical experience.
20
====================================================================================================================================
TABLE 12--INTEREST SENSITIVITY ANALYSIS
Interest rate sensitivity gaps as of December 31, 1997
-----------------------------------------------------------------------
Over
Over 6 months Over
3 months 3 through 6 through 1 through Over five
or less months 1 year five years years Cumulative
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-sensitive assets:
Interest-bearing deposits with banks .................... $ 291 $ -- $ 43 $ -- $ -- $ 334
Investment securities:
Held-to-maturity ...................................... 3,351 2,298 1,250 3,955 -- 10,854
Available-for-sale .................................... 4,689 -- 650 1,740 -- 7,079
Federal funds sold ...................................... 7,821 -- -- -- -- 7,821
Loans ................................................... 25,847 -- 1,465 10,856 34,815 72,983
----------------------------------------------------------------------
Total interest-sensitive assets ....................... 41,999 2,298 3,408 16,551 34,815 $ 99,071
----------------------------------------------------------------------
Cumulative totals ..................................... 41,999 44,297 47,705 64,256 99,071
----------------------------------------------------------------------
Interest-sensitive liabilities:
Interest checking accounts .............................. 247 740 3,058 5,821 -- $ 9,866
Money market accounts ................................... 374 1,121 4,634 8,820 -- 14,949
Savings accounts ........................................ 476 1,427 5,900 11,229 -- 19,032
Certificates less than $100,000 ......................... 6,819 6,938 3,852 6,420 -- 24,029
Certificates of $100,000 or more ........................ 9,498 1,582 2,259 400 113 13,852
Long-term debt .......................................... -- -- 1,341 44 -- 1,385
-----------------------------------------------------------------------
Total interest-sensitive liabilities .................. 17,414 11,808 21,044 32,734 113 $ 83,113
-----------------------------------------------------------------------
Cumulative totals ..................................... $17,414 $ 29,222 $ 50,266 $ 80,000 $83,113
==========================================================
Interest sensitivity gap .................................. $24,585 $ (9,510) $(17,636) $(16,183) $34,702
==========================================================
Cumulative gap ............................................ $24,585 $ 15,075 $ (2,561) $(18,744) $15,958
==========================================================
Cumulative gap/total earning assets ....................... 24.82% 15.22% (2.59)% (18.92)% 16.11%
==========================================================
Interest-sensitive assets to interest-sensitive liabilities 2.41% 0.19% 0.16% 0.51% 308.10%
==========================================================
Loan balances have been reduced for nonperforming loans.
Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and
management's estimates.
====================================================================================================================================
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
negative gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and
off-balance-sheet instruments.
The calculated estimates of changes in market value of port folio value at
December 31, 1997 are as follows:
================================================================================
Market value of Percent of
Changes in rate portfolio equity change
- --------------------------------------------------------------------------------
(Dollars in thousands)
+400 basis points.................... $ 84,215 (22.20)%
+300 basis points.................... 90,223 (16.65)
+200 basis points.................... 96,230 (11.09)
+100 basis points.................... 102,238 (5.55)
Flat rate............................ 108,245 --
- -100 basis points.................... 114,252 5.55
- -200 basis points.................... 120,260 11.09
- -300 basis points.................... 126,267 16.65
- -400 basis points.................... 132,275 22.20
================================================================================
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
21
market value of portfolio equity, could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest rate
exposure is not significant and is within the Bank's policy limits at December
31, 1997. However, if significant interest rate risk arises, the Board of
Directors and management may take (but are not limited to) one or all of the
following steps to reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit and movement into money market
deposit accounts and short-term certificates of deposit through
pricing and other marketing strategies.
2. Purchase quality loan participations with appropriate interest
rate/gap match for the Bank's balance sheet.
3. Restructure the Bank's investment portfolio.
The Board of Directors has determined that active super vision of the
interest rate spread between yield on earning assets and cost of funds will
decrease the Bank's vulnerability to interest rate cycles.
Capital Resources
Total shareholders' equity increased $300,000 in 1997 compared to a
decrease of approximately $711,000 in 1996. The increase in 1997 is a result of
retained earnings ($181,000), sale of common stock ($76,000) and an increase in
the unrealized gain on available-for-sale securities, net of taxes ($62,000).
The FRB standards for measuring capital adequacy for U.S. Banking
organizations require that banks maintain capital based on "risk-adjusted"
assets so that categories of assets with potentially higher risk will require
more capital backing than assets with lower risk. In addition, banks are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1
consists of common shareholders' equity, noncumulative and cumulative perpetual
preferred stock, and minority interests less goodwill. Tier 2 capital consists
of allowance for loan losses, hybrid capital instruments, term subordinated
debt, and intermediate-term preferred stock. Banks are required to meet a
minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at
least 4% Tier 1 capital and a Tier 1 leverage ratio of at least 6%. Capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
As indicated in Table 13, the Bank's risk-based capital ratios are above
the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
to the public as well as increasing the rate of internal capital growth as a
means of maintaining the required capital ratios. The Company and the Bank do
not anticipate paying dividends in the near future.
====================================================================================================================================
TABLE 13--CAPITAL RATIOS
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Tier 1 capital ..................................................................... $ 6,891 $ 6,558 $ 6,991
Tier 2 capital ..................................................................... 468 504 476
---------------------------------------
Total qualifying capital ......................................................... $ 7,359 $ 7,062 $ 7,467
=======================================
Risk-adjusted total assets (including off-balance-sheet exposures) ................. $51,868 $40,306 $51,560
=======================================
Tier 1 risk-based capital ratio..................................................... 13.29% 16.27% 13.56%
Total (Tier 1 and 2) risk-based capital ratio....................................... 14.19% 17.52% 14.48%
Tier 1 leverage ratio............................................................... 6.59% 7.09% 8.07%
====================================================================================================================================
Regulatory Matters
At December 31, 1997, the Bank is operating under a Supervisory Letter from
its primary regulator. The Supervisory Letter, among other things, prevents the
Bank and the Company from declaring or paying dividends without the prior
written approval of its regulators and prohibits the Bank and the Company from
issuing debt.
Income (Loss) Per Share
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
eliminates primary and fully diluted earnings per share (EPS) and requires
presentation of basic and diluted EPS in conjunction with the disclosure of the
methodology used in computing such EPS. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average common shares outstanding during the period. Diluted EPS takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common stock. Prior
period EPS calculations have been restated to reflect the adoption of SFAS No.
128.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for years
beginning after Decem ber 15, 1997. SFAS No. 130 requires entities presenting a
complete set of financial statements to include details of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
income, expenses, gains, and losses that bypass the income statement and are
reported directly in a separate component of equity. The effect of adopting SFAS
No. 130 is not expected to be material.
22
Disclosures About Segments of an Enterprise and
Related Information
In June 1997, the FASB issued SFAS No. 131, which is effective for all
periods beginning after December 15, 1997. SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic area in which they operate, and their major
customers. Management is currently evaluating the disclosure impact of SFAS No.
131 on its financial statements.
Cautionary Statement
Certain statements contained herein are not based on his torical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based upon
various assumptions (some of which are beyond the control of the Bank and the
Company), may be identified by reference to a future period, or periods, or by
the use of forward-looking terminology such as "may," "will," "believe,"
"expect," "estimate," "anticipate," "continue," or similar terms or variations
on those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, economic growth;
govern mental monetary policy, including interest rate policies of the FRB;
sources and costs of funds; levels of interest rates; inflation rates; market
capital spending; technological change; the state of the securities and capital
markets; acquisition; consumer spending and savings; expense levels; tax,
securities, and banking laws; and prospective legislation.
Year 2000
The Company has conducted a comprehensive review of its computer systems,
both internal and outsourced processing, to identify the systems that could be
affected by the "Year 2000" issue and is developing an implementation plan to
resolve the issue. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs or that of its vendor that have time-sensitive
software may recognize the date using "00" as the year 1900 rather than the Year
2000. This could result in major system failure or miscalculations. To date,
confirmations have been received from the Com pany's primary computer software
and processing vendors that they are addressing the Year 2000 issue. Current
estimates of the cost to be incurred to prepare for the Year 2000 range from
$50,000 to $100,000. In conjunction with Year 2000 preparation, the Bank plans
to make most hardware upgrades as a normal part of replacement of
equipment--thereby minimizing cost. Cost estimates include primarily personnel
and consulting time to ensure all business components/processes have been
considered and tested for compliance. The Bank has contacted its major loan
customers to advise them to review their own systems for possible Year 2000
problems. In making credit decisions for major borrowers, the Bank will consider
the impact of the Year 2000 issues. The "Year 2000" potential problems create
risk for the Company from unforeseen problems in its own computer system and
from third parties such as other financial institutions, the federal government,
federal agencies, vendors and customers. Failures of the Company's or third
party's computer systems could have a material effect on the Company's ability
to conduct business, especially to process and account for the transfer of funds
electronically.
ITEM 8 - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS*
Grant Thornton [LOGO]
Shareholders and Board of Directors
United Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of United
Bancshares, Inc. and Subsidiary as of Decem ber 31, 1997, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsi
bility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit. The consolidated financial
statements of United Bancshares, Inc. and Subsidiary as of and for the years
ended December 31, 1996 and 1995 were audited by other auditors whose report,
dated March 24, 1997, expressed an unqualified opinion on those consolidated
financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated finan cial position of United
Bancshares, Inc. and Subsidiary as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
March 20, 1998
Philadelphia, Pennsylvania*
23
United Bancshares, Inc. and Subsidiary
--------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ................................................................ $ 4,604,408 $ 3,544,110
Interest-bearing deposits with banks ................................................... 334,288 320,202
Federal funds sold ..................................................................... 7,821,000 5,380,000
-----------------------------------
Cash and cash equivalents ........................................................ 12,759,696 9,244,312
Investment securities:
Available-for-sale, at market value .................................................. 7,398,607 5,983,461
Held-to-maturity, at amortized cost (market value of $10,914,766
and $8,489,053 in 1997 and 1996, respectively) ....................................... 10,854,711 8,476,638
Loans held-for-sale (market value of $2,008,865 and $5,016,851 in
1997 and 1996, respectively) ......................................................... 1,979,177 4,906,455
Loans, net of unearned discount of $361,350 and $428,768 in
1997 and 1996, respectively .......................................................... 72,183,255 64,717,914
Less allowance for loan losses ......................................................... (468,806) (527,507)
-----------------------------------
Net loans ........................................................................ 73,693,626 69,096,862
Bank premises and equipment, net ....................................................... 1,862,647 1,788,937
Accrued interest receivable ............................................................ 1,439,587 1,376,416
Foreclosed real estate ................................................................. 165,188 68,857
Deferred branch acquisition costs ...................................................... 75,753 154,475
Prepaid expenses and other assets ...................................................... 664,475 579,443
-----------------------------------
$ 108,914,290 $ 96,769,401
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits, noninterest-bearing ................................................. $ 17,697,901 $ 12,393,256
Demand deposits, interest-bearing .................................................... 20,922,107 13,126,327
Savings deposits ..................................................................... 22,925,881 23,484,301
Time deposits, $100,000 and over ..................................................... 13,852,356 14,001,981
Time deposits ........................................................................ 24,028,818 25,755,106
-----------------------------------
99,427,063 88,760,971
Long-term debt ....................................................................... 43,688 74,561
Securities sold to repurchase ........................................................ 1,341,053 --
Accrued interest payable ............................................................. 541,225 525,161
Accrued expenses and other liabilities ............................................... 502,406 650,040
-----------------------------------
Total liabilities ................................................................ 101,855,435 90,010,733
-----------------------------------
Shareholders' equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000
shares authorized; 93,150 issued and outstanding in 1997 and 1996 .................... 932 932
Common stock, $0.01 par value; 2,000,000 shares authorized; 823,695
and 816,355 issued and outstanding in 1997 and 1996, respectively .................... 8,236 8,163
Additional paid-in-capital ........................................................... 10,425,626 10,348,989
Accumulated deficit .................................................................. (3,438,102) (3,618,692)
Net unrealized holding gains on investment securities available-for-sale ............. 62,163 19,276
-----------------------------------
Total shareholders' equity ....................................................... 7,058,855 6,758,668
-----------------------------------
$108,914,290 $96,769,401
==================================
The accompanying notes are an integral part of these statements.
24
United Bancshares, Inc. and Subsidiary
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ......................................... $ 5,912,901 $ 5,566,650 $ 5,157,578
Interest on investment securities .................................. 1,067,762 977,117 984,190
Interest on federal funds sold ..................................... 482,856 224,594 392,781
Interest on time deposits with other banks ......................... 25,333 20,519 19,474
----------------------------------------------------
Total interest income ............................................ 7,488,852 6,788,880 6,554,023
----------------------------------------------------
Interest expense:
Interest on time deposits .......................................... 1,852,080 1,650,740 1,722,086
Interest on demand deposits ........................................ 379,397 294,363 292,531
Interest on savings deposits ....................................... 459,035 506,458 521,164
Interest on borrowed funds ......................................... 54,841 78,629 6,375
----------------------------------------------------
Total interest expense ........................................... 2,745,353 2,530,190 2,542,156
----------------------------------------------------
Net interest income .............................................. 4,743,499 4,258,690 4,011,867
Provision for loan losses ............................................ 97,500 85,000 78,166
----------------------------------------------------
Net interest income after provision for loan losses .............. 4,645,999 4,173,690 3,933,701
----------------------------------------------------
Noninterest income:
Gain on sale of loans .............................................. 187,471 11,188 9,769
Customer service fees .............................................. 1,181,082 907,557 655,480
Resolution Trust Corporation fee ................................... -- 90,000 --
Gain on sale of investments ........................................ -- 9,157 --
Other income ....................................................... 148,867 99,820 76,015
----------------------------------------------------
Total noninterest income ......................................... 1,517,420 1,117,722 741,264
----------------------------------------------------
Noninterest expense:
Salaries, wages, and employee benefits ............................. 2,397,861 2,255,079 2,277,613
Occupancy and equipment ............................................ 1,015,419 898,464 819,750
Office operations and supplies ..................................... 522,525 509,158 504,050
Marketing and public relations ..................................... 172,326 136,352 92,556
Professional services .............................................. 274,999 266,955 297,743
Data processing .................................................... 844,009 811,531 620,831
Deposit insurance assessments ...................................... 66,274 616,025 199,964
Other operating .................................................... 689,416 629,603 641,804
----------------------------------------------------
Total noninterest expense ........................................ 5,982,829 6,123,167 5,454,311
----------------------------------------------------
Net income (loss) ................................................ $ 180,590 $ (831,755) $ (779,346)
====================================================
Net income (loss) per common share--basic ............................ $ 0.22 $ (1.03) $ (1.04)
====================================================
Weighted average number of common shares ............................. 818,240 810,729 749,055
====================================================
The accompanying notes are an integral part of these statements.
25
United Bancshares, Inc. and Subsidiary
--------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
Net unrealized
holding
Series A gains (losses)
Preferred Stock Common Stock Additional on investment Total
---------------- ---------------- paid-in Accumulated securities shareholders'