UNITED BANCSHARES, INC.
2002 ANNUAL REPORT
Table of Contents
President’s Letter
1
Market Price and Dividends on Common Stock
3
Five-Year Summary of Selected Financial Data
4
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
5
Independent Auditor’s Report
11
Financial Statements
Consolidated Balance Sheets
13
Consolidated Statements of Income
14
Consolidated Statements of Stockholders’ Equity
15
Consolidated Statements of Cash Flows
16
Summary of Significant Accounting Policies
18
Notes to Consolidated Financial Statements
23
Directors and Officers
41
March 20, 2003
Dear Stockholder:
Economic insecurity, a slow growth economy, a weak stock market, increased numbers of bankruptcies, corporate malfeasance, threats of terrorism and war, and low interest rates all contributed to a consumer fixation on mortgage refinancing to reduce monthly payments and/or consolidate debt. As customers flooded into banks and mortgage companies to refinance, banks were confronted with the reality that historically low mortgage interest rates had compounded the interest rate risk of holding on their balance sheets long-term fixed rate mortgage assets that ultimately must be funded by short-term core deposits.
United aggressively participated in the nationwide refinancing boom. To control interest rate risk, fixed rate home mortgages were sold in the secondary market, but all customer contact and loan servicing was retained by United. In 2002, because we successfully retained and expanded our mortgage customer relationships, our mortgage loan servicing portfolio grew by approximately $55.0 million (41%) from $133.8 million to $188.9 million. Because they were sold on the secondary market, they are not included in the consolidated balance sheet.
Economic insecurity also contributed to stockholder vigilance and prudence. Banking has long benefited from regulatory oversight. Standards of corporate governance, financial integrity, community stewardship, and adherence to a written code of ethics have been well-established. At United we remain committed to the safety and stability of our stockholders’ investment. Management and the Board have given careful attention to the segregation of duties with clear lines of authority, appropriate dual controls, and empowered audit and asset quality control functions. We are working to retain our unique roots through corporate and bank board representation while maximizing the efficiencies to be gained through standardized products, processes and procedures. Our community-based bankers deliver products and services in our communities, while centrally located teams of specialists deliver the service and support. We are confident that we will continue to improve and grow United to deliver optimum value, profitability and safety. We believe that the 18.13% increase in total stockholders’ equity of $6.3 million from $34.7 million at December 31, 2001 to $41.0 million at December 31, 2002 and the 16.89% increase in book value per share of $1.63 from $9.65 at December 31, 2001 to $11.28 at December 31, 2002 is representative of their effort.
Thank you for your continued support of United Bancshares, Inc.
Sincerely,
/s/ E. Eugene Lehman
E. Eugene Lehman
President/CEO
UNITED BANCSHARES, INC.
DESCRIPTION OF THE CORPORATION
United Bancshares, Inc., an Ohio corporation (the “Corporation”), is a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The executive offices of the Corporation are located at 100 S. High Street, Columbus Grove, Ohio. Through its subsidiaries, The Union Bank Company, Columbus Grove, Ohio (Union); The Bank of Leipsic Company, Leipsic, Ohio (Leipsic); and Citizens Bank of Delphos, Delphos, Ohio (Citizens); the Corporation is engaged in the business of commercial banking and offers a full range of commercial banking services.
Union is an Ohio state-chartered bank with its main office located in Columbus Grove, Ohio. Union presently operates two branch offices in Putnam County, Ohio (one in the village of Kalida and one in the village of Ottawa) and three branch offices in Allen County, Ohio (all in the city of Lima). Leipsic is an Ohio state-chartered bank, with its main, and only office located in the village of Leipsic, Putnam County, Ohio. Citizens is a federally chartered savings bank, with its main, and only, office located in the city of Delphos, Allen County, Ohio.
MARKET PRICE AND DIVIDENDS ON COMMON STOCK
United Bancshares, Inc. has traded its common stock on the Nasdaq Markets Exchange under the symbol “UBOH” since March 2001. From January 2000 to March 2001, the Corporation’s common stock was traded on the Nasdaq over-the-counter Bulletin Board. Prior to January 2000, there was no established public trading market for United Bancshares, Inc. common stock. Below are the trading highs and lows for the noted periods:
Year 2002
Low
First Quarter
$
10.78
$
9.03
Second Quarter
14.35
9.65
Third Quarter
14.85
11.68
Fourth Quarter
11.86
10.42
Year 2001
High
Low
First Quarter
$
11.00
$
7.60
Second Quarter
9.55
7.70
Third Quarter
9.56
8.21
Fourth Quarter
10.20
8.75
Dividends declared by United Bancshares, Inc. on its common stock during the past two years were as follows:
2002
2001
First Quarter
$
.11
$
.11
Second Quarter
.11
.11
Third Quarter
.11
.11
Fourth Quarter
.11
.11
Total
$
.44
$
.44
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=======
AVAILABILITY OF MORE INFORMATION
To obtain a copy of the United Bancshares, Inc.’s annual report (Form 10-K) filed with the Securities and Exchange Commission, please write to:
Bonita Selhorst, Secretary
United Bancshares, Inc.
100 S. High Street
Columbus Grove, Ohio 45830
419-659-2141
UNITED BANCSHARES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Years ended December 31,
2002
2001
2000
1999
1998
(Dollars in thousands, except per share data)
Statements of income:
Total interest income
$
24,679
$
26,234
$
18,940
$
16,658
$
15,247
Total interest expense
11,695
14,830
10,687
8,599
8,026
Net interest income
12,984
11,404
8,253
8,059
7,221
Provision for loan losses
722
449
502
309
222
Net interest income after
provision for loan losses
12,262
10,955
7,751
7,750
6,999
Total non-interest income
3,099
2,827
1,028
980
1,170
Total non-interest expense
11,081
9,497
7,059
6,044
5,565
Income before federal income taxes
4,280
4,285
1,720
2,686
2,604
Federal income taxes
1,721
1,031
235
544
485
Income before change in
accounting principle
2,559
3,254
1,485
2,142
2,119
Cumulative effect of change in
accounting principle
3,807
-
-
-
-
Net income
$
6,366
$
3,254
$
1,485
$
2,142
$
2,119
Per share of common stock:
Net income
$
1.77
$
0.96
$
0.66
$
0.94
$
0.95
Dividends
0.44
0.44
0.44
0.35
0.13
Book value
11.28
9.65
8.48
7.92
8.38
Average common shares outstanding
3,601,184
3,376,652
2,254,420
2,274,067
2,238,306
Year end balances:
Loans
$
243,555
$
243,995
$
178,951
$
167,229
$
141,491
Securities
154,977
105,629
54,976
52,264
62,721
Total assets
424,997
386,401
256,815
237,032
221,218
Deposits
323,657
310,897
205,506
198,130
185,542
Stockholders' equity
40,958
34,672
19,049
18,075
19,005
Average balances:
Loans
$
242,688
$
264,243
$
175,743
$
156,143
$
126,724
Securities
143,786
74,597
54,925
54,063
56,197
Total assets
408,500
364,915
244,855
225,139
198,514
Deposits
310,740
287,011
198,526
193,863
171,689
Stockholders' equity
39,856
31,661
17,506
18,327
17,352
Selected ratios:
Net yield on average interest-earning
assets
3.56%
3.44%
3.80%
4.10%
4.26%
Return on average assets
.63%
0.89%
0.61%
0.95%
1.07%
Return on average stockholders' equity
6.42%
10.28%
8.48%
11.69%
12.21%
Net loan charge-offs as a percentage
of average outstanding net loans
0.27%
0.19%
0.14%
0.19%
0.07%
Allowance for loan losses
as a percentage of year end loans
1.14%
1.06%
1.08%
1.00%
1.18%
Stockholders' equity as a percentage of
total assets
9.64%
8.97%
7.42%
7.63%
8.59%
Notes:
1) All per share data for 1998 has been adjusted for the 1999 stock dividend.
2) Amounts for 2001 include Citizens Bank of Delphos, since its acquisition on March 1, 2001.
3) 2002 ratios exclude the cumulative effect of the change in accounting principle.
UNITED BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
EARNINGS SUMMARY
Consolidated net income for United Bancshares, Inc. (the “Corporation”) for 2002 was $6.4 million compared to $3.3 million in 2001 and $1.5 million in 2000. Net income for 2002 includes $3.8 million resulting from the cumulative effect of a change in accounting principle as more fully described in Note 1 to the consolidated financial statements. The acquisition of Citizens on March 1, 2001 was accounted for as a purchase. Consequently, the results of operations for Citizens are included only from the date of acquisition. Excluding the impact of the change in accounting principle, basic income per share was $0.71 in 2002, a decrease of 26.0% from $0.96 in 2001. The 2001 basic income per share represented a 45.5% increase from $0.66 in 2000. The 2002 operating results included a special provision of $631,000 ($.18 per share) for income taxes relating to the possib le recapture of the tax bad debt reserve for Citizens.
FINANCIAL POSITION AND RESULTS OF OPERATIONS
2002 Compared With 2001
Net interest income for 2002 was $13.0 million, an increase of $1.6 million (13.9%) over 2001. The increase was primarily due to an increase in the Corporation’s net interest margin coupled with an increase in interest-earning assets. The average yield on loans decreased to 7.22% compared to 8.12% for 2001, while the average rate paid on interest-bearing liabilities decreased to 3.21% from 4.57%. The net effect of these and other factors resulted in the net interest margin on interest-earning assets, on a tax-equivalent basis, increasing from 3.44% in 2001 to 3.56% in 2002.
At December 31, 2002, total loans (including loans held for sale) were $243.6 million compared to $244.0 million at December 31, 2001. Loans held for sale decreased $4.3 million in 2002 which was essentially offset by increases in the loan portfolio. Within the loan portfolio, residential real estate loans decreased $16.9 million (14.9%) during 2002 as the subsidiary banks continued to sell a substantial portion of fixed residential real estate loans including loans which became salable during the year through improvements in the Citizens loan portfolio. Commercial loans increased $19.2 million (24.1%) as a result of continued efforts by lending management to grow this portion of the loan portfolio, including the hiring of two senior lenders at Leipsic. Consumer loans decreased $2.7 million (18.5%) during 2002 due to competition from non-traditional sources such as automobile l easing companies.
The Corporation, through its bank subsidiaries, elects to sell in the secondary market a substantial portion of the fixed rate residential real estate loans originated, and typically retains the servicing rights relating to such loans. During 2002, net gain on sale of loans was $1.9 million, including $967,000 of capitalized servicing rights.
Securities, including Federal Home Loan Bank (FHLB) stock, totaled $155.0 million at December 31, 2002, representing an increase of $49.4 million (46.7%) from total securities of $105.6 million at December 31, 2001. Approximately $27 million of the increase in securities resulted from the Corporation’s leveraged borrowing program implemented during the second quarter of 2002. Under this program, the Corporation borrowed from the FHLB and invested the borrowings in securities as part of the asset/liability management strategy. At both year-ends, all securities except FHLB stock were designated as available for sale. As such, these securities may be sold if needed for liquidity, asset-liability management or other reasons. Such securities are reported at fair value, with net unrealized gains (losses) reported as a separate component of stockholders’ equity, net of tax. At December 31, 2002, unrealized gains, net of income taxes, of $1.5 million was reported as a component of stockholders’ equity.
Total deposits at December 31, 2002 were $323.7 million, an increase of $12.8 million (4.1%) over total deposits of $310.9 million at December 31, 2001. This increase was substantially due to the interest-bearing deposit category and resulted from cross-selling efforts with existing customers and aggressive pricing.
FHLB borrowings at December 31, 2002 were $56.0 million compared to $34.8 million at December 31, 2001, an increase of $21.2 million (61.0%). As previously mentioned, the Corporation borrowed approximately $27 million from the FHLB during the second quarter of 2002 under the leveraged borrowing program. The Corporation utilizes FHLB borrowings as an alternative source of funding to support its asset growth as necessary.
The allowance for loan losses at December 31, 2002 was $2.8 million (1.14% of total loans) compared to $2.6 million (1.06% of total loans) at December 31, 2001. The increase in the allowance for loan losses as a percent of total loans was due to the increase in classified assets during 2002, as well as the aforementioned growth in the commercial loan portfolio.
The provision for loan losses charged to operations is determined by management after considering the amount of net losses incurred as well as management’s estimation of future losses based on an evaluation of loan portfolio risk and current economic factors. The provision for loan losses was $722,000 in 2002 compared to $449,000 in 2001. The increase in the provision for loan losses in 2002 was due to an increase in the level of classified loans and a trend of increasing net loan charge-offs (.27% in 2002, compared to .19% in 2001 and .14% in 2000).
Total non-interest income increased $300,000 to $3.1 million in 2002 from $2.8 million in 2001. The significant components of non-interest income is summarized in Note 10 to the consolidated financial statements. Net gains on sales of residential real estate loans increased $500,000 to $1.9 million in 2002 from $1.4 million in 2001 due to significant volume resulting from historically low residential real estate rates which prompted a significant level of refinancing activity. Service charges on deposit accounts remained relatively level with an increase of $34,000 (5.0%) to $712,000 in 2002 compared to $678,000 in 2001. Amortization of the deferred credit relating to the 2001 acquisition of Citizens ceased effective January 1, 2002 as more fully described in Note 1 to the consolidated financial statements. Consequently, there was no income from amortization in 2002 compa red to $346,000 in 2001.
Total non-interest expenses increased $1.6 million (16.7%) to $11.1 million in 2002 from $9.5 million in 2001. Salaries and related costs increased $1.2 million (25.2%) to $5.8 million in 2002 from $4.6 million in 2001. The increase was due to the Corporation’s continued commitment to improve internal controls, specialize the workforce, including the hiring of senior commercial lenders. Net occupancy costs, including buildings, furnishings, and equipment, increased $236,000 (26.9%) to $1.1 million in 2002 from $880,000 in 2001 largely due to new facilities at Leipsic and a renovation of the Citizens facility. Other non-interest expenses increased $200,000 (7.5%) to $4.2 million in 2002 compared to $4.0 million in 2001. The significant components of other non-interest expenses is summarized in Note 10 to the consolidated financial statements. Data processing costs increased $100,000 (12.2%) to $921,000 in 2002 from $821,000 in 2001. Professional fees decreased $242,000 (39.9%) to $365,000 in 2002 compared to $607,000 in 2001 due to the absence of significant merger activity in 2002.
The provision for income taxes for 2002 was $1.7 million, an increase of $690,000 (66.9%) from 1.0 million 2001. This increase primarily resulted from a $631,000 provision relating to the possible recapture of a portion or all of the tax bad debt reserve for Citizens as more fully described in Note 12 to the consolidated financial statements.
FINANCIAL POSITION AND RESULTS OF OPERATIONS
2001 Compared With 2000
Net interest income for 2001 was $11.40 million, an increase of $3.15 million (38.2%) over 2000. The increase was primarily due to a 50.4% increase in the average balance of total loans, primarily as a result of the acquisition of Citizens. The average yield on loans decreased to 8.12% compared to 8.77% for 2000. During the same period, the average rate paid on interest-bearing liabilities decreased to 4.57% from 4.84% in 2000. The net of these factors resulted in the net interest margin on earning assets, on a tax-equivalent basis, declining from 3.80% in 2000 to 3.44% in 2001.
At December 31, 2001, total loans were $244.0 million, a decrease of 20.5% over the December 31, 2000 balance of $307.1 million, adjusted for the amount acquired in the Citizens transaction. This decrease was primarily due to the Corporation electing to sell fixed-rate mortgage loans as part of its asset-liability management program.
Gains on sales of residential real estate loans was $1.4 million in 2001 compared to $155,000 in 2000, an increase of $1.3 million. The 2001 gain on sale of loans was increased and the 2000 gain on sale of loans decreased $183,000 as a result of the establishing of a valuation allowance at December 31, 2000 reflecting the excess of cost over estimated fair value of the portion of loans treated as held-for-sale at December 31, 2000. A large portion of the 2001 gain on sale of loans resulted from a $44 million sale of fixed rate real estate loans from the Citizens portfolio.
Securities, including FHLB stock, totaled $105.6 million at December 31, 2001 which represented an increase of $49.9 million (89.5%) from total securities of $55.7 million at December 31, 2000, adjusted for those acquired in the Citizens transaction. At both year-ends, all securities other than FHLB stock were designated as available for sale. Stockholders’ equity at December 31, 2001 included $168,000 relating to unrealized gains on available for sale securities, net of tax.
Total deposits at December 31, 2001 were $310.9 million, an increase of $20.1 million (6.9%) over total deposits of $290.8 million at December 31, 2000, adjusted for those acquired in the Citizens transaction. This increase was a result of cross-selling efforts with existing customers, aggressive pricing, and the increased expansion into the Lima market.
Federal Home Loan Bank borrowings at December 31, 2001 were $34.8 million compared to $60.9 million at December 31, 2000, adjusted for those acquired in the Citizens transaction.
The allowance for loan losses at December 31, 2001 was $2.6 million (1.06% of total loans) compared to $2.5 million (0.83% of total loans) at December 31, 2000, adjusted for the Citizens transaction.
The provision for loan losses was $449,000 in 2001 compared to $502,000 in 2000.
Total non-interest income increased $1.8 million to $2.8 million in 2001 from $1.0 million in 2000 largely due to the aforementioned increase in gains on sales of real estate loans. Gains on sale of loans in 2001 included $811,000 relating to the capitalization of servicing rights compared to $313,000 in 2000. The large increase in volume was attributable to 1) the falling interest rate environment that encouraged borrowers to refinance their mortgage loans and 2) the sale of a portion of Citizens’ fixed-rate mortgage portfolio as part of the Corporation’s asset-liability management program. Service charges on deposit accounts increased $55,000 to $678,000 in 2001 as compared to $623,000 in 2000. The Corporation also recognized $346,000 of amortization of the deferred credit in 2001 relating to the Citizens acquisition.
Total non-interest expenses increased $2.4 million (34.5%) to $9.5 million in 2001 from $7.1 million in 2000. Salaries and related costs increased $1.3 million (39.3%) to $4.6 million in 2001 from $3.3 million in 2000. Net occupancy costs, including buildings, furnishings, and equipment, increased $180,000 (25.6%) to $880,000 in 2001 from $700,000 in 2000. Data processing costs increased $204,000 (33.2%) to $821,000 in 2001 from $617,000 in 2000. Much of these increases are a result of the Citizens transaction. The result of accounting for this acquisition as a purchase is to include the expense amounts for the last ten months of 2001 while nothing is included for prior periods.
The provision for income taxes for 2001 was $1,031,000, an increase of $796,000 from 2000. This increase resulted from a significant increase in income before income taxes after considering the impact of tax exempt securities.
LIQUIDITY
Liquidity relates primarily to the Corporation’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available for sale, and loans held for sale. A large portion of liquidity is provided by the ability to sell securities. Accordingly, the Corporation has designated all securities other than FHLB stock as available for sale.
Another source of liquidity is represented by loans held for sale which can be sold at any time. Certain other loans are also available to collateralize borrowings.
The consolidated statements of cash flows for the years presented provide an indication of the Corporation’s sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of cash flows for 2002, 2001, and 2000 follows.
The Corporation generated cash from operating activities of $11.0 million in 2002, $6.8 million in 2001, and $3.5 million in 2000. The 2002 and 2001 increases largely resulted from secondary market activities relating to the continued selling of loans held for sale.
Net cash flows from investing activities was $(52.8) million in 2002, $12.2 million in 2001, and $(15.2) million in 2000. The decrease in investing cash flows in 2002 was essentially due to growth in the securities portfolio, including the impact of the aforementioned leverage program. The 2001 increase was largely due to the selling of loans acquired in the Citizens acquisition offset by securities portfolio growth. The 2000 decrease was largely due to loan portfolio growth.
Net cash flows from financing activities was $32.6 million in 2002, $(7.0) million in 2001, and $16.8 million in 2000. The increase in 2002 was attributable to proceeds from FHLB borrowings, net of repayments, of $21.2 million and growth in deposits of $12.8 million. In 2001, net repayments of FHLB borrowings of $26.2 million exceeded the growth in deposits of $20.6 million. In 2000, FHLB borrowings, net of repayments, increased $11.2 million and deposits increased $7.4 million.
ASSET LIABILITY MANAGEMENT
Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities. The Corporation manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.
The difference between a financial institution’s interest rate sensitive assets (assets that will mature or reprice within a specific time period) and interest rate sensitive liabilities (liabilities that will mature or reprice within the same time period) is commonly referred to as its “interest rate sensitivity gap” or, simply, its “gap”. An institution having more interest rate sensitive assets than interest rate sensitive liabilities within a given time interval is said to have a “positive gap”. This generally means that when interest rates increase, an institution’s net interest income will increase and when interest rates decrease, the institution’s net interest income will decrease. An institution having more interest rate sensitive liabilities than interest rate sensitive assets within a given time interval is said to have a “ negative gap”. This generally means that when interest rates increase, the institution’s net interest income will decrease and when interest rates decrease, the institution’s net interest income will increase.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by fluctuations in interest rates than inflation. Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies. Interest rates and inflation do not necessarily move with the same velocity or within the same period; therefore, a direct relationship to the inflation rate cannot be shown. The financial information presented in the Corporation’s consolidated financial statements has been presented in accordance with generally accepted accounting principles, which require that the Corporation measure financial position and operating results primarily in terms of historical dollars.
FORWARD-LOOKING STATEMENTS
This report includes certain forward-looking statements by the Corporation relating to such matters as anticipated operating results, prospects for new lines of business, technological developments, economic trends (including interest rates), and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions. While the Corporation believes that the assumptions underlying the forward looking statements contained herein and in other public documents are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: economic conditions, volatility and direction of market interest rates, governmental legislation and regulation, material unforeseen changes in the financial condition or results of operations of the Corporation’s customers, customer reaction to and unforeseen complications with respect to the integration of acquisition, product design initiative, and other risks identified, from time-to-time in the Corporation’s other public documents on file with the Securities and Exchange Commission.
OTHER MATTERS
As described in Note 21 to the consolidated financial statements, Union has entered into an agreement to purchase certain assets and assume certain liabilities assigned to the financial services offices of RFC Banking Company in Pemberville and Gibsonburg, Ohio. The acquisition is expected to be completed near the end of the first quarter of 2003 and is expected to result in an increase in consolidated assets of $65 million. Based on the estimated purchase price, including cash to be received, it is expected that goodwill of approximately $8.6 million will be recorded after recording a deposit base premium of approximately $1.5 million.
During the first quarter of 2003, the Corporation received approval from the appropriate regulatory authorities to collapse the charters of Citizens and Leipsic and merge them into Union. The collapsing of the charters and related administrative changes are expected to be completed near the end of the second quarter of 2003.
IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUCEMENTS
The Corporation does not believe the adoption of any recently issued pronouncements by the Financial Accounting Standards Board will have a significant impact on its consolidated financial statements.
Independent Auditor’s Report
Stockholders and Board of Directors
United Bancshares, Inc.
Columbus Grove, Ohio
We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements, the Corporation changed its method of accounting for its purchase accounting deferred credit in 2002.
/s/ Clifton Gunderson LLP
Toledo, Ohio
January 24, 2003
UNITED BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS
2002
2001
CASH AND CASH EQUIVALENTS
Cash and due from banks
$
9,652,357
$
7,907,926
Interest-bearing deposits in other banks
1,167,863
8,262,300
Federal funds sold
5,914,000
9,759,000
Total cash and cash equivalents
16,734,220
25,929,226
SECURITIES, available-for-sale
151,079,804
101,975,673
FEDERAL HOME LOAN BANK STOCK,at cost
3,896,700
3,653,100
LOANS HELD FOR SALE
2,083,887
6,363,650
LOANS
241,471,498
237,631,764
Less allowance for loan losses
2,784,509
2,592,081
Net loans
238,686,989
235,039,683
PREMISES AND EQUIPMENT,net
6,314,033
5,891,181
ACCRUED INTEREST RECEIVABLE
2,009,621
2,034,933
OTHER ASSETS
4,192,169
5,513,274
TOTAL ASSETS
$
424,997,423
$
386,400,720
==========
==========
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing
$
22,524,352
$
22,238,766
Interest-bearing
301,132,604
288,658,015
Total deposits
323,656,956
310,896,781
Federal Home Loan Bank borrowings
55,956,475
34,761,684
Deferred credit – purchase accounting
-
3,807,073
Other liabilities
4,426,016
2,262,999
Total liabilities
384,039,447
351,728,537
STOCKHOLDERS’ EQUITY
Common stock, stated value $1. Authorized
4,750,000 shares; issued 3,718,277 shares
in 2002 and 3,681,628 shares in 2001
3,718,277
3,681,628
Surplus
14,373,897
14,232,369
Retained earnings
22,612,142
17,832,408
Accumulated other comprehensive income
1,496,359
168,477
Treasury stock, 88,064 shares, at cost
(1,242,699)
(1,242,699)
Total stockholders’ equity
40,957,976
34,672,183
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
$
424,997,423
$
386,400,720
=========
=========
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002
2001
2000
INTEREST INCOME
Loans, including fees
$
17,513,362
$
21,465,191
$
15,416,133
Securities:
Taxable
5,827,316
3,189,391
1,976,162
Tax-exempt
1,159,933
1,048,988
1,298,915
Other
178,102
530,613
249,332
Total interest income
24,678,713
26,234,183
18,940,542
INTEREST EXPENSE
Deposits
9,052,380
12,336,091
8,881,567
Borrowings
2,642,213
2,494,398
1,805,781
Total interest expense
11,694,593
14,830,489
10,687,348
Net interest income
12,984,120
11,403,694
8,253,194
PROVISION FOR LOAN LOSSES
722,000
449,103
502,490
Net interest income after provision
for loan losses
12,262,120
10,954,591
7,750,704
NON-INTEREST INCOME
3,098,581
2,826,708
1,028,233
NON-INTEREST EXPENSES
Salaries, wages and employee benefits
5,759,729
4,600,830
3,302,987
Occupancy expenses
1,116,072
879,586
700,071
Other operating expenses
4,204,936
4,016,051
3,055,453
Total non-interest expenses
11,080,737
9,496,467
7,058,511
Income before income taxes and
change in accounting principle
4,279,964
4,284,832
1,720,426
PROVISION FOR INCOME TAXES
Current, including $631,000 provision in 2002
relating to recapture of tax bad debt reserve
1,784,061
674,017
265,228
Deferred
(63,061)
356,983
(30,228)
Total provision for income taxes
1,721,000
1,031,000
235,000
Income before change in
accounting principle
2,558,964
3,253,832
1,485,426
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
3,807,073
-
-
NET INCOME
$
6,366,037
$
3,253,832
$
1,485,426
=========
========
========
NET INCOME PER SHARE
Basic:
Income before change in accounting principle
$
.71
$
.96
$
.66
Change in accounting principle
1.06
-
-
Total
$
1.77
$
.96
$
.66
=========
=========
=========
Diluted:
Income before change in accounting principle
$
.70
$
.96
$
.64
Change in accounting principle
1.04
-
-
Total
$
1.74
$
.96
$
.64
=========
=========
=========
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
other compre-
hensive
Common
Retained
income
Treasury
stock
Surplus
earnings
(loss)
stock
Total
BALANCE AT
DECEMBER 31, 1999
$
2,283,635
$
1,889,936
$
15,517,485
$
(1,615,939)
$
-
$
18,075,117
Comprehensive income:
Net income
-
-
1,485,426
-
-
1,485,426
Change in net unrealized
gain (loss), net of
reclassification
adjustments and
income taxes
-
-
-
1,312,678
-
1,312,678
Total comprehen-
sive income
2,798,104
Purchase of treasury stock
-
-
-
-
(913,871)
(913,871)
Exercise of stock options
17,011
65,442
-
-
-
82,453
Cash dividends declared,
$.44 per share
-
-
(992,934)
-
-
(992,934)
BALANCE AT
DECEMBER 31, 2000
2,300,646
1,955,378
16,009,977
(303,261)
(913,871)
19,048,869
Comprehensive income:
Net income
-
-
3,253,832
-
-
3,253,832
Change in net unrealized
gain (loss), net of
reclassification
adjustments and
income taxes
-
-
-
471,738
-
471,738
Total comprehen-
sive income
3,725,570
Acquisition of Delphos
Citizens Bancorp, Inc.
1,367,344
12,224,327
-
-
-
13,591,671
Treasury stock acquired
-
-
-
-
(328,828)
(328,828)
Exercise of stock options
13,638
52,664
-
-
-
66,302
Cash dividends declared,
$.44 per share
-
-
(1,431,401)
-
-
(1,431,401)
BALANCE AT
DECEMBER 31, 2001
3,681,628
14,232,369
17,832,408
168,477
(1,242,699)
34,672,183
Comprehensive income:
Net income
-
-
6,366,037
-
-
6,366,037
Change in net unrealized
gain, net of
reclassification
adjustments and
income taxes
-
-
-
1,327,882
-
1,327,882
Total comprehen-
sive income
7,693,919
Exercise of stock options
36,649
141,528
-
-
-
178,177
Cash dividends declared,
$.44 per share
-
-
(1,586,303)
-
-
(1,586,303)
BALANCE AT
DECEMBER 31, 2002
$
3,718,277
$
14,373,897
$
22,612,142
$
1,496,359
$
(1,242,699)
$
40,957,976
========
========
=======
======
======
======
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002
2001
2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
6,366,037
$
3,253,832
$
1,485,426
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle
(3,807,073)
-
-
Depreciation and amortization
1,499,401
281,869
515,791
Deferred income taxes
(63,061)
356,983
(30,228)
Provision for loan losses
722,000
449,103
502,490
Gain on sale of loans
(1,947,726)
(1,406,963)
(155,739)
Securities losses (gains)
(107,225)
55,341
(7,968)
Amortization of deferred credit –
purchase accounting
-
(346,098)
-
Federal Home Loan Bank stock dividends
(173,800)
(298,600)
(93,300)
Net amortization (accretion) of security
premiums and discounts
274,633
52,300
(55,811)
Provision (credit) for deferred compensation
and stock appreciation rights
2,066
130,424
(40,136)
Gain on disposal of premises and equipment
(14,905)
-
-
Proceeds from sale of loans held-for-sale
98,164,180
55,664,397
7,805,196
Originations of loans held-for-sale
(92,904,169)
(50,363,651)
(6,396,113)
Decrease (increase) in accrued
interest receivable
25,312
396,396
(197,899)
Decrease (increase) in other assets
1,438,602
(634,050)
(75,424)
Increase (decrease) in other liabilities
1,514,514
(804,333)
235,795
Net cash provided by operating activities
10,988,786
6,786,950
3,492,080
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of
available-for-sale securities
60,149,483
16,885,273
11,542,518
Purchases of available-for-sale securities and
Federal Home Loan Bank stock
(107,453,442)
(47,068,565)
(12,108,949)
Proceeds from sale of loans acquired in Delphos
Citizens Bancorp, Inc. acquisition
-
28,550,063
-
Net decrease (increase) in loans
(4,518,306)
11,706,152
(13,527,305)
Proceeds from sale of premises and equipment
387,737
-
-
Net cash received from acquisition of
Delphos Citizens Bancorp, Inc.
-
2,742,144
-
Proceeds from payoff of ESOP loan
-
850,835
-
Purchases of premises and equipment
(1,363,721)
(1,428,028)
(1,090,775)
Net cash provided by (used in)
investing activities
(52,798,249)
12,237,874
(15,184,511)
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002
2001
2000
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
$
12,827,792
$
20,572,553
$
7,375,983
Federal Home Loan Bank borrowings:
Proceeds
36,000,000
6,082,705
13,500,000
Repayments
(14,805,209)
(32,253,727)
(2,262,365)
Proceeds from issuance of common stock
178,177
66,302
82,453
Purchase of treasury stock
-
(1,300)
(913,871)
Cash dividends paid
(1,586,303)
(1,431,401)
(992,934)
Net cash provided by (used in)
financing activities
32,614,457
(6,964,868)
16,789,266
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(9,195,006)
12,059,956
5,096,835
CASH AND CASH EQUIVALENTS
At beginning of year
25,929,226
13,869,270
8,772,435
At end of year
$
16,734,220
$
25,929,226
$
13,869,270
=========
=========
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest
$
11,846,460
$
14,951,806
$
10,603,551
========
=========
=========
Federal income taxes
$
250,000
$
1,071,000
$
254,000
=========
=========
=========
Non-cash operating activity:
Change in deferred income taxes on
net unrealized gain on
available-for-sale securities
$
684,061
$
243,017
$
676,228
=========
=========
=========
Non-cash investing activities:
Transfer of loans to foreclosed assets
$
-
$
259,380
$
-
=========
=========
=========
Securities received in exchange for sale of loans
$
-
$
16,990,321
$
-
=========
=========
=========
Change in net unrealized gain on
available-for-sale securities
$
2,011,943
$
714,755
$
1,988,906
=========
=========
=========
Non-cash investing and financing activities:
Common shares issued in connection with
acquisition of Delphos Citizens
Bancorp, Inc.
$
-
$
13,591,671
$
-
==========
=========
=========
Treasury shares received as payment
for ESOP loan
$
-
$
327,528
$
-
=========
=========
=========
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
UNITED BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United Bancshares, Inc. (the “Corporation”) was incorporated in 1985 in the state of Ohio. The Corporation is a bank holding company and has three wholly-owned subsidiaries, The Union Bank Company (“Union”), The Bank of Leipsic Company (“Leipsic”), and Citizens Bank of Delphos (Citizens) who operate in the commercial banking industry. Union, an Ohio chartered bank organized in 1904, has its main office in Columbus Grove, Ohio, and has branch offices in Kalida, Lima, and Ottawa, Ohio. Leipsic was formed in 1884 and chartered as an Ohio bank in 1924. Its main office is located in Leipsic, Ohio. Citizens was acquired effective March 1, 2001, as described in Note 2, and its office is located in Delphos, Ohio. Union, Leipsic and Citizens are hereafter collectively referred to as “the Banks”.
The primary source of revenue of the Banks is providing loans to customers primarily located in Northwestern and West Central Ohio. Such customers are predominately small and middle-market businesses and individuals.
Significant accounting policies followed by the Corporation are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. The most significant areas involving the use of management’s estimates and assumptions are the allowance for loan losses and the valuation of servicing assets. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, Union, Leipsic, and Citizens. All significant intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within four days.
SECURITIES AND FEDERAL HOME LOAN BANK STOCK
Securities are generally classified as available-for-sale and recorded at fair value, with unrealized gains and losses, net of applicable income taxes, excluded from income and reported as accumulated other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in fair value of securities below their cost that are deemed to be other than temporary are reflected in income as realized losses. Gains and losses on the sale of securities are recorded on the trade date, using the specific identification method.
Investment in Federal Home Loan Bank stock is classified as a restricted security, carried at cost, and evaluated for impairment.
UNITED BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Any net unrealized losses are recognized through a valuation allowance by charges to income.
LOANS
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are stated at their outstanding principal amount, adjusted for charge-offs, and the allowance for loan losses. Interest is accrued as earned based upon the daily outstanding principal balance.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they come due. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Banks will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortf all in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Banks do not separately identify individual consumer and residential loans for impairment disclosures.
UNITED BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORECLOSED ASSETS
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and fair value adjustments are included in net expenses from foreclosed assets. Foreclosed assets amounting to $314,555 and $516,843 at December 31, 2002 and 2001, respectively, are included in other assets in the accompanying consolidated balance sheets.
SERVICING
Servicing assets are recognized as separate assets when rights are acquired through sale of mortgage loans. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitaliz ed amount for the stratum.
PREMISES AND EQUIPMENT
Premises and equipment is stated at cost, less accumulated depreciation. Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income. Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed using both accelerated and straight-line methods.
DEFERRED CREDIT – PURCHASE ACCOUNTING
The deferred credit resulting from the purchase described in Note 2, was being recognized as income on a straight-line basis over a period of 10 years prior to the adoption of a new accounting pronouncement, effective January 1, 2002, as more fully described in Note 1.
FEDERAL INCOME TAXES
Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.
The Banks are not currently subject to state and local income taxes.
UNITED BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVERTISING COSTS
All advertising costs are expensed as incurred.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.
STOCK-BASED COMPENSATION AND STOCK APPRECIATION RIGHTS
Compensation expense under stock option plans is reported if options are granted below market price at the grant date. Pro forma disclosures of compensation cost of stock-based awards have been determined using the fair value method that considers the time value of the option and the risk-free interest rate over the expected life of the option. Had compensation cost for stock options been measured using Financial Accounting Standards Board’s Statement No. 123, net income and net income per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted.
2002
2001
2000
Net income as reported
$
6,366,037
$
3,253,832
$
1,485,426
Pro forma net income
6,294,197
3,234,837
1,485,426
Basic net income per share, as reported
1.77
.96
.66
Pro forma basic net income per share
1.75
.96
.66
Diluted net income per share as reported
1.74
.96
.64
Pro forma diluted net income per share
1.73
.95
.64
The pro forma effects are computed using the following weighted-average assumptions as of grant date.
Risk-free interest rate
3.0
%
3.5
%
5.0
%
Expected option life (in years)
3.4
4.0
4.1
Dividend yield
3.5
%
3.5
%
3.5
%
Any subsequent tax benefit from the exercise of options is recorded by the Corporation as an addition to capital surplus.
Stock appreciation rights are determined based on the estimated value of the Company’s common stock. The provision (credit) for any liability is included in salaries, wages and employee benefits As described in Note 13, there are no outstanding stock appreciation rights at December 31, 2002.
UNITED BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PER SHARE DATA
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year, after restatement for stock dividends. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.
The weighted average number of shares used for the years ended December 31, 2002, 2001 and 2000 were as follows:
2002
2001
2000
Basic
3,601,184
3,376,652
2,254,420
=======
=======
=======
Diluted
3,648,385
3,392,060
2,312,089
=======
=======
=======
Dividends per share are based on the number of shares outstanding at the declaration date, after restatement for any stock dividends.
This information is an integral part of the accompanying
consolidated financial statements.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CHANGE IN ACCOUNTING PRINCIPLE
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 Corporation 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 $3,807,073 ($1.06 basic per share and $1.04 diluted per share).
NOTE 2 - BUSINESS ACQUISITION
Effective March 1, 2001, the Corporation acquired all of the outstanding shares of Delphos Citizens Bancorp, Inc. (Delphos). Delphos’ wholly-owned subsidiary, Citizens Bank of Delphos, is an Ohio banking corporation with offices in Delphos, Ohio. Delphos was subsequently liquidated.
Under the terms of the Merger Agreement, shareholders of Delphos received .8749 shares of the Corporation, cash in lieu of fractional shares, and $5.41 in cash for each share of Delphos stock held. Cash paid, including acquisition costs, totalled $8,893,248. The total purchase price approximated $22,313,000, including the issuance of 1,367,344 shares of the Corporation’s common stock. The transaction was accounted for as a purchase and, accordingly, the results of operations of Delphos have been included in the 2001 consolidated results of the Corporation from the date of acquisition.
The fair value of the assets and liabilities acquired approximated $143,282,000 and $116,816,000, respectively. The major asset acquired was loans of $127,156,000 and the major liabilities assumed were deposits of $85,257,000 and Federal Home Loan Bank borrowings of $30,500,000. The purchase price, including direct acquisition costs of $311,937, was $4,153,171 less than the fair value of assets acquired (after write-down of premises and equipment to zero), resulting in a deferred credit (liability) being recorded in the accompanying 2001 consolidated balance sheet.
Delphos recognized an asset of $1,178,363 at March 1, 2001, representing the unpaid balance of a loan (and related accrued interest) made to its Employee Stock Ownership Plan (ESOP) in 1996 so that the ESOP could purchase shares of Delphos stock. The loan and accrued interest was repaid by the ESOP subsequent to the acquisition through receipt of 34,659 shares of the Corporation’s stock (with a fair value of $327,528) and a cash payment of $850,835. The ESOP was subsequently liquidated.
The following unaudited pro forma financial information combines the historical 2001 and 2000 consolidated statements of operations of the Corporation and Delphos as if the acquisition had become effective at the beginning of each period presented. The unaudited pro forma amounts are not necessarily indicative of what would have occurred or will occur in the future (amounts in thousands, except for share amounts):
2001
2000
Net interest income
$
11,953
$
12,256
=======
=======
Net income
$
3,461
$
3,010
=======
=======
Net income per share:
Basic
$
.96
$
.84
=======
=======
Diluted
$
.96
$
.83
=======
=======
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES
The amortized cost and fair value of securities as of December 31, 2002 and 2001 are as follows:
2002
2001
Amortized
Fair
Amortized
Fair
cost
value
cost
value
Available-for-sale:
U.S. Treasury and
agencies
$
12,953,586
$
13,191,443
$
4,548,720
$
4,503,711
Obligations of states and
political subdivisions
26,744,134
27,717,843
20,823,647
20,705,446
Mortgage-backed
108,961,864
110,097,509
76,246,150
76,724,628
Other
153,009
73,009
101,888
41,888
Total
$
148,812,593
$
151,079,804
$
101,720,405
$
101,975,673
=========
=========
=========
=========
A summary of unrealized gains and losses on investment securities at December 31, 2002 and 2001 follows:
2002
2001
Gross
Gross
Gross
Gross
unrealized
unrealized
unrealized
unrealized
gains
losses
gains
losses
Available-for-sale:
U.S. Treasury and agencies
$
243,506
$
5,649
$
11,470
$
56,479
Obligations of states and political
subdivisions
1,022,916
49,207
335,064
453,265
Mortgage-backed
1,450,560
314,915
618,676
140,198
Other
-
80,000
-
60,000
Total
$
2,716,982
$
449,771
$
965,210
$
709,942
========
=======
=======
=======
The amortized cost and fair value of securities at December 31, 2002, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Fair
cost
value
Due in one year or less
$
44,141,380
$
44,271,568
Due after one year through five years
71,652,373
72,720,708
Due after five years through ten years
21,814,012
22,725,060
Due after ten years
11,051,819
11,289,459
Other securities having no maturity date
153,009
73,009
Total
$
148,812,593
$
151,079,804
=========
==========
Securities with a carrying value of approximately $46,981,000 at December 31, 2002 and $10,928,000 at December 31, 2001 were pledged to secure public deposits and for other purposes as required or permitted by law.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES (CONTINUED)
Gross realized gains from sale of securities, including securities calls, amounted to $107,225, $23,085, and $7,968 in 2002, 2001, and 2000, respectively. Gross realized losses from sale of securities amounted to $78,426 in 2001 (none in 2002 and 2000).
NOTE 4 - LOANS
Loans at December 31, 2002 and 2001 consist of the following:
2002
2001
Residential real estate
$
96,340,462
$
113,215,051
Commercial
98,995,999
79,783,236
Agriculture
33,152,255
28,923,842
Consumer
11,796,462
14,474,922
Credit cards
1,186,320
1,234,713
Total loans
$
241,471,498
$
237,631,764
=========
==========
Fixed rate loans approximated $69,352,000 at December 31, 2002 and $99,258,000 at December 31, 2001, including loans classified as held-for-sale.
Impaired loans amounted to $1,170,435 at December 31, 2002 and $286,501 at December 31, 2001. The average balance of impaired loans approximated $1,321,000 in 2002 and $347,000 in 2001 (none in 2000). Allowance for loan losses allocated to impaired loans approximated $206,000 at December 31, 2002 and $43,000 at December 31, 2001. The amount of interest accrued and received on a cash basis relating to impaired loans for 2002, 2001 and 2000 was not significant.
Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan customers of the Banks. Such loans are made in the ordinary course of business in accordance with the normal lending policies of the Banks, including the interest rate charged and collateralization, and do not represent more than a normal collection risk. Such loans amounted to $1,647,349 and $1,709,947 at December 31, 2002 and 2001, respectively. The following is a summary of activity during 2002 and 2001 for such loans:
2002
2001
Beginning of year
$
1,709,947
$
1,197,841
Acquisition of Delphos (Note 2)
-
276,539
Additions
1,485,010
798,184
Repayments
(1,547,608)
(562,617)
End of year
$
1,647,349
$
1,709,947
========
=========
Additions and repayments include loan renewals, as well as sold loans.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (CONTINUED)
Most of the Banks’ lending activities are with customers primarily located in Northwestern and West Central Ohio. As of December 31, 2002 and 2001, the Banks’ loans from borrowers in the agriculture industry represent the single largest industry and amounted to $33,152,255 and $28,923,842, respectively. Agricultural loans are generally secured by property, equipment, and crop income. Repayment is expected from cash flow from the harvest and sale of crops. The agricultural customers are subject to the risks of weather and market prices of crops which could have an impact on their ability to repay their loans. Credit losses arising from the Banks’ lending experience in the agriculture industry compare favorably with the Banks’ loss experience on their loan portfolio as a whole. Credit evaluation of agricultural lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received.
Loans on non-accrual of interest amounted to $1,287,830 and $665,243 at December 31, 2002 and 2001, respectively. Loans past due more than 90 days and still accruing interest amounted to $409,910 and $835,704 at December 31, 2002 and 2001, respectively.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000:
2002
2001
2000
Balance at beginning of year
$
2,592,081
$
1,935,648
$
1,672,535
Acquisition of Delphos (Note 2)
-
721,076
-
Provision charged to operations
722,000
449,103
502,490
Loans charged-off
(655,229)
(575,293)
(372,055)
Recoveries of loans charged-off
125,657
61,547
132,678
Balance at end of year
$
2,784,509
$
2,592,081
$
1,935,648
========
=========
========
NOTE 6 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2002 and 2001:
2002
2001
Land and improvements
$
1,328,676
$
1,314,080
Buildings
4,947,872
5,065,996
Equipment
3,595,463
3,423,672
9,872,011
9,803,748
Less accumulated depreciation
3,557,978
3,912,567
Premises and equipment, net
$
6,314,033
$
5,891,181
========
========
Depreciation expense amounted to $568,037 in 2002, $434,950 in 2001 and $373,262 in 2000.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others approximated $188,876,000 and $133,849,000 at December 31, 2002 and 2001, respectively.
The balance of capitalized servicing rights, net of a valuation allowance, included in other assets amounted to $1,152,811 and $957,914 at December 31, 2002 and 2001, respectively. The estimated fair value of these rights approximated $1,262,000 and $1,013,000 at December 31, 2002 and 2001, respectively.
The following table summarizes mortgage servicing rights capitalized and amortized, along with activity in the related valuation allowance:
2002
2001
2000
Mortgage servicing rights capitalized
$
967,478
$
811,262
$
312,699
Mortgage servicing rights amortized
663,297
100,918
65,129
Valuation allowance:
Beginning of year
$
-
$
-
$
-
Additions
109,284
-
-
End of year
$
109,284
$
-
$
-
=======
========
=======
NOTE 8 - DEPOSITS
Time deposits at December 31, 2002 and 2001 include individual deposits of $100,000 or more approximating $29,177,000 and $27,695,000, respectively. Interest expense on time deposits of $100,000 or more approximated $992,000 for 2002, $1,302,000 for 2001 and $823,000 for 2000. At December 31, 2002, the scheduled maturities of time deposits were approximately as follows:
2003
$
134,132,300
2004
65,445,700
2005
7,148,900
2006
911,200
2007
12,821,200
Thereafter
221,600
Total
$
220,680,900
==========
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank borrowings consist of the following at December 31, 2002 and 2001:
2002
2001
Secured note, with interest at 7.03%, due August 30, 2002
$
-
$
8,000,000
Secured note, with interest at 7.64%, due December 21, 2002
-
5,000,000
Secured note, with interest at 4.93%, due March 26, 2003
1,000,000
1,000,000
Secured note, with interest at 3.32%, due March 28, 2003
2,000,000
-
Secured note, with interest at 4.38%, due March 28, 2004
4,000,000
-
Secured note, with interest at floating rate equal to LIBOR
plus .10% (1.88% at December 31, 2002), adjustable
quarterly, due April 29, 2004
10,000,000
-
Secured note, with interest at 4.13%, due October 29, 2004
3,000,000
-
Secured note, with interest at 5.02%, due March 28, 2005
4,000,000
-
Secured $5,000,000 term note, with monthly principal and
interest payments of $93,990, including interest
at 4.84%, due May 1, 2007
4,401,009
-
Secured note, with interest at 4.02%, due August 30, 2007
8,000,000
-
Secured note, with interest at 4.61% through June 2003,
thereafter convertible to variable rate at the option
of the holder, due December 4, 2008
5,000,000
5,000,000
Secured note, with interest at 6.55% through June 2003,
thereafter convertible to variable rate at the option
of the holder, due June 16, 2010
6,500,000
6,500,000
Secured note, with interest at 6.46% through June 2003,
thereafter convertible to variable rate at the option
of the holder, due July 28, 2010
5,000,000
5,000,000
Advances secured by individual residential mortgages
under blanket agreement
3,055,466
4,261,684
Total
$
55,956,475
$
34,761,684
=========
========
Outstanding borrowings are secured by Federal Home Loan Bank stock, other securities and all eligible mortgage loans. Interest on advances outstanding at December 31, 2002 secured by individual mortgages under blanket agreement ranged from 5.1% to 8.8%, with maturities ranging from June 2003 through June 2019.
Future estimated principal payments on Federal Home Loan Bank borrowings are as follows at December 31, 2002:
2003
$
4,231,360
2004
18,280,626
2005
5,346,375
2006
1,369,398
2007
8,677,622
Thereafter
18,051,094
Total
$
55,956,475
=========
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NON-INTEREST INCOME AND EXPENSES
Non-interest income consisted of the following for the years ended December 31, 2002, 2001 and 2000:
2002
2001
2000
Service charges on deposit accounts
$
712,180
$
678,471
$
623,185
Gain on sale of loans
1,947,726
1,406,963
155,739
Securities gains (losses)
107,225
(55,341)
7,968
Amortization of deferred credit – purchase
accounting
-
346,098
-
Other operating income
331,450
450,517
241,341
Total non-interest income
$
3,098,581
$
2,826,708
$
1,028,233
========
========
========
Other operating expenses consisted of the following for the years ended December 31, 2002, 2001 and 2000:
2002
2001
2000
Data processing expense
$
921,364
$
820,742
$
616,395
Professional fees
365,205
606,866
504,305
Stationery and supplies
271,622
244,614
170,363
Advertising expense
257,477
193,504
176,739
Franchise tax expense
433,000
407,013
216,467
Other
1,956,268
1,743,312
1,371,184
Total other operating expenses
$
4,204,936
$
4,016,051
$
3,055,453
========
========
========
NOTE 11 - OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2002, 2001 and 2000:
2002
2001
2000
Unrealized holding gains on
available-for-sale securities
$
2,119,168
$
659,414
$
1,996,874
Reclassification adjustments for securities
losses (gains) realized to income
(107,225)
55,341
(7,968)
Net unrealized gains
2,011,943
714,755
1,988,906
Tax effect
684,061
243,017
676,228
Net-of-tax amount
$
1,327,882
$
471,738
$
1,312,678
=========
=======
=========
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES
The income tax provision attributable to income from operations differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes and change in accounting principle as a result of the following:
2002
2001
2000
Expected tax using statutory tax rate of 34%
$
1,455,200
$
1,456,800
$
584,900
Increase (decrease) in tax resulting from:
Recapture of tax bad debt reserve
631,000
-
-
Tax-exempt income on state and municipal
securities and political subdivision loans
(413,500)
(362,900)
(457,800)
Interest expense associated with carrying
certain state and municipal securities
and political subdivision loans
48,800
62,000
73,900
Amortization of deferred credit –
purchase accounting
-
(117,700)
-
Acquisition-related costs capitalized for
income tax purposes
-
-
20,300
Other, net
(500)
(7,200)
13,700
Total
$
1,721,000
$
1,031,000
$
235,000
========
========
========
Prior to 1988, qualified savings and loan associations and other thrift lenders were allowed deductions to increase their bad debt reserve for tax purposes and were not required to provide deferred tax liabilities on such amounts.
In August 1996, legislation was enacted that repeals the percentage of taxable income method of accounting used by many thrifts to calculate their bad debt expense for federal income tax purposes. As a result, thrifts such as Citizens were required to recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for tax years beginning after December 31, 1987. The legislation also requires thrifts to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. Under this change, a tax liability relating to the tax effects of the 1987 base year tax bad debt reserve is not recognized unless it becomes apparent that it will be reduced and result in taxable income.
Retained earnings of Citizens at the time of the acquisition described in Note 2, included approximately $1,860,000 for which no provision for federal income taxes was required under generally accepted accounting principles. Such amount represents the qualifying and non-qualifying tax bad debt reserve as of the 1987 base year. Based on dividends paid by Citizens as well as other events that have transpired during 2002, management believes it is reasonably possible that a portion or all of the 1987 base year tax reserve may be recognized as taxable income for the 2002 tax year. Consequently, a current provision of $631,000 has been made in the 2002 consolidated financial statements.
The deferred income tax provision (credit) of ($63,061) for 2002, $356,983 for 2001, and ($30,228) for 2000 resulted from the tax effects of temporary differences. There was no impact for changes in tax laws and rates or changes in the valuation allowance for deferred tax assets.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below:
2002
2001
Deferred tax assets:
Allowance for loan losses
$
712,400
$
583,800
Deferred compensation
273,300
274,300
Accrued expenses and other
150,852
91,291
Total deferred tax assets
1,136,552
949,391
Deferred tax liabilities:
Unrealized gain on securities available-for-sale
770,852
86,791
Federal Home Loan Bank stock dividends
538,500
479,400
Capitalized mortgage servicing rights
392,000
325,600
Depreciation of premises and equipment
70,600
72,300
Cash surrender value of life insurance
61,600
61,300
Total deferred tax liabilities
1,833,552
1,025,391
Net deferred tax liabilities
$
(697,000)
$
(76,000)
========
========
Net deferred tax liabilities are included in other liabilities in the consolidated balance sheets.
Management believes it is more likely than not that the benefit of deferred tax assets will be realized. Consequently, no valuation allowance for deferred tax assets is deemed necessary as of December 31, 2002 and 2001.
Refundable income taxes approximating $684,000 at December 31, 2001, are included in other assets in the 2001 consolidated balance sheet and includes $266,000 relating to refundable income taxes acquired through the Delphos acquisition described in Note 2. A portion of the refundable income taxes was applied as 2002 estimated payments. Income taxes payable at December 31, 2002, approximates $1,157,000 and is included in other liabilities.
NOTE 13 - EMPLOYEE AND DIRECTOR BENEFITS
Prior to February 1, 2002, the Corporation sponsored an employee stock ownership plan with 401(k) provisions (referred to as a KSOP plan). Under the terms of the plan, employees meeting certain eligibility requirements could elect to participate and make a voluntary contribution of up to 12% of their pay, subject to Internal Revenue Service Code limitations. The Banks provided a discretionary matching contribution and also made discretionary contributions to a profit sharing plan in 2002, 2001 and 2000.
Effective February 1, 2002, the KSOP plan was terminated and the Corporation and Banks adopted the United Bancshares, Inc. 401(k) Profit Sharing Plan (401(k) Plan) and the United Bancshares, Inc. ESOP Plan (ESOP Plan). Under the 401(k) Plan, participants who meet the plan’s eligibility conditions, as described in the plan, are eligible to participate and defer a specified percentage of their eligible compensation subject to certain income tax law limitations. The plan provides the Corporation and Banks may make discretionary matching and profit sharing contributions. The ESOP Plan has been established to purchase shares of the Corporation’s stock for the benefit of all employees who meet the plan’s eligibility requirements. Contributions to the ESOP Plan, which may be made in the form of cash or shares of stock, are discretionary and subject to certain income tax law limitations.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE AND DIRECTOR BENEFITS (CONTINUED)
Total contributions under these plans amounted to $370,100, $259,393 and $209,657 in 2002, 2001 and 2000, respectively. At December 31, 2002, the ESOP Plan owned 192,705 shares of the Corporation’s common stock.
Union has a nonqualified deferred compensation plan covering certain key employees which has been indirectly funded through the purchase of bank-owned life insurance policies. The cash value of these policies aggregated $1,657,787 and $1,644,787 at December 31, 2002 and 2001, respectively. Such amounts are included in other assets in the accompanying consolidated balance sheets. In connection with the policies, Union has provided an estimated liability for accumulated supplemental retirement benefits. Such liability amounts to $430,404 at December 31, 2002 and $428,338 at December 31, 2001 and is included in other liabilities in the accompanying consolidated balance sheets.
Leipsic has an agreement with its former President and the Corporation’s current Chairman of the Board of Directors to provide for retirement compensation benefits. Such benefits are to be paid over a period of twenty years commencing upon retirement effective December 31, 2001. Provision for deferred compensation amounted to $63,072 in 2001 and $31,534 in 2000, with the increase in the 2001 provision resulting from the one year early retirement of the individual. At December 31, 2002 and 2001, the net present value (based on a discount rate of 12%) of future deferred compensation payments amounted to $373,563 and $378,414, respectively. Such amounts are included in other liabilities in the December 31, 2002 and 2001 consolidated balance sheets. Leipsic has purchased a split dollar life insurance policy to fund the future deferred compensa tion payments and the cash value of the policy aggregated $423,402 and $407,697 at December 31, 2002 and 2001, respectively. Such amounts are included in other assets in the accompanying consolidated balance sheets.
In 1998, the Corporation granted stock appreciation rights to the President of Union which provide additional compensation based upon increases in the value of the Corporation’s stock. The provision (credit) for stock appreciation rights amounted to ($142,400) in 2000 (none in 2002 and 2001) and such amount is included in salaries, wages and employee benefits in the consolidated statements of income. During 2002, the President of Union resigned and the stock appreciation rights were cancelled. There was no impact on consolidated net income as a result of the cancellation of the rights.
During 2000, the Corporation agreed to lump sum payments aggregating $285,000 to two executive officers of Leipsic as part of their early retirement arrangement. The payments, which were accrued at December 31, 2000, were made during the first quarter of 2001.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTIONS
The Corporation maintains both qualified and nonqualified stock option plans, under which directors and certain Union officers are entitled to purchase common shares. The plans generally provide that the exercise price of any stock option may not be less than the fair market value of the common stock on the date of the grant.
The following summarizes the stock options activity for the years ended December 31, 2002, 2001 and 2000:
2002
2001
2000
Weighted
Weighted
Weighted
average
average
average
exercise
exercise
exercise
Shares
price
Shares
price
Shares
price
Outstanding at
beginning of year
189,543
$
8.29
108,802
$
5.75
125,813
$
5.63
Assumed in connection
with Delphos
acquisition
-
-
162,932
10.59
-
-
Exercised
(36,649)
4.86
(13,638)
4.86
(17,011)
4.85
Forfeited
(31,209)
11.99
(68,553)
10.40
-
-
Outstanding at end
of year
121,685
$
8.37
189,543
$
8.29
108,802
$
5.75
=====
=====
======
=====
======
=====
Options exercisable
at year end
119,970
$
8.35
167,933
$
7.99
108,802
$
5.75
======
=====
======
====
======
=====
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments are primarily
loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of involvement the Banks have in these financial instruments.
The Banks’ exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Banks use the same credit policies in making loan commitments as they do for on-balance sheet loans.
The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2002 and 2001:
Contract amount
2002
2001
Commitments to extend credit
$
34,362,000
$
30,080,000
=========
========
Letters of credit
$
1,062,000
$
544,500
=========
========
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing commercial properties.
Letters of credit are written conditional commitments issued by the Banks to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. At December 31, 2002, letters of credit totalling $1,047,000 expire in 2003, and $15,000 expire in 2004. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Banks require collateral supporting these commitments when deemed necessary.
NOTE 16 - REGULATORY MATTERS
The Corporation (on a consolidated basis) and Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other f actors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Corporation and Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from federal and state banking agencies categorized the Banks as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks’ category.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - REGULATORY MATTERS (CONTINUED)
The actual capital amounts and ratios of the Corporation and Banks as of December 31, 2002 and 2001 are also presented in the following table:
Minimum to be
well capitalized
Minimum
under prompt
capital
corrective
Actual
requirement
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
As of December 31, 2002:
Total Capital (to Risk-
Weighted Assets)
Consolidated
$
41,978
15.8%
$
21,218
> 8.0%
N/A
N/A
The Union Bank
17,318
10.7%
12,904
> 8.0%
$
16,130
10.0%
The Bank of Leipsic
6,078
13.9%
3,502
> 8.0%
4,377
10.0%
Citizens Bank of Delphos
11,646
20.9%
4,456
> 8.0%
5,570
10.0%
Tier I Capital (to Risk-
Weighted Assets)
Consolidated
$
39,193
14.8%
$
10,609
> 4.0%
N/A
N/A
The Union Bank
15,648
9.7%
6,452
> 4.0%
$
9,678
6.0%
The Bank of Leipsic
5,529
12.6%
1,751
> 4.0%
2,626
6.0%
Citizens Bank of Delphos
11,080
19.9%
2,228
> 4.0%
3,342
6.0%
Tier I Capital (to
Average Assets)
Consolidated
$
39,193
9.1%
$
17,199
> 4.0%
N/A
N/A
The Union Bank
15,648
7.2%
8,744
> 4.0%
$
10,931
5.0%
The Bank of Leipsic
5,529
8.2%
2,702
> 4.0%
3,377
5.0%
Citizens Bank of Delphos
11,080
8.0%
5,574
> 4.0%
6,968
5.0%
As of December 31, 2001:
Total Capital (to Risk-
Weighted Assets)
Consolidated
$
36,121
15.2%
$
18,973
> 8.0%
N/A
N/A
The Union Bank
15,333
10.1%
12,093
> 8.0%
$
15,116
10.0%
The Bank of Leipsic
5,600
16.2%
2,762
> 8.0%
3,453
10.0%
Citizens Bank of Delphos
14,948
29.2%
4,100
> 8.0%
5,125
10.0%
Tier I Capital (to Risk-
Weighted Assets)
Consolidated
$
33,662
14.2%
$
9,487
> 4.0%
N/A
N/A
The Union Bank
13,948
9.2%
6,046
> 4.0%
$
9,069
6.0%
The Bank of Leipsic
5,167
15.0%
1,381
> 4.0%
2,072
6.0%
Citizens Bank of Delphos
14,307
27.9%
2,050
> 4.0%
3,075
6.0%
Tier I Capital (to
Average Assets)
Consolidated
$
33,662
8.9%
$
15,203
> 4.0%
N/A
N/A
The Union Bank
13,948
7.0%
7,939
> 4.0%
$
9,924
5.0%
The Bank of Leipsic
5,167
7.5%
2,748
> 4.0%
3,435
5.0%
Citizens Bank of Delphos
14,307
12.8%
5,067
> 4.0%
6,334
5.0%
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - REGULATORY MATTERS (CONTINUED)
On a parent company only basis, the Corporation’s primary source of funds is dividends paid by the Banks. The ability of the Banks to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the Banks may declare dividends without the approval of the State of Ohio Division of Financial Institutions, unless the total dividends in a calendar year exceed the total of each Bank’s respective net profits for the year combined with its retained profits of the two preceding years.
The Board of Governors of the Federal Reserve System generally considers it to be an unsafe and unsound banking practice for a bank holding company to pay dividends except out of current operating income, although other factors such as overall capital adequacy and projected income may also be relevant in determining whether dividends should be paid.
NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 are as follows:
CONDENSED BALANCE SHEETS
2002
2001
Assets:
Cash
$
5,936,884
$
458,100
Investment in bank subsidiaries
34,102,252
33,974,034
Bank premises, net of accumulated depreciation
523,747
-
Other assets
618,633
291,003
Total assets
$
41,181,516
$
34,723,137
========
=========
Liability – accrued expenses
$
223,540
$
50,954
Stockholders’ equity:
Common stock
3,718,277
3,681,628
Surplus
14,373,897
14,232,369
Retained earnings
22,612,142
17,832,408
Accumulated other comprehensive income
1,496,359
168,477
Treasury stock, at cost
(1,242,699)
(1,242,699)
Total stockholders’ equity
40,957,976
34,672,183
Total liability and stockholders’ equity
$
41,181,516
$
34,723,137
=========
========
CONDENSED STATEMENTS
OF INCOME
2002
2001
2000
Income– dividends from bank subsidiaries
$
7,800,000
$
1,685,000
$
3,981,000
Expenses–professional fees and other expenses,
net of federal income tax benefit
(224,267)
(191,506)
(272,531)
Income before equity in undistributed
net income of bank subsidiaries
7,575,733
1,493,494
3,708,469
Equity in undistributed net income of
bank subsidiaries
(1,209,696)
1,760,338
(2,223,043)
Net income
$
6,366,037
$
3,253,832
$
1,485,426
========
========
========
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (CONTINUED)
CONDENSED STATEMENTS
OF CASH FLOWS
2002
2001
2000
Cash flows from operating activities:
Net income
$
6,366,037
$
3,253,832
$
1,485,426
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of bank subsidiaries
1,209,696
(1,760,338)
2,223,043
Depreciation of bank premises
8,268
-
-
Decrease (increase) in other assets
(286,541)
(55,758)
118,789
Increase (decrease) in accrued expenses
172,586
13,554
(105,000)
Net cash provided by
operating activities
7,470,046
1,451,290
3,722,258
Cash flows from investing activities:
Capital contribution to bank subsidiary
-
-
(1,800,000)
Net cash received from acquisition of
Delphos Citizens Bancorp
-
253,618
-
Purchases of bank premises, including
$436,674 from Union
(532,015)
-
-
Purchase of available-for-sale security
(51,121)
-
-
Net cash provided by (used in)
investing activities
(583,136)
253,618
(1,800,000)
Cash flows from financing activities:
Proceeds from issuance of common stock
178,177
66,302
82,453
Purchase of treasury shares
-
(1,300)
(913,871)
Cash dividends paid
(1,586,303)
(1,431,401)
(992,934)
Net cash used in financing
activities
(1,408,126)
(1,366,399)
(1,824,352)
Net increase in cash
5,478,784
338,509
97,906
Cash at beginning of the year
458,100
119,591
21,685
Cash at end of the year
$
5,936,884
$
458,100
$
119,591
========
=======
========
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments”, requires that the estimated fair value of financial instruments, as defined by the Statement, be disclosed. Statement 107 also requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of recognized financial instruments at December 31, 2002 and 2001 are as follows:
2002
2001
Carrying
Estimated
Carrying
Estimated
amount
value
amount
value
FINANCIAL ASSETS
Cash and cash
equivalents
$
16,734,220
$
16,734,220
$
25,929,226
$
25,929,226
Securities, including
Federal Home
Loan Bank stock
154,976,504
154,976,504
105,628,773
105,628,773
Loans, including loans
held for sale
240,770,876
247,842,995
241,403,333
249,600,000
Total
$
412,481,600
$
419,553,719
$
372,961,332
$
381,157,999
==========
==========
=========
=========
FINANCIAL LIABILITIES
Deposits
$
323,656,956
$
326,276,245
$
310,896,781
$
315,236,000
Federal Home Loan
Bank borrowings
55,956,475
61,379,448
34,761,684
37,074,000
Other liabilities
4,426,016
4,618,513
2,262,999
2,443,440
Total
$
384,039,447
$
392,274,206
$
347,921,464
$
354,753,440
==========
==========
==========
==========
The above summary does not include accrued interest receivable which is also considered a financial instrument. The estimated fair value of accrued interest receivable is considered to be the carrying amount.
The Banks also have unrecognized financial instruments at December 31, 2002 and 2001. These financial instruments relate to commitments to extend credit and letters of credit. The contract amount of such financial instruments amounts to $35,424,000 at December 31, 2002 and $30,624,500 at December 31, 2001. Such amounts are also considered to be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less and do not represent unanticipated credit concerns.
Securities:
The fair value of securities is determined based on quoted market prices of the individual securities or, if not available, estimated fair value was obtained by comparison to other known securities with similar risk and maturity characteristics. Such value does not consider possible tax ramifications or estimated transaction costs.
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans:
Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans, which re-price at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For fixed rate loans the fair value is estimated based on a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows. The estimated value of credit card loans is based on existing loans and does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at year end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.
Other financial instruments:
The fair value of commitments to extend credit and letters of credit is determined to be the contract amount since these financial instruments generally represent commitments at existing rates. The fair value of Federal Home Loan Bank borrowings is determined based on a discounted cash flow analysis using current interest rates. The fair value of other liabilities is generally considered to be carrying value except for the deferred compensation agreement described in Note 13. The fair value of the contract is determined based on a discounted cash flow analysis using current interest rates for similar instruments.
The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precisi on. Changes in assumptions could significantly affect these estimates.
NOTE 19 - CONTINGENT LIABILITIES
The Corporation has executed employment agreements with certain officers which provide for continued compensation for amounts as specified in the contracts in the event of the officer’s involuntary termination without cause, or death or incapability to continue working (as defined in the agreements).
UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONTINGENT LIABILITIES (CONTINUED)
In the normal course of business, the Corporation and its subsidiaries may be involved in various legal actions, but in the opinion of management and legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of selected unaudited quarterly financial data for 2002 and 2001 (dollar amounts in thousands, except earnings per share data):
Net
Earnings per
Interest
interest
Net
common share
income
income
income
Basic
Diluted
2002
First quarter
$
5,913
$
2,988
$
4,357
$
1.21
$
1.20
Second quarter
6,277
3,179
681
.19
.19
Third quarter
6,239
3,295
906
.25
.25
Fourth quarter
6,250
3,522
422
.12
.10
2001
First quarter
5,635
2,218
387
.14
.14
Second quarter
7,355
3,204
865
.24
.24
Third quarter
6,927
3,093
1,250
.35
.35
Fourth quarter
6,317
2,889
752
.23
.23
First quarter 2002 net income includes $3,807,073 ($1.06 basic per share and $1.04 diluted per share), as a result of the change in accounting principle described in Note 1.
NOTE 21 - BRANCH ACQUISITIONS
In December 2002, Union entered into a purchase and assumption agreement to purchase certain assets and assume certain liabilities assigned to the financial services offices of RFC Banking Company in Pemberville and Gibsonburg, Ohio. The acquisition, which is subject to approval by certain regulatory authorities, is expected to take place near the end of the first quarter of 2003. Under the agreement, Union will acquire loans and premises and equipment, and will assume deposits. The estimated total purchase price, net of cash received from deposits being assumed, is approximately $1.5 million and is expected to result in goodwill of approximately $8.6 million after recording a deposit base premium intangible asset of approximately $1.9 million and making other fair value adjustments, net of related income taxes. The acquisition is expected to result in an incr ease in consolidated assets of approximately $65 million.
NOTE 22 - MERGING OF BANK SUBSIDIARIES
During the first quarter of 2003, the Corporation received approval from the appropriate regulatory authorities to collapse the charters of Citizens and Leipsic and merge them into Union. The collapsing of the charters and related administrative changes are expected to be completed near the end of the second quarter of 2003.
This information is an integral party of the accompanying
consolidated financial statements.
United Bancshares, Inc.
Columbus Grove, Ohio
DIRECTORS
DIRECTORS – UNITED BANCSHARES, INC.
As of 3/1/03
YEAR
YEAR
NAME
AGE
ELECTED
NAME
AGE
ELECTED
Robert L. Dillhoff
56
2001
John P. Miller
42
2001
District Highway Mgnt. Adm.
Banking
Joe S. Edwards, Jr.
60
2000
William R. Perry
44
2000
Businessman/Investor
Farmer
Thomas J. Erhart
77
1986
James N. Reynolds
65
2000
Retired/Insurance Agency
Chairman
P. Douglas Harter
56
2001
H. Edward Rigel
60
2000
Associate of Harter & Son Funeral Home
Farmer
E. Eugene Lehman
61
1981
David P. Roach
52
2001
President/CEO
President Vogel Radio Broadcasting
Carl L. McCrate
78
1986
Robert M. Schulte, Sr.
70
2002
Retired/Hardware Retailing
Businessman/Spherion Services
DIRECTORS – The UNION BANK Co.
As of 12/31/02
YEAR
YEAR
NAME
AGE
ELECTED
NAME
AGE
ELECTED
Robert L. Benroth
40
2001
James Anthony O’Neill, M.D. 46
2001
Putnam County Treasurer/Co-owner of
Physician
Benroth Farms and Cattle
Jane E. Gettman
58
1993
James N. Reynolds
65
2000
Telephone Consultant
Banking
Herbert H. Huffman
52
1993
Robert M. Schulte, Sr.
70
1994
Educator
Businessman/Spherion Services
E. Eugene Lehman
61
1989
R. Steven Unverferth
50
1993
Chairman and Chief Executive Officer
President, Unverferth Manufacturing
DIRECTORS – THE BANK OF LEIPSIC CO.
As of 12/31/02
YEAR
YEAR
NAME
AGE
ELECTED
NAME
AGE
ELECTED
Joe S. Edwards, Jr.
60
1977
James N. Reynolds
65
1958
Investor/Attorney
Chairman
Brent A. Gibson
41
2001
Larry D. Place
56
1990
President
Banking
Kevin L. Lammon
48
1996
H. Edward Rigel
60
1979
Insurance and Real Estate Sales
Farmer
E. Eugene Lehman
61
2000
Lewis R. Renollet
40
2002
Banking
CEO
William R. Perry
44
1990
Farmer
DIRECTORS – CITIZENS BANK OF DELPHOS
As of 12/31/02
YEAR
YEAR
NAME
AGE
ELECTED
NAME
AGE
ELECTED
David P. Roach
52
1997
John P. Miller
42
2001
President Vogel Radio Broadcasting
President/CEO
Robert L. Dillhoff
56
1991
Nancy C. Rumschlag
53
1987
District Highway Mgnt. Adm.
Vice President
P. Douglas Harter
56
1969
E. Eugene Lehman
61
2001
Associate of Harter & Son Funeral Home
Banking
United Bancshares, Inc.
Columbus Grove, Ohio
OFFICERS
OFFICERS – UNITED BANCSHARES, INC.
As of 3/1/03
James N. Reynolds – Chairman
E. Eugene Lehman – President / Chief Executive Officer
Bonita R. Selhorst – Secretary
Brian D. Young – Chief Financial Officer & Treasurer