UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 000-29283
UNITED BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
100 S. High Street, Columbus Grove, Ohio
(Address of principal executive offices)
34-1516518
(I.R.S. Employer Identification Number)
45830
(Zip Code)
(419) 659-2141
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of October 31, 2003: 3,652,404
#
UNITED BANCSHARES, INC.
Table of Contents
Page
Part I – Financial Information
3
Item 1 – Financial Statements
3
Item 2 – Management’s Discussion and Analysis of Financial Condition
12
and Results of Operations
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
17
Item 4 – Controls and Procedures
18
Part II – Other Information
18
PART 1 - FINANCIAL INFORMATION
ITEM 1
United Bancshares, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
September 30, | December 31, | |||
2003 | 2002 | |||
ASSETS | ||||
CASH AND CASH EQUIVALENTS | ||||
Cash and due from banks | $ 9,500 | $ 9,652 | ||
Interest-bearing deposits in other banks | 325 | 1,168 | ||
Federal funds sold | 3,981 | 5,914 | ||
Total cash and cash equivalents | 13,806 | 16,734 | ||
SECURITIES, available-for-sale | 154,101 | 151,080 | ||
FEDERAL HOME LOAN BANK STOCK, at cost | 4,014 | 3,897 | ||
LOANS HELD FOR SALE | 4,703 | 2,084 | ||
LOANS | 287,917 | 241,471 | ||
Allowance for loan losses | (3,019) | (2,784) | ||
Net loans | 284,898 | 238,687 | ||
PREMISES AND EQUIPMENT, net | 7,334 | 6,314 | ||
GOODWILL | 8,782 | - | ||
OTHER ASSETS, including accrued interest receivable | ||||
and other intangible assets | 8,989 | 6,201 | ||
TOTAL ASSETS | $ 486,627 | $ 424,997 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
LIABILITIES | ||||
Deposits | ||||
Non-interest bearing | $ 30,213 | $ 22,524 | ||
Interest bearing | 345,916 | 301,133 | ||
Total deposits | 376,129 | 323,657 | ||
Federal Home Loan Bank borrowings | 56,054 | 55,956 | ||
Trust preferred securities | 10,000 | - | ||
Accrued expenses and other liabilities | 2,565 | 4,426 | ||
Total liabilities | 444,748 | 384,039 | ||
SHAREHOLDERS' EQUITY | ||||
Common stock, $1 stated value, 4,750,000 shares | ||||
authorized, 3,740,468 shares issued as of September 30, 2003 | ||||
and 3,718,277 shares issued as of December 31, 2002 | 3,740 | 3,718 | ||
Surplus | 14,460 | 14,374 | ||
Retained earnings | 24,132 | 22,612 | ||
Accumulated other comprehensive income: Unrealized | ||||
gain on available-for-sale securities, net of tax | 790 | 1,497 | ||
Treasury stock, 88,064 shares at cost | (1,243) | (1,243) | ||
Total shareholders' equity | 41,879 | 40,958 | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 486,627 | $ 424,997 | ||
See notes to consolidated financial statements | ||||
United Bancshares, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
Three months ended September 30, | Nine months ended September 30, | ||||||||
2003 | 2002 | 2003 | 2002 | ||||||
INTEREST INCOME | |||||||||
Loans, including fees | $ 4,764 | $ 4,220 | $ 13,927 | $ 12,894 | |||||
Securities: | |||||||||
Taxable | 1,020 | 1,698 | 3,433 | 4,469 | |||||
Tax-exempt | 425 | 298 | 1,235 | 863 | |||||
Other | 37 | 23 | 82 | 42 | |||||
Total interest income | 6,246 | 6,239 | 18,677 | 18,268 | |||||
INTEREST EXPENSE | |||||||||
Deposits | 1,856 | 2,229 | 5,548 | 7,053 | |||||
Other borrowings | 730 | 715 | 2,113 | 1,914 | |||||
Total interest expense | 2,586 | 2,944 | 7,661 | 8,967 | |||||
NET INTEREST INCOME | 3,660 | 3,295 | 11,016 | 9,301 | |||||
PROVISION FOR LOAN LOSSES | 450 | 230 | 450 | 422 | |||||
NET INTEREST INCOME AFTER | - | ||||||||
PROVISION FOR LOAN LOSSES | 3,210 | 3,065 | 10,566 | 8,879 | |||||
NON-INTEREST INCOME | |||||||||
Gain on sales of loans | 697 | 209 | 2,130 | 693 | |||||
Other | 325 | 671 | 843 | 1,481 | |||||
Total non-interest income | 1,022 | 880 | 2,973 | 2,174 | |||||
NON-INTEREST EXPENSES | 3,340 | 2,670 | 9,930 | 8,160 | |||||
Income before income taxes | |||||||||
and change in accounting principle | 892 | 1,275 | 3,609 | 2,893 | |||||
PROVISION FOR INCOME TAXES | 144 | 369 | 885 | 756 | |||||
Income before change in accounting principle | 748 | 906 | 2,724 | 2,137 | |||||
CUMULATIVE EFFECT OF CHANGE IN | |||||||||
ACCOUNTING PRINCIPLE | - | - | - | 3,807 | |||||
NET INCOME | $ 748 | $ 906 | $ 2,724 | $ 5,944 | |||||
NET INCOME PER SHARE | |||||||||
Basic: | |||||||||
Before change in accounting principle | $ 0.21 | $ 0.25 | $ 0.75 | $ 0.59 | |||||
Change in accounting principle | - | - | - | 1.06 | |||||
After change in accounting principle | $ 0.21 | $ 0.25 | $ 0.75 | $ 1.65 | |||||
Weighted average common shares outstanding | 3,642,763 | 3,601,262 | 3,642,027 | 3,596,169 | |||||
Diluted: | |||||||||
Before change in accounting principle | $ 0.20 | $ 0.25 | $ 0.74 | $ 0.59 | |||||
Change in accounting principle | - | - | - | 1.04 | |||||
After change in accounting principle | $ 0.20 | $ 0.25 | $ 0.74 | $ 1.63 | |||||
Weighted average common shares outstanding | 3,690,415 | 3,668,006 | 3,686,968 | 3,649,068 | |||||
See notes to consolidated financial statements | |||||||||
United Bancshares, Inc. and Subsidiaries | ||||||
Consolidated Statements of Shareholder's Equity (Unaudited) | ||||||
Nine months ending September 30, 2003 and 2002 | ||||||
(Dollars in thousands) | ||||||
Common | Capital | Retained | Accum other | Treasury | ||
Stock | Surplus | Earnings | Comp Inc. | Stock | Total | |
BALANCE AT DECEMBER 31, 2002 | $ 3,718 | 14,374 | 22,612 | 1,497 | (1,243) | $ 40,958 |
Net income | 2,724 | 2,724 | ||||
Change in unrealized gain on securities, net of tax | (707) | (707) | ||||
Total comprehensive income | 2,017 | |||||
Dividends declared ($0.33 per share) | (1,204) | (1,204) | ||||
Exercise of stock options for 22,191 shares | 22 | 86 | 108 | |||
BALANCE AT SEPTEMBER 30, 2003 | $ 3,740 | 14,460 | 24,132 | 790 | (1,243) | $ 41,879 |
Common | Capital | Retained | Accum other | Treasury | ||
Stock | Surplus | Earnings | Comp Inc. | Stock | Total | |
BALANCE AT DECEMBER 31, 2001 | $ 3,682 | 14,232 | 17,832 | 169 | (1,243) | $ 34,672 |
Net income | 5,944 | 5,944 | ||||
Change in unrealized gain on securities, net of tax | 1,462 | 1,462 | ||||
Total comprehensive income | 7,406 | |||||
Dividends declared ($0.33 per share) | (1,187) | (1,187) | ||||
Exercise of stock options for 10,000 shares | 10 | 39 | 49 | |||
BALANCE AT SEPTEMBER 30, 2002 | $ 3,692 | 14,271 | 22,589 | 1,631 | (1,243) | $ 40,940 |
United Bancshares, Inc. and Subsidiaries | ||||||
Condensed Consolidated Statement of Cash Flows (Unaudited) | ||||||
(Dollars in thousands) | ||||||
Nine months ended September 30, | ||||||
2003 | 2002 | |||||
Cash flows from operating activities | $ 1,952 | $ 5,804 | ||||
Cash flows from investing activities: | ||||||
Purchases of available-for-sale securities, net of proceeds | ||||||
from sales or maturities | (4,766) | (42,448) | ||||
Net cash received from acquisition of RFCBC branches | 5,749 | - | ||||
Net decrease in loans | 4,993 | 771 | ||||
Proceeds from sale of bank premises | - | 345 | ||||
Expenditures for premises and equipment | (549) | (887) | ||||
Net cash from investing activities | 5,427 | (42,219) | ||||
Cash flows from financing activities: | ||||||
Net change in deposits | (19,309) | 8,775 | ||||
Federal Home Loan Bank borrowings, net of repayments | 98 | 26,495 | ||||
Proceeds from issuance of trust preferred securities | 10,000 | - | ||||
Exercise of stock options | 108 | 49 | ||||
Cash dividends paid | (1,204) | (1,187) | ||||
Net cash from financing activities | (10,307) | 34,132 | ||||
Net change in cash and cash equivalents | (2,928) | (2,283) | ||||
Cash and cash equivalents: | ||||||
At beginning of period | 16,734 | 25,929 | ||||
At end of period | $ 13,806 | $ 23,646 | ||||
See notes to consolidated financial statements | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Consolidated Financial Statements
The consolidated financial statements of United Bancshares, Inc. and subsidiaries (the “Company”) reflect all adjustments (which include normal recurring adjustments) necessary to present fairly such information for the periods and dates indicated. Since the unaudited financial statements have been prepared in accordance with instructions to Form 10-Q, they do not contain all information and footnotes typically included in financial statements prepared in conformity with generally accepted accounting principles. Operating results for the three months and nine months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Complete audited consolidated financial statements with footnotes thereto are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to generally accepted practices within the banking industry. The Company considers all of its principal activities to be banking related.
Note 2 – New Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations” (Statement 141), which addresses financial accounting and reporting for business combinations. Under the provisions of Statement 141, any unamortized deferred credit resulting from a business combination occurring before July 1, 2001 shall be written-off and reported as the cumulative effect of a change in accounting principle. Consequently, as a result of the adoption of Statement 141 effective January 1, 2002, the Company ceased amortizing the deferred credit relating to the Delphos acquisition and recognized as income from a change in accounting principle the unamortized deferred credit, amounting to $3,807,000.
Note 3 – Branch Acquisitions
In December 2002, the Company’s wholly-owned subsidiary, The Union Bank Company “Union”, entered into a purchase and assumption agreement to purchase certain assets and assume certain liabilities assigned to the branch offices of RFC Banking Company “RFCBC” in Pemberville and Gibsonburg, Ohio. The acquisition received approval from regulatory authorities, and was completed on March 28, 2003. The acquisition was accounted for as a business combination since the Company acquired substantially all operating assets and liabilities of the branches and retained most of the branch employees. Consequently, assets acquired and liabilities assumed in connection with the acquisition were recorded at fair value and included the following: Cash ($5,749,000), loans ($54,505,000), premises and equipment ($1,033,000), and deposits ($71,955,000). Based on the negotiated purchase price, the transaction resulte d in the recording of a deposit base premium of $1,778,000 and goodwill of $8,782,000. The results of operations of the branches have been included for the period subsequent to the acquisition.
In accordance with Statement No. 142, “Goodwill and Other Intangible Assets”, issued by the Financial Accounting Standards Board, the goodwill arising from the RFCBC acquisition is not amortized but will be subject to an annual impairment test. The deposit base premium is being amortized over a period of 7 years.
Note 4 – Merging of Bank Subsidiaries
On March 7, 2003, following the receipt of approval from the appropriate regulatory authorities, the Company collapsed the charters of Citizens Bank of Delphos and the Bank of Leipsic and merged them into the charter of The Union Bank Company. Accordingly, the Company is now a one-bank holding company.
Note 5 – Trust Preferred Securities Issuance
During the quarter ended March 31, 2003, the Company formed a wholly-owned subsidiary business trust, United (OH) Statutory Trust I “United Trust”. Effective March 26, 2003, United Trust issued $10 million of trust preferred securities, which are guaranteed by the Company. The trust used the proceeds from the issuance of their trust preferred securities to purchase subordinated deferrable interest debentures issued by the Company. These debentures are United Trust’s only assets and the interest payments from the debentures and related income effects are not reflected in the Company’s consolidated financial statements since they are eliminated in consolidation.
The interest rate of the trust preferred securities and debentures is fixed at 6.40% for a five-year period through March 2008. Thereafter, interest is at a floating rate adjustable quarterly and equal to 315 basis points over the 3-month LIBOR. Interest is payable quarterly. The Company has the right, subject to events in default, to defer payments of interest on the debentures by extending the interest payment period for a period not exceeding 20 consecutive quarterly periods. The trust preferred securities are subject to mandatory redemption upon payment of the debentures. The debentures mature on March 26, 2033, which date may be shortened to March 26, 2008, if certain conditions are met, as well as quarterly thereafter.
The trust preferred securities are reported as a liability but have been structured to qualify as Tier I capital for regulatory purposes.
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated financial statements and management’s discussion and analysis that follow:
For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2003
2002
2003
2002
SIGNIFICANT RATIOS (Unaudited)
Net income to:
Average assets (a)
0.62%
0.87%
0.77%
0.68%
Average shareholders’ equity (a)
7.04%
9.20%
8.67%
7.23%
Net interest margin (a)
3.43%
3.53%
3.50%
3.47%
Efficiency ratio (a)(b)
75.04%
61.67%
70.05%
71.11%
Average shareholders’ equity to average assets
8.76%
9.52%
8.93%
9.48%
Loans to deposits (end of period)
76.55%
75.80%
76.55%
75.80%
Allowance for loan losses to loans (end of period)
1.05%
1.14%
1.05%
1.14%
Cash dividends to net income
53.88%
43.76%
44.20%
55.57%
PER SHARE DATA
Book value per share
$11.47
$11.29
$11.47
$11.29
(a) Net income to average assets, net income to average shareholders’ equity, net interest margin, and efficiency ratio are presented on an annualized basis. Net interest margin is calculated using fully tax equivalent net interest income as a percentage of average interest earning assets. For purposes of these calculations, as well as cash dividends to net income, net income excludes the impact of the change in accounting principle in 2002.
(b) Efficiency ratio is a ratio of non-interest expense as a percentage of fully tax equivalent net interest income plus non-interest income.