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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2003
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)f of the Act: NONE
Securities registered pursuant to Section 12(g)f 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 ___
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. [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes ___ No [ X ]
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United Bancshares, Inc. (sometimes herein also referred to as the "Company"
or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01
par value Common Stock and a Series Preferred Stock (Series A Preferred Stock).
The Board of Directors designated a subclass of the common stock, Class B
Common Stock, by filing of Articles of Amendment to its Articles of
Incorporation on September 30, 1998. This Class B Common Stock has all of the
rights and privileges of Common Stock with the exception of voting rights. Of
the 2,000,000 shares of authorized Common Stock, 250,000 have been designated
Class B Common Stock. There is no market for the Common Stock. 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 15, 2004 the aggregate number of the shares of the
Registrant's Common Stock outstanding was 1,068,588 (including 191,667 Class B
non-voting). There are 33,500 shares of Common Stock held in treasury stock at
March 15, 2004.
The Series A Preferred Stock consists of 500,000 authorized shares of stock
of which 136,842 shares are outstanding and 6,308 shares are held in treasury
stock as of March 15, 2004.
There are 75 pages in the Form 10-K.
FORM 10-K
United Bancshares, Inc.
Index
Item No. Page
PART I
1. Business............................................................ 3
2. Properties..........................................................12
3. Legal Proceedings...................................................13
4. Submission of Matters to a Vote of Security Holders.................13
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................14
6. Selected Financial Data.............................................15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15
7A. Quantitative and Qualitative Disclosures about Market Risk..........35
8. Financial Statements and Supplementary Data.........................35
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................35
9A. Controls and Procedures.............................................36
PART III
10. Directors and Executive Officers of Registrant......................36
11. Executive Compensation..............................................41
12. Security Ownership of Certain Beneficial Owners and Management......43
13. Certain Relationships and Related Transactions......................43
14. Principal Accounting Fees and Services..............................43
PART IV
15. Exhibits, Financial Statements Schedules and Reports on Form 8-K....44
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 15, 2004.
2
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 caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward looking statements for the purposes of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended, and may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
United Bancshares, Inc ("UBS") to be materially different from future results,
performance or achievements expressed or implied by such forward looking
statements. The words "expect," "anticipate," "intended," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. UBS' actual results may differ materially from the
results anticipated by the forward-looking statements due to a variety of
factors, including without limitation: (a) the effects of future economic
conditions on UBS and its customers, including economic factors which affect
consumer confidence in the securities markets, wealth creation, investment and
consumer saving patterns; (b) UBS interest rate risk exposure and credit risk;
(c) changes in the securities markets with respect to the market values of
financial assets and the stability of particular securities markets; (d)
governmental monetary and fiscal policies, as well as legislation and regulatory
changes; (e) changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral and securities, as well as
interest-rate risks; (f) changes in accounting requirements or interpretations;
(g) the effects of competition from other commercial banks, thrifts, mortgage
companies, consumer finance companies, credit unions securities brokerage firms,
insurance company's, money-market and mutual funds and other financial
institutions operating in the UBS' trade market area and elsewhere including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet; (h) any extraordinary events (such as the
September 11, 2001 events) and the U.S. Government's response to those events or
the U.S. Government becoming involved in a conflict in a foreign country; (i)
the failure of assumptions underlying the establishment of reserves for loan
losses and estimates in the value of collateral, and various financial assets
and liabilities and technological changes being more difficult or expensive than
anticipated; (j) UBS' success in generating new business in its existing
markets, as well as its success in identifying and penetrating targeted markets
and generating a profit in those markets in a reasonable time; (k) UBS' timely
development of competitive new products and services in a changing environment
and the acceptance of such products and services by customers; and (l) UBS'
success in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to UBS are
expressly qualified in their entirety by use of the foregoing cautionary
statements. All forward-looking statements included in this Report are based
upon information presently available, and UBS assumes no obligation to update
any forward-looking statement.
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 15, 2004, UBS and the Bank had a total of 49 employees.
3
United Bank of Philadelphia
United Bancshares, Inc. is an African American controlled and managed bank
holding company for United Bank of Philadelphia (the "Bank"), a commercial bank
chartered in 1992 by the Commonwealth of Pennsylvania, Department of Banking and
a member of the Federal Reserve System. The deposits held by the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides
full service community banking in Philadelphia neighborhoods that are rich in
diversity providing a market opportunity that includes men, women, families,
small business owners, skilled laborers, professionals and many more who value
home ownership and need banking services to help make their dreams come true.
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 38th 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, 2003,
the Bank had total deposits aggregating approximately $67.1 million and had
total net loans outstanding of approximately $46.7 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
2000 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
1,517,550, which includes a minority population of 752,309.
United Bank of Philadelphia, while state chartered as a commercial
bank, is uniquely structured to be a formidable player in providing retail
services to its urban communities, while maintaining and establishing a solid
portfolio of commercial relationships that include small businesses, churches
and corporations. The Bank will take full advantage of its CDFI (community
development financial institution) designation as established by the United
States Department of Treasury. While the Bank's certification period was
scheduled to end in January 2004, a recent review by the CDFI Fund has extended
the Bank's certification period to June 2005.
Among the greatest challenges facing inner city communities is their
lack of stability and transience. Outside organizations and institutions that
attempt to work within the community get frustrated and can leave at any time
because they have no vested stake in the neighborhood. It is very easy for an
organization without vested roots in the community to just pick up and leave,
thus fostering lack of institutional consistency. The Bank represents
consistency to these communities. The Bank takes its commitment to community
development quite seriously and recognizes that effective corporate and
institutional partnerships must be forged to truly make a difference. Bank
management recognizes the potential in these communities and knows that with the
right mix of financial services, growth will occur. The Bank will continue to
leverage its community know-how with the appropriate corporate and institutional
partners to ensure that we create economic profit by ensuring that comprehensive
products and services are available and accessible through service focused
delivery channels.
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.
4
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 15, 2004, the Bank's
maximum legal lending limit was approximately $859,000 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 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.
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 participates in an automobile refinance
program that allows customers to reduce high interest rates paid on their
automobile loans down to more reasonable market rates. The Bank also offers
residential mortgage loans to its customers. Other services the Bank offers
include 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.
The Bank will continue to focus on its niche businesses to include the
basic deposit and loan business, while developing relationships with several
corporate entities that have a commitment to community and economic development
in the urban sector. Strategic alliances and partnerships are key to the
economic strength of inner city neighborhoods. The Bank will seek to promptly
develop these strategic alliances/partnerships to help ensure that the
communities we serve have full access to financial products and services.
With strategic and focused strategies the Bank can realize fee income
with a select number of corporations. By developing the relationships
appropriately, a new niche for the Bank can be expanded to add to its core
earnings stream. These opportunities will include loan syndications, cash
management and lock box services, to name a few.
5
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.
United Wealth Management Services ("UWMS"), a division of the Bank, was
introduced in September 2002, to provide a full array of non-deposit products
including investments, insurance and brokerage services through the Bank's
branch network. The Bank's partner in this venture is UVEST Investment Services.
UVEST is a registered broker/dealer that has been offering a wide range of
investment products and services since 1982. The Bank intends to use UWMS as a
vehicle to introduce and market all of its products and services including loans
and deposits.
Registrant will continue to be cognizant of the diversity in its market and
will continue to develop partnerships to leverage the Bank's capacity in its
niche market by skillfully targeting customers and building stakeholder
relationships.
Supervision and Regulation
Regulation of United Bancshares, Inc.
UBS, as a Pennsylvania business corporation, is subject to the
jurisdiction of the Securities and Exchange Commission (the "SEC") and certain
state securities commissions concerning matters relating to the offering and
sale of its securities. Accordingly, if UBS wishes to issue additional shares of
its Common Stock, for example, to raise capital or to grant stock options, UBS
must comply with the registration requirements of the Securities Act of 1933, as
amended, and any applicable states securities laws, or find an applicable
exemptions from registration.
6
The Bank Holding Company Act
UBS, as a bank holding company, is subject to the Bank Holding Company
Act of 1956, as amended (the "BHC Act"), and supervision by the Federal Reserve
Board. The BCH Act limits the business of bank holding companies to banking,
managing or controlling banks, performing certain servicing activities for
subsidiaries and engaging in such other activities as the Federal Reserve Board
may determine to be closely related to banking. UBS is subject to the
supervision of and inspection by the Federal Reserve Board and required to file
with the Board an annual report and such additional information as the Board may
require pursuant to the BHC Act and its implementing regulations.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities, unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks, as to be a proper incident thereto. In making
this determination, the Board considers whether the performance of these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects.
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 an 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.
Subject to compliance with Pennsylvania law, and, as noted above,
compliance with the BHC Act, UBS is permitted to control a number of banks.
However, UBS is required under the BHC Act to obtain the prior approval of the
Federal Reserve Board before acquiring all or substantially all of the assets of
any bank, or acquiring ownership or control of any voting shares of any other
bank if, after such acquisition, UBS would control more than 5% of the voting
shares of such bank.
The BHC Act and the Federal Reserve Board's regulations prohibit a bank
holding company and its subsidiaries from engaging in certain tying arrangements
in connection with any extension of credit or services. The "anti-tying"
provisions prohibit a bank from extending credit, leasing, selling property or
furnishing 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.
The Bank, as a subsidiary of UBS, is subject to certain restrictions
imposed by the Federal Reserve Act, as amended, on any extensions of credit to
UBS or its subsidiaries, on investments in the stock or other securities UBS or
its subsidiaries, and on taking such stock or securities as collateral for
loans.
The Federal Reserve Act 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, that Act and
those 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 by UBS 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.
7
The Financial Services Act
The Financial Services Act (the "FSA Act"), sometimes referred to as the
Gramm-Leach-Bliley Act, repealed the provisions of the Glass-Steagall Act, which
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 Act authorizes the establishment of "financial holding companies"
("FHC") to engage in new financial activities offering and banking, insurance,
securities and other financial products to consumers. Bank holding companies may
elect to become a FHC, if all of its subsidiary depository institutions are well
capitalized and well managed. See "Regulatory Action" and "Regulatory Matters"
below. If those 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 are 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.
Under the FSA Act the Bank, subject to various requirements, is permitted
to engage through "financial subsidiaries" in certain financial activities
permissible for affiliates of an FHC. However, to be able to engage in such
activities the Bank must be well capitalized and well managed and receive at
least a "satisfactory" rating in its most recent Community Reinvestment Act (the
"CRA Act") examination. See "The Community Reinvestment Act" below.
UBS cannot be certain of the future effect of the legislation and
regulations, described above, on its business, although there may be
consolidation among financial service institutions and increased competition for
UBS as well as an increase in the expense of regulatory compliance.
Regulation of the Bank
The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and the Federal Reserve Board because the
Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank's
deposits and thus the Bank is subject to certain FDIC regulations. In addition,
the Bank is subject to a variety of local, state and federal laws that affect
its operation. Below are summarized those laws and regulations which a have
material impact on the operations and expenses of the Bank and thus UBS.
Branch Banking
The Pennsylvania Banking Code of 1965, as amended, the ("Banking Code"),
has been amended to harmonize Pennsylvania law with federal law to enable
Pennsylvania banking institutions, such as the Bank, to participate fully in
interstate banking and to remove obstacles to out of state banks engaging in
banking in Pennsylvania.
Federal Reserve Membership Regulations
Since the Bank is a member bank of the Federal Reserve System, 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 violate the law. Moreover, the Board has: (i) empowered 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) authorized the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricted lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricted management personnel of the 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 of the acquisition
or extended the period for disapproval.
The Federal Deposit Insurance Corporation Act
The Federal Deposit Insurance Corporation Act (the "FDIC Act") includes
several provisions that have a direct material impact on the Bank. The most
significant of these provisions are discussed below.
8
To minimize losses to the deposit insurance funds, the FDIC Act has
established a format to monitor FDIC-insured institutions and to enable prompt
corrective action to be taken by the appropriate federal supervisory agency if
an institution begins to experience difficulty. The FDIC 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 dated March 11, 2004, from the
Federal Reserve authorities categorized the Bank as "adequately capitalized"
under the regulatory framework for prompt and corrective action. However, at
December 31, 2003, the Bank fell below the tier one leverage ratio of 7.00%
(6.81% at December 31, 2003) that is mandated in the Written Agreement with its
regulators. See "Regulatory Action" and "Regulatory Matters" below.
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 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.
The Community Reinvestment Act
The Bank is required, by the CRA Act and its implementing regulations, to:
(i) meet the credit needs of the community, including the low and
moderate-income neighborhoods, which it serves. The Bank's CRA Act record is
taken into account by the regulatory authorities in their evaluation of any
application made by the Bank for, among other things, approval of a branch or
other deposit facility, branch office relocation, a merger or an acquisition.
The CRA Act also requires the federal banking agencies to make public disclosure
of their evaluation of a bank's record of meeting the credit needs of its entire
community, including low and moderate-income neighborhoods. After its most
recent CRA Act examination the Bank was given an "outstanding" CRA Act rating."
The Bank Secrecy Act
Under the Bank Secrecy Act ("BSA"), the Bank and other financial
institutions are required to report to the Internal Revenue Service currency
transactions, of more than $10,000 or multiple transactions of which the Bank
has knowledge exceed $10,000 in the aggregate. 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.
Privacy of Consumer Financial Information
The FSA Act also contains provisions designed to protect the privacy of
each consumer's financial information held in a financial institution. The
regulations (the "Regulations") issued pursuant to the FSA Act are designed to
prevent financial institutions, such as the Bank, from disclosing a consumer's
nonpublic personal information to third parties. However, financial institutions
can share a consumer customer's personal information or information about
business with affiliated companies.
The FSA Act Regulations permit financial institutions to disclose nonpublic
personal information to nonaffiliated third parties for marketing purposes but
financial institutions must provide a description of their privacy policies to
the consumers and give consumers an opportunity to opt-out of such disclosure
and prevent disclosure by the financial institution of the consumer's nonpublic
personal information to nonaffiliated third parties. These privacy Regulations
will affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
9
Consumer Protection Rules - Sale of Insurance Products
In addition, as mandated by FSA Act, the bank 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.
The Rules provide that before the sale of insurance or annuity products can
be completed, disclosures must be made 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 any affiliate and that insurance products,
including an annuities, may involve an investment risk, 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 any affiliate or on the consumer's agreement not obtain or prohibit the
consumer from obtaining an insurance product or annuity from an unaffiliated
entity.
Finally the Rules also require formal acknowledgment by 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 Patriot Act
The Patriot Act of 2001 which was enacted in the wake of the September
11, 2001 attacks, include provisions designed to combat international money
laundering and advance the U.S. government's war against terrorism. The Patriot
Act, and the regulations, which implement it, contains many obligations, which
must be satisfied by financial institutions, including the Bank, which involve
additional expenses for the Bank.
The Sarbanes-Oxley Act of 2002
On July 30, 2002 the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley
Act") became law. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, provide enhanced penalties for accounting and auditing
improprieties by publicly traded companies and protect investors by improving
the accuracy and reliability of corporate disclosures made pursuant to the
securities law. The changes required by Sarbanes-Oxley Act and its implementing
regulations are intended to allow shareholders to monitor the performance of
companies and their directors more easily and effectively.
The Sarbanes-Oxley Act generally applies to all domestic companies,
such as UBS, that file periodic reports with the SEC under the Securities
Exchange Act of 1934, as amended. The Sarbanes-Oxley Act includes very
significant disclosure requirements and new corporate governance rules, requires
the SEC, the securities exchanges and the NASDAQ stock market to adapt extensive
additional disclosures, corporate governance provisions and other related rules,
as well as mandating that studies of certain significant issues be made by the
SEC and the US Comptroller General. Given the extensive number of Sarbanes-Oxley
Act rules and regulations to be finalized and implemented, the final scope and
impact of its requirements on UBS and the financial services industry have yet
to be determined.
The Sarbanes-Oxley Act addresses, among other matters, directors' audit
committees; certification of financial statements by the chief executive officer
and chief financial officer; forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension blackout periods;
disclosure of off-balance sheet transactions; a prohibition by companies, other
than federally insured financial institutions, on personal loans to their
directors and officers; expedited filing of reports concerning stock
transactions by directors and executive officers; formation of a public
accounting oversight board; auditor independence; and increased criminal
penalties for violation of certain the securities laws.
10
To implement the requirements of Sarbanes-Oxley Act and regulations,
UBS' management has instituted a series of actions to strengthen and improve
UBS', corporate governance practices. Included in those actions was the
development of a system designed to evaluate and monitor the continued
effectiveness of the design and operation of UBS' internal controls and
procedures for financial reporting.
These series of actions by UBS' management improves UBS' and the Bank's
Audit Committees and Risk Management Committees of the Boards, and UBS' and
Bank's structures and processes which are intended to provide tools to
strengthen internal controls, communications and disclosure of necessary
information to those who must know and use it. UBS' system of internal controls
and procedures, which are in place, are designed to capture information from all
segments of its business. At UBS and the Bank, each key material element of
their operation is subject to oversight to help insure proper internal controls
and procedures, administration, risk management and delivery of critical
information disclosures to appropriate audit and financial officers, executive
management, Board committees and the Boards of directors. UBS' management
believes that the addition of these new controls and processes has brought with
it a broader and more in depth analysis to UBS' systems of controls and
procedures and corporate governance.
The rules and regulations, discussed above, which implement the
Sarbanes-Oxley Act could have a significant economic impact on the compliance
cost of the UBS and all publicly held companies.
New Legislation and Regulations
The Fair and Accurate Credit Reporting Transactions Act
The Fair and Accurate Credit Reporting Transactions Act of 2003 (the "Fact
Act") became law on December 4, 2003. Among other things, the Fact Act
permanently extended the provisions of the Fair Credit Reporting Act (the FCR
Act") that would have expired on January 1, 2004 and had prevented the states
from enforcing credit reporting laws that were more restrictive than the FCR Act
provisions.
Specifically, the Fact Act now permanently prohibits the states from
enforcing laws stricter than the Fact Act regulate that regulate: (1) the
prescreening of consumer reports, (2) the time within which credit bureaus must
respond to consumer disputes, (3) the duties of users of credit bureau
information, (4) the information contained in the credit reports, (5) the duties
of the information providers, and (6) the exchange of credit information between
affiliates.
In addition the Fact Act contains provisions concerning (i) how often
consumers may obtain free copies of their credit reports, (ii) the disclosure of
credit scores used for credit decisions, (iii) a consumers opt-out procedure for
exchange of credit information, that would otherwise be treated as a credit
report, among affiliates, (iv) the duty of lenders to notify consumers that
information contained in their credit reports resulted in their receiving credit
on less than the most favorable terms."
The Fact Act also contains provisions designed to reduce identity theft and
protect the confidentiality of a consumer's private medical information.
Future Legislation and Governmental Policies
From time to time various Federal and state legislation have been proposed
that could result in additional regulation of, and restrictions on, the business
of the Bank. As the enactment of the FSA Act and the Sarbanes-Oxley Act confirm,
from time to time, various proposals are enacted in the United States Congress
as well as Pennsylvania legislature and issued by various bank regulatory
authorities which alter the powers of, and place restrictions on, different
types of bank organizations.
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. Bank management cannot anticipate the
changes in laws and regulations and their impact on the Bank's business,
financial position and reported results of operation.
11
Regulatory Action
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement ("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.
As of December 31, 2003, the Bank's tier one leverage capital ratio fell to
6.81% , below the 7% minimum capital ratio required by the Agreement. However,
at February 29, 2004, the tier one leverage ratio had improved to 7.29% as a
result of a $265,000 recovery on a previously charged-off loan. Management
continues to review and revise its capital plan to address the development of
new equity. In addition, a profit restoration plan was developed and implemented
that includes expense reduction and profit enhancement strategies.
A regulatory examination completed in February 2004 determined that the
Bank was not in compliance certain other elements of the Agreement including the
implementation of a viable earnings/strategic plan and the timely
charge-off/funding of the allowance for loan losses. Management believes that it
has implemented corrective action where necessary including the adoption of an
achievable strategic plan for 2004 and the charge-off of all loans for which the
full collection appears unlikely. As a result, 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.
ITEM 2 -- PROPERTIES
Corporate Headquarters
United Bank of Philadelphia's corporate offices are located at 300 N. Third
Street. The Bank has been at this location for the past four years in the area
of the City known as "Old City." This is an up and coming vibrant area filled
with art galleries, new development of condominiums, small businesses, and
restaurants. The facility consists of 25,000 square feet including executive
offices, operations, finance, human resource, security and loss prevention
functions. The Bank sublets approximately 2,500 square feet to the African
American Interdenominational Ministries. As part of the Bank's profit
restoration plan, this property may be sold in 2004 to generate substantial
gains to re-capitalize the Bank. Management is in the process of evaluating
offers from potential buyers as well as reviewing alternate sites/expenses
related to the relocation of the corporate headquarters.
Mt. Airy Branch
The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy
section of Philadelphia. During 2004, this office will undergo modest cosmetic
improvements. Management believes this branch has not reached its capacity and
looks forward to increased opportunities in all aspects of the Bank's niche
businesses. This facility, comprising a retail banking lobby, teller area,
offices, vault and storage space is currently leased at a monthly rental of
$3,517.
Center City Branch
The Bank operates a branch location at Two Penn Center, 15th Street and JFK
Boulevard, Philadelphia, Pennsylvania. Two Penn Center has been the Bank's main
office since the closure of the 714 Market Street location in January 2002. 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. As part of the Bank's profit restoration plan, upon
expiration of this lease in May 2004, this branch will be closed and
consolidated with other branches in the network to further reduce operating
costs.
12
Frankford Branch and ATM Machine
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In
September 2000, the Bank closed this facility. In June 2002, the Bank sold this
facility. An ATM machine remains operational at this facility. The aggregate
monthly rental for the ATM Machine is $500.
West Girard Branch and ATM Machine
The Bank leased a facility located at 2820 West Girard Avenue. The branch
operations of this facility were discontinued in September 2000. An ATM machine
remained operational at this facility until February 2002 when it was relocated
to 2820 West Girard. The aggregate monthly rental for the ATM Machine at the new
location is $500.
West Philadelphia Branch
In August 2003, the Bank purchased the branch location at 3750 Lancaster
Avenue for $287,500. From July 1996 to the time of purchase, this facility had
been leased. With the purchase of this facility, management looks forward to
capital improvements to be in line with the University City District's
environmental improvements along the Lancaster Avenue corridor. It 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 was
$2,875 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 Progress Plaza branch is a very active branch
with the largest number of customers seeking service on a daily basis. This
branch became the office of choice after the consolidation of the 28th & West
Girard location in 2000. This area of North Philadelphia is an important area
for the Bank and its mission. The facility is comprised of a teller and customer
service area, lobby and vault. The aggregate monthly rental for this facility is
$3,875 per month. This lease expired in October 2003. The Bank had been notified
by the landlord that extensive improvements to the shopping plaza in which this
branch is located were planned for early 2004 but have since been placed on
hold. The Bank is currently leasing this facility on a month-to-month basis
until final renovation plans are determined by the landlord .
ITEM 3 -- LEGAL PROCEEDINGS
No 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.
13
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Common Stock
As of March 15, 2004 there were 3,156 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.
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 UBS 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 UBS 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.
In June 2002, the Bank received $20,400 and issued 1,700 shares as a result
of the purchase of UBS common stock by new 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 June 2003, a shareholder of the Bank returned 33,500 shares of common
stock and 6,308 shares of preferred Series A stock. These shares were returned
for no consideration and were recorded as treasury stock by the Bank. No other
transactions with respect to UBS common stock occurred during 2003.
Dividends
UBS has not, has never declared or paid any cash or stock dividends. The
Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may
be declared and paid only from accumulated net earnings and that, prior to the
declaration of any dividend, if the surplus of a bank is less than the amount of
its capital, the bank shall, until surplus is equal to such amount, transfer to
surplus an amount which is at least ten percent of the net earnings of the bank
for the period since the end of the last fiscal year or any shorter period since
the declaration of a dividend. If the surplus of a bank is less than 50% of the
amount of its capital, no dividend may be declared or paid by the Bank without
the prior approval of the Pennsylvania Department of Banking.
Under the Federal Reserve Act, if a bank has sustained losses equal to or
exceeding its undivided profits then on hand, no dividend shall be paid, and no
dividends can ever be paid in an amount greater than such bank's net profits
less losses and bad debts. Cash dividends must be approved by the Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Bank's net profits for that
year plus its retained net profits from the preceding two years less any
required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the 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.
14
The information below has been derived from UBS' consolidated financial
statements.
ITEM 6 -- SELECTED FINANCIAL DATA
Selected Financial Data
Year ended December 31,
------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999
------------------------------------------------------------
Net interest income.............................. $ 3,290 $ 3,726 $ 4,060 $ 5,415 $ 5,264
Provision for loan losses........................ 565 175 335 565 1,007
Noninterest income............................... 1,891 2,327 2,443 3,197 2,226
Noninterest expense.............................. 5,732 6,095 7,038 8,801 7,714
Net income (loss)................................ (1,115) (217) (870) (755) (1,230)
Net income (loss) per share - basic.............. (1.03) (0.20) (0.79) (0.72) (1.24)
Balance sheet totals:
Total assets................................. $74,717 $86,044 $88,668 $93,533 $137,249
Net loans.................................... 46,690 43,459 42,292 44,743 59,444
Investment securities........................ 15,637 21,518 25,806 35,014 51,433
Deposits..................................... 67,117 76,929 79,423 83,238 124,766
Shareholders' equity......................... 7,235 8,500 8,558 9,350 9,027
Ratios:
Tangible Equity to assets................. 6.85 % 7.45 % 7.67 % 7.74 % 8.07 %
Return on assets.......................... (1.38)% (0.25)% (0.95)% (0.63)% (1.03)%
Return on equity.......................... (13.03)% (2.55)% (9.63)% (8.08)% (12.71)%
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Because UBS 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.
Critical Accounting Policies
Allowance for Credit Losses
The Bank considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The balance in the allowance for loan losses is
determined based on management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the portfolio,
current economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from management's estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets are subject to management's
judgment based upon available evidence that future realization is more likely
than not. For financial reporting purposes, a valuation allowance of 100% of the
deferred tax asset has been recognized to offset the deferred tax assets related
to cumulative temporary differences and tax loss carryforwards. If management
determines that the Bank may be able to realize all or part of the deferred tax
asset in the future, a credit to income tax expense may be required to increase
the recorded value of net deferred tax asset to the expected realizable amount.
15
Background Summary
History
The Bank entered a Written Agreement ("the Agreement") with the Federal
Reserve Bank in 2000 that had many ambitious timelines for the board and
management to meet. This Agreement became a motivator for the new management
team to dismantle a lack luster business model in order to keep the franchise
alive and relevant. This was a model that originally held great promise for it
was established to bring the "unbanked" into the mainstream of financial
services through affordable pricing and sensitive customer service. The
customers came and the numbers grew quickly and the franchise grew through the
acquisition of failed savings and loan branches. However, with this growth came
increased expenses through the assimilation of acquired branch locations,
people, products and the overall conversion expense.
The Bank had quickly strayed from its model of building a
customer-friendly and affordable franchise into a franchise of transforming
several branches of savings and loan customers into the Bank's commercial
platform. In 2000, the Bank was still faced with an enormous array of accounts
that had not yet been streamlined, thus curtailing the sales capacity of the
staff. In addition, the Bank's pricing had not kept pace with the prevailing
rates in the local market. Thus, in early 2000 the Bank's pricing model was
enhanced to be more competitive while still affordable to its clients. This
shift gave the Bank a quick boost in revenue.
A major factor that needed to be addressed by the Bank was its capital
(tier one leverage ratio). With the onset of the Agreement, the Bank's tier one
leverage ratio was slightly under 5%. Aggressive strategies were developed and
implemented by moving more expensive deposit relationships (certificates of
deposit and IRA's) off the Bank's balance sheet. These deposits were sold for a
gain and thus the Bank's total assets were reduced getting the Bank closer to
the 7% capital requirement.
A fundamental problem for the Bank's business model was its expense
profile. Major cuts have been made including consolidating the branch network
(from 8 offices to 4). Even with this reduction in branch offices, the Bank
still carried more branches than its peer group, which was generally two and no
more than three branches. This reduction yielded $600,000 to the overall expense
savings, which is an aggregate of approximately $3 million over the past four
years.
The Bank's reengineering and restructuring has resulted in a more
streamlined organization that provided the proper organizational platform to
become a more strategy-focused institution. Without compromising the segregation
of duties and internal controls, management was able to capitalize on the
strengths of its staff by combining functions while pushing for more enhanced
leadership throughout the organization which is essential to achieve
profitability, the Bank's primary goal.
Management recognized that before it could introduce new strategies for
the Bank's core business, it had to ensure that the organization was running
like a well-oiled machine at every level. By compressing the organization and
putting emphasis on process improvements, management eliminated waste, and
improved on operational efficiencies, which is validated through improved
audits.
To maintain relevance in its marketplace, the Bank must have sound
business strategies that will yield results. The recent past has enabled
management to place more emphasis on strategy, with keen focus on a sound
organization. While there was a conscientious effort to dismantle the original
business model, management recognized the positive aspects of the model -
consistent core (versatile) staffing, low cost of funds, loyal customer base,
and strong net interest margins. These strengths can be built upon as a new,
productive model formulates and moves into action.
As was described earlier, the Bank is much more streamlined and through
effective cost controls, expenses are manageable. The goal is to develop more
earning assets to achieve profitability. Although many changes have been made
through consolidations and compressions, there are still opportunities for the
Bank to operate more efficiently and cost-effectively.
16
The Bank's Goals
Although the Bank's bottom line has not yet achieved a profit, the Bank
is a much stronger institution as a result of the aggressive steps taken to
decrease expenses, compress the organization, and strengthen internal controls.
The ultimate challenge for the institution has been to keep the franchise
vibrant while enhancing the business model. Continuing to surround these new
strategies and opportunities is a regulatory restraint that is unyielding until
the Bank produces a steady stream of earnings and an infusion of equity.
In spite of these challenges, new relationships have been developed
that will have a positive impact on the Bank's performance. It is apparent that
lack of time is an enemy to the profit restoration plan. There is clear evidence
that the cycle is changing with a good pipeline of business and new corporate
relationships that are abounding All solid relationships require time to
cultivate and develop. However, management continues to move with gusto to
enhance current business lines while developing new fee income streams that are
sustainable.
Of course, the Bank's core consumer business is poised for growth
through the financial service centers. With an aggressive marketing plan and
strategic partners and alliances, the following products are projected to yield
profitable returns:
|_| Auto Loan Refinance Program
|_| Home Equity Loans
|_| Personal Loans (Secured and Unsecured)
|_| Overdraft Protection
|_| Residential Mortgages
|_| Student Loans
The Bank will continue to participate in commercial deals with regional
banks to foster fee income in the following areas:
|_| Working Capital Lines of Credit
|_| Term Loans
|_| Demand Loans
|_| Commercial Real Estate (Construction & Permanent Mortgages)
The Bank continues with its niche businesses that are specialized areas
whereby the Bank has a strong position. These businesses are considered to have
a significant profit potential, but are not necessarily basic to a community
bank or its corporate mission. Certain niche products may be appropriately
marketed outside of the geographic area defined in the Bank's mission; however,
the marketing strategies will be consistent with the Bank's objectives:
|_| Church Loans
|_| Priority Loan Program (Auto Refinance Program)
|_| Predatory Loan Program (Home Improvement/Refinance Loan Program)
|_| Small Business Loans (Emerging Markets)
|_| Credit Cards
The key for the Bank in achieving its external goals is to maximize its
strategic partnerships and to supplement its loan originations with additional
loan volume from partners that have a stake in the urban communities. In
addition, other sources for fee income will include the maximum utilization of
the Bank's ATM network in high volume locations (i.e. areas near public
transportation, shopping, and restaurants) that are out of the reach of the
Bank's branches to capitalize on additional fees. Some of the Bank's ATMs have
experienced a drop in volume as competitors placed machines in close proximity
to existing high volume ATMs of the Bank and several of the Bank's high volume
ATM's were replaced with those of competitors that paid significantly higher
transactional fees to site owners. Management continues the process of
identifying potentially high volume locations to place machines.
17
Results of Operations
Summary
The Company recorded a net loss of approximately $1,115,000 for 2003
($1.03 per share) compared to a net loss of $217,000 for 2002 ($0.20 per share)
compared to a net loss of approximately $870,000 ($0.79 per share) for 2001. In
2003, the Bank made provisions to its allowance for loan losses totaling
$565,000 primarily to cover the charge-off of $710,000 for the non-Small
Business Administration guaranteed portion of a loan to one customer totaling
approximately $1.3 million. A reserve of $357,000 had been provided for this
loan in previous years. The balance of this loan has been submitted to the SBA
for collection.
In addition, during 2003, the Bank's average earning assets declined
by $6.7 million resulting in a decrease in net interest income of $436,000. The
decline in earning assets was primarily related the reduction in deposit
balances of two deposit customers. These funds were required for the operating
needs of the customers.
During 2003, the Bank continued the implementation of its profit
restoration plan that resulted in a decline in noninterest expenses of $363,000
compared to 2002. Components of the plan include among other things staff
reductions/consolidations, salary reductions, reduction in branch operating
hours, continued elimination of director fees, and the reduction of other
operating expenses.
In 2002, the Bank was awarded a $198,000 grant from the U.S. Treasury
Department's Bank Enterprise Award (BEA) Fund that is included in other income
on the consolidated statement of operations. These funds are awarded to
financial institutions that demonstrate community development through loan and
deposit activity. The Bank submitted its application to the BEA Fund in February
2004 for its 2003 loan activity. If selected, the Bank may receive a grant in
September 2004.
In addition, revenue enhancement strategies have been employed to
expand opportunities for fee income through the implementation of new products
and services including corporate loan syndications where the Bank serves in the
role of arranger and/or administrative agent. During 2003, the Bank generated
fees totaling $85,000 from this line of business. Further growth in this new
core line of business is projected in 2004.
While expense reductions continue to be achieved, a greaterimpact will be
realized with increased loan originations that build the Bank's loan-to-deposit
ratio. Increased loan volume will result in a higher net interest margin and
therefore increased revenues. Thus, while continuing to control expenses,
management will place more focus on the implementation of business development
strategies to increase the level of loans outstanding to achieve profitability.
18
A more detailed explanation for each component of earnings is included in
the sections below.
Table 1--Average Balances, Rates, and Interest Income and Expense Summary
December 31,
2003 2002 2001
----------------------- ----------------------- ------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate
----------------------- ----------------------- ------------------------
Assets:
Interest-earning assets:
Loans........................... $45,168 $2,913 6.45% $42,839 $3,006 7.02% $45,828 $3,595 7.85%
Investment securities
held-to-maturity 6,479 273 4.21 10,155 626 6.16 14,669 987 6.73
Investment securities
available-for-sale 10,262 553 5.38 13,783 831 6.03 11,758 772 6.57
Federal funds sold.............. 8,498 98 1.15 10,406 169 1.62 7,726 282 3.65
------- ------ ------- ------ ------- ------
Total interest-earning assets 70,407 3,837 5.45 77,183 4,632 6.00 79,981 5,636 7.05
Noninterest-earning assets:
Cash and due from banks......... 4,433 4,542 4,801
Premises and equipment, net..... 2,679 2,613 3,214
Other assets.................... 3,922 2,926 4,028
Less allowance for loan losses.. (713) (674) (576)
------- ------- ------
Total........................ $80,728 $86,590 $91,448
======= ======= =======
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits................. $11,924 $ 83 0.70% $12,882 114 0.89% $13,802 178 1.29%
Savings deposits................ 20,241 89 0.44 21,931 129 0.59 24,480 317 1.29
Time deposits................... 21,565 375 1.74 23,712 662 2.79 24,089 1,081 4.49
Other borrowed funds............ - - - - - - 1 - -
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 53,730 547 1.02 58,525 906 1.55 62,372 1,576 2.53
Noninterest-bearing liabilities:
Demand deposits................. 18,439 19,565 19,612
Other........................... - - 431
Shareholders' equity................ 8,559 8,500 9,033
------- ------- -------
Total........................ $80,728 $91,448
======= ======= =======
Net interest earnings............... 3,290 $ 3,726 $ 4,060
Net yield on interest-earning assets 4.67% 4.83% 5.08%
For purposes of computing the average balance, loans are not reduced for
nonperforming loans.
Net Interest Income
Net interest income is an effective measure of how well management has
balanced the Bank's interest rate-sensitive assets and liabilities. Net interest
income, the difference between (a) interest and fees on interest-earning assets
and (b) interest paid on interest-bearing liabilities, is a significant
component of the Bank's earnings. Changes in net interest income result
primarily from increases or decreases in the average balances of
interest-earning assets, the availability of particular sources of funds and
changes in prevailing interest rates.
Net interest income in 2003 totaled $3.3 million, a decrease of $436,000,
or 11.70%, compared to 2002. Net interest income for 2002 totaled $3.7 million,
a decrease of $334,000 or 8.23%, compared to 2001.
19
2003 compared to 2002 2002 compared to 2001
----------------------------- -----------------------------
Increase (decrease) due to Increase (decrease) due to
----------------------------- -----------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest earned on:
Loans............................................... $ 151 $ (244) $ (93) $(209) $(380) $ (589)
Investment securities held-to-maturity.............. (167) (186) (353) (277) (84) (361)
Investment securities available-for-sale............ (161) (117) (278) 122 (63) 59
Federal funds sold.................................. (22) (49) (71) 44 (157) (113)
----- ----- ----- ----- ----- ------
Total interest-earning assets.................... (199) (596) (795) (320) (684) (1,004)
----- ----- ----- ----- ----- ------
Interest paid on:
Loans............................................... $ (209) $ (380) $(589) $(742) $(317) $(1,059)
Demand deposits..................................... (6) (25) (31) (8) (55) (63)
Savings deposits................................... (7) (33) (40) (16) (172) (188)
Time deposits....................................... (37) (251) (288) (9) (410) (419)
----- ----- ----- ----- ----- ------
Total interest-bearing liabilities............... (50) (309) (359) (33) (637) (670)
----- ----- ----- ----- ----- -------
Net interest income.............................. $ (149) $ (287) $(436) $(287) $ (47) $ (334)
====== ====== ===== ===== ===== =======
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 2003, there was a decrease in net interest income of $149,000 due to
changes in volume and a decrease of $287,000 due to changes in rate. In 2002,
there was a decrease in net interest income of $287,000 due to changes in volume
and a decrease of $47,000 due to changes in rate.
Average earning assets decreased from $77 million in 2002 to $70
million in 2003 and decreased from $80 million in 2000 to $77 million in 2002.
To meet capital requirements mandated in its Written Agreement with regulators
(Refer to "Regulatory Action" above and "Regulatory Matters" below) the Bank
implemented an asset reduction/capital improvement plan in 2000 that included
the reduction of deposits. Beginning in June 2000, the Bank sold higher yielding
certificates of deposit to other financial institutions, encouraged some large
deposit account holders to remove deposits, and consolidated three branches in
its branch network. During the three subsequent years, in effort to manage its
capital adequacy, the Bank has not aggressively sought significant deposit
growth. The Bank's core deposit base has remained relatively stable and
represents 85% of total deposits. Until additional capital is raised, the Bank
will not seek to significantly increase its level of deposits.
The net interest margin of the Bank was 4.67% in 2003, 4.83% in 2002,
and 5.08% in 2001. Management actively manages its exposure to interest rate
changes. While the prime rate decreased more than 450 basis points over the last
three years, the Bank did not experience a similar decline in yield on its
earning assets. This is because only 29.65% of the Bank's loan portfolio
reprices or matures in less than one year. The structure for many of the
commercial loans of the Bank includes a five to seven year fixed rate with a
balloon. This type of structure minimizes the Bank's interest rate risk and
allows for repricing in five to seven years. In addition, except for a recently
purchased portfolio of home equity lines of credit that float with prime, much
of the Bank's consumer and mortgage portfolios have fixed interest rates. 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 2003, the average federal funds yield was 1.15% compared to
1.62% in 2002 and 3.65% in 2001. During 2003, the average investment in federal
funds decreased by $2 million. Alternate investment strategies were implemented
to place liquid funds into loans and longer-term securities including
mortgage-backed (MBS) to minimize the impact of the decline in the rate paid on
Federal Funds Sold.
The yield on the investment portfolio decreased 116 basis points to
4.93% in 2003 compared to 6.09% in 2002 and 6.66% in 2001. Over the last two
years, 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.
20
The cost of interest-bearing liabilities declined to 1.02% in 2003
compared to 1.55% in 2002. Consistent with market conditions during 2003, the
Bank reduced the rates it pays on many of its interest-bearing products. When
setting the pricing for its deposits, the Bank generally uses the median rate
paid by its competitors in the region. 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 2003 was
$565,000 compared to $175,000 in 2002 and $335,000 in 2001. In December 2003,
the Bank charged off $710,000 that represented the non-Small Business
Administration (SBA) guaranteed portion of a loan to one borrower in the
telecommunications industry. A specific reserve of $357,000 had previously been
established to cover potential losses. Severe financial difficulties experienced
by the borrower make the full collection of this loan uncertain. Loans to this
borrower totaled $1.3 million. The Bank has presented this loan to the SBA for
collection of the guaranteed portion of the loans that total $569,000 . Although
the Bank has charged-off a portion of this loan, management will seek to
maximize its recovery through appropriate legal action.
During the current uncertain economic environment, the Bank monitors
its credit quality very closely by working with borrowers in an effort to
identify and control credit risk. Systematic provisions are made to the
allowance to cover potential losses related to the Bank's classified loans.
Management believes the level of the allowance for loan losses is adequate as of
December 31, 2003.
Noninterest Income
Noninterest income decreased $436,000 in 2003 compared to 2002 and
decreased $116,000 in 2002 compared to 2001.
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
$275,000 in 2003 compared to 2002 primarily because of a reduction in activity
fees on deposits and lower surcharge income on the Bank's ATM network. The
Bank's lower deposit levels in 2003 compared to 2002 resulted in less overdraft
fees, activity service charges and low balance fees. In 2003, to avoid the
necessity to escheat the balances of inactive customer accounts (NOTE: The
Commonwealth of Pennsylvania requires that accounts that are inactive for five
years or more be closed and escheated to the state.), the Bank made an extensive
effort to contact customers to re-activate their accounts. This resulted in a
reduction in activity/dormant account service charges.
During 2003, surcharge income on the Bank's ATM network declined by
$121,000, or 14.76%, compared to 2002. Some of the Bank's ATMs have experienced
a drop in volume as competitors placed machines in close proximity to existing
high volume ATMs of the Bank and several of the Bank's high volume ATM's were
replaced with those of competitors that paid significantly higher transactional
fees to site owners. Management continues the process of identifying potentially
high volume locations to place machines.
In September 2002, the Bank received a $198,000 grant from the U.S.
Treasury Department's Bank Enterprise Award (BEA) Fund. The Bank received this
grant as a result of certificates of deposit it placed with other Community
Development Financial Institutions (CDFI) throughout the country. (Note: United
Bank of Philadelphia also has a CDFI designation and periodically receives such
deposits to support its community development mission.) The Bank submitted its
application to the BEA Fund in February 2004 for its 2003 loan activity. If
selected, the Bank may receive a grant in September 2004.
21
During 2003, the Bank further developed a new core line of business--
serving as arranger/agent for loan syndications for major corporations
throughout the country. In 2003, the Bank was selected to syndicate three
significant back-up lines/letters of credit with other minority banks throughout
the country for major corporations for which it received agent fees totaling
$85,000. These fees will be received annually for the administration of the
credit facilities. In 2002, these fees totaled $25,000. Management plans to
continue to develop this core line of business to generate fee income to support
the Bank's profitability goals.
During 2002, the Bank sold its former Frankford branch facility for a
gain of $48,000. In addition, the Bank sold approximately $1.1 million of its
available-for-sale portfolio for a gain of approximately $26,000.
During 2001, the Bank sold its former West Girard branch facility 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.
Noninterest Expense
Noninterest expense decreased $363,000, or 5.96%, in 2003 compared to
2002 and decreased $943,000, or 13.4%, in 2002 compared to 2001.
Salaries and benefits decreased $140,000, or 5.98% in 2003 compared to
a decrease of $320,000, or 12.01%, in 2002. In April 2002, as part of its Profit
Restoration Plan, the Bank made strategic reductions in staff, job
consolidations, and reduced salaries for certain employees to lower the level of
personnel expense. Management continues its review to ensure the Bank is
operating with the most efficient organizational structure.
Occupancy and equipment expense decreased approximately $69,000, or
5.34%, during 2003 compared to a decrease of approximately $316,000, or 19.62%,
during 2002. In August 2003, the Bank purchased its 38th and Lancaster Street
Branch as a measure to reduce its occupancy expense. This branch had been leased
on a "triple net" basis where the Bank bore all expenses related to the
facility. The projected annual savings on this transaction is $20,000. Also, in
conjunction with the expiration of the lease, the Bank's 714 Market Street
branch was closed/consolidated with the Two Penn Center branch office in
February 2002. Further, the Bank's former Frankford branch office was sold on
June 8, 2002 resulting in a reduction in real estate taxes and property
insurance. Finally, many of the fixed assets initially acquired in 1992 when the
Bank opened for business are now fully depreciated (10-year life). This results
in a reduction in monthly depreciation expense.
Data processing expenses are a result of the management decision 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, and student loan portfolios. Data processing expenses
increased by $40,000, or 6.45%, during 2003 compared to a decrease of $168,000
or 20.81%, during 2002. This increase is related to increased service activities
provided by the Bank's new core data processor, FISERV. These services including
statement rendering and research (imaging), were previously performed in-house.
In November 2002, the Bank converted its core data processing to FISERV to
achieve cost savings and create efficiencies to allow for further reductions in
personnel expense. In December 2003, the Bank converted/consolidated its
consumer loan accounting process (previously outsourced to EDS) with its core
vendor, FISERV. This conversion will reduce monthly processing cost by an
estimated $6,000. Savings will begin to be realized in 2004. The Bank continues
to study methods by which it may further reduce its data processing cost.
Marketing and public relations expense increased by $31,000, or 37.32%,
in 2003 compared to a decrease of $27,000, or 24.39% in 2002. In 2003, to
further enhance its image and encourage business development, the Bank began a
re-branding campaign that included, among other things, new brochures and
in-branch signage. Management is firmly committed to enhancing the Bank's
marketing and sales profile through effective communication and leadership. It
knows that to remain competitive the Bank must develop better strategies for
marketing and sales. Management is also committed to making the Bank's marketing
drive the overall business planning process. Niche markets (church lending) have
been identified and the Bank is committed to increasing this niche while adding
others.
22
There are two basic things that need to be done in order to reach the
Bank's goals and objectives-- attract new customers and partners and retain the
existing customers and partners. In order to do this, management must look at a
variety of strategies including the following:
Advertising
|_| Management will seek cost-effective ways to advertise the Bank's
products and services. Community-based newspapers and other forms
of advertising that include the church bulletins in targeted
churches will be utilized.
Public Relations
|_| The Bank will seek innovative ways to get its story out to the
public. It will participate on talk radio programs, and use a
variety of methods such as special events to make the Bank's name
more visible.
Marketing
|_| The Bank will retain professional services to assist management
in creating a "buzz" about the Bank.
Professional services decreased by $63,000, or 22.18%, in 2003 compared
to an increase of $51,000, or 21.92%, in 2002. During 2002, the Bank worked with
outside attorneys to settle two outstanding legal matters. In addition, the
legal review and implementation of the Sarbanes-Oxley Act that was enacted in
2002, resulted in increased legal fees. There were no significant legal matters
during 2003.
Office operations and supplies expense increased by $20,000, or 4.53%,
in 2003 compared to a decrease of $21,000, or 4.54%, in 2002. The increase in
2003 is primarily related to additional security cost. With the new emphasis on
Homeland Security, the Bank heightened its security coverage. The review of more
cost-effective security measures is currently underway. In addition, in
conjunction with the Bank's earnings enhancement / profit restoration plan, all
other operating expenses are tightly controlled.
Federal deposit insurance premiums were $34,000 in 2003, $36,000 in 2002
and $150,000 in 2001. 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 15 basis points for BIF (Bank Insurance Fund)
assessable deposits and SAIF (Savings Insurance Fund) assessable deposits. The
decrease during 2003 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.
23
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 below
indicates how the Bank has managed these elements. Average funding uses
decreased approximately$6.8 million, or 8.78%, in 2003 compared to a decrease of
$2.8 million, or 3.50%, in 2002.
Table 3--Sources and Use of Funds Trends
2003 2002 2001
------------------------------- ------------------------------- ---------
Increase Increase
Average (decrease) Average (decrease) Average
(Dollars in thousands) balance amount Percent balance amount Percent balance
--------- -------- ------- --------- -------- ------- ---------
Funding uses:
Loans ............................. $45,168 $ 2,329 5.44% $42,839 $(2,989) (6.52)% $45,828
Investment securities..............
Held-to-maturity................. 6,479 (3,676) (36.20) 10,155 (4,514) (30.77) 14,669
Available-for-sale............... 10,262 (3,521) (25.55) 13,783 2,025 17.22 11,758
Federal funds sold............... 8,498 (1,908) (18.34) 10,406 2,680 34.69 7,726
------- ------- ------- ------- -------
Total uses................... $70,407 $(6,776) $77,183 $(2,798) $79,981
======= ======= ======= ======= =======
Funding sources:
Demand deposits:
Noninterest-bearing.............. $18,439 $(1,126) (5.76)% $19,565 $ (47) (0.09)% $19,612
Interest-bearing................. 11,924 (958) (7.44) 12,882 (920) (6.67) 13,802
Savings deposits................... 20,241 (1,690) (7.70) 21,931 (2,549) (10.41) 24,480
Time deposits...................... 21,565 (2,147) (9.05) 23,712 (377) (1.57) 24,089
Other borrowed funds............... - - - - (1) (100.00) 1
------- ------- ------- ------- -------
Total sources................ $72,169 $(5,921) $78,090 $(3,894) $81,984
======= ======= ======= ======= =======
*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 $9.1 million, or 26.5% in 2003 compared to an increase of $191,000,
or .56%, in 2002 . The significant decline in the portfolio was caused by the
high level of called agency securities as well as an increase in the prepayment
speed on the Bank's mortgage-backed securities. In addition, excess liquidity
previously held in Federal Funds Sold was re-deployed to higher yielding loans
during 2003.
The Bank's current 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 below, the average duration of the
portfolio is 2.78 years. In the current low interest rate environment, the
duration of the investment portfolio is shortened because of the of callable
government agency securities and the increase in the prepayment speed on the
Bank's mortgage-backed security portfolio. Approximately $4 million in
securities were called during 2003. The average yield of called securities was
6.00%. Calls will likely diminish in 2004 as most of the higher yielding
callable agency securities were called over the last two years. The average
yield on the callable agency portfolio at December 31, 2003 was 4.43% and is
closely aligned with current market pricing.
24
Approximately 70.2% of the portfolio consist 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. Because customers
are more likely to refinance in the current low interest rate environment, the
prepayment speed increased on this component of the portfolio. The constant one
year prepayment rate (CPR) at December 31, 2003 was 42.93 that translates into
42.93% of the mortgage pool repaying on an annual basis. This results in more
cashflow availability to fund loans or to reinvest in the projected increasing
interest rate environment.
The Bank will continue to take steps to control the level of optionality
in the portfolio by identifying replacement loans or securities that
diversify risk and provide some level of monthly cashflow to be reinvested in
the future rising rate environments. The Bank's strategy is to invest funds in
hybrid mortgage-backed securities that are fixed for three to ten years and then
become adjustable with the current market conditions. These securities have
average current yields of at least 4.00% and estimated durations of 5 years with
monthly cashflow.
Table 4--Analysis of Investment Securities
After one but After five but
Within one year within five years within ten years After ten years
--------------- ----------------- ---------------- ---------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- ------
Other government securities...... $ - - % $1,250 3.92% $3,250 4.85% $ - - % $ 4,500
Mutual funds and other........... - - - - - - - - 395
Mortgage-backed securities....... - - - - - - - - 10,611
----- ------ ------ ------ -------
Total securities................. $ - - $1,250 - $3,250 - $ - - $15,506
Average maturity................. 2.78 years
The above table sets forth the maturities of investment securities at December
31, 2003 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security).
Loans
Average loans increased approximately $2.3 million, or 5.44%, in 2003
compared to a decrease of approximately $3 million, or 6.52%, in 2002. The Bank
has developed relationships with other financial institutions in the region with
which it participates in loans as a strategy to stabilize and grow its
commercial loan portfolio. This strategy continues to be utilized while the Bank
enhances it own business development capacity. Approximately $3 million in
commercial loan participations were booked during 2003. Most of these
participations were secured by commercial real estate.
In June 2003, the Bank purchased approximately $4.8 million adjustable
rate residential mortgage loans. This purchase was made to supplement the Bank's
residential loan portfolio that had declined because of high refinancing
activity as a result of the historically low interest rate environment. Also, in
December 2003, the Bank sold approximately $3 million in lower yielding student
loans and purchased approximately $3.7 million in higher yielding variable rate
Home Equity Lines of Credit.
The Bank's loan-to-deposit ratio at December 31, 2003 was 69.6% up from
56.5% at December 31, 2002. The target loan-to-deposit ratio is 75%. This level
would allow the Bank to optimize interest income on earning assets while
maintaining adequate liquidity. The increase in this ratio is the result of an
increase in loans outstanding coupled with a smaller deposit base. Management
will continue to implement loan growth strategies including the purchase of
additional commercial loan participations and the origination of small business
loans and consumer loans including home equity, automobile, student and credit
card loans.
25
As reflected in Table 5 below, during 2003, because of the purchase of
residential mortgage loans, this category increased by $1.5 million to 32% of
total loans.
As reflected in Table 6 below, approximately 40% of the Bank's loan
portfolio have scheduled maturities or reprice in five years or more. This
position is largely a result of the Bank's relatively high level of residential
mortgage loans and the typical five to seven year balloon structure of the
commercial real estate portfolio. While scheduled maturities and repricing
exceed five years, the actual duration of the portfolio may be much shorter
because of the rapid repayment speed of the Bank's residential mortgage loan
portfolio.
Table 5--Loans Outstanding, Net of Unearned Income
December 31,
(Dollars in thousands) 2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Commercial and industrial................... $11,361 $10,855 $11,054 $11,429 $13,664
Commercial real estate...................... 11,862 11,898 5,504 652 1,288
Residential mortgages....................... 15,110 13,560 18,148 22,316 26,237
Consumer loans.............................. 8,695 7,820 8,294 10,908 19,822
------- ------- ------- ------- -------
Total loans............................. $47,028 $44,133 $43,000 $45,305 $61,011
======= ======= ======= ======= =======
Table 6--Loan Maturities and Repricing
Within After one but After
(Dollars in thousands) one year within five years five years Total
------------ ----------------- ---------- -------
Commercial and industrial................... $ 7,742 $ 2,759 $ 649 $11,150
Commercial real estate...................... 757 2,616 8,700 12,073
Residential mortgages....................... 360 7,031 7,719 15,110
Consumer loans.............................. 5,085 1,797 1,813 8,695
------ ------ ------ ------
Total loans........................... 13,944 14,203 18,881 47,028
Loans maturing after one year with:
Fixed interest rates.................... $21,767
Variable interest rates................. 11,317
Nonperforming Loans
Table 7 reflects the Bank's nonperforming and restructured 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.
Table 7--Nonperforming Loans
(Dollars in thousands) 2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Nonaccrual loans............................ $1,588 $ 651 $ 412 $ 453 $2,027
Interest income included in net income
for the year............................ 62 25 25 20 67
Interest income that would have been
recorded under original terms........... 120 49 29 28 113
Loans past due 90 days and still accruing... 560 797 526 34 53
Restructured loans.......................... 569 1,286 182 632 580
26
At December 31, 2003, nonaccrual loans totaled $1,588,000, compared to
$651,000 at December 31, 2002. The increase in nonaccrual loans is primarily in
the commercial loan sector of the loan portfolio. At December 31, 2003, $897,000
of the Bank's nonaccrual loans carried some level of guarantee from the Small
Business Administration ("SBA"). The underlying credit enhancement provided by
the SBA minimizes the risk of loss on these loans. In addition, at December 31,
2003, approximately $415,000 of the total nonaccrual loans were residential
mortgages. The strong loan-to-values associated with these loans reduce the risk
of loss. Historically, the Bank has not experienced losses in its residential
loan portfolio.
The balance of impaired loans was $1,124,000 and $1,951,000 as of
December 31, 2003 and 2002, respectively. The Bank identifies a loan as impaired
when it is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement. The allowance for loan loss
associated with these loans was $75,000 and $402,000 at December 31, 2003 and
2002, respectively. The reduction in the allowance during 2003 resulted from the
charge-off of $710,00 related to the un-guaranteed portion of a $1.3 million
loan to one customer. The balance of this loan, $569,000 (guaranteed by the SBA)
remains in the total of impaired loans. The Bank has submitted this loan for
collection from the SBA.
At December 31, 2003, approximately $897,000 (including the loan referenced
above) of the impaired loans have SBA guarantees. Interest income recognized on
impaired loans during 2003 and 2002 was $64,000 and $104,000, respectively. The
Bank recognizes income on impaired loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Bank. If these factors do not exist, the Bank will
not recognize income on such loans.
From time to time, management will modify or restructure the terms of
certain loans to provide relief to borrowers. Restructured loans are those loans
whose terms have been modified because of deterioration in the financial
condition of a borrower to provide for a reduction of either interest or
principal, regardless of whether such loans are secured or unsecured and
regardless of whether such credits are guaranteed by the government or by
others. As of December 31, 2003, the Bank had approximately $569,000 in
restructured loans.
There is no known information about possible credit problems other than
those classified as nonaccrual or impaired 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, 2003, approximately 20% 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, 2003, none of these
loans were nonperforming.
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 below 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.
27
The allowance for loan losses as a percentage of total loans was 0.72%
at December 31, 2003 compared with 1.53% at December 31, 2002. The decline in
the allowance is a result of the charge-off of $710,000 of the non-SBA
guaranteed portion of loans to one borrower for which full collectibility is
uncertain. (Refer to Provision for Loan Losses above for further discussion on
this loan.)
At December 31, 2003, the Bank's classified loans totaled $1.2 million,
or 2.60%, of total loans. Approximately, $897,000 of these loans have guarantees
of the SBA. In addition, specific reserves of $178,000 have been allocated to
these loans.
Table 8--Allocation of Allowance for Loan Losses
2003 2002 2001 2000 1999
------------------- ------------------- ------------------- ------------------- -------------------
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 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......... $ 267 31.51% $ 565 24.60% $ 576 37.30% $ 383 25.23% $ 263 22.40%
Commercial real
estate............. 1.22 37 26.96 29 1.21 11 1.44 877 2.11
Residential mortgages 35 24.57 45 17.72 30 19.29 102 24.08 144 43.00
Consumer loans........ 37 42.70 28 30.72 73 42.20 66 49.25 283 32.49
Unallocated.... - - - - - - - - 32 -
----- ------ ----- ------ ----- ------ ----- ------ ------ ------
$ 339 100.00% $ 675 100.00% $ 708 100.00% $ 562 100.00% $1,567 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ====== ======
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,
------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Balance at January 1....................... $ 675 $ 708 $ 562 $ 1,567 $ 679
Charge-offs:
Commercial and industrial.............. (799) - (61) (321) (25)
Commercial real estate................. - (100) - (803) -
Residential mortgages.................. - - - - (47)
Consumer loans......................... (174) (261) (261) (597) (315)
------ ------ ------ ------- ------
(973) (361) (322) (1,721) (387)
------ ------ ------ ------- ------
Recoveries--commercial loans................ - 27 - - -
Recoveries--consumer loans.................. 72 126 133 151 268
------ ------ ------- ------- ------
72 153 133 151 268
Net charge-offs............................ (901) (208) (189) (1,570) (119)
Provisions charged to operations........... 565 175 335 565 1,007
------ ------ ------- ------- ------
Balance at December 31..................... $ 339 $ 675 $ 708 $ 562 $1,567
====== ====== ====== ======= ======
Ratio of net charge-offs to average loans
outstanding............................. 1.41% 0.49% 0.41% 2.84% 0.17%
28
The amount charged to operations and the related balance in the
allowance for loan losses are based upon the periodic evaluations of the loan
portfolio by management. These evaluations consider several factors, including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan loss experience, and management's estimate of future potential
losses.
Deposits
Average deposits declined approximately $6 million, or 7.70%, in 2003
compared to a decline of $3.9 million, or 4.71%, in 2002. This decline is
primarily because of a reduction in deposits totaling $3 million of a large
quasi-local government entity. Whether these deposits will be replaced remains
uncertain. In addition, to avoid the necessity to escheat the balances of
inactive customer accounts, the Bank made an extensive effort to contact
customers to re-activate their accounts. This resulted in the closure of some
accounts. At December 31, 2003, the Bank had $258,000 in dormant accounts that
were escheated to the Commonwealth of Pennsylvania.
Significant deposit growth is not projected because of the Bank's
mandatory capital requirements outlined in its Written Agreement with its
regulators (See "Regulatory Action" above and "Regulatory Matters" below).
Therefore, aggressive deposit retention or new business development strategies
have not been implemented.
Table 10--Average Deposits by Class and Rate
2003 2002 2001
------------------ ------------------ ------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------------------ ------------------ ------------------
Noninterest-bearing demand deposits $18,439 - % $19,565 - % $19,612 - %
Interest-bearing demand deposits 11,924 0.70 12,882 0.89 13,802 1.29
Savings deposits 20,241 0.44 21,931 0.59 24,480 1.30
Time deposits 21,565 1.74 23,712 2.79 24,089 4.49
Other Borrowed Funds
The Bank did not borrow funds during 2003. 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. The Bank's liquidity has been 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, 2003,
management believes the Bank's liquidity is satisfactory and in compliance with
FRB regulations.
29
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 $9.2 million
in loans are scheduled to mature within one year.
The Bank's overall liquidity has been enhanced by a significant level
of core deposits which management has determined are less sensitive to interest
rate movements. The Bank has avoided reliance on large-denomination time
deposits as well as brokered deposits. Table 11 provides a breakdown of the
maturity of 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............................................ $ 200
Over 3 through 6 months..................................... 10,150
Over 6 months through 1 year................................ -
Over 1 through five years................................... -
Over five years............................................. -
-------
Total....................................................... $10,350
=======
The following table sets forth contractual obligation and other commitments
representing required and potential cash outflows as of December 31, 2003:
Table 12--Contractual Obligations and Other Commitments
Less than One to Four to After
(Dollars in thousands) Total one year three years five years five years
-------- ---------- ----------- ---------- ---------
Certificates of Deposit........ $ 21,264 $ 19,623 $ 1,495 $ 146 $ -
Rental Obligations............. 393 134 210 49 -
Letters of Credit.............. 57 57 - - -
-------- -------- ------- ----- -----
Total loans........... $ 21,714 $ 19,814 $ 1,705 $ 195 $ -
======== ======== ======= ===== =====
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 13 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 2003, 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, 2003, a
liability sensitive position is maintained on a cumulative basis through one
year of 6.83%. This level is within the Bank's policy guidelines of +/-15% on a
cumulative one-year basis. The current gap position is due to the short maturity
of the Bank's certificates of deposit. As indicated in Table 11 above, all of
the Bank's certificates of $100,000 or more mature in six months or less and
approximately $9.5 million of certificates of deposit less than $100,000 mature
in less than one year. Interest rate risk is minimized by the Bank's high level
of core deposits that have been placed in shorter repricing intervals.
Generally, because of the Bank's negative gap position in shorter time frames,
the Bank can anticipate that increases in market rates will have a negative
impact on the net interest income, while decreases will have the opposite
effect.
30
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.
Table 13--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2003
--------------------------------------------------------------------------
Over
Over 1 year Over
3 months 3 through through 3 through Over
(Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative
-------- --------- --------- --------- --------- ----------
Interest-sensitive assets:
Interest-bearing deposits with banks. $ $ 874 $ $ $ $ 874
Investment securities................ 7,739 531 409 1,094 5,470 15,243
Federal funds sold................... 1,500 1,500
Loans................................ 15,465 5,555 8,647 5,316 12,045 47,028
------- ------- ------- ------- ------- -------
Total interest-sensitive assets.... 24,704 6,960 9,056 6,410 17,515 $64,645
------- ------- ------- ------- ------- -------
Cumulative totals.................. 24,704 31,664 40,720 47,130 64,645
------- ------- ------- ------- -------
Interest rate sensitivity gaps as of December 31, 2003
--------------------------------------------------------------------------
Over
Over 1 year Over
3 months 3 through through 3 through Over
(Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative
-------- --------- --------- --------- --------- ----------
Interest-sensitive liabilities:
Interest checking accounts........... 5,737 4,694 10,431
Savings accounts..................... 10,620 8,689 19,309
Certificates $100,000 or more....... 638 8,735 1,384 157 10,914
Certificates of less than $100,000 .. 200 10,150 10,350
------- ------- ------- ------- ------- -------
Total interest-sensitive liabilities $17,195 $ 18,885 $14,767 $ 157 $ - $51,004
======= ======== ======= ======= ======= =======
Cumulative totals.................. $17,195 $ 36,080 $50,847 $51,004 $51,004
======= ======== ======= ======= =======
Interest sensitivity gap................. $ 7,509 $(11,925) $(5,711) $ 6,253 $17,515
======= ======== ======= ======= =======
Cumulative gap........................... 7,509 (4,416) (10,127) (3,874) 13,641
Cumulative gap/total earning assets...... 11.62% 6.83% 15.67% 5.99% 21.10%
Interest-sensitive assets to
interest-sensitive liabilities........ 1.44 0.37 0.61 40.83 -
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, 2003 are as follows:
31
Net interest Percent of
Changes in rate income change
--------------- ----------- ----------
(Dollars in thousands)
+200 basis points $ 3,235 1.02%
+100 basis points 3,217 0.56
Flat rate 3,199 -
-100 basis points 3,184 (0.47)
-200 basis points 3,153 (1.44)
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, 2003 are as follows:
MV of equity as a %
Changes in rate MV equity of MV of assets
--------------- ----------- -------------------
(Dollars in thousands)
+200 basis points $ 4,230 5.96%
+100 basis points 5,496 7.55
Flat rate 6,839 9.17
-100 basis points 8,237 10.77
-200 basis points 9,613 12.27
The market value of equity may be impacted by the composition of the
Bank's assets and liabilities. A shift in the level of variable versus fixed
rate assets will create swings in the market value of equity. The Bank's market
value of equity declines in a rising rate environment because of the high level
of fixed rate loans and investments it has in its portfolio that do not follow
market rate changes.
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, 2003. 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.
32
Capital Resources
Total shareholders' equity declined $1.3 million in 2003 compared to
2002. The decrease in 2003 is a result of the net loss of $1.1 million that
resulted in an increase in the accumulated deficit and a decrease in other
comprehensive income for the fair market value of available for sale investment
securities, net of taxes.
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 (excluding net unrealized holding gains
on available for sale securities), 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 14, 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. UBS and the Bank do not
anticipate paying dividends in the near future.
Table 14--Capital Ratios
(Dollars in thousands) 2003 2002 2001
------- ------- -------
Total Capital................................. $ 7,235 $ 8,263 $ 8,459
Less: Intangible Assets/Net unrealized gains
(losses) on available for sale ............. (1,826) (1,937) (2,119)
------- ------- -------
Tier I capital................................ 5,409 6,326 6,340
Tier II capital............................... 339 528 510
------- ------- -------
Total qualifying capital...................... $ 5,748 $ 6,854 $ 6,850
======= ======= =======
Risk-adjusted total assets
(including off-balance-sheet exposures).... $44,971 $42,104 $41,624
======= ======= =======
Tier I risk-based capital ratio................ 12.03% 15.02% 15.23%
Total (Tier I and II) risk-based capital ratio. 12.78% 16.28% 16.46%
Tier I leverage ratio.......................... 7.19% 7.46% 7.12%
The Board and management are aggressively exploring strategies for the
infusion of new capital into the organization. The most productive way to
increase capital is through sustained earnings. The Bank's plan projects this
occurrence in 2004; however, external equity is essential for management to hit
the ground running.
A new Capital Planning Committee has been appointed that consists of
two outside directors and the Bank's two executive officers. This Committee is
charged to leave no stone unturned by exploring all available options for
capital infusion as soon as possible. The Board and management have a heightened
sensitivity to this area and recognize that the lack of proper capital levels
coupled with the deterioration in earnings can threaten the viability of the
institution. Aggressive steps are being taken to address both matters. One
significant step being taken includes the possible sale of the Corporate
Headquarters Building, 300 N. Third Street. It is anticipated that the Bank
could realize a gain of at least $1.5MM on this transaction.
33
Regulatory Matters
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. 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.
As of December 31, 2003, the Bank's tier one leverage capital ratio
fell to 6.81% , below the 7% minimum capital ratio required by the Agreement.
However, at February 29, 2004, the tier one leverage ratio had improved to 7.29%
as a result of a $265,000 recovery on a previously charged-off loan. Management
continues to review and revise its capital plan to address the development of
new equity. In addition, a profit restoration plan was developed and implemented
that includes expense reduction and profit enhancement strategies.
A regulatory examination completed in February 2004 determined that the
Bank was not in compliance certain other elements of the Agreement including the
implementation of a viable earnings/strategic plan and the timely
charge-off/funding of the allowance for loan losses. Management believes that it
has implemented corrective action where necessary including the adoption of an
achievable strategic plan for 2004 and the charge-off of all loans for which the
full collection appears unlikely. As a result, 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. See also "Regulatory Action" above.
Recent Accounting Pronouncements
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. The adoption of SFAS No. 149 did not have a
material impact on the Company's financial position or results of operations.
The FASB issued SFAS No.150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, on May 15,
2003. SFAS No. 150 changes the classification in the statement of financial
position of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies for financial
instruments entered into or modified after May 31, 2003 and is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
has not entered into any financial instruments that would qualify under SFAS No.
150. As a result, management does not anticipate the adoption of SFAS No. 150 to
have a material impact on the Company's financial position or results of
operations.
The Company adopted FASB Interpretation ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others on January 1, 2003. FIN 45 requires a
guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company has financial
and performance letters of credit. Financial letters of credit require the
Company to make payment if the customer's financial condition deteriorates, as
defined in the agreements. Performance letters of credit require the Company to
make payments if the customer fails to perform certain non-financial contractual
obligation. The Company previously did not record a liability when guaranteeing
obligations unless it became probable that the Company would have to perform
under the guarantee. FIN 45 applies prospectively to guarantees the Company
issues or modifies subsequent to December 31, 2002. At December 31, 2003, the
Company was contingently liable on financial and performance standby letters of
34
credit totaling $57,000, none of which were originated this year. The Company's
commitments under standby letters of credit expire at various dates through
June 2004. The Bank generally holds collateral and/or obtains personal
guarantees supporting these commitments. In the event that the Bank is
required to fulfill its contingent liability under a standby letter of credit,
it could liquidate the collateral held, if any, and enforce the personal
guarantee(s) held, if any, to recover all or a portion of the amount paid under
the letter of credit.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations. The Company
does not anticipate FIN 46 to have a material impact on its consolidated
financial position and results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or
Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with
the evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
The Bank adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and Its Application to Certain Investments, as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115, Accounting
for Certain Investments in Debt and Equity Securities, that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in the
financial statements.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial information required by this Item 7A is incorporated by
reference to page 29 of this Report, the Liquidity and Interest Rate
Sensitivity Management provisions and pages 29 to 32 of this Report,
including Table 13 the Interest Sensitivity Analysis Table of this Report.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements on pages 49 to 75 hereof.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
35
ITEM 9A--CONTROLS AND PROCEDURES
UBS carried out an evaluation, under the supervision and with the
participation of the UBS' management, including the UBS' Chief Executive
Officer, Evelyn F. Smalls and Chief Financial Officer, Brenda Hudson-Nelson, of
the effectiveness of the design and operation of the UBS' disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act), as of December 31, 2003 pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that UBS' disclosure controls and procedures as of December
31, 2003, are effective and timely in alerting them to material information
relating to UBS (including its consolidated subsidiaries) required to be
included in UBS' periodic SEC filings.
As of the date of this Report, there have not been any significant
changes in UBS' internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the UBS' internal control
over financial reporting.
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
- ---- --- --------------------------- --------------- -----------
Bernard E. Anderson 65 Professor of Management/Economist 2002 2006
At the Wharton School,
Philadelphia, PA
David R. Bright 64 Retired, Executive Vice President
Meridian Bancorp 2002 2006
Philadelphia, PA
Joseph T. Drennan 60 Mulberry Consulting Group 2004 2008
Ardmore, PA
L. Armstead Edwards 62 Co-Chairman, 1993 2004
United Bancshares, Inc.
Owner and President,
P.A.Z., Inc.
Philadelphia, Pennsylvania
Marionette Y. Wilson(Frazier) 59 Retired as Partner, 1996 2004
John Frazier, Inc.
Philadelphia, Pennsylvania
Angela M. Huggins 62 Treasurer, 1993 2005
United Bancshares, Inc.
Retired as Vice President
Real Estate Affairs
RMS Technologies, Inc.
36
Principal occupation and Year first Term
Name Age other directorships became director will expire
- ---- --- --------------------------- --------------- -----------
William B. Moore 61 Secretary,
United Bancshares, Inc.
Pastor, Tenth Memorial 1993 2007
Baptist Church
Philadelphia, Pennsylvania
Steven L. Sanders 43 President and Co-CEO,
MDL Capital 2002 2006
Evelyn F. Smalls 58 President and CEO of Registrant 2000 2007
and United Bank of Philadelphia
Ernest L. Wright 75 Founder, President and 1993 2004
CEO of Ernest L. Wright
Construction Company
Philadelphia, Pennsylvania
(b) Executive Officers of Registrant and Bank
Name Age Office
- ---- --- ------
Evelyn F. Smalls 58 President and Chief Executive Officer
Brenda M. Hudson-Nelson 42 Executive Vice President/Chief Financial Officer
L. Armstead Edwards 62 Chairman, Board of Directors
Steven L. Sanders 43 Vice Chairman, Board of Directors
William B. Moore 61 Secretary
Marionette Y. Frazier 59 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 UBS or 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.
37
INFORMATION ABOUT THE AUDIT COMMITTEES
Information about the Company's Audit/Compliance Committee
The Audit/Compliance Committee, comprised of Angela M. Huggins (Chairman),
L. Armstead Edwards, James F. Bodine(retired-July 2003), Marionette Y. Frazier
and William B. Moore, meets when necessary at the call of the Chairman. The
Committee meets with the internal auditor to review audit programs and the
results of audits of specific areas, as well as other regulatory compliance
issues. In addition, the Committee meets with UBS' independent certified public
accountants to review the results of the annual audit and other related matters.
Each member of the Committee is "independent" as defined in the applicable
listing standards of the National Association of Securities Dealers ("NASDAQ").
The Committee held ten (10 ) meetings during 2003.
In 2003, the Compliance Committee was combined with the Audit Committee and
is comprised of the same members. On a quarterly basis compliance matters are
addressed to included the review of regulatory compliance matters, the Bank's
compliance programs and the Community reinvestment Act( CRA) activities.
Information about the Bank's Audit/Compliance Committee and Financial Expert
The Audit/Compliance Committee comprised of Angela M. Huggins (Chairman),
L. Armstead Edwards, James F. Bodine (retired-July 2003), William B. Moore,
William C. Green and Marionette Y. Frazier meets at least quarterly. The
Audit/Compliance Committee meets with the internal auditor to review audit
programs and the results of audits of specific areas, as well as other
regulatory compliance issues. In addition, the Audit/Compliance Committee meets
with the Bank's independent certified public accountants to review the results
of the annual audit and other related matters, with the internal auditor to
review audit programs and the results of audits of specific areas, as well as
other regulatory compliance issues. In addition, the Audit/Compliance Committee
meets with the independent certified public accountants to review the results of
the annual audit and other related matters. Each member of the Audit/Compliance
Committee is "independent" as defined in the applicable listing standards of the
National Association of Securities Dealers. The Committee held ten (10 )
meetings during 2003.
In 2003, the Compliance Committee was combined with the Audit Committee and
is comprised of the same members. On a quarterly basis compliance matters are
addressed to included the review of regulatory compliance matters, the Bank's
compliance programs and the Community reinvestment Act( CRA) activities.
Each member of the Audit/Compliance Committee is independent and
financially literate as defined by NASDAQ. The Board of Directors of the Company
and the Bank have determined that Joseph T. Drennan(1) is the "Financial
Expert," as defined in the SEC's regulations.
- -------------
(1) Please note that Mr. Drennan was elected to the Company's and the Bank's
Boards of Directors and the Audit Committees of those Board's of Directors
on March 24, 2004, and assumed his duties as a Financial Expert of the
Audit Committees the Company's and the Bank's Boards of Directors Boards on
that date.
38
INFORMATION ABOUT THE COMMITTEES OF THE BOARDS
Under UBS' By-Laws, persons elected by the Board of Directors to fill a
vacancy on the Board serve as directors for the balance of the term of the
director who that person succeeds.
The Board of Directors of UBS and the Board of Directors of the Bank meet
when necessary. The Executive Committee of the Bank meets in those months when
the Board of Directors does not meet. The Executive Committees of UBS and the
Bank act in the stead of the Boards of Directors of UBS and the Bank,
respectively, and exercise the authority and powers of the Boards of Directors
at intervals between meetings of the Boards of Directors insofar as may be
permitted by law and have responsibility for the nomination of new directors.
The Asset and Liability Management Committee of the Bank's Board meets for the
purpose of managing and monitoring the Bank's exposure to interest rate risks,
market risk and liquidity risk. UBS' and the Bank's Audit/Compliance Committees
interface with UBS' and the Bank's independent certified public accountants to
review the results of the annual audit as well as regulatory compliance matters.
UBS' Board of Directors does not have a Compensation Committee of the Board
since it has no employees, and does not have a Nominating Committee.
General Information About UBS' and Bank's Boards of Directors
UBS' Board of Directors meets when necessary and during 2003 held eleven
(11) meetings, including UBS' organization meeting. The Bank's Board of
Directors was scheduled to meet at least monthly, except in August.
Information About the Committees of UBS' Board of Directors
The Committees of UBS' Board of Directors are the Executive Committee
and the Audit/Compliance Committee. The Executive Committee comprised of
L. Armstead Edwards (Chairman), Steven L. Sanders(Vice Chairman), Angela M.
Huggins, William B. Moore, Evelyn F. Smalls, and Marionette Y. Frazier meets,
when necessary, at the call of the Chairman, and to exercise the authority and
powers of UBS' Board of Directors at intervals between meetings of the Board of
Directors insofar as may be permitted by law. The Executive Committee held
eleven (11) meetings during 2003.
For information about UBS' and the Bank's Audit/Compliance Committees
refer to "INFORMATION ABOUT THE AUDIT COMMITTEES" above.
Meetings of UBS' Board and its Committees
The total number of meetings of UBS' Board of Directors, which were held in
2003 was eleven (11). All of the incumbent directors, who were directors during
2003 (i) attended at least seventy-five percent (75%) of the total number of
meetings.
Information About Committees of the Bank's Board of Directors
The Committees of the Bank's Board of Directors are the Executive,
Asset and Liability Management, the Audit/Compliance Committees, and the
Loan Committee.
The Executive Committee comprised of L. Armstead Edwards (Chairman), Steven
L. Sanders (Vice Chairman), Angela M. Huggins, William B. Moore, Evelyn F.
Smalls and Marionette Y. Frazier meets, when necessary, at the call of the
Chairman, to discuss and approve certain human resource matters including
compensation, to ratify and approve certain of the Bank's loans and to exercise
the authority and powers of the Bank's Board of Directors at intervals between
meetings of the Board of Directors insofar as may be permitted by law. The
Executive Committee held eleven (11) meetings during 2003. The Bank's Board of
Directors does not have a Compensation Committee but the Executive Committee
performs that function.
The Asset and Liability Management Committee comprised Bernard E. Anderson
(Chairman), L. Armstead Edwards, Angela M. Huggins, Evelyn F. Smalls and Ernest
L. Wright meets quarterly to review and manage the Bank's exposure to interest
rate risk, market risk and liquidity risk. During 2003, the Asset and Liability
Management Committee held four (4) meetings.
The Loan Committee, comprised of David R. Bright (Chairman) L. Armstead
Edwards, Ernest L. Wright, and Evelyn F. Smalls meets when necessary to review
and approve loans that are $200,000 and over and to discuss other related loan
matters. The Committee held 9 (nine) meetings during 2003.
For information about UBS' and the Bank's Audit/Compliance Committees
refer to "INFORMATION ABOUT THE AUDIT COMMITTEES" above.
39
Meetings of UBS' and the Bank's Board and its Committees
The total number of meetings of the Bank's Board of Directors that were
held in 2003 was eleven (11). All incumbent directors (i) attended at least
seventy-five percent (75%) of the total number of meetings of the Board of
Directors.
BOARDS OF DIRECTORS COMPENSATION
Directors Fees
The normal non-officer director fee paid by the Bank is Three Hundred
Fifty Dollars ($350) for attending each Board meeting and One Hundred
Seventy-five Dollars ($175) per quarter for attending the Board of Directors'
Committee meetings. Directors' fees are not paid to officer directors for
attending Bank Board of Directors or Committee meetings. UBS does not pay any
fees to any directors for attending UBS' Board of Directors or Committee
meetings. Effective April 1, 2002, the Board of Directors elected to waive all
fees for an indefinite period of time.
UBS'S AND BANK'S EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
current executive officers of UBS and Bank as of March 15, 2004:
UBS Stock
Name, Principal Occupation and Age as of Beneficially
Business Experience For Past 5 Years March 15, 2004 Office with the UBS and/or Bank Owned
------------------------------------- -------------- ------------------------------- ------------
Evelyn F. Smalls(1)(2) 58 President and Chief Executive Officer and 450
Director of UBS and Bank
Brenda M. Hudson-Nelson (3) 42 Executive Vice President and 50
Chief Financial Officer of UBS and Bank
- ------------------
Footnote Information Concerning Executive Officers
(1) Ms. Smalls was elected as a director and was appointed as President and
Chief Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior
Vice President of Human Resources and Compliance from October 1993 to May
2000.
(2) The President and Chief Executive Officer, currently Evelyn F. Smalls, acts
as Trustee of certain voting trust agreements (the "Voting Trusts")
pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of
UBS.
(3) Ms. Hudson-Nelson was appointed Senior Vice President and Chief Financial
Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President
and Controller from January 1992 to May 2000. In May 2002, Ms.
Hudson-Nelson was promoted to Executive Vice President and Chief Financial
Officer.
The Board of Directors of the Company and the Bank has determined that all
of its members are independent and meet the independence requirements of THE
NASDAQ Stock Market ("NASDAQ") except Evelyn F. Smalls. Because Ms. Smalls is
the President and Chief Executive Officer of the Company and the Bank she is not
independent as defined by NASDAQ.
CODE OF ETHICS
The Company and the Bank has adopted a Code of Business Conduct and Ethics
(the "Code") that applies to all its directors, employees and officers and
including its Chief Executive Officer and its Chief Financial Officer.
The Code meets the requirement of a code of ethics for the Company's and the
Bank's principal executive officer and principal financial officer or persons
performing similar functions under Item 406 of the SEC's Regulation S-K.
Any amendments to the Code, or any waivers of the Code for directors or
executive officers will be disclosed promptly on a Form 8-K filed with the SEC
or by any other means approved by the SEC.
The Company will provice, without charge, a copy of its Code of Business
Conduct and Ethics to any person who requests a copy of the Code. A copy of the
Code may be requested by writing to the President of the Company at
United Bank of Philadelphia at 300 North Third Street, Philadelphia, PA
19106-1101
40
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that UBS' directors and executive officers file reports of their holdings of
UBS' Common Stock with the Securities and Exchange Commission (the
"Commission"). Based on UBS' records and other information available to UBS
believes that the Commission's Section 16(a) reporting requirements applicable
to UBS' directors and executive officers were complied with for UBS' fiscal year
ended December 31, 2003. There were no reportable transactions during this
period."
ITEM 11 -- EXECUTIVE COMPENSATION
The following information relates to all plan and non-plan compensation
awarded to, earned by, or paid to (i) Evelyn F. Smalls, the President and Chief
Executive Officer of the Bank , and (ii) Brenda M. Hudson-Nelson, Executive Vice
President and Chief Financial Officer of the Bank, the only persons who were
serving as executive officers of the Bank at December 31, 2003 (Ms. Smalls and
Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the
"Named Executive Officers").
(1) UBS' executives are not compensated for their services to UBS rather,
because the Bank is the principal subsidiary of UBS, they are compensated
as officers of the Bank.
Summary Compensation Table
The disclosure regarding the compensation of the Bank's executives includes
the following table that sets forth the compensation paid to the Named Executive
Officers during the last three fiscal years.
Annual Compensation(1)
----------------------
Stock All Other
Name and Principal Position During 2002 Year Salary Bonus Options Compensation(2)
- --------------------------------------- ---- ------ ------- ------- ---------------
($) (#) ($)
Evelyn F. Smalls 2003 $139,050 -- -- --
President and Chief Executive Officer 2002 $148,009 -- -- --
of UBS and the Bank 2001 $141,000 -- -- --
Brenda M. Hudson-Nelson 2003 $ 97,850 -- -- --
Executive Vice President and Chief Financial 2002 $102,112 -- -- --
Officer of UBS and the Bank 2001 $100,900 -- -- --
- ------------------
(1) Amounts are not included in the Bonus, Stock Option and All Other
Compensation columns of the table because no compensation of this nature
was paid by UBS or the Bank and the restricted stock awards and long term
incentive payouts columns are not included in the Compensation Table since
these benefits are not made available by UBS or the Bank.
(2) The Commission's compensation disclosure rules require the use, where
applicable, of a series of tables to describe various types of compensation
paid to the specified executive officers. The use of a specific table or
column in a table is not required by the Commission's rules if no
compensation was paid or awarded to the named executives. Only the tables
or columns required to be used by the Commission's rules, because of the
compensation paid to the specified executive officers, have been used in
this Proxy Statement.
41
Executive Employment Agreements
The Bank entered into an Employment Agreement with Evelyn F. Smalls dated
June 12, 2000 to serve as the Bank's President and Chief Executive Officer. The
initial term of the Employment Agreement is two (2) years, unless extended or
terminated. In June 2002, the Employment Agreement was extended for two (2)
years. The Employment Agreement provides for an annual base salary of $135,000
that may be increased, but not decreased. Under her Employment Agreement, Ms.
Smalls has an opportunity to receive an annual initial cash bonus (the "Initial
Cash Bonus") of 12% of her annual base salary and an annual additional cash
bonus (the "Additional Cash Bonus") of 12% of her annual base salary in calendar
years 2002 and 2003, based on performance targets specified in the Employment
Agreement which are based on the annual earnings of the Bank.
The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson
dated June 12, 2000 to serve as the Bank's Senior Vice President and Chief
Financial Officer. The initial term of the Employment Agreement is two (2)
years, unless extended or terminated. In June 2002, the Employment Agreement was
extended for two (2) years. The Employment Agreement provides for an annual base
salary of $95,000 that may be increased, but not decreased. Under her Employment
Agreement, Ms. Hudson-Nelson has an opportunity to receive an annual initial
cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary and an
annual additional cash bonus (the "Additional Cash Bonus") of 12% of her annual
base salary in calendar years 2000 and 2001, based on performance targets
specified in the Employment Agreement which are based on the annual earnings of
the Bank.
Equity Compensation Plan Information
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.
Equity Compensation Plan Table
- --------------------------------------------------------------------------------------------------
(a) (b) (c)
- --------------------------------------------------------------------------------------------------
Plan Category Number of Securities Weighted average Number of securities
to be issued upon exercise price remaining available for
exercise of of outstanding future issuance under equity
outstanding options, options, warrants, compensation plans
warrants and rights and rights (excluding securities
reflected in column (a))
- --------------------------------------------------------------------------------------------------
Equity compensation plans 29,694 $8.54 70,306
approved by security holders
- --------------------------------------------------------------------------------------------------
Equity compensation plans not - - -
approved by security holders
- --------------------------------------------------------------------------------------------------
Total 29,694 $8.54 70,306
==================================================================================================
42
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to UBS, as of
March 15, 2004 (1), with respect to the only persons to UBS' knowledge, who may
be beneficial owners of more than 5% of UBS' Common Stock.
Percentage of
Amount and Nature of Outstanding
Beneficial Ownership Corporation
Name and Address of Corporation Common Stock
of Beneficial Owner Common Stock Owned
- -------------------------------------------------------------------------------
Philadelphia Municipal 71,667 8.67%
Retirement System
2000 Two Penn Center
Philadelphia, Pennsylvania 19102
Wachovia Corporation(2) 50,000 6.05%
1 Wachovia Center
Charlotte, NC 28288
- ------------------
(1) As of March 15, 2004, there were 826,922 shares of UBS' voting Common Stock
outstanding. (2) Wachovia Corporation owns 241,666 shares of UBS Common Stock of
which 50,000 are voting shares.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the UBS and Bank and the
entities 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 2003. 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 transactions and loan commitments did not involve more than
normal risk of collectively or present other unfavorable features.
ITEM 14 -- Principal Accountanting Fees and Services
The following table presents the fees for each of the last two fiscal years
for the principal accounts of UBS by category:
2003 2002
--------- --------
Audit Fees............................ $ 83,500 $ 73,500
Audit-related fees.................... 15,750 13,500
Tax fees.............................. 7,000 4,500
All other fees........................ - -
-------- --------
Total fees......................... $106,250 $ 91,500
======== ========
The Audit Committee pre-approves all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for
UBS by its independent auditor, subject to the minimus exceptions for non-audit
services described in Section 10A (I) (1) (B) of the Exchange Act which are
approved by the Committee prior to the completion of the audit. The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting.
43
PART IV
ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report of United
Bancshares, Inc.:
(a) 1. Financial Reports of United Bancshares, Inc. Page
-------------------------------------------- ----
Report of Independent Certified Public Accountants, March 15, 2004...51
Consolidated Balance Sheets at December 31, 2003 and 2002............52
Consolidated Statements of Operations for the three years ended
December 31, 2003.................................................53
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 2003..............................54
Consolidated Statements of Cash Flows for the three years ended
December 31, 2003................................................55
Notes to Consolidated Financial Statements...........................56
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.
4. The following Exhibits are filed herewith or incorporated by reference
as a part of this Annual Report:
Exhibit Number Item
-------------- ----
(3(i)) Articles of Incorporation
(Incorporated by reference to Registrant's 1998 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).
(10) Material Contracts
a) Lease for branch office located at Two Penn Center
(Incorporated by reference to Registrant's 2002 Form 10K)
b) Lease for branch office located at 1620 Wadsworth Avenue
(Incorporated by reference to Registrant's 2002 Form 10K)
c) Lease for branch office located at 3750 Lancaster Avenue
(Incorporated by reference to Registrant's 2002 Form 10K)
d) Lease for branch office located at 1015 North Broad Street
(Incorporated by reference to Registrant's 2002 Form 10K)
e) Evelyn F. Smalls' Employment Agreement (Incorporated by
reference to Registrant's 2002 Form 10K)
f) Brenda Hudson-Nelson's Employment Agreement (Incorporated by
reference to Registrant's 2002 Form 10K)
44
g) Brokerage Services Agreement (Dual Employee Program) by and
between UVEST Financial Services Group, Inc. and the United
Bank of Philadelphia, dated July 17, 2002 (Incorporated by
reference to Registrant's 2002 Form 10K).
h) Long Term Incentive Compensation Plan (Incorporated by
reference to Registrant's 1992 Form 10)
(11) Statement of Computation of Earnings Per Share.
Included at Footnote 16 of the Financial Statements hereof.
(12) Statement of Computation of Ratios. Included at Footnote 14
of the Financial Statements hereof.
c) Not applicable.
(13) Annual Report to Security Holders
(14) Code of Ethics
(21) Subsidiaries of Registrant
Name State of Incorporation
---- ----------------------
United Bank of Philadelphia Pennsylvania
(31) Certification of Annual Report
(31.1) Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sabanes-Oxley Act of 2002.
(31.2) Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32) Certification Pursuant to issue of Section 1350
(A) Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Chief Executive Officer.
(B) Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Chief Financial Officer.
(99) Additional Exhibits
(A) Exhibit 99 Registrants Proxy Statement for its Annual
Shareholders Meeting held on July 25, 2003 is attached
hereto as Exhibit 99(A).
b) No reports on Form 8-K have been filed during the last quarter
covered by this report.
45
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.
/s/ Evelyn F. Smalls
-------------------------------------------
Evelyn F. Smalls, President & CEO, Director
Date: March 30, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Corporation and
in the capacities and on the date indicated.
DATE
----
/s/ Evelyn F. Smalls March 30, 2004
- -------------------------------------------
Evelyn F. Smalls, President & CEO, Director
/s/ Brenda M. Hudson-Nelson March 30, 2004
- ------------------------------------------
Brenda M. Hudson-Nelson, EVP, CFO
/s/ L. Armstead Edwards March 30, 2004
- ------------------------------------------
L. Armstead Edwards, Chairman, Director
/s/ Steven L. Sanders March 30, 2004
- ------------------------------------------
Steven L. Sanders, Vice Chairman, Director
/s/ Marionette Y. Wilson(Frazier) March 30, 2004
- ------------------------------------------
Marionette Y. Wilson(Frazier), Assistant Secretary, Director
/s/ Angela M. Huggins March 30, 2004
- ------------------------------------------
Angela M. Huggins, Treasurer, Director
/s/ William B. Moore March 30, 2004
- ------------------------------------------
William B. Moore, Secretary, Director
/s/ Bernard E. Anderson March 30, 2004
- ------------------------------------------
Bernard E. Anderson, Director
/s/ David R. Bright March 30, 2004
- ------------------------------------------
David R. Bright, Director
/s/ Joseph T. Drennan March 30, 2004
- ------------------------------------------
Joseph T. Drennan, Director
/s/ Ernest L. Wright March 30, 2004
- ------------------------------------------
Ernest L. Wright, Director
46
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, 2003 and 2002, 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,
2003. 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.
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, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Bank
will continue as a going concern. As discussed in Note 2 to the financial
statements the Bank entered into a written agreement (Agreement) with its
primary regulators dated February 23, 2000. As of December 31, 2003 the Bank was
not in compliance with certain requirements of the Agreement. Not meeting these
requirements, losses incurred in the current year and the results of a recent
regulatory examination, could expose the Bank to possible further regulatory
actions. As more fully discussed in Note 2, these matters raise substantial
doubt about the Bank's ability to continue as a going concern. The ability of
the Bank to continue as a going concern is dependent on many factors, including
achieving the required capital levels, earnings and fully complying with the
Agreement. Management's plans with respect to these matters are also described
in Note 2. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
February 27, 2004
49
United Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 2003 2002
------------ ------------
Cash and due from banks...................................................... $ 4,318,584 $ 4,541,667
Interest-bearing deposits with banks......................................... 874,362 865,421
Federal funds sold........................................................... 1,500,000 10,122,000
----------- -----------
Cash and cash equivalents.......................................... 6,692,946 15,529,088
Investment securities:
Available-for-sale, at fair market value................................. 8,933,216 14,334,360
Held-to-maturity, at amortized cost (fair market value of $6,772,762
and $7,442,870 in 2003 and 2002, respectively)........................ 6,703,476 7,183,403
Loans, net of unearned discount of $43,181 and $87,124 in 2003
and 2002, respectively................................................... 47,028,397 44,133,190
Less allowance for loan losses............................................... (338,574) (674,550)
----------- -----------
Net loans.......................................................... 46,689,823 43,458,640
Bank premises and equipment, net............................................. 2,772,153 2,612,608
Accrued interest receivable.................................................. 380,583 555,006
Intangible assets............................................................ 1,738,436 1,937,221
Prepaid expenses and other assets............................................ 806,734 433,793
----------- -----------
Total assets....................................................... $74,717,367 $86,044,119
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Demand deposits, noninterest-bearing..................................... $16,112,983 $20,453,455
Demand deposits, interest-bearing........................................ 10,430,349 12,837,464
Savings deposits......................................................... 19,309,126 20,494,208
Time deposits, under $100,000............................................ 10,349,830 10,882,722
Time deposits, $100,000 and over......................................... 10,914,535 12,261,455
----------- -----------
67,116,823 76,929,304
Accrued interest payable................................................. 77,775 156,219
Accrued expenses and other liabilities................................... 287,876 458,455
----------- -----------
Total liabilities.................................................. 67,482,474 77,543,978
----------- -----------
Shareholders' equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares
authorized; 136,842 issued and outstanding in 2003 and 2002,
respectively; 6,308 shares held in treasury at
December 31, 2003..................................................... 1,368 1,432
Common stock, $0.01 par value; 2,000,000 shares authorized;
1,068,588 and 1,102,088 issued and outstanding in 2003 and
2002, respectively.................................................... 10,686 11,021
Treasury Stock, 33,500 shares at December 31, 2003....................... - -
Additional paid-in-capital............................................... 14,749,852 14,749,453
Accumulated deficit...................................................... (7,614,662) (6,499,197)
Accumulated other comprehensive income .................................. 87,649 237,432
----------- -----------
Total shareholders' equity......................................... 7,234,893 8,500,141
----------- -----------
Total liabilities and shareholders' equity......................... $74,717,367 $86,044,119
=========== ===========
The accompanying notes are an integral part of these statements.
50
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2003 2002 2001
------------ ------------ ------------
Interest income:
Interest and fees on loans................................. $ 2,912,547 $ 3,006,367 $ 3,595,477
Interest on investment securities.......................... 805,655 1,446,072 1,750,549
Interest on federal funds sold............................. 97,599 169,071 281,540
Interest on time deposits with other banks................. 21,002 10,921 8,701
----------- ---------- ----------
Total interest income................................ 3,836,803 4,632,431 5,636,267
----------- ---------- ----------
Interest expense:
Interest on time deposits.................................. 374,297 662,493 1,080,533
Interest on demand deposits................................ 83,267 114,399 178,059
Interest on savings deposits............................... 89,020 129,227 317,489
Interest on borrowed funds................................. - - 75
----------- ---------- ----------
Total interest expense............................... 546,584 906,119 1,576,156
----------- ---------- ----------
Net interest income.................................. 3,290,219 3,726,312 4,060,111
Provision for loan losses...................................... 565,000 175,000 335,000
----------- ---------- ----------
Net interest income after provision for loan losses.. 2,725,219 3,551,312 3,725,111
----------- ---------- ----------
Noninterest income:
Gain on sale of loans...................................... 57,061 - -
Customer service fees...................................... 1,653,008 1,927,838 2,202,489
Gain on sale of investments................................ - 25,789 78,456
Gain on sale of fixed assets............................... - 48,054 84,090
Other income............................................... 180,837 325,337 77,998
----------- ---------- ----------
Total noninterest income............................. 1,890,906 2,327,018 2,443,033
----------- ---------- ----------
Noninterest expense:
Salaries, wages and employee benefits...................... 2,204,583 2,344,746 2,664,660
Occupancy and equipment.................................... 1,224,719 1,293,803 1,609,539
Office operations and supplies............................. 453,202 433,557 454,200
Marketing and public relations............................. 113,552 82,692 109,367
Professional services...................................... 220,765 283,671 232,662
Data processing............................................ 661,939 639,854 808,012
Deposit insurance assessments.............................. 33,501 36,258 150,042
Other operating............................................ 819,329 980,332 1,009,165
----------- ---------- ----------
Total noninterest expense............................ 5,731,590 6,094,913 7,037,647
----------- ---------- ----------
Net loss............................................. $(1,115,465) $ (216,583) $ (869,503)
=========== ========== ==========
Net loss per common share--basic and diluted.................... $ (1.03) $ (0.20) $ (0.79)
=========== ========== ==========
Weighted average number of common shares....................... 1,084,694 1,101,247 1,099,520
=========== ========== ==========
The accompanying notes are an integral part of these statements.
51
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
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
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
income (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
Proceeds from issuance
of common stock....... 1,700 17 20,383 20,400
Unrealized gains on
investment securities. 138,613 138,613 138,613
Net loss.............. (216,583) (216,583) (216,583)
------- ------ --------- ------- ----------- ----------- ---------- ---------- -----------
Total comprehensive
income (loss)............ $ (77,970)
===========
Balance at
December 31, 2002........ 143,150 1,432 1,102,088 11,021 14,749,453 (6,499,197) 237,432 8,500,141
Treasury Stock......... (6,408) (64) (33,500) (335) 399 -
Unrealized losses on
investment securities. (149,783) (149,783) (149,783)
Net loss.............. (1,115,465) (1,115,465) (1,115,465)
------- ------ --------- ------- ----------- ----------- ---------- ---------- -----------
Total comprehensive
income (loss)............ $(1,265,248)
===========
Balance at
December 31, 2003........ 36,842 $1,368 1,068,588 $10,686 $14,749,852 $(7,614,662) $ 87,649 $7,234,893
======= ====== ========= ======= =========== ============ ========== ==========
The accompanying notes are an integral part of this statement.
52
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss................................................... $ (1,115,485) $ (216,583) $ (869,503)
Adjustments to reconcile net loss to net cash
(used in)provided by operating activities:
Provision for loan losses............................... 565,000 175,000 335,000
Gain on sale of loans................................... (57,061) -
Gain on sale of fixed assets............................ - (48,054) (84,090)
(Gain)loss on sale of investment securities............. - (25,789) (78,456)
Depreciation and amortization........................... 688,247 673,361 772,742
(Increase) decrease in accrued interest receivable and
other assets......................................... (198,518) 702,412 (35,995)
Decrease in accrued interest payable and
other liabilities.................................... (249,024) (73,151) (257,763)
------------ ------------ ------------
Net cash (used in) provided by operating activities.. (366,820) 1,187,196 (218,065)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale investments................. (3,200,237) (10,792,294) (14,859,870)
Purchase of held-to-maturity investments................... (3,510,938) (2,247,096) (3,145,558)
Proceeds from maturity and principal reductions of
available-for-sale investments.......................... 8,414,626 9,936,685 8,674,401
Proceeds from maturity and principal reductions of
held-to-maturity investments............................ 3,967,709 6,568,297 15,315,665
Proceeds from sale of investments available-for-sale....... - 1,091,063 3,487,208
Proceeds from sale of student loans........................ 3,054,429 - -
Purchase of loans from other financial institutions........ (9,325,656) - -
Net (increase)decrease in loans............................ 2,532,105 (1,341,919) 2,116,573
Purchase of premises and equipment......................... (588,878) (182,004) (78,265)
------------ ------------ ------------
Net cash used in investing activities................ 1,343,161 3,032,732 11,510,154
------------ ------------ ------------
Cash flows from financing activities:
Net decrease in deposits................................... (9,812,482) (2,493,218) (3,815,587)
Net proceeds from issuance of common stock................. - 20,400 11,596
------------ ------------ ------------
Net cash used in financing activities................ (9,812,482) (2,472,818) (3,803,991)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents. (8,836,142) 1,747,110 7,488,098
------------ ------------ ------------
Cash and cash equivalents at beginning of year................. 15,529,088 13,781,978 6,293,880
------------ ------------ ------------
Cash and cash equivalents at end of year....................... $ 6,692,946 $ 15,529,088 $ 13,781,978
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................... $ 468,141 $ 1,013,450 $ 1,542,963
============ ============ ============
The accompanying notes are an integral part of these statements.
53
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002, and 2001
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.
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.
Securities Held-to-Maturity
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.
Securities Available-for-Sale
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.
Derivative Note for Investment Securities
The Bank adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended, as of
January 1, 2001. The statement requires the Company to recognize all
derivative instruments at fair value as either assets or liabilities.
Financial derivatives are reported at fair value in other assets or other
liabilities. The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and qualifies as part
of a hedging relationship. The Bank does not have any derivative
instruments at December 31, 2003, 2002 or 2001.
The Bank adopted EITF 03-1, The Meaning of Other than Temporary Impairment
and Its Application to Certain Investments, as of December 31, 2003. EITF
03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115,
Accounting for Certain Investments in Debt and Equity Securities, that are
impaired at the balance sheet date, but an other-than-temporary impairment
has not been recognized. The disclosures under EITF 03-1 are required for
financial statements for years ending after December 15, 2003 and are
included in these financial statements.
(Continued)
54
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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.
The Company adopted FASB Interpretation ("FIN") 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees
of Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value
of the obligation undertaken in issuing the guarantee. The Company has
financial and performance letters of credit. Financial letters of credit
require the Company to make payment if the customer's financial condition
deteriorates, as defined in the agreements. Performance letters of credit
require the Company to make payments if the customer fails to perform
certain non-financial contractual obligation. The Company previously did
not record a liability when guaranteeing obligations unless it became
probable that the Company would have to perform under the guarantee. FIN 45
applies prospectively to guarantees the Company issues or modifies
subsequent to December 31, 2002. At December 31, 2003, the Company was
contingently liable on financial and performance standby letters of credit
totaling $57,000, none of which were originated this year. The Company's
commitments under standby letters of credit expire at various dates through
June 2004. The Bank generally holds collateral and/or obtains personal
guarantees supporting these commitments. In the event that the Bank is
required to fulfill its contingent liability under a standby letter of
credit, it could liquidate the collateral held, if any, and enforce the
personal guarantee(s) held, if any, to recover all or a portion of the
amount paid under the letter of credit.
Loans Held-for-Sale
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the
evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all
cash flows expected at acquisition over the investor's initial investment
in the loan as interest income on a level-yield basis over the life of the
loan as the accretable yield. The loan's contractual required payments
receivable in excess of the amount of its cash flows excepted at
acquisition (nonaccretable difference) should not be recognized as an
adjustment to yield, a loss accrual or a valuation allowance for credit
risk. SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 31, 2004. Early adoption is permitted. Management is
currently evaluating the provisions of SOP 03-3.
The Bank accounts for its transfers and servicing financial assets in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises
the standards for accounting for transfers of financial assets and
collateral. Transfers of financial assets, for which the Bank has
surrendered control, are accounted for as sales to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. Retained interests in a sale of financial assets are
measured at the date of transfer by allocating the previous carrying amount
between the assets transferred and based on their relative estimated fair
values. The fair values of retained servicing rights and any other retained
interests are determined based on the present value of expected future cash
flows associated with those interests and by reference to market prices for
similar assets.
Loans held-for-sale are carried at the aggregate of lower of cost or market
value. The Bank had no loans held for sale as of December 31, 2003.
(Continued)
55
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
Allowance for Loan Losses
The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures." Under SFAS No. 114, 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 that 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.
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.
On January 1, 2002, the Company adopted 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. The adoption of this statement did not have an impact
o n the financial condition or results of operations of the Company.
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.
(Continued)
56
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings (Loss) Per Share
The Company follows the provisions of SFAS No. 128, which eliminates primary
and fully diluted earnings per share (EPS) and requires presentation of
basic and diluted EPS in conjunction with the disclosure of the methodology
used in computing such EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted EPS takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock.
Stock-based Compensation
The Bank accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service period,
which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar
equity instruments under Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees. Entities that continue to account
for stock options using APB Opinion 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied.
At December 31, 2003, the Company had one stock-based employee compensation
plan, which is more fully described in note 12. The Bank account for this
plan under the recognition and measurement principles of APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based employee compensation costs are not reflected in net income, as
all options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings (loss)
per share if the Bank had applied the fair value recognition provisions of
SFAS No. 123, to stock-based employee compensation (in thousands, except per
share amounts).
Year ended December 31,
-----------------------
(In thousands) 2003 2002
--------- ---------
Net loss
As reported.................................. $(1,115) $ (217)
Less: Stock-based compensation costs
determined under fair value-based
Method for all awards............... - -
Pro forma.................................... $(1,115) $ (217)
Basic and Diluted loss per share
As reported.................................. $ (1.03) $ (0.20)
Pro forma.................................... $ (1.03) $ (0.20)
(Continued)
57
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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.
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 held-for-sale: Fair values are estimated using quoted rates based upon
secondary market sources for similar loans.
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.
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.
(Continued)
58
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
Intangible Assets
On September 24, 1999, the Bank acquired four branches from First Union
Corporation with deposits totaling $31.5 million. As a result of the
acquisition, the Bank recorded a core deposit intangible of 2,449,488. The
core deposit intangible is being amortized over 14 years. Amortization
totaled $178,078, $178,078 and $178,078 for the year ended December 31,
2003, 2002, and 2001, respectively. The Bank tested the core deposit
intangible for impairment. No impairment has been recognized.
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions," and
requires that those transactions be accounted for in accordance with SFAS
No. 141, "Business Combinations and SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 147 also requires that the acquisition of a
less-than-whole financial institution, such as a branch, be accounted for as
a business combination if the transferred assets and activities constitute a
business. In addition, SFAS No. 147 amends SFAS 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets," to include within its scope
long-term customer relationship intangible assets of financial institutions
such as depositor-relationship intangible assets.
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.
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.
(Continued)
59
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Segments
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.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2003 presentation.
Comprehensive Income
The Bank follows SFAS No. 130, which establishes new standards for reporting
comprehensive income that includes net income as well as certain other items
that result in a change to equity during the period. These financial
statements have been reclassified to reflect the provisions of SFAS No. 130.
The income tax effects allocated to comprehensive income (loss) are as
follows:
(Continued)
60
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2003
------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized losses on securities
Unrealized holding losses arising during period.... $ (223,555) $ 73,772 $(149,783)
Less: reclassification adjustment for gains
realized in net income.......................... - - -
---------- ---------- ---------
Other comprehensive income(loss), net................. $ (223,555) $ 73,772 $(149,783)
========== ========== =========
December 31, 2002
------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized gains on securities
Unrealized holding losses arising during period $ 232,674 $ (76,782) $ 155,892
Less: reclassification adjustment for gains
realized in net income 25,789 (8,510) 17,279
---------- --------- ---------
Other comprehensive income, net $ 206,885 $ (68,272) $ 138,613
========== ========== =========
December 31, 2001
------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized gains on securities
Unrealized holding gains arising during period $ 177,126 $ (58,451) $ 118,675
Less: reclassification adjustment for gains
realized in net income 78,456 (25,890) 52,566
---------- ---------- ---------
Other comprehensive income, net $ 98,670 $ (32,561) $ 66,109
========== ========== =========
New Accounting Pronouncements
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns,
or both. FIN 46 also requires disclosures about variable interest entities that
a company is not required to consolidate, but it which it has a significant
variable interest. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to existing entities in the first fiscal year or interim
period beginning after June 15, 2003. The Company is in the process of
determining what impact, if any, the adoption of the provisions of FIN 46 will
have upon its financial condition or results of operations.
(Continued)
61
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
2. REGULATORY AGREEMENT
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 Agreement required 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. Failure to comply could result in
additional regulatory supervision and/or actions.
As of December 31, 2003, the Bank's tier one leverage capital ratio fell to
6.81%, below the 7% minimum capital ratio required by the Agreement.
However, at February 29, 2004, the tier one leverage ratio had improved to
7.29% as a result of a $265,000 recovery on a previously charged-off loan.
Management continues to review and revise its capital plan to address the
development of new equity. One significant element of the Bank's capital
plan is the sale of bank-owned property including the corporate offices
located at 300 North 3rd Street and its remote parking lot. Both are
scheduled to be sold in 2004 to generate substantial gains to re-capitalize
the Bank.
A regulatory examination completed in February 2004 determined that the
Bank was not in compliance certain other elements of the Agreement
including the implementation of a viable earnings/strategic plan and the
timely charge-off/funding of the allowance for loan losses. Management
believes that it has implemented corrective action where necessary
including the adoption of an achievable strategic plan for 2004 and the
charge-off of all loans for which the full collection appears unlikely.
A profit restoration plan was developed and continues to be implemented. It
includes among other things staff reductions/consolidations, salary
reductions, reduction in branch operating hours, continued elimination of
director fees, and the reduction of other operating expenses. Also, as part
of the Bank's profit restoration plan, upon expiration of the lease in May
2004, the Bank's Two Penn Center branch will be closed and consolidated
with other branches in the network to further reduce occupancy, personnel,
and other operating cost.
While expense reductions continue to be achieved, a greater impact will be
realized with increased loan originations that build the Bank's
loan-to-deposit ratio. Increased loan volume will result in a higher net
interest margin and therefore increased revenues. Thus, while continuing to
control expenses, management will place more focus on the implementation of
business development strategies to increase the level of loans outstanding
to achieve profitability.
Also, revenue enhancement strategies have been employed to expand
opportunities for fee income through the implementation of new products and
services including corporate loan syndications where the Bank serves in the
role of arranger and/or administrative agent.
As a result of all of the actions referred to above, Management strongly
believes that the Bank is now "substantially" in compliance with the
Agreement's terms and conditions and will continue to operate as an
independent financial institution for the foreseeable future.
(Continued)
62
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
3. 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, 2002.
4. INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and estimated
market value of the available-for-sale and held-to-maturity investment
securities by major security type at December 31, 2003 and 2002 are as
follows:
2003
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- -----------
Available-for-sale:
U.S. Government agency securities...... $ 2,250,000 $ 5,705 $ $ 2,255,705
Mortgage-backed securities............. 6,157,392 130,575 (5,459) 6,282,508
----------- ---------- -------- -----------
Total debt securities.................. 8,407,392 136,280 (5,459) 8,538,213
Investments in mutual funds............ 107,653 107,653
Other investments...................... 287,350 287,350
----------- --------- -------- -----------
$ 8,802,395 $ 136,280 $ (5,459) $ 8,933,216
=========== ========= ======== ===========
Held-to-maturity:
U.S. Government agency securities...... $ 2,250,000 $ 7,907 $(24,845) $ 2,233,062
Mortgage-backed securities............. 4,453,476 93,147 (6,923) 4,539,700
----------- ---------- -------- -----------
$ 6,703,476 $ 101,054 $(31,768) $ 6,772,762
=========== ========= ======== ===========
(Continued)
63
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
4. INVESTMENTS - Continued
2002
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- -----------
Available-for-sale:
Other Government securities............ $ 4,299,596 $ 62,189 $ $ 4,361,785
Mortgage-backed securities............. 9,286,548 292,187 9,578,735
----------- ---------- -------- -----------
Total debt securities.................. 13,586,144 354,376 13,940,520
Investments in mutual funds............ 106,490 106,490
Other investments...................... 287,350 287,350
----------- ---------- -------- -----------
$13,979,984 $ 354,376 $ - $14,334,360
=========== ========== ======== ============
Held-to-maturity:
Other Government securities............ $ 500,000 $ 8,985 $ $ 508,985
Mortgage-backed securities............. 6,683,403 250,482 6,933,885
----------- ---------- -------- -----------
$ 7,183,403 $ 259,467 $ - $ 7,442,870
=========== ========== ======== ===========
The table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been in a continuous
unrealized loss position at December 31, 2003 (in thousands):
Less than 12 months 12 months or longer Total
Number ---------------------- ----------------------- ---------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
Securities securities value losses value losses value losses
------------------- ------------ -------- ----------- -------- ---------- ------ ----------
U.S. Government
agency securities 3 $1,475 $25 $ - $ - $1,475 $25
Mortgage-backed
securities 7 2,445 12 - - 2,445 12
--- ------ --- --- ---- ------ ---
Total temporarily
impaired investment
securities 10 $3,920 $37 $ - $ - $3,920 $37
=== ====== === === ==== ====== ===
(Continued)
64
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
4. INVESTMENTS - Continued
Management has considered factors regarding other than temporarily impaired
securities and determined that there are no securities that are impaired as
of December 31, 2003.
Maturities of investment securities classified as available-for-sale and
held-to-maturity at December 31, 2003 were as follows. Expected maturities
may differ from contractual maturities.
Amortized Market
cost value
----------- -----------
Available-for-sale:
Due after one month through three years................................ $ - $ -
Due after three year through five years................................ 1,250,000 1,250,000
Due after five years through fifteen years............................. 1,000,000 1,005,705
Mortgage-backed securities............................................. 6,157,392 6,282,508
----------- ----------
Total debt securities.................................................. 8,407,392 8,538,213
Investments in mutual funds............................................ 107,653 107,653
Other investments...................................................... 287,350 287,350
----------- ----------
$ 8,802,395 $ 8,933,216
=========== ===========
Held-to-maturity:
Due in one month through three years................................... $ $
Due after three years through five years...............................
Due after five years through fifteen years............................. 2,250,000 2,233,062
Mortgage-backed securities............................................. 4,453,476 4,539,700
----------- -----------
$ 6,703,476 $ 6,772,762
=========== ===========
(Continued)
65
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
4. INVESTMENTS - Continued
The Bank recorded a gain of $25,789 on the sale of investments during the
year ended December 31, 2002. The Bank recorded a gain of $78,456 on the
sale of investments during the year ended December 31, 2001.
As of December 31, 2003 and 2002, investment securities with a book value of
$7,451,203 and $7,250,989, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the net loans is as follows:
Assets 2003 2002
------------ ------------
Commercial and industrial................................................. $ 11,361,087 $ 10,854,697
Commercial real estate.................................................... 11,862,638 11,897,622
Residential mortgages..................................................... 15,109,802 13,560,602
Consumer loans............................................................ 8,694,870 7,820,269
------------ -----------
Total loans............................................................ 47,028,397 44,133,190
Less allowance for loan losses............................................ (338,574) (674,550)
------------ ------------
Net loans.............................................................. $ 46,689,823 $ 43,458,640
============ ============
As of December 31, 2003 and 2002, the Bank had loans to certain officers and
directors and their affiliated interests in aggregate dollar amounts of
$808,000 and $839,000, respectively. During 2003 and 2002, there were no new
loans to related parties and repayments amounted to $65,000 and $249,000,
respectively.
The balance of impaired loans was $1,124,000 and $1,951,000 as of December
31, 2003 and 2002, respectively. The Bank identifies a loan as impaired when
it is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement. The impaired loan balance
included $1,124,000 and $651,000 of non-accrual loans at December 31, 2003
and 2002, respectively. The allowance for loan loss associated with the
$1,124,000 of impaired loans was $75,000 at December 31, 2003. A portion of
impaired loans, $897,000, is guaranteed by the SBA. Interest income
recognized on impaired loans during 2003 and 2002 was $67,000 and $104,000,
respectively. The Bank recognizes income on impaired loans under the cash
basis when the loans are both current and the collateral on the loan is
sufficient to cover the outstanding obligation to the Bank. If these factors
do not exist, the Bank will not recognize income on such loans.
At December 31, 2003 and 2002, unamortized deferred fees and costs totaled
$107,676 and $108,670, respectively.
(Continued)
66
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
5. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued
Changes in the allowance for possible loan losses are as follows:
2003 2002 2001
---------- ---------- ----------
Balance, beginning of year.............................. $ 674,550 $ 708,156 $ 562,174
Provision............................................... 565,000 175,000 335,000
Charge-offs............................................. (972,938) (361,656) (321,681)
Recoveries.............................................. 71,962 153,050 132,663
---------- ---------- ----------
Balance, end of year.................................... $ 338,574 $ 674,550 $ 708,156
========== ========== ==========
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, 2003, approximately 20% of the Bank's
commercial loan portfolio was concentrated in loans made to religious
organizations.
6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
Estimated
useful life 2003 2002
----------- ----------- -----------
Buildings and leasehold improvements.................... 10-15 years $ 3,181,656 $ 2,870,558
Furniture and equipment................................. 3-7 years 1,542,140 1,411,250
----------- -----------
4,723,796 4,281,808
Less accumulated depreciation........................... (1,951,643) (1,669,200)
----------- -----------
$ 2,772,153 $ 2,612,608
=========== ===========
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, 2003, 2002, and 2001 was $329,878, $364,469 and
$465,825.
Future minimum lease payments under operating leases are as follows:
Operating
Year ending December 31, leases
------------------------ --------
2004.................................................$ 134,110
2005................................................. 69,841
2006................................................. 71,184
2007................................................. 69,255
Thereafter........................................... 48,929
----------
Total minimum lease payments.........................$ 393,319
==========
(Continued)
67
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
7. DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits
(certificates of deposit) are as follows (dollars in thousands):
2004.................................................$ 19,623
2005................................................. 732
2006................................................. 752
2007................................................. 11
Thereafter........................................... 146
----------
$ 21,264
8. BORROWINGS
As of December 31, 2003, 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, 2003, the Bank had no borrowings outstanding.
9. CAPITAL STOCK
In June 2003, a shareholder of the Bank returned 33,500 shares of common
stock and 6,308 shares of preferred Series A stock. These shares were
returned for no consideration and were recorded as treasury stock by the
Bank.
In June 2002, the Bank received $20,400 and issued 1,700 shares 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.
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.
10. INCOME TAXES
At December 31, 2003, the Bank has net operating loss carryforwards of
approximately $6,228,000 for income tax purposes that begin to expire in
2008 through 2020.
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 $2,352,209 and
$1,783,520 as of December 31, 2003 and 2002, 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:
(Continued)
68
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
10. INCOME TAXES - Continued
2003 2002
----------- -----------
Deferred tax assets:
Provision for loan losses.............................................. $ (31,349) $ 105,778
Unrealized (gains) losses on investment securities..................... (43,172) (116,944)
Depreciation........................................................... 369,277 308,844
Net operating loss carryforwards....................................... 2,135,303 1,592,020
Other.................................................................. 77,850) (106,178)
Valuation allowance for deferred tax assets............................ (2,352,209) (1,783,520)
----------- -----------
Net deferred tax assets............................................ $ - $ -
=========== ===========
2003 2002 2001
------------ ----------- -----------
Effective rate reconciliation:
Tax at statutory rate................................ $ (379,258) $ (73,638) $ (295,631)
Nondeductible expenses............................... 4,325 3,152 2,416
Increase in valuation allowance...................... 494,737 70,486 174,938
Other................................................ (119,804) - 118,277
----------- ----------- -----------
Total tax expense $ - $ - $ -
=========== =========== ===========
11. 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.
Summaries of the Bank's financial instrument commitments are as follows:
2003 2002
----------- -----------
Commitments to extend credit.............. $ 8,152,988 $ 7,939,136
Outstanding letters of credit............. 32,155 57,155
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.
(Continued)
69
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
12. 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.
2003 2002
-------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
(Dollars in thousands)
Assets:
Cash and cash equivalents..................... $ 6,693 $ 6,693 $ 15,529 $ 15,529
Investment securities......................... 15,637 15,706 21,518 21,777
Loans, net of allowance for loan losses....... 46,690 46,587 43,459 41,942
Liabilities:
Demand deposits............................... 26,543 26,543 33,291 33,291
Savings deposits.............................. 19,309 19,309 20,494 20,494
Time deposits................................. 21,264 21,264 23,144 23,144
Off-balance-sheet:
Commitments to extend credit.................. 8,153 8,153 7,939 7,939
Outstanding letters of credit................. 32 32 57 57
13. 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
as salaries, bonuses and benefits. The agreements expired in 2002 and were
renewed for two more years. These agreements provide for guaranteed minimum
annual compensation over the term of the contracts. The Company made no
stock-based compensation awards to any employee during 2003, 2002 and 2001.
In 1998, the Company adopted a Stock Option Plan with the approval of its
shareholders. In accordance with the contractual terms with its former chief
executive officer, the Bank granted the right 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. 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.
(Continued)
70
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets
December 31,
---------------------
(Dollars in thousands) 2003 2002
-------- --------
Assets:
Due from banks (subsidiary).................. $ 289 $ 289
Investment in United Bank of Philadelphia.... 6,946 8,211
-------- --------
Total assets............................. $ 7,235 $ 8,500
======== ========
Shareholders' equity:
Series A preferred stock..................... $ 1 $ 1
Common stock................................. 11 11
Additional paid-in capital................... 14,750 14,750
Accumulated deficit.......................... (7,615) (6,499)
Net unrealized holding gains (losses)
on securities available-for-sale...... 88 237
-------- --------
Total shareholders' equity........... $ 7,235 $ 8,500
======== ========
Condensed Statements of Operations
Year ended December 31,
-----------------------------------
(Dollars in thousands) 2003 2002 2001
-------- -------- --------
Equity in net loss of subsidiary....... $ (1,115) $ (217) $ (870)
-------- -------- --------
Net loss............................... $ (1,115) $ (217) $ (870)
======== ======== ========
Condensed Statements of Cash Flows
Year ended December 31,
-----------------------------------
(Dollars in thousands) 2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net loss............................ $ (1,115) $ (217) $ (870)
Equity in net loss of subsidiary.... 1,115 217 870
-------- -------- --------
Net cash provided by
operating activities............ - - -
-------- -------- --------
Cash flows from investing activities:
Investment in subsidiary.............. - (20) (12)
-------- -------- --------
Net cash used in investing activities. - (20) (12)
-------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock......... - - -
Issuance of common stock............ - 20 12
-------- -------- --------
Net cash provided by
financing activities........... - 20 12
-------- -------- --------
Net increase in cash and
cash equivalents............... - -
Cash and cash equivalents
at beginning of year................ 289 289 289
-------- -------- --------
Cash and cash equivalents
at end of year...................... $ 289 $ 289 $ 289
======== ======== ========
(Continued)
71
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
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).
(Continued)
72
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
15. REGULATORY MATTERS - Continued
The most recent notification dated March 11, 2004, 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.
(Also see Footnote 2 -- Regulatory Agreement above.)
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, 2003:
Total capital to risk-weighted assets:
Consolidated........................ $ 5,748 12.78% $ 3,621 >8.00% N/A
Bank................................ 5,459 12.14 3,598 8.00 $ 4,497 10.00%
Tier I capital to risk-weighted assets:
Consolidated........................ 5,409 12.03 1,810 4.00 N/A
Bank................................ 5,120 11.39 1,799 4.00 $ 2,698 >6.00%
Tier I capital to average assets:
Consolidated........................ 5,409 7.19 3,020 4.00 N/A
Bank................................ 5,120 6.81 3,008 4.00 $ 3,760 >5.00%
As of December 31, 2002:
Total capital to risk-
weighted assets:
Consolidated........................ $ 6,854 16.28% $ 3,391 >8.00% N/A N/A
Bank................................ 6,565 15.59 3,368 8.00 $ 4,210 10.00%
Tier I capital to risk-weighted assets:
Consolidated........................ 6,326 15.02 1,696 4.00 N/A N/A
Bank................................ 6,037 14.34 1,684 4.00 $ 2,526 >6.00%
Tier I capital to average assets:
Consolidated........................ 6,326 7.46 3,402 4.00 N/A N/A
Bank................................ 6,037 7.12 3,390 4.00 $ 4,238 >5.00%
(Continued)
73
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
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.
17. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
Year ended December 31, 2003
---------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Net loss......................................$ (1,115,465)
============
Basic EPS
Income available to stockholders......... $ (1,115,465) 1,084,694 $ (1.03)
============ ========== ========
Year ended December 31, 2002
---------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Net loss..................................... $ (216,583)
============
Basic EPS
Income available to stockholders......... $ (216,583) 1,101,247 $ (0.20)
============ ========== ========
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)
============ ========== ========
Options to purchase 29,694 shares of common stock were not included in the
computation of diluted EPS for the years ended December 31, 2003, 2002 and
2001 because the Company is in a loss position.
(Continued)
74
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
18. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2003
and 2002, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
2003
(Dollars in thousands) ------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
--------- -------- -------- --------
Interest income $ 913 $ 925 $ 990 $ 1,008
Interest expense 115 129 149 153
-------- -------- -------- --------
Net interest income 798 796 841 855
Provisions for loan losses 385 60 60 60
-------- -------- -------- --------
Net interest after provisions
for loan losses 413 736 781 795
Non-interest income 557 462 409 462
Non-interest expense 1,451 1,453 1,422 1,404
-------- -------- -------- --------
Net (loss) income $ (481) $ (255) $ (232) $ (147)
======== ======== ======== ========
2002
(Dollars in thousands) ------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
--------- -------- -------- --------
Interest income $ 1,131 $ 1,157 $ 1,169 $ 1,175
Interest expense 201 208 232 265
-------- -------- -------- --------
Net interest income 930 949 937 910
Provisions for loan losses 63 37 38 37
-------- -------- -------- --------
Net interest after provisions
for loan losses 867 912 899 873
Non-interest income 492 760 544 531
Non-interest expense 1,482 1,487 1,508 1,618
-------- -------- -------- --------
Net (loss) income $ (123) $ 185 $ (65) $ (214)
======== ======== ======== ========
75