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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
UNITED BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
0-25976
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(Registrants' file number)
Pennsylvania 23-2802415
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North Third Street, Philadelphia, Pennsylvania 19106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 351-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01
par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Documents Incorporated by Reference: Part III -- Portions of Registrant's
definitive Proxy Statement for 2001 annual shareholders meeting, filed with the
Commission pursuant to Regulation 14A.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
1
FORM 10-K
Index
PART I
Item No. Page
1. Business........................................................ 3
2. Properties...................................................... 11
3. Legal Proceedings............................................... 12
4. Submission of Matters to a Vote of Security Holders............. 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 12
6. Selected Financial Data......................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
7a Quantitative and Qualitative Disclosures about Market Risk...... 28
8. Financial Statements and Supplementary Data..................... 28
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 28
PART III
10. Directors and Executive Officers of Registrant.................. 29
11. Executive Compensation.......................................... 30
12. Security Ownership of Certain Beneficial Owners and Management.. 30
13. Certain Relationships and Related Transactions.................. 30
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 31
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 28, 2002.
2
United Bancshares, Inc. (sometimes herein also referred to as the "Company"
or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01
par value Common Stock and Series Preferred Stock (Series A Preferred Stock).
The Board of Directors designated a subclass of the common stock, designated
Class B Common Stock, by filing of Articles of Amendment to its Articles of
Incorporation on September 30, 1998. This Class of stock has all of the rights
and privileges of Common Stock with the exception of voting rights. Of the
2,000,000 shares of Common Stock authorized, 250,000 have been designated Class
B Common Stock. There is no market for the Common Stock. None of the shares of
the Registrant's stock was sold within 60 days of the filing of this Form 10-K.
As of March 18, 2002 the aggregate number of the shares of the Registrant's
Common Stock outstanding was 1,100,388 (including 191,667 Class B Non voting).
The Board of Directors of United Bancshares, Inc. designated one series of
the Series Preferred Stock (the "Series A Preferred Stock"), 500,000 authorized
of which 143,150 shares were outstanding as of March 18, 2002.
The Exhibit index is on page 57. There are 57 pages in the Form 10-K.
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENT
Certain of the matters discussed in this document and the documents
incorporated by reference herein, including matters discussed under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward looking statements for the purposes of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended, and may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
United Bancshares, Inc (the "UBS") to be materially different from future
results, performance or achievements expressed or implied by such forward
looking statements. The words "expect," "anticipate," "intended," "plan,"
"believe," "seek," "estimate," and similar expressions are intended to identify
such forward-looking statements. UBS's actual results may differ materially from
the results anticipated by the forward-looking statements due to a variety of
factors, including without limitation: (a) the effects of future economic
conditions on the UBS and its customers; (b) governmental monetary and fiscal
policies, as well as legislation and regulatory changes; (c) the risks of
changes in interest rates on the level and composition of deposits, loan demand,
and the values of loan collateral and securities, as well as interest-rate
risks; (d) the effects of competition from other commercial banks, thrifts,
mortgage companies, consumer finance companies, credit unions securities
brokerage firms, insurance companies, money-market and mutual funds and other
financial institutions operating in the UBS's trade market area and elsewhere
including institutions operating locally, regionally, nationally and
internationally together with such competitors offering banking products and
services by mail, telephone, computer and the Internet; and (e) the failure of
assumptions underlying the establishment of reserves for loan losses and
estimates in the value of collateral, and various financial assets and
liabilities and technological changes being more difficult or expensive than
anticipated. All written or oral forward-looking statements attributable to UBS
are expressly qualified in their entirety by use of the foregoing cautionary
statements.
ITEM 1 -- BUSINESS
United Bancshares, Inc.
United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for
United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of
the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the
Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of
1956, as amended, on October 14, 1994.
The Bank commenced operations on March 23, 1992. UBS provides banking
services through the Bank. The principal executive offices of UBS and the Bank
are located at 300 North Third Street, Philadelphia, Pennsylvania 19106. The
Registrant's telephone number is (215) 351-4600.
As of March 18, 2002, the UBS and the Bank had a total of 64 employees.
3
United Bank of Philadelphia
The Bank, an African-American controlled, state-chartered member bank of
the Federal Reserve System is regulated by both the Federal Reserve Board and
the Commonwealth of Pennsylvania Department of Banking (the "Department"). The
deposits held by the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC").
The Bank conducts all its banking activities through its four offices
located as follows: (i) Center City Branch Two Penn Center, Philadelphia,
Pennsylvania; (ii) West Philadelphia Branch 37th and Lancaster Avenue,
Philadelphia, Pennsylvania, (iii) Mount Airy Branch 1620 Wadsworth Avenue,
Philadelphia, Pennsylvania; and (iv) Progress Plaza Branch 1015 North Broad
Street, Philadelphia, Pennsylvania. In January 2002, the Bank closed and
consolidated its 714 Market Street Branch with its branch located at Two Penn
Center to create operating efficiencies. Through its locations, the Bank offers
a broad range of commercial and consumer banking services. At December 31, 2001,
the Bank had total deposits aggregating approximately $79.4 million and had
total net loans outstanding of approximately $42.3 million. Although the Bank's
primary service area for Community Reinvestment Act purposes is Philadelphia
County, it also services, generally, the Delaware Valley, which consists of
portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania;
New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties
in New Jersey.
The city of Philadelphia is comprised of 353 census tracts and, based on
1990 census data, 204 or 58% of these are designated as low to moderate-income
tracts while 105 or 30% are characterized both as low to moderate-income and
minority tracts. The Bank's primary service area consists of a population of
1,577,815, which includes a minority population of 752,309.
The Bank engages in the commercial banking business, serving the banking
needs of its customers with a particular focus on, and sensitivity to, groups
that have been traditionally under-served, including Blacks, Hispanics and
women. The Bank offers a wide range of deposit products, including checking
accounts, interest-bearing NOW accounts, money market accounts, certificates of
deposit, savings accounts and Individual Retirement Accounts.
The focus of the Bank's lending activities is on the origination of
commercial, consumer and residential loans. A broad range of credit products is
offered to the businesses and consumers in the Bank's service area, including
commercial loans, mortgage loans, student loans, home improvement loans, auto
loans, personal loans, and home equity loans. At March 18, 2002, the Bank's
maximum legal lending limit was approximately $984,000 per borrower. However,
the Bank's internal Loan Policy limits the Bank's lending to $500,000 per
borrower in order to diversify the loan portfolio. The Bank has established
relationships with correspondent banks to participate in loans that exceed the
Bank's internal policies or legal lending limits. The Board of Directors of the
Bank maintains the ability to waive its internal lending limit upon
consideration of a loan. The Board of Directors has exercised this power with
respect to loans and participations on a number of occasions.
The Bank also offers commercial and retail products. In the area of
commercial loans, the Bank has flexibility to develop loan arrangements targeted
at a customer's objectives. Typically, these loans are term loans or revolving
credit arrangements with interest rate, collateral and repayments terms, varying
based upon the type of credit, and various factors used to evaluate risk. The
Bank participates in the government-sponsored Small Business Administration
("SBA") lending program and when the Bank deems it appropriate, obtains SBA
guarantees for up to 90% of the loan amount. This guaranty is intended to reduce
the Bank's exposure to loss in its commercial loan portfolio. Commercial loans
are typically made on the basis of cash flow to support repayment with secondary
reliance placed on the underlying collateral.
The Bank's consumer loan program includes installment loans for home
improvement and the purchase of consumer goods and automobiles, student loans,
home equity and VISA secured and unsecured revolving lines of credit, and
checking overdraft protection. The Bank also offers residential mortgage loans
to its customers. In addition, the Bank offers safe deposit boxes, travelers'
checks, money orders, direct deposit of payroll and Social Security checks, wire
transfers and access to regional and national automated teller networks as well
as international and trust services through correspondent institutions.
4
Competition
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with local, regional and national commercial
banks, as well as savings banks and savings and loan associations. Many of these
banks and financial institutions have an amount of capital that allows them to
do more advertising and promotion and to provide a greater range of services to
customers. To date, the Bank has attracted, and believes it will continue to
attract its customers from the deposit base of such existing banks and financial
institutions largely due to the Bank's mission to service groups of people who
have traditionally been un-served and by its devotion to personalized customer
service. The Bank's strategy has been, and will continue to be, to emphasize
personalized services with special sensitivity to the needs of Blacks, Hispanics
and women and to offer competitive rates to borrowers and depositors.
In order to compete, the Bank relies upon personal contacts by the
officers, directors and employees of the Bank to establish and maintain
relationships with Bank customers. The Bank focuses its efforts on the needs of
individuals and small and medium-sized businesses. In the event there are
customers whose loan demands exceed the Bank's lending limit, the Bank will seek
to arrange for such loans on a participation basis with other financial
institutions and intermediaries. The Bank will also assist those customers
requiring other services not offered by the Bank to obtain such services from
its correspondent banks.
Registrant believes that a portion of the Bank's customer base is derived
from customers who were dissatisfied with the level of service provided at
larger financial institutions. While some of such customers have followed
officers of those institutions who were hired by the Bank, others were attracted
to the Bank by calling programs of its officers and referrals from other
customers. The Bank has sought, in the past, and intends to continue in the
future, to hire customer contact officers who have good relationships with
desirable customers. These personal relationships, provision of a high level of
customer services, and referrals from satisfied customers, form the basis of the
Bank's competitive approach, as opposed to advertising, rate competition or the
development of proprietary banking products, services or programs.
In the past, the principal competition for deposits and loans have been
other depository institutions. However, now the Bank also competes with other
financial intermediaries such as brokerage houses offering investment vehicles
to the general public. Other entities, both public and private, seeking to raise
capital through the issuance and sale of debt or equity securities are also
competitors with banks and savings and loan associations in the acquisition of
deposits.
Supervision and Regulation
The Holding Company, UBS, is registered under the Securities Exchange Act
of 1934, as amended, and is subject to the jurisdiction of the Securities and
Exchange Commission (the "SEC") and of state securities commissions for matters
relating to the offering and sale of its securities. Accordingly, if UBS wishes
to issue additional shares of its common stock, in order, for example, to raise
capital or to grant stock options, UBS will have to comply with the registration
requirements of the Securities Act of 1933, as amended and the applicable states
securities laws, or to qualify for exemption from registration.
UBS is subject to the provisions of the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The
BHC Act requires UBS to secure the prior approval of the Federal Reserve Board
before it owns or controls, directly or indirectly, more than 5% of the voting
shares of any corporation, including another bank. In addition, the BHC Act
prohibits UBS from acquiring more than 5% of the voting shares of, or interest
in, or all or substantially all of the assets of, any bank located outside
Pennsylvania, unless such an acquisition is specifically authorized by the laws
of the state in which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
5
As a bank holding company, UBS is required to file an annual report with
the Federal Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may
also make examinations of the holding company and any or all of subsidiaries.
Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal
Reserve Board's regulation, a bank holding company's subsidiaries are prohibited
from engaging in certain tying arrangements in connection with any extension of
credit or provision of credit of any property or services. The so called
"anti-tying" provisions state generally that a bank may not extend credit,
lease, sell property or furnish any service to a customer on the condition that
the customer obtain additional credit or service from the bank, its bank holding
company or any other subsidiary of its bank holding company, or on the condition
that the customer not obtain other credit or services from a competitor of the
bank, its bank holding company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.
A bank holding company located in Pennsylvania, another state, the District
of Columbia or a territory or possession of the United States may control one or
more banks, bank and trust companies, national banks, interstate banks and, with
the prior written approval of the Pennsylvania Department of Banking, may
acquire control of a bank and trust company or a national bank located in
Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any
other state, the District of Columbia, or a territory or possession of the
United States upon the written approval of the Pennsylvania Department of
Banking.
Subject to satisfaction of the requirements of the Pennsylvania Banking
Code of 1965, as amended, the ("Code"), the Registrant is permitted to control
an unlimited number of banks. However, the Registrant would be required under
the BHC Act to obtain the prior approval of the Federal Reserve Board before it
could acquire all or substantially all of the assets of any bank, or acquiring
ownership or control of any voting shares of any bank other than the Bank, if,
after such acquisition, the registrant would own or control more than 5% of the
voting shares of such bank. The BHC Act has been amended by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 which authorizes bank
holding companies, subject to certain limitations and restrictions, to acquire
banks located in any state.
The Bank. The deposits of United Bank of Philadelphia are insured by the
FDIC. The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.
In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.
In addition, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property is not liable
under the environmental acts or common law equivalents to the Pennsylvania
Department of Environmental resources or to any other person by virtue of the
fact that the lender engages in such commercial lending practices. A lender,
however, will be liable if it, its employees or agents, directly cause an
immediate release or directly exacerbate a release of regulated substances on or
from the property, or knowingly and willfully compelled the borrower to commit
an action which caused such release or violation of an environmental act. The
Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
6
The Bank as a subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.
The Federal Reserve Board possesses the power to prohibit institutions
regulated by it, such as the Bank, from engaging in any activity that would be
an unsafe and unsound banking practice or in violation of applicable law.
Moreover, the Federal Reserve Board may: (i) empower the FDIC to issue
cease-and-desist or civil money penalty orders against the Bank or its executive
officers, directors and/or principal shareholders based on violations of law or
unsafe and unsound banking practices; (ii) authorize the FDIC to remove
executive officers who have participated in such violations or unsound
practices; (iii) restrict lending by the Bank to its executive officers,
directors, principal shareholders or related interests thereof; (iv) restrict
management personnel of a bank from serving as directors or in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area. Additionally,
the Bank Control Act provides that no person may acquire control of the Bank
unless the Federal Reserve Board has been given 60-days prior written notice and
within that time has not disapproved the acquisition or extended the period for
disapproval.
In April 1995, the Bank's regulators revised the Community Reinvestment
Act ("CRA") with an emphasis on performance over process and documentation.
Under the revised rules, the five-point rating scale is still utilized by
examiners to assign a numerical score for a bank's performance in each of three
areas: lending, service and investment. Under the CRA, the Federal Reserve Board
is required to: (i) assess the records of all financial institutions regulated
by it to determine if these institutions are meeting the credit needs of the
community (including low-and moderate-income neighborhoods) which they serve,
and (ii) take this record into account in its evaluation of any application made
by any such institutions for, among other things, approval of a branch or other
deposit facility, office relocation, a merger or an acquisition of bank shares.
The CRA also requires the federal banking agencies to make public disclosures of
their evaluation of each bank's record of meeting the credit needs of its entire
community, including low and moderate income neighborhoods. This evaluation will
include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance") and a statement describing the basis for the
rating. After its most recent examination of the Bank under CRA, the FDIC gave
the Bank a CRA rating of "outstanding".
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions of
more than $10,000 or multiple transactions in any one day of which the Bank is
aware that exceed $10,000 in the aggregate or other lesser amounts. Civil and
criminal penalties are provided under the BSA for failure to file a required
report, for failure to supply information required by the BSA or for filing a
false or fraudulent report.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
The Bank believes that further merger activity within Pennsylvania is likely
to occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely.
7
Through interstate merger transactions, banks will be able to acquire branches
of out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).
Federal Deposit Insurance Corporation Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDIC
Improvement Act") includes several provisions that have a direct impact on the
Bank. The most significant of these provisions are discussed below. In order to
minimize losses to the deposit insurance funds, the FDIC Improvement Act
establishes a format to monitor FDIC-insured institutions and to enable prompt
corrective action by the appropriate federal supervisory agency if an
institution begins to experience any difficulty. The FDIC Improvement Act
establishes five "capital" categories. They are: (1) well capitalized, (2)
adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The overall goal of these
new capital measures is to impose more scrutiny and operational restrictions on
banks as they descend the capital categories from well capitalized to critically
undercapitalized.
Under Current regulations, a "well-capitalized" institution would be one
that has at least a 10% total risk-based capital ratio, a 6% Tier I risk-based
capital ratio, a 5% Tier I Leverage Ratio, and is not subject to any written
order or final directive by its regulatory agency to meet and maintain a
specific capital level.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier I capital, this also will mean that a bank would need to maintain
at least 4% Tier I risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized." The most recent notification from the Federal Reserve authorities
categorized the Bank as "adequately capitalized" under the regulatory framework
for prompt and corrective action.
An "undercapitalized" institution is one that fails to meet one or more of
the required minimum capital levels for an "adequately capitalized" institution.
Under the FDIC Improvement Act, an "undercapitalized" institution must file a
capital restoration plan and is automatically subject to restrictions on
dividends, management fees and asset growth. In addition, the institution is
prohibited from making acquisitions, opening new branches or engaging in new
lines of business without the prior approval of its primary federal regulator. A
number of other restrictions may be imposed.
A "critically undercapitalized" institution is one that has a tangible
equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.
8
Financial Services Act of 1999
On March 11, 2000 the Financial Services Act of 1999 (the "FSA"),
sometimes referred to as the Gramm-Leach-Bliley Act, became effective.
The FSA repeals provisions of the Glass-Steagall Act, which had prohibited
commercial banks and securities firms from affiliating with each other and
engaging in each other's businesses. Thus, many of the barriers prohibiting
affiliations between commercial banks and securities firms have been eliminated.
The FSA amends the BHC Act to allow new "financial holding companies"
("FHC") to offer banking, insurance, securities and other financial products to
consumers. Specifically, the FSA amends Section 4 of the Act in order to provide
for a framework for the engagement in new financial activities. Bank holding
companies may elect to become a financial holding company if all its subsidiary
depository institutions are well capitalized and well managed. If these
requirements are met, a bank holding company may file a certification to that
effect with the Federal Reserve Board and declare that it elects to become a
FHC. After the certification and declaration is filed, the FHC may engage either
de novo or through an acquisition in any activity that has been determined by
the Federal Reserve Board to be financial in nature or incidental to such
financial activity. Bank holding companies may engage in financial activities
without prior notice to the Federal Reserve Board if those activities qualify
under the new list in Section 4(k) of the BHC Act. However, notice must be given
to the Federal Reserve Board within 30 days after a FHC has commenced one or
more of the financial activities.
Under the FSA, a bank subject to various requirements is permitted to
engage through "financial subsidiaries" in certain financial activities
permissible for affiliates of FHC's. However, to be able to engage in such
activities the bank must continue to be well-capitalized and well-managed and
receive at least a "satisfactory" rating in its most recent Community
Reinvestment Act examination. UBS cannot be certain of the effect of the
foregoing recently enacted legislation on its business, although there is likely
to be consolidation among financial services institutions and increased
competition for UBS.
Privacy of Consumer Financial Information
The FSA also a contains a provision designed to protect the privacy of
each consumer's financial information in a financial institution. Pursuant to
the requirements of the FSA, the financial institution regulators (the
"regulators") have promulgated final regulations (the "regulations") intended to
better protect the privacy of a consumer's financial information maintained in
financial institutions.
The regulations are designed to prevent financial institutions, such as
the Bank, from disclosing a consumer's nonpublic personal information to third
parties that are not affiliated with the financial institution.
However, financial institutions can share a customer's personal
information or information about business with their affiliated companies. The
regulations also provide that financial institutions can disclose nonpublic
personal information to non-affiliated third parties for marketing purposes but
the financial institution must provide a description of its privacy policies to
the consumers and give the consumers an opportunity to opt-out of such
disclosure and, thus, prevent disclosure by the financial institution of the
consumer's nonpublic personal information to non-affiliated third parties.
The regulations, among other things, provide guidance concerning what are
"nonpublic personal information", "consumers", and "customers", as well as about
the required timing for notices to customers and the means by which customers
can exercise their right to opt out of disclosure of their personal information.
These privacy regulations will affect how consumer information is
transmitted through diversified financial companies and conveyed to outside
vendors. Although it is not possible at this time to assess the impact of the
privacy regulations on financial institutions or the Bank, the Bank does not
believe the privacy regulations will have a material adverse impact on its
operations in the near term. Nevertheless, the implementation of the privacy
regulations have and will continue to require significant effort by the staff
for the Bank and UBS.
9
Consumer Protection Rules - Sale of Insurance Products
In addition, as mandated by Section 305 of the FSA, the regulators have
published consumer protection rules (the "Rules") which apply to the retail
sales practices, solicitation, advertising or offers of insurance products,
including annuities, by depository institutions such as the Bank and its
subsidiaries.
In very brief summary, the Rules provide that before the sale of insurance
or annuity products can be completed, disclosures must be made that state that
such insurance products are not deposits or other obligations of or guaranteed
by the FDIC or any other agency of the United States, the Bank or its
affiliates. In the case of an insurance product, including an annuity, that
involves an investment risk, there is an investment risk involved with the
product, including a possible loss of value.
The Rules also provide that the Bank may not condition an extension of
credit on the consumer's purchase of an insurance product or annuity from the
Bank or its affiliates or on the consumer's agreement not obtain or prohibit the
consumer from obtaining an insurance product or annuity from an unaffiliated
entity.
The Rules also require formal acknowledgment from the consumer that such
disclosures have been received. In addition, to the extent practical, the Bank
must keep insurance and annuity sales activities physically separate from the
areas where retail sales are routinely accepted from the general public.
The Bank currently does not market insurance products. The Rules will
significantly affect the manner in which the Bank would market insurance
products, if the Bank does so in the future.
Impact of Governmental Policies and Future Legislation
As the enactment of the FSA confirms, from time to time, various proposals
are made in the United States Congress as well as Pennsylvania legislature and
by various bank regulatory authorities which would alter the powers of, and
place restrictions on, different types of bank organizations. Among current
proposals which could be significant to UBS or the Bank are the continued
liberalization of the restrictions on the acquisition of out-of-state banks by
bank holding companies, the expansion of the powers of banks and thrift
institutions, the liberalization of the restrictions upon the activities in
which bank holding companies may engage, the imposition of limitations on
interest rates and service charges, certain consumer legislation and the
requirement to provide certain basic banking services. It is impossible to
predict whether any of the proposals will be adopted and the impact, if any, of
such adoption on the business of UBS or the Bank.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal and state legislation and regulations that may
increase the costs of doing business.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
the Bank.
Regulatory Actions.
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement with its primary
regulators with regard to, among other things, achievement of agreed-upon
capital levels, implementation of a viable earnings/strategic plan, adequate
funding of the allowance for loan losses, the completion of a management review
and succession plan, and improvement in internal controls. See, Item 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Recent Regulatory Developments
By the end of 2001, in the wake of the events of September 11, 2001, the
banking regulators had published for comment or taken under consideration new
regulations concerning money laundering.
10
The federal budget for 2003 indicates a possible need for an increase in
bank deposit insurance coverage and in the premiums charged to banks for such
insurance and draft legislation has been introduced in the Congress with respect
to these matters. In March of 2002 the FDIC announced that an increase in
deposit insurance premiums was likely in the second half of 2002.
It is not now possible to assess the impact on the Bank of any of the
foregoing proposals.
ITEM 2 -- PROPERTIES
Corporate Headquarters
In August 1999, the Bank moved its corporate headquarters from the branch
facility at 714 Market Street to the building at 300 North Third Street,
Philadelphia, Pennsylvania. In October 2000, the Bank purchased the building
from a former officer in conjunction with the settlement of a legal matter for
approximately $1.4 million. Before its purchase, the Bank leased the building
from this officer under a 10-year non-cancelable capital lease. The facility
consists of 25,000 square feet including executive offices, operations, finance,
human resource, security and loss prevention functions. The Bank sublets
approximately 1400 square feet to the law firm of Tucci & Tannenbaum, P.C.;
2,500 square feet to the African American Interdenominational Ministries; and
650 square feet to Roland Jarvis, Esquire.
Market Street Branch
The Bank's Market Street Branch was located on the first floor of a
multi-tenant retail and commercial office building at 714 Market Street,
Philadelphia, Pennsylvania. The Bank occupied approximately 5,700 square feet of
space pursuant to a lease that expired on February 28, 2002. In conjunction the
expiration of the lease, the branch operations of this facility were
consolidated with the branch located at Two Penn Center in January 2002. The
aggregate monthly rent for this location was $14,023.
Mt. Airy Branch
The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section
of Philadelphia. This facility, comprising a retail banking lobby, teller area,
offices, vault and storage space is currently leased at a monthly rental of
$3,415.
Center City Branch
The Bank operates a branch location at Two Penn Center, 15th Street and JFK
Boulevard, Philadelphia, Pennsylvania. The Bank leases approximately 4,769
square feet at its Two Penn Center location. The space includes lobby, teller
area, customer service area, primary lending area and administrative offices, as
well as a vault. The aggregate monthly rent for this location is $13,115.
Frankford Branch
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In
September 2000, the Bank closed this facility. It is expected to be sold during
2002.
West Girard Branch
The Bank leases a facility located at 2836 West Girard Avenue. The branch
operations of this facility were discontinued in September 2000. An ATM machine
remained operational at this facility until the February 2002 when it was
relocated to 2820 West Girard. The aggregate monthly rental for the facility is
$500.
11
West Philadelphia Branch
On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster
Avenue from PNC Bank. The facility is comprised of approximately 3,000 square
feet. The main floor houses teller and customer service areas, a drive-up teller
facility and automated teller machine. The basement provides storage for the
facility. The aggregate monthly rental is $2,750 exclusive of taxes, insurance,
utilities and janitorial service.
Progress Plaza Branch
The Bank leases a branch facility located at 1015 North Broad Street,
Philadelphia, Pennsylvania. The facility comprises a teller and customer service
area, lobby and vault. The aggregate monthly rental for this facility is $3,656
per month.
ITEM 3 -- LEGAL PROCEEDINGS
None. All of the litigation involving the Bank listed in the Registrant's
10-Q Report for the period ending September 30, 2001 has been settled in a
manner satisfactory to the Bank.
NO OTHER MATERIAL CLAIMS HAVE BEEN INSTITUTED OR THREATENED BY OR AGAINST
REGISTRANT OR ITS AFFILIATES OTHER THAN IN THE ORDINARY COURSE OF BUSINESS.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable. No matters were submitted to a vote of Registrant's
security holders since the Registrant's last periodic filing.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Common Stock
As of March 18, 2002 there were 3,163 shareholders of record of UBS's Common
Stock.
The Common Stock is not traded on any national exchange or otherwise traded
in any recognizable market. Prior to December 31, 1993, the Bank conducted a
limited offering (the "Offering") pursuant to a registration exemption provided
in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Act"). The
price-per-share during the Offering was $12.00. Prior to the Offering, the Bank
conducted an initial offering of the Common Stock (the "Initial Offering") at
$10.00 per share pursuant to the same registration exemption.
Beginning April 24, 1995, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock and 750,000 warrants
to purchase a share of the common stock. 18,465 shares and 55,395 warrants have
been sold pursuant to this offering. Each unit, consisting of one share of
common stock and three warrants to purchase one share of common stock in each of
three subsequent years (total 3 shares), was issued at $12.00 per unit. The
warrant exercise price was $8.00 per share for the 1996 Warrant, was $9.00 per
share for the 1997 Warrant, and was $10.00 per share for the 1998 Warrant. The
units were offered pursuant to an exemption from registration contained in
section 4(2) and 3(a)(5) of the Act. No underwriters were used and no
commissions were paid as a result of this offering. The offering closed on
December 31, 1995. In December 1995, the Registrant sold 41,666 shares of
Registrant's common stock in an offering exempt from registration pursuant to
section 4(2) of the Act at a purchase price of $12.00 per share. This sale was
accomplished pursuant to a commitment to purchase these securities issued in
December 1994.
Beginning May 10, 1996, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock. 6,934 shares were
sold pursuant to this offering. The stock was offered pursuant to an exemption
from registration contained in 4(2) and 3(a)(5) of the Act. During 1996, the
Registrant received, $55,536 and issued 6,942 shares as a result of warrant
exercises by shareholders to purchase common stock at a price of $8.00 per
12
share. Beginning May 19, 1997, Registrant commenced an offering solely to
existing stockholders of 250,000 shares of its common stock, initially on a
pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was
offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act.
During 1997, the Registrant received $34,710 and issued 3,856 shares as a result
of exercise of the 1997 warrants at $9.00 per share. During 1998, the Registrant
received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per
share and sold 6,492 shares of common stock as a result to its offering solely
to stockholders of record. This offering was exempt pursuant to an exemption
from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March
31, 1999, there were no warrants outstanding to purchase common stock of the
Bank.
In June 2000 and December 2000, respectively, the Bank received $411,809 and
$436,212 and issued 34,317 and 36,351 shares, respectively, as a result of the
purchase of common stock by members of the Bank's board of directors in a
limited offering at a price of $12.00 per share. This offering was exempt from
registration under the Act pursuant to the exemption in section 4(2) of the Act.
In May 2001 and December 2001, respectively, the Bank received $2,000 and
$9,596 and issued 167 and 800 shares, respectively, as a result of the purchase
of common stock by two individuals in a limited offering at a price of $12.00
per share. This offering was exempt from registration under the Act pursuant to
the exemption in section 4(2) of the Act.
Class B Common Stock
On September 30, 1998, the Registrant filed Articles of Amendment to its
Articles of Incorporation with the Secretary of State of the Commonwealth of
Pennsylvania. The filing amended the Articles of Incorporation of the Registrant
to designate a sub-class of its Common Stock as Class B Common Stock. Pursuant
to the terms of the amendment, holders of the Class B Common Stock have all
rights of Common Stockholders, with the exception of voting rights.
Effective October 9, 1998, the Registrant sold 83,333 shares of its Class B
Common Stock to First Union Corporation ("First Union") for a purchase price of
$12 per share. The sale was exempt from registration requirements pursuant to
section 4(2) of the Act.
Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B
Common Stock to First Union for a purchase price of $12 per share. The sale was
exempt from registration requirements pursuant to section 4(2) of the Act.
Effective September 23, 1999, Registrant sold 25,000 shares of its Class B
Common Stock to First Union Corporation at a purchase price of $12 per share.
The sale was exempt from registration pursuant to section 4(2) of the Act.
Effective December, 1999, the Registrant sold 5,000 shares of its Class B
Common Stock to an individual for a purchase price of $12 per share. The sale
was exempt from registration pursuant to section 4(2) of the Act.
Series A Preferred Stock
Registrant has engaged in the sale of Series A Preferred Stock which has the
characteristics identified in the UBS Articles of Incorporation incorporated by
reference as an Exhibit hereto pursuant to an exemption from registration
contained in Section 4(2) of the Act.
Dividends
The bank has not, during the three most recent fiscal periods declared or
paid any cash or stock dividends. The Pennsylvania Banking Code of 1965, as
amended, provides that cash dividends may be declared and paid only from
accumulated net earnings and that, prior to the declaration of any dividend, if
the surplus of a bank is less than the amount of its capital, the bank shall,
until surplus is equal to such amount, transfer to surplus an amount which is at
least ten percent of the net earnings of the bank for the period since the end
of the last fiscal year or any shorter period since the declaration of a
dividend. If the surplus of a bank is less than 50% of the amount of its
capital, no dividend may be declared or paid by the Bank without the prior
approval of the Pennsylvania Department of Banking.
13
Under the Federal Reserve Act, if a bank has sustained losses equal to or
exceeding its undivided profits then on hand, no dividend shall be paid, and no
dividends can ever be paid in an amount greater than such bank's net profits
less losses and bad debts. Cash dividends must be approved by the Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Bank's net profits for that
year plus its retained net profits from the preceding two years less any
required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the Federal Reserve Board has the power to
prohibit the payment of cash dividends by a bank if it determines that such a
payment would be an unsafe or unsound banking practice. As a result of these
laws and regulations, the Bank, and therefore the Registrant, whose only source
of income is dividends from the Bank, will be unable to pay any dividends while
an accumulated deficit exists. The Registrant does not anticipate that dividends
will be paid for the foreseeable future.
The Federal Deposit Insurance Act generally prohibits all payments of
dividends by a bank, which is in default of any assessment to the FDIC.
Because the Company is a bank holding company for the Bank, the financial
statements in this report are prepared on a consolidated basis to include the
accounts of the Company and the Bank. The purpose of this discussion is to focus
on information about the Bank's financial condition and results of operations,
which is not otherwise apparent from the consolidated financial statements
included in this annual report. This discussion and analysis should be read in
conjunction with the financial statements presented elsewhere in this report.
ITEM 6 -- SELECTED FINANCIAL DATA
Selected Financial Data
Year ended December 31,
-------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999 1998 1997
- --------------------------------------------- ---- ---- ---- ---- ----
Net interest income ......................... $ 4,060 $ 5,415 $ 5,264 $ 5,241 $ 4,744
Provision for loan losses ................... 335 565 1,007 351 97
Noninterest income .......................... 2,443 3,197 2,226 1,816 1,517
Noninterest expense ......................... 7,038 8,801 7,714 6,696 5,983
Net income (loss) ........................... (870) (755) (1,230) 10 181
Net income (loss) per share - basic.......... (0.79) (0.72) (1.24) 0.01 0.22
Balance sheet totals:
Total assets ............................. $ 88,668 $ 93,533 $ 137,249 $ 121,983 $ 108,914
Net loans ................................ 42,292 44,743 59,444 57,271 73,694
Investment securities .................... 25,806 35,014 51,433 43,196 18,253
Deposits ................................. 79,423 83,238 124,766 109,063 99,427
Shareholders' equity ..................... 8,558 9,350 9,027 8,904 7,059
Ratios:
Equity to assets ....................... 7.67% 7.74% 8.07% 6.40% 6.61%
Return on assets ....................... (0.95)% (0.63)% (1.03)% 0.01% 0.18%
Return on equity ....................... (9.31)% (8.08)% (12.71)% 0.14% 2.69%
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Summary
The Company recorded a net loss of approximately $870,000 for 2001 ($0.79 per
share) compared to a net loss of approximately $755,000 ($0.72 per share) for
2000 and net loss of approximately $1,230,000 ($1.24 per share) in 1999. During
2001, the Bank's financial results were negatively impacted by a 27% reduction
in the level of average earning assets, a declining interest rate environment
and a reduction in fees earned on deposits. In addition, 2000 included net gains
on the sales of assets and deposits in excess of $400,000, compared to net gains
of $160,000 in 2001. Thus, there was an improvement in the Bank's core operating
results. Expense reduction continued as a priority during 2001 with a resultant
decline in noninterest expense of 20% or $1.8 million. A more detailed
explanation for each component of earnings is included in the sections below.
14
The allowance for loan losses as a percentage of total loans increased
from 1.24% in 2000 to 1.65% in 2001. This increase is attributable to loan loss
provisions related to one significant commercial loan as well as a reduction in
total loans outstanding.
Table 1--Average Balances, Rates, and Interest Income and Expense Summary
DECEMBER 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ --------------------------- --------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------ --------------------------- --------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans .................................. $45,828 $3,595 7.84% $ 55,262 $ 4,655 8.42% $ 68,526 $5,589 8.16%
Investment securities held-to-maturity . 14,669 987 6.73 28,659 1,875 6.54 21,692 1,226 5.65
Investment securities available-for-sale 11,758 772 6.57 18,044 1,284 7.12 9,275 612 6.60
Federal funds sold ..................... 7,726 282 3.65 5,518 339 6.14 13,753 681 4.95
------- ------ -------- ------- -------- ------
Total interest-earning assets ........ 79,981 5,636 7.05 107,483 8,153 7.59 113,246 8,108 7.16
Noninterest-earning assets:
Cash and due from banks ................ 4,801 5,339 2,835
Premises and equipment, net ............ 3,214 3,671 1,880
Other assets ........................... 4,028 4,494 3,366
Less allowance for loan losses ......... (576) (562) (1,567)
------- -------- --------
Total ................................ $91,448 $120,425 $119,760
======= ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits ........................ $13,802 178 1.29% $ 19,851 602 3.03% $ 19,892 569 2.86%
Savings deposits ....................... 24,480 317 1.29 30,776 497 1.61 26,744 440 1.65
Time deposits .......................... 24,089 1,081 4.49 28,531 1,387 4.86 35,020 1,695 4.84
Other borrowed funds ................... 1 -- -- 1,925 252 13.09 1,246 140 11.24
------- ------ -------- ------- -------- ------
Total interest-bearing liabilities ... 62,372 1,576 2.53 81,083 2,738 3.38 82,902 2,844 3.43
Noninterest-bearing liabilities:
Demand deposits ........................ 19,612 27,567 24,019
Other .................................. 431 3,233 3,177
Shareholders' equity ..................... 9,033 8,542 9,662
------- -------- --------
Total ................................. $91,448 $120,425 $119,760
======= ======== ========
Net interest earnings .................... $4,060 $5,415 $5,264
Net yield on interest-earning assets ..... 5.08% 5.04% 4.65%
- ----------
For purposes of computing the average balance, loans are not reduced for
nonperforming loans.
Net Interest Income
Net interest income is an effective measure of how well management has
balanced the Bank's interest rate-sensitive assets and liabilities. Net interest
income, the difference between (a) interest and fees on interest-earning assets
and (b) interest paid on interest-bearing liabilities, is a significant
component of the Bank's earnings. Changes in net interest income result
primarily from increases or decreases in the average balances of
interest-earning assets, the availability of particular sources of funds and
changes in prevailing interest rates.
15
Net interest income for 2001 totaled $4.1 million, a decrease of $1.3 million
or 25%, compared to 2000. Net interest income in 2000 totaled $5.4 million, an
increase of $151,000, or 2.86%, compared to 1999.
Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2001 COMPARED TO 2000 2000 COMPARED TO 1999
------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------- -------------------------------------
(Dollars in thousands) VOLUME RATE NET VOLUME RATE NET
------------------------------------- -------------------------------------
Interest earned on:
Loans .................................. $ (742) $ (317) $(1,059) $ (673) $ (261) $ (934)
Investment securities held-to-maturity . (942) 55 (887) 646 3 649
Investment securities available-for-sale (412) (100) (512) 605 67 672
Federal funds sold ..................... 81 (138) (57) (450) 108 (342)
------- ------- ------- ------- ------- -------
Total interest-earning assets ........ (2,015) (500) (2,515) 128 (83) 45
------- ------- ------- ------- ------- -------
Interest paid on:
Demand deposits ........................ (78) (345) (423) (33) 66 33
Savings deposits ....................... (83) (96) (179) 109 (52) 57
Time deposits .......................... (200) (107) (307) (226) (82) (308)
Other borrowed funds ................... (252) -- (252) 68 44 112
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ... (613) (548) (1,161) (82) (24) (106)
------- ------- ------- ------- ------- -------
Net interest income .................. $(1,402) $ 48 $(1,354) $ 210 $ (59) $ 151
======= ======= ======= ======= ======= =======
- ----------
Changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
In 2001, there was a decrease in net interest income of $1.4 million due to
changes in volume but an increase of $48,000 due to changes in rate. In 2000,
there was an increase in net interest income of $210,000 due to changes in
volume but a decrease of $59,000 due to changes in rate.
Average earning assets decreased from $107.5 million in 2000 to $80 million
in 2001 and decreased from $113.2 million in 1999 to $107.5 million in 2000. The
1999 growth in earning assets was primarily attributed to the acquisition of
$31.5 million in deposits from First Union Corporation in September 1999. The
acquired deposits primarily consisted of core noninterest checking deposits and
savings deposits. However, to meet capital requirements mandated in its Written
Agreement with regulators (Refer to Regulatory Matters below) the Bank
implemented an asset reduction/capital improvement plan in 2000 that included
the reduction of non-First Union acquired deposits. Beginning in June 2000, the
Bank sold higher yielding certificates of deposit to other financial
institutions, encouraged some large deposit accountholders to remove deposits,
and consolidated three branches in its branch network.
The net interest margin of the Bank was 5.08% in 2001, 5.04% in 2000 and
4.65% in 1999. While the prime rate decreased 400 basis points during 2001, the
Bank did not experience a significant decline in yield on its loan portfolio.
This is because much of the Bank's loan portfolio is fixed rate in nature and
not related to prime. In addition, 82% of the Bank's investment portfolio is
fixed rate. These characteristics of the Bank's earning assets coupled with the
Bank's significant level of core deposits resulted in minimal impact to the
Bank's net interest margin during the declining rate environment.
During 2001, the average federal funds yield was 3.65% compared to 6.15% in
2000 and 4.95% in 1999. During 2001, the average investment in federal funds
increased by $2.2 million. Because of the declining rate environment, the Bank
experienced a high level of payoffs/paydowns in its loan portfolio as well as a
significant level of calls of its higher yielding government agency securities.
The yield on the investment portfolio decreased 10 basis points to 6.66% in
2001 compared to 6.76% in 2000 and 5.94% in 1999. As indicated above, the Bank
experienced a significant level of called agency securities that were
re-invested in a lower interest rate environment--thereby, reducing the yield on
the portfolio.
16
The cost of interest-bearing liabilities declined to 2.53% in 2001 compared
to 3.38% in 2000. Consistent with market conditions, during 2001, the Bank
reduced the rates it pays on many of its interest-bearing products by as much as
200 basis points. Because most of the Bank's deposits are considered core, they
were not sensitive to declining rates.
Provision for Loan Losses
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings in 2001 was $335,000
compared to $565,000 in 2000 and $1,007,003 in 1999. Significant provisions were
made for the year ended December 31, 2001 for one significant commercial loan
that the Bank added to its classified loans and provided a specific reserve of
$357,000. During the 2001 economic downturn, the Bank monitored its credit
quality very closely worked with borrowers in an effort to identify and control
credit risk. Management believes the level of the allowance for loan losses is
adequate as of December 31, 2001.
Noninterest Income
Noninterest income decreased $754,000 in 2001 compared to 2000 and increased
$971,000 in 2000 compared to 1999.
The amount of the Bank's noninterest income generally reflects the volume of
the transactional and other accounts handled by the Bank and includes such fees
and charges as low balance account charges, overdrafts, account analysis, and
other customer service fees. Customer service fees decreased $415,000 in 2001
compared to 2000. This decline was primarily due to a reduction in the average
level of non-interest bearing demand deposit accounts from $27.6 million in 2000
to $19.6 million in 2001. A lower level of demand deposit accounts results in
less overdraft fees, activity service charges and low balance fees.
During 2001, the Bank sold one of its closed branch facilities for a gain of
$78,000. In addition, the Bank sold approximately $3.5 million of its
available-for-sale portfolio for a gain of approximately $78,000.
To achieve capital ratios as set forth in its Written Agreement with
regulatory agencies (Refer to Regulatory Matters below), in June 2000 the Bank
sold approximately $6.6 million in certificates of deposit to other financial
institutions to reduce its asset size. These transactions resulted in a gain of
$253,000. During 2000, the Bank sold approximately $20 million of its investment
portfolio to fund the reduction in deposits as well as the asset size. The Bank
recorded a loss of $200,000 on these sales. In October 2000, the Bank sold one
of the branch facilities it acquired from First Union in 1999 for a gain of
approximately $329,000.
Noninterest Expense
Noninterest expense decreased $1.8 million to $7.0 million, or 20% in 2001
compared to an increase of $1.1 million, or 14.1% increase, in 2000 and $8.8
million compared to $7.7 million in 1999.
Salaries and benefits decreased $411,000, or 13.4% in 2001 compared to an
increase of $113,000, or 3.8%, in 2000. This decrease is primarily attributable
to attrition and strategic reductions in staff and job consolidations. The
closure/consolidation of three branches in September 2000 also contributed to
reductions in this expense.
Occupancy and equipment expense decreased approximately $181,000, or 10.1%,
during 2001 compared to an increase of approximately $353,000, or 24.5%, during
2000. The decrease during 2001 was primarily attributable to the conversion of
the lease of the Bank's corporate headquarters to a bank-owned facility.
Beginning in July 1999, the Bank leased 25,000 square feet at an average cost of
$14.14 per foot until September 2000. In accordance with Financial Accounting
Standards Board Statement No. 13, this lease was accounted for as a capital
lease in the amount of $1,483,000 as the present value of future minimum lease
payments exceeds 90% of the fair market value of the building. In October 2000,
the Bank purchased this facility for approximately $1.4 million. This
transaction is expected to save the Bank $1.6 million over the remaining 9-year
term of the lease it had in place and removes the capital lease obligation.
17
In addition, in conjunction with its acquisition of deposits from First Union
in September 1999, the Bank assumed the leases of four branches, two of which
were in close proximity to its existing branches. Due to more favorable
characteristics of these branches (i.e. visibility, drive-through, ATM's, etc.),
the Bank relocated its branch operations to the acquired facilities. The Bank
consolidated two of the acquired branches with its existing branch network and
closed its Frankford branch in September 2000. In October 2000, the Bank sold
one of the acquired facilities located in West Philadelphia for a gain of
approximately $329,000. In June 2001, the Bank sold its former West Girard
branch for a gain of $78,000. The Bank's Frankford branch has been listed with a
realtor and is expected to be sold shortly.
Data processing expenses are a result of the management decision of the Bank
to outsource a majority of its data processing operations to third party
processors. Such expenses are reflective of the high level of accounts being
serviced for which the Bank is charged a per account charge by processors. In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, installment and student loan portfolios. Data processing
expenses decreased by $163,000, or 16.8%, during 2001 compared to an increase of
$108,000, or 12.5%, during 2000. This decline is primarily attributable to
strategic reductions in deposit levels during 2000 and 2001 to meet mandated
capital levels. The Bank continues to study methods by which it may reduce its
data processing costs, including but not limited to a consolidation of
servicers, in-house processing versus outsourcing, and the renegotiation of
existing contracts with servicers.
Marketing and public relations expense decreased by $49,000, or 31.1% in 2001
compared to a decrease of $146,000, or 47.9%, in 2000. In 2000, management
implemented an earnings enhancement plan that included a reduction of all
nonessential expenses including marketing. As the Bank was in an asset reduction
mode during 2000 and 2001, there were no new business initiatives that required
marketing.
Professional services decreased by $311,000, or 57.2% in 2001. During 2000,
the Bank paid fees to attorneys to handle loan related legal matters as well as
to negotiate the elements of its Written Agreement (Refer to Regulatory Matters
below) with Federal Regulators in February 2000. The Bank did not have
significant legal matters during 2001 nor did it use outside consultants to
handle operational matters.
Office operations and supplies expense decreased by $323,000, or 41.6%, in
2001. This decrease was primarily attributable to the closure/consolidation of
three branches in September 2000 which resulted in a full year of reductions in
branch operating costs (i.e. security guards, supplies, etc.) during 2001.
Federal deposit insurance premiums were $150,000 in 2001 compared to $169,000
in 2000 and $105,000 in 1999. FDIC insurance premiums are applied to all
financial institutions based on a risk based premium assessment system. Under
this system, bank strength is based on three factors: 1) asset quality, 2)
capital strength, and 3) management. Premium assessments are then assigned based
on the institution's overall rating, with the stronger institutions paying lower
rates. The Bank's assessment was based on 1.96 basis points for BIF (Bank
Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable
deposits. The decrease during 2001, is a result of a reduction in the Bank's
level of deposits.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
18
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 3
indicates how the Bank has managed these elements. Average funding uses
decreased approximately $27.5 million, or 25.6% in 2001 compared to
approximately $5.8 million, or 5.09%, in 2000.
Table 3--Sources and Use of Funds Trends
2001 2000 1999
--------------------------------- ---------------------------------- -------
INCREASE INCREASE
AVERAGE (DECREASE) AVERAGE (DECREASE) AVERAGE
BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE
------- ------ ------- ------- ------ ------- -------
(Dollars in thousands)
Funding uses:
Loans ............... $45,828 $ (9,434) (17.07)% $ 55,262 $(13,264) (19.36)% $ 68,526
Investment securities
Held-to-maturity .. 14,669 (13,990) (48.82) 28,659 6,967 32.12 21,692
Available-for-sale 11,758 (6,286) (34.84) 18,044 8,769 94.54 9,275
Federal funds sold 7,726 2,208 40.01 5,518 (8,235) (59.88) 13,753
------- -------- -------- -------- --------
Total uses ...... $79,981 $(27,502) $107,483 $ (5,763) $113,246
======= ======== ======== ======== ========
Funding sources:
Demand deposits:
Noninterest-bearing $19,612 $ (7,955) (28.86)% $ 27,567 $ 3,548 14.77% $ 24,019
Interest-bearing .. 13,802 (6,049) (30.47) 19,851 (41) (0.21) 19,892
Savings deposits .... 24,480 (6,296) (20.46) 30,776 4,032 15.08 26,744
Time deposits ....... 24,089 (4,442) (15.57) 28,531 (6,489) (18.53) 35,020
Other borrowed funds 1 (1,924) (99.95) 1,925 679 54.49 1,246
------- -------- -------- -------- --------
Total sources ... $81,984 $(26,666) $108,650 $ 1,729 $106,921
======= ======== ======== ======== ========
- ----------
*Includes held-to-maturity and available-for-sale securities
Investment Securities and Other Short-Term Investments
The Bank's investment portfolio is classified as either held-to-maturity or
available-for-sale. Investments classified as held-to-maturity are carried at
amortized cost and are those securities the Bank has both the intent and ability
to hold to maturity. Investments classified as available-for-sale are those
investments the Bank intends to hold for an indefinite amount of time, but not
necessarily to maturity, and are carried at fair value, with the unrealized
holding gains and losses reported as a component of shareholders' equity on the
balance sheet.
Average investment securities and federal funds sold, in the aggregate,
decreased by $18 million, or 34.6%, in 2001 compared to an increase of $7.5
million, or 16.8%, in 2000. The decrease in the average balances during 2001 is
a result of the Bank's asset reduction/capital improvement plan that required
the sale of investment securities totaling approximately $20 million during the
latter half of 2000.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities and other government-sponsored agency securities.
The Bank does not invest in high-risk securities or complex structured notes.
As reflected in Table 4, the assumed average maturity of the investment
portfolio was 3.34 years at year-end 2001. Approximately 64% of the portfolio
consists of mortgage-backed pass-through securities that have longer-term
contractual maturities but are sometimes paid off/down before maturity or have
repricing characteristics that occur before final maturity. The Bank has
attempted to minimize the repayment risk (risk of very fast or very slow
repayment) associated with these types of securities by investing primarily in a
number of seasoned mortgage pools for which there is a repayment history. This
history better enables the Bank to project the repayment speeds of these pools.
In addition, the Bank has minimized the interest rate risk associated with these
mortgage-backed securities by investing in a variety of pools, many of which
have variable rates with indices that track closely with the current interest
rate environment.
19
In a declining rate environment, the duration of the investment portfolio is
significantly shortened because of the high level of callable government agency
securities - approximately 34.2% at December 31, 2001. These higher yielding
securities are likely to be called as rates trend downward. During 2001,
approximately $19 million of these securities were called. The result was
additional liquidity and a reduction in yield on the portfolio. The Bank is
taking steps to combat the impact of the high level of optionality in the
portfolio by identifying replacement loans or securities that are fixed rate or
perform well when "shock" tested in a declining rate environments.
Table 4--Analysis of Investment Securities
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
------------------ ------------------ ----------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
Other government securities $ -- -- % $ 2,604 6.00% $ 6,229 6.14% $ -- -- % $ 8,833
Mutual funds .............. 105 2.07 -- -- -- -- -- -- 105
Other investments ......... -- -- -- -- 287 6.00 -- -- 287
Mortgage-backed securities -- -- -- -- -- -- 16,581
------- ------- ------- ------ -------
Total securities .......... $ 105 $ 2,604 $ 6,516 $ -- $25,806
======= ======= ======= ====== =======
Average maturity..... 3.34 years
The above table sets forth the maturities of investment securities at December
31, 2001 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security).
Loans
Average loans decreased approximately $9.4 million, or 17.1%, in 2001
compared to a decrease of $13.3 million, or 19.4%, in 2000. Although the Bank
purchased a $22 million portfolio of seasoned automobile loans from NationsBank
in February 1999, over 90% of this portfolio had paid down by year-end of 2001.
The average life of this portfolio at the time of purchase was three years. The
Bank's mortgage loan portfolio continues to decline because of refinancings and
payoffs/paydowns for which there were no new originations to replace. During
2001, the Bank purchased $8.7 million in commercial loans from other financial
institutions in the region in effort to cover reductions in the portfolio while
it increased its capacity to originate loans. Management believes it is now
positioned to expand its business development efforts in the Philadelphia region
and has developed strategic plans to incorporate these initiatives.
Table 5--Loans Outstanding, Net of Unearned Income
DECEMBER 31,
---------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Commercial and industrial $11,054 $11,429 $13,664 $13,643 $12,095
Commercial real estate .. 5,504 652 1,288 1,518 1,515
Residential mortgages ... 18,148 22,316 26,237 31,365 35,962
Consumer loans .......... 8,294 10,908 19,822 11,424 22,611
Loans held-for-sale ..... -- -- -- -- 1,979
------- ------- ------- ------- -------
Total loans .......... $43,000 $45,305 $61,011 $57,950 $74,162
======= ======= ======= ======= =======
20
Table 6--Loan Maturities and Interest Sensitivity
WITHIN AFTER ONE BUT AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL
-------- ----------------- ---------- -----
(Dollars in thousands)
Commercial and industrial ......... $ 6,267 $ 904 $ 3,883 $11,054
Commercial real estate ............ -- 4,984 520 5,504
Residential mortgages ............. -- -- 18,148 18,148
Consumer loans .................... 613 5,928 1,753 8,294
------- ------- ------- -------
Total loans ................... $ 6,880 $11,816 $24,304 $43,000
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates ........... $28,261
Variable interest rates ........ 7,859
Nonperforming Loans
Table 7 reflects the Bank's nonperforming loans for the last five years. The
Bank generally determines a loan to be "nonperforming" when interest or
principal is past due 90 days or more. If it otherwise appears doubtful that the
loan will be repaid, management may consider the loan to be nonperforming before
the lapse of 90 days. The Bank's policy is to charge off unsecured loans after
90 days past due. Interest on nonperforming loans ceases to accrue except for
loans that are well collateralized and in the process of collection. When a loan
is placed on nonaccrual, previously accrued and unpaid interest is reversed out
of income unless adequate collateral from which to collect the principal of, and
interest on, the loan appears to be available.
The Bank had a One Million Dollar ($1,000,000) unsecured loan participation
in a $40.4 Million ($40,400,000) line of credit to KMART Corporation. The Bank
was repaid the One Million Dollar ($1,000,000) loan participation in full on
January 8, 2002. KMART Corporation filed for protection under Chapter 11 of the
federal bankruptcy laws on January 22, 2002 and such a filing by KMART
Corporation could expose the Bank to a future claim that the repayment to the
Bank of its loan participation was a preference payment. If the preference claim
is made and is successful, the Bank may be required to return the One Million
Dollar ($1,000,000) loan repayment and incur a loss in that amount to the extent
that the Bank can not obtain repayment of the loan participation from KMART
Corporation or as an unsecured creditor in the bankruptcy proceeding. As of
March 28, 2002, the Bank has not received any notification in regard to this
matter.
Table 7--Nonperforming Loans
(Dollars in thousands) 2001 2000 1999 1998 1997
- ---------------------- ---- ---- ---- ---- ----
Nonaccrual loans ........................ $ 412 $ 453 $2,027 $1,720 $1,179
Interest income included in net income
for the year ......................... 25 20 67 37 14
Interest income that would have been
recorded under original terms ........ 29 28 113 189 112
Loans past due 90 days and still accruing 526 34 53 125 306
There is no known information about possible credit problems other than those
classified as nonaccrual that causes management to be uncertain as to the
ability of any borrower to comply with present loan terms.
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the region's economy.
At December 31, 2001, approximately 22.8% of the commercial loan portfolio of
the Bank was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At December 31, 2001, none of these loans were
nonperforming.
During 2001, nonaccrual loans totaled $412,000, compared to $453,000 at
December 31, 2000. At December 31, 2001, approximately $238,000 of the total
nonaccrual loans was residential mortgages. The underlying real estate
collateral associated with these loans minimizes the risk of loss. During 2001,
the Bank increased its collection efforts by designating a unit of the Bank
given specific responsibilities related to collections.
21
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation of
the loan portfolio, assessment of economic conditions, the diversification and
size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount and quality of nonperforming loans. Table 8 presents
the allocation of loan losses by major category for the past five years. The
specific allocations in any particular category may prove to be excessive or
inadequate and consequently may be reallocated in the future to reflect then
current conditions.
Table 8--Allocation of Allowance for Loan Losses
2001 2000 1999 1998 1997
-------------------- -------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Commercial and
industrial ........ $576 37.30% $383 25.23% $ 263 22.40% $272 23.55% $144 16.31%
Commercial real
estate ............ 29 1.21 11 1.44 877 2.11 132 2.62 13 2.04
Residential mortgages 30 19.29 102 24.08 144 43.00 55 54.12 180 48.49
Consumer loans ...... 73 42.20 66 49.25 283 32.49 188 19.71 97 33.16
Unallocated ......... -- -- -- -- -- -- 32 -- 34 --
---- ------ ---- ------ ------ ------ ---- ------ ---- ------
$708 100.00% $562 100.00% $1,567 100.00% $679 100.00% $468 100.00%
==== ====== ==== ====== ====== ====== ==== ====== ==== ======
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
Table 9--Analysis of Allowance for Loan Losses
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at January 1 .................... $ 562 $ 1,567 $ 679 $ 468 $ 528
Charge-offs:
Commercial and industrial ............ (61) (321) (25) -- (66)
Commercial real estate ............... -- (803) -- -- --
Residential mortgages ................ -- -- (47) -- (9)
Consumer loans ....................... (261) (597) (315) (180) (160)
------- ------- ------- ------- -------
Total charge-offs .................. (322) (1,721) (387) (180) (235)
------- ------- ------- ------- -------
Recoveries--consumer loans .............. 133 151 268 41 78
------- ------- ------- ------- -------
Net charge-offs ......................... (189) (1,570) (119) (139) (157)
Provisions charged to operations ........ 335 565 1,007 350 97
------- ------- ------- ------- -------
Balance at December 31 .................. $ 708 $ 562 $ 1,567 $ 679 $ 468
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding .......................... 0.41% 2.84% 0.17% 0.19% 0.23%
The amount charged to operations and the related balance in the allowance for
loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
22
Deposits
Average deposits declined approximately $24.7 million, or 23.2%, in 2001
compared to growth of $1.05 million, or 1.0%, in 2000. To meet capital
requirements mandated in its Written Agreement with regulators (Refer to
Regulatory Matters below) the Bank implemented an asset reduction/capital
improvement plan in 2000 that included the reduction of non-First Union acquired
deposits. Beginning in June 2000, the Bank sold higher yielding certificates of
deposit to other financial institutions and encouraged some large deposit
accountholders to remove deposits to fund its asset reduction plan. In addition,
the Bank's September 2000 branch consolidation resulted in some deposit
attrition.
Table 10--Average Deposits by Class and Rate
2001 2000 1999
---------------------- ---------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Noninterest-bearing demand deposits $ 19,612 -- % $ 27,567 -- % $ 24,019 -- %
Interest-bearing demand deposits .. 13,802 1.29 19,851 3.03 19,892 2.86
Savings deposits .................. 24,480 1.30 30,776 1.61 26,744 1.65
Time deposits ..................... 24,089 4.49 28,531 4.86 35,020 4.84
-------- -------- --------
$ 81,993 $106,725 $105,675
======== ======== ========
Other Borrowed Funds
The average balance for other borrowed funds declined $1.9 million, or 99.9%,
in 2001 compared to an increase of $679,000, or 54.5%, in 2000. During 2000,
borrowings were necessary to temporarily fund the Bank's asset reduction/capital
improvement plan until other assets were sold. Generally, the level of other
borrowed funds is dependent on many items such as loan growth, deposit growth,
customer collateral/security requirements and interest rates paid for these
funds. During 2001, the Bank's liquidity was enhanced by loan paydowns/payoffs
and called investment securities--thereby, reducing the need to borrow.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and enhance
consistent growth of net interest income through periods of changing interest
rates.
The Bank is required to maintain minimum levels of liquid assets as defined
by Federal Reserve Board (FRB) regulations. This requirement is evaluated in
relation to the composition and stability of deposits; the degree and trend of
reliance on short-term, volatile sources of funds, including any undue reliance
on particular segments of the money market or brokered deposits; any difficulty
in obtaining funds; and the liquidity provided by securities and other assets.
In addition, consideration is given to the nature, volume and anticipated use of
commitments; the adequacy of liquidity and funding policies and practices,
including the provision for alternate sources of funds; and the nature and trend
of off-balance-sheet activities. As of December 31, 2001, management believes
the Bank's liquidity is satisfactory and in compliance with FRB regulations.
The Bank's principal sources of asset liquidity include investment securities
consisting primarily of U.S. Government and agency issues, particularly those of
shorter maturities, and mortgage-backed securities with monthly repayments of
principal and interest. There are no securities maturing in one year or less.
However, other types of assets such as federal funds sold, as well as maturing
loans, are sources of liquidity. Approximately $6.9 million in loans are
scheduled to mature within one year.
23
The Bank's overall liquidity has been enhanced by a significant level of core
deposits which management has determined are less sensitive to interest rate
movements. The Bank has avoided reliance on large-denomination time deposits as
well as brokered deposits. Table 11 provides a breakdown of the maturity of time
deposits of $100,000 or more.
Table 11--Maturity of Time Deposits of $100,000 or More
(Dollars in thousands)
3 months or less...................... $ 7,435
Over 3 through 6 months............... 4,407
Over 6 months through 1 year.......... 1,154
Over 1 through five years............. 800
Over five years....................... --
-------
Total................................. $13,796
=======
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which rates
change daily and loans that are tied to prime or other short-term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest-sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap or excess interest-earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations. Table 12 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 2001, the Bank's interest rate
sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over
interest rate-sensitive liabilities, divided by total assets) and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table,
except for savings deposits, an asset or liability is considered rate-sensitive
within a specified period when it matures or could be repriced within such
period in accordance with its contractual terms. At December 31, 2001, a slight
asset sensitive position is maintained on a cumulative basis through one year of
1.22%. This level is within the Bank's policy guidelines of +/-15% on a
cumulative one-year basis. The current gap position is relatively evenly matched
as a result of the number of loans either repricing or maturing in 12 months
closely matching certificate of deposit maturities. Interest rate risk is
minimized by the Bank's high level of core deposits that have been placed in
longer repricing intervals. Generally, because of the Bank's positive gap
position in shorter time frames, the Bank can anticipate that increases in
market rates will have a positive impact on the net interest income, while
increases will have the opposite effect.
For purposes of the gap analysis, such deposits (savings, MMA, NOW) which do
not have definitive maturity dates and do not readily react to changes in
interest rates have been placed in longer repricing intervals versus immediate
repricing time frames, making the analysis more reflective of the Bank's
historical experience.
24
Table 12--Interest Sensitivity Analysis
INTEREST RATE SENSITIVITY GAPS
AS OF DECEMBER 31, 2001
----------------------------------------------------------------------------------
OVER
OVER 1 YEAR OVER
3 MONTHS 3 THROUGH THROUGH 3 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 5 YEARS 5 YEARS CUMULATIVE
------- --------- ------- ------- ------- ----------
(Dollars in thousands)
Interest-sensitive assets:
Interest-bearing deposits with banks $ 257 $ -- $ -- $ -- $ -- $ 257
Investment securities .............. 9,265 1,295 897 2,257 11,700 25,414
Federal funds sold ................. 7,778 -- -- -- -- 7,778
Loans .............................. 13,418 5,024 6,546 3,753 14,259 43,000
------- ------ ------ ------ ------ -------
Total interest-sensitive assets ... 30,718 6,319 7,443 6,010 25,959 $76,449
------- ------ ------ ------ ------ =======
Cumulative totals ................. 30,718 37,037 44,480 50,490 76,449
------- ------ ------ ------ ------
INTEREST RATE SENSITIVITY GAPS
AS OF DECEMBER 31, 2001
----------------------------------------------------------------------------------
OVER
OVER 1 YEAR OVER
3 MONTHS 3 THROUGH THROUGH 3 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 5 YEARS 5 YEARS CUMULATIVE
------- --------- ------- ------- ------- ----------
(Dollars in thousands)
Interest-sensitive liabilities:
Interest checking accounts ..... 3,068 -- 3,749 -- -- $ 6,817
Savings accounts ............... 11,029 -- 17,995 -- -- 29,024
Certificates less than $100,000 3,560 5,934 1,343 494 -- 11,331
Certificates of $100,000 or more 7,435 5,561 800 -- -- 13,796
Other borrowed funds ........... -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-
sensitive liabilities ........ $ 25,092 $ 11,495 $ 23,887 $ 494 $ -- $ 60,968
======== ======== ======== ========= ======== ========
Cumulative totals ............. $ 25,092 $ 36,587 $ 60,474 $ 60,968 $ 60,968
======== ======== ======== ========= ========
Interest sensitivity gap .......... $ 5,626 $ (5,176) $(16,494) $ 5,516 $ 25,959
======== ======== ======== ========= ========
Cumulative gap .................... 5,626 450 (15,994) 44,974 15,481
Cumulative gap/
total earning assets ............ 18.31% 1.22% (35.96)% 89.08% 20.25%
Interest-sensitive assets to
interest-sensitive
liabilities .................... 1.22 .55 .31 12.17 --
Core deposits such as checking and savings deposits have been placed in
repricing intervals based on historical trends and management's estimates.
While using the interest sensitivity gap analysis is a useful management tool
as it considers the quantity of assets and liabilities subject to repricing in a
given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
positive gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
net income of the Bank. The calculated estimates of net income or "earnings" at
risk at December 31, 2001 are as follows:
25
NET INTEREST PERCENT OF
CHANGES IN RATE INCOME CHANGE
--------------- ------ ------
(Dollars in thousands)
+200 basis points $ -- -- %
+100 basis points -- --
Flat rate 3,500 --
-100 basis points (38) 1.08
-200 basis points (87) 2.47
A simulation model is also used to estimate the impact of various changes,
both upward and downward, in market interest rates and volumes of assets and
liabilities on the economic value of the Bank. This model produces an interest
rate exposure report that measures the long-term rate risks in the balance sheet
by valuing the Bank's assets and liabilities at market. It simulates what amount
would be left over if the Bank liquidated its assets and liabilities. This is
otherwise known as "economic value" of the capital of the Bank. The calculated
estimates of economic value at risk at December 31, 2001 are as follows:
PERCENT OF
CHANGES IN RATE MV EQUITY CHANGE
--------------- --------- ------
(Dollars in thousands)
+200 basis points $ 3,976 (34.06)%
+100 basis points 6,030 (25.60)
Flat rate 8,112 --
-100 basis points 10,241 26.24
-200 basis points 12,152 18.66
The assumptions used in evaluating the vulnerability of the Bank's earnings
and equity to changes in interest rates are based on management's consideration
of past experience, current position and anticipated future economic conditions.
The interest sensitivity of the Bank's assets and liabilities, as well as the
estimated effect of changes in interest rates on the earnings and equity, could
vary substantially if different assumptions are used or actual experience
differs from the assumptions on which the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest rate
exposure is not significant and is within the policy limits of the Bank at
December 31, 2001. However, if significant interest rate risk arises, the Board
of Directors and management may take, but are not limited to, one or all of the
following steps to reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit and movement into money market
deposit accounts and short-term certificates of deposit through
pricing and other marketing strategies.
2. Purchase quality loan participations with appropriate interest
rate/gap match for the Bank's balance sheet.
3. Restructure the Bank's investment portfolio.
The Board of Directors has determined that active supervision of the interest
rate spread between yield on earning assets and cost of funds will decrease the
Bank's vulnerability to interest rate cycles.
Capital Resources
Total shareholders' equity declined $792,000 in 2001 compared to an increase
of approximately $322,000 in 2000. The decrease in 2001 is a result of the net
loss of $870,000 which resulted in an increase in the accumulated deficit offset
by an increase in other comprehensive income (fair market value of available
for sale investment securities).
26
The FRB standards for measuring capital adequacy for U.S. Banking
organizations require that banks maintain capital based on "risk-adjusted"
assets so that categories of assets with potentially higher risk will require
more capital backing than assets with lower risk. In addition, banks are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier I and Tier II. Tier I
consists of common shareholders' equity, noncumulative and cumulative perpetual
preferred stock, and minority interests less goodwill and/or intangible assets).
Tier II capital consists of allowance for loan losses, hybrid capital
instruments, term subordinated debt, and intermediate-term preferred stock.
Banks are required to meet a minimum ratio of 8% of qualifying capital to
risk-adjusted total assets with at least 4% Tier I capital and a Tier I leverage
ratio of at least 6%. Capital that qualifies as Tier II capital is limited to
100% of Tier I capital.
As indicated in Table 13, the Company's risk-based capital ratios are above
the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
in a private offering as well as increasing the rate of internal capital growth
as a means of maintaining the required capital ratios. However, the Bank's
growth, continued losses and the additional provisions to the allowance for loan
losses may have an adverse effect on its capital ratios. The Company and the
Bank do not anticipate paying dividends in the near future.
Table 13--Capital Ratios
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Total Capital ........................... $ 8,459 $ 9,317 $ 9,223
Less:
Intangible Assets .................... (2,119) (2,298) (2,429)
-------- -------- --------
Tier I capital .......................... 6,340 7,019 6,794
Tier II capital ......................... 510 537 770
-------- -------- --------
Total qualifying capital ................ $ 6,850 $ 7,556 $ 7,564
======== ======== ========
Risk-adjusted total assets
(including off-balance-sheet exposures) $ 41,624 $ 42,949 $ 60,795
======== ======== ========
Tier I risk-based capital ratio ......... 15.23% 16.34% 11.18%
Total (Tier I and II)
risk-based capital ratio .............. 16.46% 17.59% 12.44%
Tier I leverage ratio ................... 7.12% 7.39% 5.08%
Regulatory Matters
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (herein sometimes
referred to as the "Agreement") with its primary regulators with regard to,
among other things, achievement of agreed-upon capital levels, implementation of
a viable earnings/strategic plan, adequate funding of the allowance for loan
losses, the completion of a management review and succession plan, and
improvement in internal controls. The Agreement requires the Bank to increase
its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As
of December 31, 2000, the Bank had met the required ratios by implementing
strategies that included: reducing expenses, consolidating branches, and
soliciting new and additional sources of capital. Management continues to
address all matters outlined in the Agreement. Management believes that the Bank
is "substantially" in compliance with the Agreement's terms and conditions.
Failure to comply could result in additional regulatory supervision and/or
actions.
As of December 31, 2001, the Bank's tier one leverage capital ratio fell to
6.80%, below the 7% minimum capital ratio required by the Agreement. The failure
of the Bank to maintain a minimum capital ratio of at least 7% at all times
while the Agreement is in force is a violation of the Agreement. The Federal
Reserve authorities could take regulatory and supervisory actions against the
Bank for violation of the Agreement. As of March 28, 2002, no such actions have
been taken.
27
The Bank's management believes the Bank is in substantial compliance with the
terms and conditions of the Agreement. Management is reviewing and revising its
capital plan to address the development of new equity. In addition, a profit
restoration plan is being developed to include numerous expense reduction and
profit enhancement strategies.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements
to recognize and measure the impairment of long-lived assets to be held and used
or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope
and certain measurement requirements of existing accounting guidance. SFAS No.
144 also changes the requirements relating to reporting the effects of a
disposal or discontinuation of a segment of a business. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The adoption of
this statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP. The adoption of SAB
No. 102 did not have an impact on the Company's consolidated financial position
or results of operations.
ITEM 7a -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto as Exhibits.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant and Bank
------------------------------------
PRINCIPAL OCCUPATION AND YEAR FIRST TERM
NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE
- ---- --- ------------------- --------------- -----------
James F. Bodine 81 Retired as Managing Partner, 1993 2002
Urban Affairs Partnership
Philadelphia, Pennsylvania
Kemel G. Dawkins 79 President, Kemrodco 1993 2002
Development and
Construction Company, Inc.,
President, Kem-Her
Construction Company Inc.
Philadelphia, Pennsylvania
L. Armstead Edwards 60 Treasurer, 1993 2004
United Bancshares, Inc.
Owner and President,
P.A.Z., Inc.
Philadelphia, Pennsylvania
Marionette Y. Frazier 57 Partner, 2000 2004
John Frazier, Inc.
Philadelphia, Pennsylvania
William C. Green 78 Co-founder, Ivy Leaf 1993 2002
Middle School
Philadelphia, Pennsylvania
Angela M. Huggins 62 President and CEO 1993 2005
RMS Technologies
Inc. Foundation
William B. Moore 59 Secretary, 1993 2003
United Bancshares, Inc.
Pastor, Tenth Memorial
Baptist Church
Philadelphia, Pennsylvania
Wanda Richards Vice President, General Counsel 2001 2005
Madison Bank
Evelyn F. Smalls 56 President and CEO of Registrant 2000 2003
and United Bank of Philadelphia
Ernest L. Wright 73 Founder, President and 1993 2004
CEO of Ernest L. Wright
Construction Company
Philadelphia, Pennsylvania
- ----------
Note: Director S. Amos Brackeen retired from the board in December 2001
due to medical reasons.
29
(b) Executive Officers of Registrant and Bank
-----------------------------------------
NAME AGE OFFICE
- ---- --- ------
Evelyn F. Smalls 56 President and Chief Executive Officer
Brenda M. Hudson-Nelson 40 Senior Vice President/Chief Financial Officer
James F. Bodine 81 Co-Chairman, Board of Directors
L. Armstead Edwards 60 Co-Chairman, Board of Directors
William B. Moore 59 Secretary
Marionette Y. Frazier 57 Assistant Secretary
Angela M. Huggins 62 Treasurer
(c) Family Relationships.
--------------------
There are no family relationships between any director, executive officer or
person nominated or chosen by the Bank to become a director or executive
officer.
(d) Other
-----
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any director or executive officer during the past five years.
ITEM 11 -- EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference on
pages 8 through 10 of the definitive proxy statement of the Corporation, filed
with the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference on page
2, and pages 5 and 6 of the Corporation's definitive proxy statement, filed with
the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the Bank and the Companies
with which they are associated were customers of and had banking transactions
with the Bank in the ordinary course of its business during the year 2001. All
loans and commitments to lend were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. In the opinion of Bank management,
the loan commitments did not involve more than normal risk of collectively or
present other unfavorable features.
30
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements December 31, 2001 and 2000
--------------------
Report of Independent Certified Public Accountants, March 28, 2002.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Operations for the three years ended
December 31, 2001.
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 2001.
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in the
respective financial statements or in the notes thereto.
3. The following exhibits are filed herewith or incorporated by reference
as a part of this Annual Report.
3(i) Articles of Incorporation (Incorporated by reference to Registrant's
1997 Form 10-K).
3(ii) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K).
9.1 Voting Trust Agreement with NationsBank (Incorporated by reference to
Registrant's 1997 Form 10-K).
9.2 Voting Trust Agreement with Fahnstock (Incorporated by reference to
Registrant's 1997 Form 10-K).
b. No reports on Form 8-K have been filed during the last quarter covered by
this report.
c. Not applicable.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized
UNITED BANCSHARES, INC. DATE
/s/ Evelyn F. Smalls April 1, 2002
- ----------------------------------------------------
Evelyn F. Smalls, President & CEO, Director
/s/ Brenda M. Hudson-Nelson April 1, 2002
- ----------------------------------------------------
Brenda M. Hudson-Nelson, SVP, CFO
/s/ James F. Bodine April 1, 2002
- ----------------------------------------------------
James F. Bodine, Co-Chairman
/s/ Kemel G. Dawkins April 1, 2002
- ----------------------------------------------------
Kemel G. Dawkins, Director
/s/ L. Armstead Edwards April 1, 2002
- ----------------------------------------------------
L. Armstead Edwards, Co-Chairman
/s/ Marionette Y. Frazier April 1, 2002
- ----------------------------------------------------
Marionette Y. Frazier, Assistant Secretary, Director
/s/ William C. Green April 1, 2002
- ----------------------------------------------------
William C. Green, Director
/s/ Angela M. Huggins April 1, 2002
- ----------------------------------------------------
Angela M. Huggins, Treasurer, Director
/s/ William B. Moore April 1, 2002
- ----------------------------------------------------
William B. Moore, Secretary, Director
/s/ Wanda Richards April 1, 2002
- ----------------------------------------------------
Wanda Richards, Director
/s/ Ernest L. Wright April 1, 2002
- ----------------------------------------------------
Ernest L. Wright, Director
32
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
United Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of United
Bancshares, Inc. and Subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audits 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.
As discussed in note 15 to the financial statements, the Bank entered into a
written agreement with the Federal Reserve Bank of Philadelphia and the
Pennsylvania Department of Banking dated February 23, 2000.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Bancshares,
Inc. and Subsidiary as of December 31, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON
Philadelphia, Pennsylvania
March 28, 2002
33
United Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 2001 2000
----------- -----------
Cash and due from banks ........................... $ 5,747,131 $ 5,328,384
Interest-bearing deposits with banks .............. 256,847 245,496
Federal funds sold ................................ 7,778,000 720,000
----------- -----------
Cash and cash equivalents .................. 13,781,978 6,293,880
Investment securities:
Available-for-sale, at fair value .............. 14,339,643 11,426,544
Held-to-maturity, at amortized cost
(fair value of $11,735,146
and $23,555,339 in 2001 and 2000, respectively) 11,466,372 23,587,092
Loans, net of unearned discount of $141,267 and
$176,915 in 2001 and 2000, respectively ........ 42,999,877 45,305,468
Less allowance for loan losses .................... (708,156) (562,174)
----------- -----------
Net loans .................................. 42,291,721 44,743,294
Bank premises and equipment, net .................. 2,978,265 3,457,518
Accrued interest receivable ....................... 911,470 1,158,485
Foreclosed real estate ............................ 45,000 50,000
Core deposit intangible, net ...................... 2,118,868 2,297,674
Prepaid expenses and other assets ................. 734,741 518,721
----------- -----------
Total assets ............................... $88,668,058 $93,533,208
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Demand deposits, noninterest-bearing ........... $19,471,758 $20,386,652
Demand deposits, interest-bearing .............. 12,613,507 15,942,933
Savings deposits ............................... 23,227,604 25,355,811
Time deposits, under $100,000 .................. 10,313,657 12,489,281
Time deposits, $100,000 and over ............... 13,795,997 9,063,433
----------- -----------
Total deposits ............................. 79,422,523 83,238,110
Accrued interest payable ....................... 263,550 230,357
Accrued expenses and other liabilities ......... 424,274 715,232
----------- -----------
Total liabilities .......................... 80,110,347 84,183,699
----------- -----------
Shareholders' equity:
Series A preferred stock, noncumulative, 6%,
$0.01 par value, 500,000 shares authorized;
143,150 issued and outstanding
in 2001 and 2000 ............................. 1,432 1,432
Common stock, $0.01 par value; 2,000,000
shares authorized; 1,100,388 and 1,099,421
issued and outstanding in 2001 and
2000, respectively ........................... 11,004 10,994
Additional paid-in-capital ..................... 14,729,070 14,717,484
Accumulated deficit ............................ (6,282,614) (5,413,111)
Accumulated other comprehensive income ......... 98,819 32,710
----------- -----------
Total shareholders' equity ................... 8,557,711 9,349,509
----------- -----------
Total liabilities and shareholders' equity ... $88,668,058 $93,533,208
=========== ===========
The accompanying notes are an integral part of these statements.
34
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2001 2000 1999
----------- ----------- -----------
Interest income:
Loans, including fees ................... $ 3,595,477 $ 4,655,329 $ 5,589,589
Investment securities ................... 1,750,549 3,150,160 1,812,983
Federal funds sold ...................... 281,540 339,348 680,715
Time deposits with other banks .......... 8,701 8,469 24,834
----------- ----------- -----------
Total interest income ............... 5,636,267 8,153,306 8,108,121
----------- ----------- -----------
Interest expense:
Time deposits ........................... 1,080,533 1,387,091 1,695,078
Demand deposits ......................... 178,059 602,194 568,903
Savings deposits ........................ 317,489 496,764 440,002
Borrowed funds .......................... 75 252,515 140,075
----------- ----------- -----------
Total interest expense .............. 1,576,156 2,738,564 2,844,058
----------- ----------- -----------
Net interest income ................. 4,060,111 5,414,742 5,264,063
Provision for loan losses .................. 335,000 565,000 1,007,003
----------- ----------- -----------
Net interest income after
provision for loan losses ......... 3,725,111 4,849,742 4,257,060
----------- ----------- -----------
Noninterest income:
Customer service fees ................... 2,202,489 2,617,845 2,031,245
Gain on sale of loans ................... -- 18,931 43,856
Gain on sale of deposits ................ -- 253,527 --
Gain (loss) on sale of investments ...... 78,456 (200,070) --
Gain on sale of fixed assets ............ 84,090 329,237 --
Other income ............................ 77,998 177,464 151,303
----------- ----------- -----------
Total noninterest income ............ 2,443,033 3,196,934 2,226,404
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits .......... 2,664,660 3,075,523 2,962,500
Occupancy and equipment ................. 1,609,539 1,790,356 1,437,775
Office operations and supplies .......... 454,200 777,112 715,207
Marketing and public relations .......... 109,367 158,698 304,537
Professional services ................... 232,662 544,083 393,607
Data processing ......................... 808,012 971,503 863,208
Deposit insurance assessments ........... 150,042 169,102 104,991
Other operating ......................... 1,009,165 1,315,019 931,861
----------- ----------- -----------
Total noninterest expense ........... 7,037,647 8,801,396 7,713,686
----------- ----------- -----------
Net loss ............................ $ (869,503) $ (754,720) $(1,230,222)
=========== =========== ===========
Net loss per common share--basic and diluted $ (0.79) $ (0.72) $ (1.24)
=========== =========== ===========
Weighted average number of common shares ... 1,099,520 1,049,166 995,699
=========== =========== ===========
The accompanying notes are an integral part of these statements.
35
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
SERIES A ACCUMULATED TOTAL COMPRE-
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER SHARE- HENSIVE
--------------- ------------ PAID-IN ACCUMULATED COMPREHENSIVE HOLDERS' INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) EQUITY (LOSS)
------ ------ ------ ------ ------- ------- ------------- ------ ---------
Balance at January 1, 1999 132,999 $1,330 913,490 $ 9,134 $12,286,233 $(3,428,169) $ 35,788 $ 8,904,316
Proceeds from issuance of
preferred stock 10,151 102 -- -- 202,918 -- -- 203,020
Proceeds from issuance of
common stock -- -- 115,263 1,154 1,381,018 -- -- 1,382,172
Unrealized losses on
investment securities -- -- -- -- -- -- (231,971) (231,971) $ (231,971)
Net loss -- -- -- -- -- (1,230,222) -- (1,230,222) (1,230,222)
------- ------ ------- ------- ----------- ----------- --------- ----------- -----------
Total comprehensive loss $(1,462,193)
===========
Balance at December 31, 1999 143,150 1,432 1,028,753 10,288 13,870,169 (4,658,391) (196,183) 9,027,315
Proceeds from issuance of
common stock -- -- 70,668 706 847,315 -- -- 848,021
Unrealized gains on
investment securities -- -- -- -- -- -- 228,893 228,893 228,893
Net loss -- -- -- -- -- (754,720) -- (754,720) (754,720)
------- ------ ------- ------- ----------- ----------- --------- ----------- -----------
Total comprehensive loss $ (525,827)
===========
Balance at December 31, 2000 143,150 1,432 1,099,421 10,994 14,717,484 (5,413,111) 32,710 9,349,509
Proceeds from issuance of
common stock -- -- 967 10 11,586 -- -- 11,596
Unrealized gains on
investment securities -- -- -- -- -- -- 66,109 66,109 $ 66,109
Net loss -- -- -- -- -- (869,503) -- (869,503) (869,503)
------- ------ ------- ------- ----------- ----------- --------- ----------- -----------
Total comprehensive loss $ (803,394)
===========
Balance at December 31, 2001 143,150 $1,432 1,100,388 $11,004 $14,729,070 $(6,282,614) $ 98,819 $ 8,557,711
======= ====== ========= ======= =========== =========== ========= ===========
The accompanying notes are an integral part of this statement.
36
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss ..................................................... $ (869,503) $ (754,720) $ (1,230,222)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for loan losses .................................. 335,000 565,000 1,007,003
Gain on sale of loans ...................................... -- (18,931) (43,856)
Gain on sale of fixed assets ............................... (84,090) (329,237) --
Gain on sale of deposits ................................... -- (253,527) --
(Gain)loss on sale of investment securities ................ (78,456) 200,070 --
Depreciation and amortization .............................. 772,742 959,158 677,452
(Increase) decrease in accrued interest receivable and
other assets ............................................. (35,995) 1,470,150 410,561
Decrease in accrued interest payable and
other liabilities ........................................ (257,763) (1,065,172) (435,256)
------------ ------------ ------------
Net cash (used in) provided by operating activities ...... (218,065) 772,791 385,682
------------ ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale investments ................... (14,859,870) (1,737,678) (14,688,776)
Purchase of held-to-maturity investments ..................... (3,145,558) (2,636,746) (48,678,917)
Proceeds from maturity and principal reductions of
available-for-sale investments ............................. 8,674,401 951,885 3,377,145
Proceeds from maturity and principal reductions of
held-to-maturity investments ............................... 15,315,665 982,708 51,501,203
Proceeds from sale of investments available-for-sale ......... 3,487,208 18,888,327 --
Net proceeds from branch acquisitions ........................ -- -- 27,694,690
Proceeds from sale of student loans .......................... -- 2,574,775 2,975,360
Proceeds from sale of deposits to other financial institutions -- (6,544,666) --
Net decrease in loans ........................................ 2,116,573 11,580,215 15,870,049
Purchase of automobile loans ................................. -- -- (21,982,333)
Proceeds from sale of premises and equipment ................. 84,090 329,237 --
Purchase of premises and equipment ........................... (162,355) (1,895,909) (1,429,324)
------------ ------------ ------------
Net cash provided by investing activities ................ 11,510,154 22,492,148 14,639,097
------------ ------------ ------------
Cash flows from financing activities:
Net decrease in deposits ..................................... (3,815,587) (34,730,093) (14,463,843)
Repayments on long-term debt ................................. -- (9,203) (11,191)
Reverse repurchase agreement ................................. -- -- (1,557,755)
Net proceeds from issuance of common stock ................... 11,596 848,021 1,382,172
Net proceeds from issuance of preferred stock ................ -- -- 203,020
------------ ------------ ------------
Net cash used in financing activities .................... (3,803,991) (33,891,275) (14,447,597)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ..... 7,488,098 (10,626,336) 577,182
------------ ------------ ------------
Cash and cash equivalents at beginning of year .................. 6,293,880 16,920,216 16,343,034
------------ ------------ ------------
Cash and cash equivalents at end of year ........................ $ 13,781,978 $ 6,293,880 $ 16,920,216
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ....................... $ 1,542,963 $ 3,108,753 $ 2,780,355
============ ============ ============
The accompanying notes are an integral part of these statements.
37
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of United
Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank
of Philadelphia (the Bank). All significant intercompany transactions and
balances have been eliminated.
Management's Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Segments
Statement of Financial Accounting Standards (SFAS) No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement also requires that
public enterprises report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires that
information be reported about revenues derived from the enterprises' products
or services, or about the countries in which the enterprises earn revenues
and hold assets, and about major customers, regardless of whether that
information is used in making operating decisions.
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
other. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer
and residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment or
unit.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold on an overnight
basis.
Investment Securities
Bonds, notes, and debentures for which the Bank has both the positive intent
and ability to hold to maturity are classified as held-to-maturity and
carried at cost, adjusted for premiums and discounts that are recognized in
interest income using the interest method over the period to maturity.
38
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Investment Securities - continued
Available-for-sale securities consist of bonds, notes and debentures, and
certain equity securities for which the Bank does not have positive intent to
hold to maturity. These securities are carried at fair value. Unrealized
holding gains and losses on securities classified as available-for-sale are
carried as a separate component of shareholders' equity net of related income
tax effects.
Gains and losses on the sale of available-for-sale securities are determined
by the specific identification method. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June, 1999, and amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Under SFAS
No. 133, an entity may designate a derivative as a hedge of exposure to
either changes in: (a) fair value of a recognized assets or liability or firm
commitment, (b) cash flows of a recognized or forecasted transaction, or (c)
foreign currencies of a net investment in foreign operations, firm
commitments, available-for-sale securities or a forecasted transaction.
Depending upon the effectiveness of the hedge and/or the transaction being
hedged, any changes in the fair value of the derivative instrument is either
recognized in earnings in the current year, deferred to future periods, or
recognized as hedge accounting are recognized in current year earnings. On
April 1, 2000, the Company adopted SFAS No. 133. Concurrent with the
adoption, the Company reclassified approximately $6.1 million of investment
securities from held-to-maturity to available-for-sale. Subsequent to the
reclassification, the Company sold approximately $9.5 million of investment
securities from available-for-sale. In June 2000, the Company recorded a loss
on the sale of these securities of $127,000.
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments," (SFAS No. 119) requires disclosures about
financial instruments, which are defined as futures, forwards, swap and
option contracts and other financial instruments with similar
characteristics. On-balance sheet receivables and payables are excluded from
this definition. The Company did not hold any derivative financial
instruments as defined by SFAS No. 119 at December 31, 2001 or 2000.
Loans
The Bank has both the positive intent and ability to hold its loans to
maturity. These loans are stated at the amount of unpaid principal, reduced
by net unearned discount and an allowance for loan losses. Interest income on
loans is recognized as earned based on contractual interest rates applied to
daily principal amounts outstanding and accretion of discount. It is the
Bank's policy to discontinue the accrual of interest income when a default of
principal or interest exists for a period of 90 days except when, in
management's judgment, the collection of principal and interest is reasonably
anticipated or adequate collateral exists. Interest received on nonaccrual
loans is either applied against principal or reported as interest income
according to management's judgment as to collectibility of principal. When
interest accruals are discontinued, interest credited to income is reversed
and the loan is classified as nonperforming.
39
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loans - continued
Unearned discount is amortized over the weighted average maturity of the
mortgage loan portfolio.
Loan origination and commitment fees and certain direct loan origination
costs are deferred, and the net amount is amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over the
contractual life of the loan.
In September 2000, the Financial Accounting Standards Board has adopted SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which replaces SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, revises the standards for accounting for the securitizations and
other transfers of financial assets and collateral. This new standard also
requires certain disclosures, but carries over most of the provisions of SFAS
No. 125. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
However, for recognition and reclassification of collateral and for
disclosures relating to securitizations, transactions and collateral, this
statement is effective for fiscal years ending after December 15, 2000 with
earlier application not allowed and is to be applied prospectively. The
adoption of this statement did not have a material impact on the Company's
consolidated financial statements.
Loans Held-for-Sale
Loans held-for-sale are carried at the aggregate of lower of cost or market
value. For purchased loans, the discount -remaining after the loan loss
allocation is being amortized over the remaining life of the purchased loans
using the interest method. The Bank had no loans held for sale ass of
December 31, 2001.
Allowance for Loan Losses
The allowance for loan losses related to "impaired loans" is based on the
discounted cash flows using the impaired loans' initial effective interest
rate as the discount rate, or the fair value of the collateral for
collateral-dependent loans. A loan is impaired when it meets the criteria to
be placed on nonaccrual status. Loans which are evaluated for impairment
pursuant to SFAS No. 114 are assessed on a loan-by-loan basis and include
only commercial nonaccrual loans. Large groups of smaller, homogeneous loans,
such as credit cards, student loans, residential mortgages, and other student
loans, are evaluated collectively for impairment.
The allowance for loan losses is maintained at a level considered adequate to
provide for potential losses in the loan portfolio. The allowance is
increased by provisions charged to operating expenses and reduced by
charge-offs net of recoveries. Management's determination of the adequacy of
the allowance is based on continuous credit reviews of the loan portfolio,
consideration of the current economic conditions, review of specific problem
loans, and other relevant factors. This evaluation is subjective as it
requires material estimates, including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change. However, actual losses on specific loans, which are
encompassed in the analysis, may vary from estimated losses.
40
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets. Amortization of leasehold improvements is
computed over the shorter of the related lease term or the useful life of the
assets.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to
be held and used or to be disposed of by sale. However, SFAS No. 144 makes
changes to the scope and certain measurement requirements of existing
accounting guidance. SFAS No. 144 also changes the requirements relating to
reporting the effects of a disposal or discontinuation of a segment of a
business. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. The adoption of this statement is not expected to have a
significant impact on the financial condition or results of operations of the
Company.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of carrying amount or fair value less the cost to sell. Revenue and
expenses from operations and changes in valuation allowance are charged to
operations. The historical average holding period for such properties is 24
months.
Income Taxes
The liability method is used in accounting for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Income (Loss) Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing
income available to common shareholders by the weighted average common shares
outstanding during the period. Diluted EPS takes into account the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
41
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Financial Instruments
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: The fair value of loans was estimated using a discounted cash flow
analysis, which considered estimated prepayments and amortizations.
Prepayments and discount rates were based on current marketplace estimates
and pricing. Residential mortgage loans were discounted at the current
effective yield, including fees, of conventional loans, adjusted for their
maturities with a spread to the Treasury yield curve.
Loans held-for-sale: Fair values are estimated using quoted rates based upon
secondary market sources for similar loans.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are equal to the amounts payable on demand at the
reporting date (e.g., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate the fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation. The Treasury Yield Curve was utilized for discounting cash flows
as it approximates the average marketplace certificate of deposit rates
across the relevant maturity spectrum.
Commitments to extend credit: The carrying amounts for commitments to extend
credit approximate fair value as such commitments are not substantially
different from the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparts.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
Comprehensive Income
The Bank reports comprehensive income which includes net income (loss) as
well as certain other items which result in a change to equity during the
period. The income tax effects allocated to comprehensive income (loss) are
as follows:
42
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Comprehensive Income - continued
DECEMBER 31, 2001
-----------------------------------------
NET OF
BEFORE TAX TAX TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized gains on securities
Unrealized holding gains arising during period $ 20,214 $ 6,671 $ 13,543
Plus reclassification adjustment for gains
realized in net loss ........................ 78,456 25,890 52,566
--------- --------- ---------
Other comprehensive income, net ................. $ 98,670 $ 32,561 $ 66,109
========= ========= =========
DECEMBER 31, 2000
-----------------------------------------
NET OF
BEFORE TAX TAX TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized gains on securities
Unrealized holding gains arising during period $ 543,166 $ 180,826 $ 362,340
Less reclassification adjustment for losses
realized in net loss ........................ (200,070) (66,623) (133,447)
--------- --------- ---------
Other comprehensive income, net ................. $ 343,096 $ 114,203 $ 228,893
========= ========= =========
DECEMBER 31, 1999
-----------------------------------------
NET OF
BEFORE TAX TAX TAX
AMOUNT BENEFIT AMOUNT
------ ------- ------
Unrealized losses on securities
Unrealized holding losses arising during period $(348,498) $(116,527) $(231,971)
Less reclassification adjustment for losses
realized in net loss ........................ -- -- --
--------- --------- ---------
Other comprehensive loss, net ................... $(348,498) $(116,527) $(231,971)
========= ========= =========
2. CASH AND DUE FROM BANK BALANCES
The Bank maintains various deposit accounts with other banks to meet normal
fund transaction requirements and to compensate other banks for certain
correspondent services. The withdrawal or usage restrictions of these
balances did not have a significant impact on the operations of the Bank as
of December 31, 2001.
43
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
3. INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and fair value
of the available-for-sale and held-to-maturity investment securities by major
security type at December 31, 2001 and 2000 are as follows:
2001
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Available-for-sale:
Other Government securities $ 5,048,639 $ 49,241 $ -- $ 5,097,880
Mortgage-backed securities 8,751,555 98,250 -- 8,849,805
----------- -------- -------- -----------
Total debt securities 13,800,194 147,491 -- 13,947,685
Investments in mutual funds 104,608 -- -- 104,608
Other investments 287,350 -- -- 287,350
----------- -------- -------- -----------
$14,192,152 $147,491 $ -- $14,339,643
=========== ======== ======== ===========
Held-to-maturity:
Other Government securities $ 3,735,435 $117,612 $ -- $ 3,853,047
Mortgage-backed securities 7,730,937 151,162 -- 7,882,099
----------- -------- -------- -----------
$11,466,372 $268,774 $ -- $11,735,146
=========== ======== ======== ===========
2000
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Available-for-sale:
Other Government securities $ 5,475,732 $ 26,629 $ -- $ 5,502,361
Mortgage-backed securities 5,395,957 22,192 -- 5,418,149
----------- -------- -------- -----------
Total debt securities 10,871,689 48,821 -- 10,920,510
Investments in mutual funds 100,084 -- -- 100,084
Other investments 405,950 -- -- 405,950
----------- -------- -------- -----------
$11,377,723 $ 48,821 $ -- $11,426,544
=========== ======== ======== ===========
Held-to-maturity:
Other Government securities $15,260,048 $ -- $(20,454) $15,239,594
Mortgage-backed securities 8,327,044 -- (11,299) 8,315,745
----------- -------- -------- -----------
$23,587,092 $ -- $(31,753) $23,555,339
=========== ======== ======== ===========
44
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
3. INVESTMENTS - Continued
Maturities of investment securities classified as available-for-sale and
held-to-maturity at December 31, 2001 were as follows. Expected maturities
may differ from contractual maturities.
AMORTIZED FAIR
COST VALUE
----------- -----------
Available-for-sale:
Due after one month through three years .... $ -- $ --
Due after three year through five years .... 250,000 254,610
Due after five years through fifteen years . 4,798,639 4,843,270
Mortgage-backed securities ................. 8,751,555 8,849,805
----------- -----------
Total debt securities ...................... 13,800,194 13,947,685
Investments in mutual funds ................ 104,608 104,608
Other investments .......................... 287,350 287,350
----------- -----------
$14,192,152 $14,339,643
=========== ===========
Held-to-maturity:
Due in one month through three years ....... $ -- $ --
Due after three years through five years ... 2,349,500 2,427,584
Due after five years through fifteen years . 1,385,935 1,425,463
Mortgage-backed securities ................. 7,730,937 7,882,099
----------- -----------
$11,466,372 $11,735,146
=========== ===========
The Bank recorded a gain of $78,456 on the sale of investments during the
year ended December 31, 2001. The Bank recorded a loss of $200,070 on the
sale of investments during the year ended December 31, 2000. There were no
investments sold during 1999.
As of December 31, 2001 and 2000, investment securities with a book value of
$12,839,925 and $12,930,953, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the net loans is as follows:
2001 2000
----------- -----------
Commercial and industrial .... $11,053,584 $11,429,356
Commercial real estate ....... 5,504,474 651,969
Residential mortgages ........ 18,147,893 22,316,280
Consumer loans ............... 8,293,926 10,907,863
----------- -----------
Total loans ................ 42,999,877 45,305,468
Less allowance for loan losses (708,156) (562,174)
----------- -----------
Net loans .................. $42,291,721 $44,743,294
=========== ===========
45
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
4. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued
As of December 31, 2001 and 2000, the Bank had loans to certain officers and
directors and their affiliated interests in aggregate dollar amounts of
$1,088,000 and $1,463,900, respectively. During 2001, there were no new loans
to related parties and repayments amounted to $375,900. During 2000, new
loans to such related parties amounted to $86,800 and repayments amounted to
$65,500, respectively. Such transactions are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for other nonrelated party transactions.
Nonaccrual loans, which were considered to be impaired loans under SFAS No.
114, totaled approximately $412,000 and $453,000 as of December 31, 2001 and
2000, respectively.
At December 31, 2001 and 2000, unamortized deferred fees and costs totaled
$93,853 and $111,413, respectively.
Loans having a carrying value of $50,000 were transferred to foreclosed real
estate in 2000, respectively.
Changes in the allowance for possible loan losses are as follows:
2001 2000 1999
--------- ----------- ----------
Balance, beginning of year $ 562,174 $ 1,566,642 $ 679,557
Provision ................ 335,000 565,000 1,007,003
Charge-offs .............. (321,681) (1,720,755) (387,480)
Recoveries ............... 132,663 151,287 267,562
--------- ----------- ----------
Balance, end of year ..... $ 708,156 $ 562,174 $1,566,642
========= =========== ==========
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding
counties in the Delaware Valley. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy. At December 31, 2001, approximately 22.8% of the Bank's
commercial loan portfolio was concentrated in loans made to religious
organizations.
5. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
ESTIMATED
USEFUL LIFE 2001 2000
----------- ---- ----
Buildings and leasehold improvements 10-15 years $3,617,403 $3,506,388
Furniture and equipment............ 3- 7 years 3,140,428 3,100,810
---------- ----------
6,757,831 6,607,198
Less accumulated depreciation...... (3,779,566) (3,149,680)
---------- ----------
$2,978,265 $3,457,518
========== ==========
46
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
5. BANK PREMISES AND EQUIPMENT - Continued
In October 2000, the Bank purchased the building that houses its corporate
headquarters from a former officer in conjunction with the settlement of a
legal matter for approximately $1.4 million. Before its purchase, the Bank
leased this building from this officer under a non-cancelable capital lease.
At December 31, 1999, this lease was accounted for as a capital lease in the
amount of $1,483,000 with accumulated depreciation of $74,150.
The Bank leases other facilities and other equipment under non-cancelable
operating lease agreements. The amount of expense for operating leases for
the years ended December 31, 2001, 2000 and 1999 was $465,825, $511,836 and
$367,554.
Approximate future minimum lease payments under operating leases are as
follows:
Operating
Year ending December 31, leases
------------------------ ----------
2002................................................... $ 308,000
2003................................................... 275,000
2004................................................... 240,000
2005................................................... 84,000
2006................................................... 70,000
Thereafter............................................. 97,000
----------
Total minimum lease payments........................... $1,074,000
==========
6. DEPOSITS
At December 31, 2001, the approximate scheduled maturities of time deposits
(certificates of deposit) are as follows:
2002................................................... $21,473,000
2003................................................... 1,000,000
2004................................................... 1,144,000
2005................................................... 182,000
2006................................................... 237,000
Thereafter............................................. 74,000
-----------
$24,110,000
===========
7. BORROWINGS
Reverse Repurchase Agreements
The Bank enters into sales of securities under agreements to repurchase
identical securities or reverse repurchase agreements. The amounts advanced
to the Bank under these agreements represent short-term loans and would be
reflected as a payable in the balance sheet. The securities underlying the
agreements are book-entry securities maintained at the Federal Reserve Bank
of Philadelphia. The Bank did not enter into repurchase agreements during
2001. As of December 31, 2001 and 2000, the Bank had no reverse repurchase
agreements outstanding.
47
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
7. BORROWINGS - Continued
Credit Lines
As of December 31, 2001, the Bank has outstanding two borrowing arrangements
with financial institutions, collateralized by investment securities. One
arrangement is a fully secured Federal Funds line of credit with a
correspondent bank totaling $2 million, the second is a Master Repurchase
Agreement with another financial institution. Borrowings under these
agreements have interest rates that fluctuate based on market conditions. As
of December 31, 2001, the Bank had no borrowings outstanding.
8. CAPITAL STOCK OFFERINGS
In May 2001 and December 2001, respectively, the Bank received $2,000 and
$9,596 and issued 167 and 800 shares, respectively, as a result of the
purchase of common stock by two individuals in a limited offering at a price
of $12.00 per share.
In June 2000 and December 2000, respectively, the Bank received $411,809 and
$436,212 and issued 34,317 and 36,351 shares, respectively, as a result of
the purchase of common stock by members of the Bank's board of directors in a
limited offering at a price of $12.00 per share.
The Company designated a subclass of its Common Stock as Class B. Pursuant to
the terms of the amendment, holders of the Class B Common Stock have rights
of Common Stockholders, with the exception of voting rights. On February 9,
1999 and September 24, 1999, the Bank sold 83,333 and 25,000 shares of Class
B Stock, respectively, to the same shareholder at $12 per share.
The Company began a limited offering of its Series A Preferred Stock
(noncumulative, 6%, $.01 par value) to Fannie Mae Corporation in 1998. The
nonvoting preferred stock was offered at a price of $20 per share, in an
amount for which the aggregate purchase price does not exceed the lesser of
(1) 9.99% of the total equity of the Company or (2) $880,000. During 1999,
the Company received $203,020 from Fannie Mae and issued 10,151 shares of
preferred stock from this offering.
Upon the declaration of a common dividend, each of the Series A preferred
shares will be accorded a non-cumulative dividend preference equal to 6% of
the purchase price of the stock per annum prior to the payment of any
dividend on account of any other class or series of the Company. No dividends
have been declared or paid.
48
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
9. INCOME TAXES
At December 31, 2001, the Bank has net operating loss carryforwards of
approximately $4,690,000 for income tax purposes that begin to expire in 2008
through 2021.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. For financial
reporting purposes, a valuation allowance of $1,781,306 and $1,643,919 as of
December 31, 2001 and 2000, respectively, has been recognized to offset the
deferred tax assets related to the cumulative temporary differences and the
tax loss carryforwards. Significant components of the Bank's deferred tax
assets are as follows:
2001 2000
----------- -----------
Deferred tax assets:
Provision for loan losses .................. $ 139,875 $ 91,668
Unrealized gains on investment securities .. (48,672) (11,121)
Depreciation ............................... 189,844 147,588
Net operating loss carryforwards ........... 1,597,884 1,465,342
Other ...................................... (97,625) (49,558)
Valuation allowance for deferred tax assets (1,781,306) (1,643,919)
----------- -----------
Net deferred tax assets .................. $ -- $ --
=========== ===========
2001 2000 1999
--------- --------- ---------
Effective rate reconciliation:
Tax at statutory rate ......... $(295,631) $(256,073) $(418,275)
Nondeductible expenses ........ 2,416 4,903 33,742
Increase in valuation allowance 174,938 155,997 379,094
Other ......................... 118,277 95,173 6,055
(Utilization of) increase in
net operating loss ............ -- -- (616)
--------- --------- ---------
Total tax expense ........... $ -- $ -- $ --
========= ========= =========
10. FINANCIAL INSTRUMENT COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters
of credit, which are conditional commitments issued by the Bank to guarantee
the performance of an obligation of a customer to a third party. Both
arrangements have credit risk essentially the same as that involved in
extending loans and are subject to the Bank's normal credit policies.
Collateral may be obtained based on management's assessment of the customer.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments is represented by the contractual
amount of those instruments.
49
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
10. FINANCIAL INSTRUMENT COMMITMENTS - Continued
Summaries of the Bank's financial instrument commitments are as follows:
2001 2000
---------- ----------
Commitments to extend credit.................. $5,325,662 $5,570,835
Outstanding letters of credit................. 64,625 139,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract and
unused credit card lines. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments is required to be
disclosed, whether or not recognized in the balance sheet, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash
flows or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are exempt from
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
2001 2000
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(Dollars in thousands)
Assets:
Cash and cash equivalents ............. $13,781 $13,781 $ 6,294 $ 6,294
Investment securities ................. 25,806 26,075 35,014 34,982
Loans, net of allowance for loan losses 42,292 41,866 44,743 44,600
Liabilities:
Demand deposits ....................... 32,085 32,085 36,330 36,330
Savings deposits ...................... 23,228 23,228 25,356 25,356
Time deposits ......................... 24,110 25,127 21,553 21,538
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
cost to terminate the letters of credit. Fair values of unrecognized
financial instruments including commitments to extend credit and the fair
value of letters of credit are considered immaterial.
50
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
12. EMPLOYEE COMPENSATION
In June 2000, the Bank entered into two-year employment agreements with its
chief executive officer and its chief financial officer covering such items
a salaries, bonuses and benefits. The agreements expire in 2002 and provide
for guaranteed minimum annual compensation over the term of the contracts.
The Company made no stock-based compensation awards to any employee during
2001, 2000 and 1999.
In accordance with the contractual terms with its former chief executive
officer, the Bank granted the option to acquire up to 4% of the Bank's stock
as of December 31, 1993 at $8.54 per share, which was the book value at the
date of grant.
The Company adopted a Stock Option Plan in 1998. Under this Plan, options to
acquire shares of common stock were granted to the former chief executive
officer. The Stock Option Plan provides for the granting of options at the
fair market value of the Company's common stock at the time the options are
granted. Each option granted under the stock Option Plan may be exercised
within a period of ten years from the date of grant. However, no option may
be exercised within one year from the date of grant. In 1998, options to
purchase 29,694 shares of the Company's common stock at a price of $8.54 per
share were awarded, to the former chief executive officer.
Had compensation cost for the Plan been determined based on the fair value
of the options at the grant date consistent with the method required by SFAS
No. 123, "Accounting for Stock-based Compensation," the Company's net loss
and loss per share would have been reduced to the pro forma amounts
indicated below:
Year ended December 31,
-----------------------
(In thousands) 2001 2000
--------- ---------
Net loss
As reported..................................... $ (870) $ (755)
Pro forma....................................... $ (870) $ (755)
Basic and diluted loss per share
As reported..................................... $(0.79) $(0.72)
Pro forma....................................... $(0.79) $(0.72)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: no dividends declared; expected
volatility of 20%; a risk-free interest rate of 4.7%, and expected life of
10 years.
13. CORE DEPOSIT INTANGIBLES
On September 24, 1999, the Bank acquired four branches from First Union
Corporation with deposits totaling $31.5 million. The Bank paid a deposit
premium of 7%, or $2,186,500, and incurred approximately $351,650 in
consulting and other costs directly related to these branch acquisitions.
Subsequent to the acquisition, the Bank transferred back to First Union one
significant deposit relationship totaling $940,000 and received a $66,000
refund of deposit premium. The premium and branch acquisition costs are
being amortized over 14 years. Amortization totaled $178,078, $176,818 and
$43,626 for the year ended December 31, 2001, 2000 and 1999, respectively.
51
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets
DECEMBER 31,
----------------------
(Dollars in thousands) 2001 2000
-------- --------
Assets:
Due from banks (subsidiary) .............. $ 289 $ 289
Investment in United Bank of Philadelphia 8,268 9,060
-------- --------
Total assets ........................... $ 8,557 $ 9,349
======== ========
Shareholders' equity:
Series A preferred stock ................. $ 1 $ 1
Common stock ............................. 11 11
Additional paid-in capital ............... 14,729 14,717
Accumulated deficit ...................... (6,283) (5,413)
Net unrealized holding gains on securities
available-for-sale ..................... 99 33
-------- --------
Total shareholders' equity ............ $ 8,557 $ 9,349
======== ========
Condensed Statements of Operations
YEAR ENDED DECEMBER 31,
-----------------------------
(Dollars in thousands) 2001 2000 1999
----- ----- -------
Equity in net loss of subsidiary......... $(870) $(755) $(1,230)
----- ----- -------
Net loss................................. $(870) $(755) $(1,230)
===== ===== =======
Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31,
------------------------------
(Dollars in thousands) 2001 2000 1999
----- --------- ---------
Cash flows from operating activities:
Net loss............................... $(870) $(755) $(1,230)
Equity in net loss of subsidiary....... 870 755 1,230
----- ----- -------
Net cash provided by
operating activities................ -- -- --
----- ----- -------
Cash flows from investing activities:
Investment in subsidiary................. (12) (847) (1,561)
----- ----- -------
Net cash used in investing activities.... (12) (847) (1,561)
----- ----- -------
Cash flows from financing activities:
Issuance of preferred stock............ -- -- 203
Issuance of common stock............... 12 847 1,382
----- ----- -------
Net cash provided by
financing activities............... 12 847 1,585
----- ----- -------
Net increase in cash and
cash equivalents................... -- -- 24
Cash and cash equivalents at
beginning of year..................... 289 289 265
----- ----- -------
Cash and cash equivalents at end of year $ 289 $ 289 $ 289
===== ===== =======
52
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
15. REGULATORY MATTERS
The Bank engages in the commercial banking business, with a particular focus
on serving Blacks, Hispanics and women, and is subject to substantial
competition from financial institutions in the Bank's service area. As a
bank holding company and a banking subsidiary, the Company and the Bank,
respectively, are subject to regulation by the Federal Reserve Board and the
Pennsylvania Department of Banking and are required to maintain capital
requirements established by those regulators. Prompt corrective actions may
be taken by those regulators against banks that do not meet minimum capital
requirements. Prompt corrective actions range from restriction or
prohibition of certain activities to the appointment of a receiver or
conservator of an institution's net assets. 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 Bank's financial statements. Under capital adequacy
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices, the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier I capital (as defined in the regulations) for
capital adequacy purposes to risk-weighted assets (as defined).
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (Agreement) with
its primary regulators with regard to, among other things, achievement of
agreed-upon capital levels, implementation of a viable earnings/strategic
plan, adequate funding of the allowance for loan losses, the completion of a
management review and succession plan, and improvement in internal controls.
The current Agreement requires the Bank to increase its capital ratio to
6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31,
2000, the Bank had met the required ratios by implementing strategies that
included: increasing profitability, consolidating branches, and soliciting
new and additional sources of capital. Management continues to address all
matters outlined in the Agreement. Management believes that the Bank is
"substantially" in compliance with the Agreement's terms and conditions.
Failure to comply could result in additional regulatory supervision and/or
actions.
As of December 31, 2001, the Bank's tier one leverage capital ratio fell to
6.80%, below the 7% minimum capital ratio required by the Agreement. The
failure of the Bank to maintain a minimum capital ratio of at least 7% at
all times while the Agreement is in force is a violation of the Agreement.
The Federal Reserve authorities could take regulatory and supervisory
actions against the Bank for violation of the Agreement. As of March 28,
2002, no such actions have been taken.
The Bank's management believes the Bank is in substantial compliance with
the terms and conditions of the Agreement. Management is reviewing and
revising its capital plan to address the development of new equity. In
addition, a profit restoration plan is being developed to include numerous
expense reduction and profit enhancement strategies.
53
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
15. REGULATORY MATTERS - Continued
The most recent notification dated March 20, 2002, from the Federal Reserve
Bank categorized the Bank as "adequately capitalized" under the regulatory
framework for prompt and corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. The
Bank's growth, continued losses and the additional provisions to the
allowance for loans losses may have an adverse effect on its capital ratios.
The Bank's actual capital amounts and ratios are as follows:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2001:
Total capital to risk-
weighted assets:
Consolidated......... $6,850 16.46% $3,330 => 8.00% N/A N/A
Bank................. 6,561 16.15 3,250 => 8.00 $4,062 => 10.00%
Tier I capital to risk-
weighted assets:
Consolidated......... 6,340 15.23 1,665 => 4.00 N/A N/A
Bank................. 6,051 14.90 1,625 => 4.00 $2,437 => 6.00%
Tier I capital to
average assets:
Consolidated......... 6,340 7.12 3,573 => 4.00 N/A N/A
Bank................. 6,051 6.80 3,562 => 4.00 $4,452 => 5.00%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total capital to risk-
weighted assets:
Consolidated ......... $7,556 17.59% $3,459 => 8.00% N/A N/A
Bank ................. 7,267 16.92 3,436 => 8.00 4,295 => 10.00%
Tier I capital to risk-
weighted assets:
Consolidated ......... 7,019 16.34 1,730 => 4.00 N/A N/A
Bank ................. 6,730 15.67 1,718 => 4.00 2,577 => 6.00%
Tier I capital to
average assets:
Consolidated ......... 7,019 7.39 3,812 => 4.00 N/A N/A
Bank ................. 6,730 7.08 3,800 => 4.00 4,750 => 5.00%
54
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
16. COMMITMENTS AND CONTINGENCIES
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial condition of the Company.
The Bank had a One Million Dollar ($1,000,000) unsecured loan participation
in a $40.4 Million ($40,400,000) line of credit to KMART Corporation. The
Bank was repaid the One Million Dollar ($ 1,000,000) loan participation in
full on January 8, 2002. KMART Corporation filed for protection under
Chapter 11 of the federal bankruptcy laws on January 22, 2002 and such a
filing by KMART Corporation could expose the Bank to a future claim that the
repayment to the Bank of its loan participation was a preference payment. If
the preference claim is made and is successful, the Bank may be required to
return the One Million Dollar ($1,000,000) loan repayment and incur a loss
in that amount to the extent that the Bank can not obtain repayment of the
loan participation from KMART Corporation or as an unsecured creditor in the
bankruptcy proceeding. As of March 28, 2002, the Bank has not received any
notification in regard to this matter.
17. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
Year ended December 31, 2001
---------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss........................... $(869,503)
========
Basic loss per share
Loss available to stockholders $(869,503) 1,099,520 $ (0.79)
======== ========= ======
Year ended December 31, 2000
---------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss........................... $(754,720)
========
Basic loss per share
Loss available to stockholders $(754,720) 1,049,166 $ (0.72)
======== ========= ======
Year ended December 31, 1999
---------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss........................... $(1,230,222)
===========
Basic EPS
Income available to
stockholders.................. $(1,230,222) 995,699 $ (1.24)
=========== ======= =======
Options to purchase 29,694 shares of common stock were not included in the
computation of diluted EPS for the years ended December 31, 2001, 2000 and
1999 because the Company is in a loss position.
55
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
18. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2001
and 2000, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
2001
--------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income ............................... $ 1,247,217 $ 1,351,334 $ 1,514,441 $ 1,523,275
Interest expense .............................. 317,035 402,164 412,339 444,618
----------- ----------- ----------- -----------
Net interest income ......................... 930,182 949,170 1,102,102 1,078,657
Provision for loan losses ..................... 275,000 30,000 20,000 10,000
----------- ----------- ----------- -----------
Net interest after provisions for loan losses 655,182 919,170 1,082,102 1,068,657
Non-interest income ........................... 629,800 576,429 651,750 585,054
Non-interest expense .......................... 1,769,236 1,767,727 1,778,585 1,722,099
----------- ----------- ----------- -----------
Net loss .................................... $ (484,254) $ (272,128) $ (44,733) $ (68,388)
=========== =========== =========== ===========
Net loss per share
Basic and diluted ........................... $ (0.44) $ (0.25) $ (0.04) $ (0.06)
2000
--------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income ............................... $ 1,651,518 $ 1,900,590 $ 2,311,551 $ 2,289,647
Interest expense .............................. 447,953 640,977 806,139 843,495
----------- ----------- ----------- -----------
Net interest income ......................... 1,203,565 1,259,613 1,505,412 1,446,152
Provision for loan losses ..................... (75,000) 460,000 90,000 90,000
----------- ----------- ----------- -----------
Net interest after provisions for loan losses 1,278,565 799,613 1,415,412 1,356,152
Non-interest income ........................... 913,772 687,262 941,818 654,082
Non-interest expense .......................... 1,907,830 2,167,860 2,343,721 2,381,985
----------- ----------- ----------- -----------
Net income (loss) ........................... $ 284,507 $ (680,985) $ 13,509 $ (371,751)
=========== =========== =========== ===========
Net income (loss) per share
Basic and diluted ........................... $ 0.27 $ (0.65) $ 0.01 $ (0.35)
56
EXHIBIT INDEX
3(i) Articles of Incorporation (Incorporated by reference to Registrant's
1997 Form 10-K).
3(ii) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K).
9.1 Voting Trust Agreement with NationsBank (Incorporated by reference to
Registrant's 1997 Form 10-K).
9.2 Voting Trust Agreement with Fahnstock (Incorporated by reference to
Registrant's 1997 Form 10-K).
57