Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PAex31-1.htm
EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PAex31-2.htm
EX-99.2A - EXHIBIT 99.2 A - UNITED BANCSHARES INC /PAex99-2a.htm
EX-32.2B - EXHIBIT 32.2 B - UNITED BANCSHARES INC /PAex32-2b.htm
EX-32.1A - EXHIBIT 32.1 A - UNITED BANCSHARES INC /PAex32-1a.htm

(Mark One)
For the fiscal year ended December 31, 2011

for the transition period from                      to                     

Commission file number: 0-25976
(Exact name of registrant as specified in its charter)

(State of other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
The Graham Building, 30 South 15th Street,     Suite
1200, Philadelphia, Pennsylvania
(Address of principal executive offices)
(Zip Code)

(215) 351-4600
[Registrant’s telephone number, including area code]

Name and fiscal year not changed, but former address was 300 North 3rd Street Philadelphia, PA 19106
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on
which registered

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $ .01 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

 Yeso Nox

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yeso      Nox
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.   Yesx    Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso    Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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. X

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):

Large Accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company

Indicate by checkmark whether the Registrant is a shell company (as defined by Rule 126-2 of the Exchange Act):
Yes o    No X 

The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was [_not applicable ] on June 30, 2011.   Not applicable, the Registrant shares are not publicly traded.
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 500,000 shares of $.01 par value 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 5, 2012 the aggregate number of the shares of the Registrant’s Common Stock outstanding was 1,068,588 (including 191,667 Class B non-voting).


Parts Into Which Incorporated

The exhibit index is on pages 54 through 56.  There are 96 pages in this report.




United Bancshares, Inc.

Item No.
Risk Factors
Unresolved Staff Comments
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules




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,” “will” and similar expressions are intended to identify such forward-looking statements.  These forward looking statements include: (a) statements of goals, intentions and expectations; (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity.  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 fair 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), the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) UBS’ need for capital; (j) 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; (k) 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; (l) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; (m) the ability of key third party providers to perform their obligations to UBS and; (n) UBS’ success in managing the risks involved in the foregoing; and,  (o) failure to comply with the consent orders with the FDIC and Pennsylvania Department of Banking.

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.

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 The Graham Building, 30 S 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102.  The Registrant’s telephone number is (215) 351-4600.

As of March 5, 2012, UBS and the Bank had a total of 31 employees.



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.  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 three offices located as follows:  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 addition, the Bank leases the retail space on the bottom floor of its Center City Graham Building corporate office. The Bank has an automated teller machine in the lobby of this space that allows it to have a branding presence in Center City Philadelphia without incurring additional occupancy expense. Through its locations, the Bank offers a broad range of commercial and consumer banking services.  At December 31, 2011, the Bank had total deposits aggregating approximately $71.3 million and had total net loans outstanding of approximately $40.6 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 385 census tracts and, based census data, 250 or 65% of these are designated as low to moderate-income tracts while 105 or 27.3% are characterized both as low to moderate-income and minority tracts.  The Bank’s primary service area consists of a population of 1,526,006, which includes a minority population of 752,309.

United Bank of Philadelphia, while state chartered as a commercial bank, is uniquely structured to provide 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 has leveraged its CDFI (community development financial institution) designation as established by the United States Department of Treasury to attract deposits from universities and corporations in the region seeking Community Reinvestment Act (the “CRA Act”) credit.  The Bank is eligible to receive grants from the U.S. Treasury CDFI Bank Enterprise Award Fund for its qualified small business lending activity. Although grants have been received in the past, in 2011, the Bank did not have qualifying activity.  Management intends to actively pursue additional CDFI and other government funding in 2012 to support its lending activity and capital adequacy.

The Bank seeks to strengthen communities in the Philadelphia region with innovative products and services including remote deposit capture and other electronic banking services. The Bank engages in commercial banking business 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.

A broad range of credit products is offered to the businesses and consumers in the Bank’s service area, including commercial loans, student loans, home improvement loans, auto loans, personal loans, home equity loans and secured credit card loans.  At March 5, 2012, the Bank’s maximum legal lending limit was approximately $863,000 per borrower.  However, the Bank’s internal Loan Policy limits the Bank’s lending to $500,000 per borrower in order to diversify the credit risk in 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.

      United Bank of Philadelphia has the 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 and other local agency credit enhancement programs including the Small Business Administration (“SBA”) and Department of Transportation (DOT), and Philadelphia Industrial Development Corporation (“PIDC”) when deemed appropriate.  These programs offer guarantees of up to 90% of the loan amount.  These guarantees are 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.


Other services the Bank offers include safe deposit boxes, travelers’ checks, money orders, direct deposit of payroll and Social Security checks, wire transfers, access to regional and national automated teller networks and most recently, remote deposit capture.


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 it 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.

Access to the Bank’s Website and the United States Securities and Exchange Commission Website

Reports filed electronically by United Bancshares, Inc.’s with the Securities and Exchange Commission including proxy statements, reports on Form 10-K, reports on Form 10-Q, and current event reports on Form 8–K, as well as any amendment of those reports, and other information about UBS and the Bank are accessible at no cost on the Bank’s website at  under the “investor information” section.  These files are also accessible on the Commission’s website  at .


There is significant competition among financial institutions in the Bank’s service area.  Money center banks have positioned new branches in once abandoned neighborhoods seeking to grow market share in minority communities.  The Bank competes with local, regional and national commercial banks, as well as savings banks, credit unions 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 including cash management, investment and trust services.  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 “uniqueness” in the marketplace and its mission to service groups of people who have traditionally been under served and by its devotion to personalized customer service.  The Bank’s branding message, “So Much More Than Banking”, was introduced in 2011. It highlights the Bank’s community development focus.

The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses.  In the event that 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. In addition, major corporations with operations in the Philadelphia region will continue to be targeted for business including deposits and other banking services.
Supervision and Regulation

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 use an applicable exemption from such registration, if available.


Capital Adequacy

Federal and state banking laws impose on financial institutions such as USB and the Bank certain minimum requirements for capital adequacies.  The Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk rated assets of 8%.  At least half of the total capital must be composed of “Tier I Capital” which is defined as common equity, retained earnings and qualified perpetual preferred stock, less certain intangibles.  The remainder may consist of “Tier II Capital” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance.  Also, federal banking regulatory agencies have established minimum leverage capital requirements for banking organizations.  Under these requirements, banking organizations must maintain a minimum of Tier I Capital to adjusted average quarterly assets equal to 3% to 5%, subject to bank regulatory evaluation of an organization’s overall safety and soundness.  Under the federal banking regulations, a financial institution would be deemed to “adequately capitalized” or better if it exceeds the minimum federal regulatory capital requirements.  A financial institution would be deemed “undercapitalized” if it fails to meet the minimum capital requirements and significantly undercapitalized if it has a total risk based capital ratio that is less than 6%, Tier I risk based capital ratio is less than 3%, or a leverage ratio that is less than 3% and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to less than 2%.  USB and the Bank are “well-capitalized” for regulatory capital purposes based upon the most recent notification under regulatory framework for prompt corrective action.

On January 31, 2012, the Bank entered into a Consent Order with its primary regulators that requires the development of a written capital plan (“Capital Plan”) that details the manner in which the Bank will meet and maintain a Leverage Ratio of at least 8.50% and a Total Risk-Based Capital Ratio of at least 12.50%.  At a minimum, the Capital Plan must include specific benchmark Leverage Ratios and Total Risk-Based Capital Ratios to be met at each calendar quarter-end, until the required capital levels are achieved.

In late 2010, the Basel Committee on Banking Supervision issued Basel III, a new capital framework for bank and bank holding companies, which will impose a stricter definition of capital for those banks to which it is applicable.  At this time, we do not know whether Basel III, as implemented in the United States, will be applicable to UBS and the Bank.

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 is 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.  The Federal Reserve Board also conducts inspections of UBS.

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 holding company or 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.


Under Federal Reserve Board Policy, UBS is expected to serve as a source of financial strength to the Bank and to commit resources to support the Bank.  Consistent with its “source of strength” policy, the Federal Reserve Board has stated that as a matter of prudent banking, the bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the perspective rate of earnings retention appears to be consistent with UBS’s capital needs, asset quality and overall financial condition.

Federal Law also grants to the federal banking agencies the power to issue cease and desist orders when a bank or bank holding company, or an officer or director thereof, is engaged in or is about to engage in unsafe and unsound practices.

Regulatory Restrictions on Dividends

The Consent Orders with the FDIC and the Pennsylvania Department of Banking prohibit the payment of dividends without the approval of both regulatory agencies.

Dividend payments by the Bank to UBS are subject to the Pennsylvania Banking Code and the FDIC Act.  Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally undivided profits).  Under the FDIC, an insured bank may not pay dividends if the bank is in arrears and the payment of any insurance assessment due to the FDIC.  See dividend restrictions under Item 5 below.

The Financial Services Act

The Financial Services Act (the “FSA”), 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 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. 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, 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 CRA examination. See “The Community Reinvestment Act” below.

Dodd Frank Act

On July 21, 2010, the Dodd Frank Act was signed into law. The Dodd Frank Act will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd Frank Act will require many new rules to be issued by various federal regulatory agencies over the next several years. There will be a significant amount of uncertainty regarding the overall impact of this new law on the financial services industry until final rulemaking is complete. The ultimate impact of this law could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd Frank Act also includes provisions that, among other things, either have been adopted or will be adopted:

Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws, but depository institutions such as the bank with less than $10 billion in assets will continue to be examined and supervised by its current regulators.
Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity.
Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on certain loan terms will be restricted.
Require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure.
Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will result in a decrease in the level of assessments for institutions with assets less than $10 billion.
Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.
Implement corporate governance revisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just financial institutions.
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.
Amend the Electronic Funds Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
Apply the same leverage and risk based capital requirements that apply to insured depository institutions and holding companies.
  As noted above, the Dodd Frank Act requires that the federal regulatory agencies draft many new regulations which will implement the foregoing provisions as well as other provisions contained in the Dodd Frank Act, the ultimate impact of which will not be known for some time.

The Sarbanes-Oxley Act of 2002 (The” SOX Act”)

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In accordance with the requirements of Section 404(a) of the Sarbanes-Oxley Act, management’s report on internal controls is included herein at Part 9. The Dodd-Frank Act permanently exempts non-accelerated filers from the auditor attestation requirement of the Act.


UBS, in compliance with the Sarbanes-Oxley Act of 2002, has made the determination that the Audit Committee of UBS has a “financial expert” on the committee. This “financial expert” is Joseph Drennan, an independent director of the Bank, who is not associated with the daily management of UBS.  Mr. Drennan is a former bank executive and currently serves as Chief Financial Officer for a venture capital firm.  He has an understanding of financial statements and generally accepted accounting principles.

The Bank has a Code of Ethics for the Chief Executive Officer and Chief Financial Officer of the Bank in compliance with the Sarbanes-Oxley Act.

The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the FDIC.  In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Those laws and regulations which have material impact on the operations and expenses of the Bank and thus UBS are summarized below.

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.

FDIC Membership Regulations

The FDIC (i) is empowered to issue consent 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) is authorized to remove executive officers who have participated in such violations or unsound practices; (iii) has restricted lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) has 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 FDIC has been given 60-days prior written notice and within that time has not disapproved of the acquisition or extended the period for disapproval.

Federal Law also grants to the federal banking agencies the power to issue consent orders when a bank or bank holding company, or an officer or director thereof, is engaged in or is about to engage in unsafe and unsound practices.


Regulatory Order

On January 31, 2012, the Bank entered into stipulations consenting to the issuance of Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”).  The material terms of the Consent Orders are identical.  The Consent Orders require the Bank to

increase participation of the Bank’s board of directors in the Bank’s affairs by having the board assume full responsibility for approving the Bank’s policies and objectives and for supervising the Bank’s management;

have and retain qualified management, and notify the FDIC and the Department of any changes in the Bank’s board of directors or senior executive officers;

retain a bank consultant acceptable to the FDIC and the Department to develop a written analysis and assessment of the Bank’s management needs and thereafter formulate a written management plan;

formulate and implement written profit and budget plans for each year during which the orders are in effect;

develop and implement a strategic plan for each year during which the orders are in effect, to be revised annually;

develop a written capital plan detailing the manner in which the Bank will meet and maintain a ratio of Tier 1 capital to total assets (“leverage ratio”) of at least 8.5% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) of at least 12.5%, within a reasonable but unspecified time period;

formulate a written plan to reduce the Bank’s risk positions in each asset or loan in excess of $100,000 classified as “Doubtful” or “Substandard” at its current regulatory examination;

eliminate all assets classified as “Loss” at its current regulatory examination;

revise the Bank’s loan policy to establish and monitor procedures for adherence to the loan policy and to eliminate credit administration and underwriting deficiencies identified at its current regulatory examination;

develop a comprehensive policy and methodology for determining the allowance for loan and lease losses;

develop an interest rate risk policy and procedures to identify, measure, monitor and control the nature and amount of interest rate risk the Bank takes;

revise its liquidity and funds management policy and update and review the policy annually;

refrain from accepting any brokered deposits;

refrain from paying cash dividends without prior approval of the FDIC and the Department;

establish an oversight committee of the board of directors of the Bank with the responsibility to ensure the Bank’s compliance with the orders, and

prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the orders.

The Orders will remain in effect until modified or terminated by the FDIC and the Department and do not restrict the Bank from transacting its normal banking business.  The Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions.  Customer deposits remain fully insured to the highest limits set by the FDIC.  The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Consent Orders. Also, as a result of these Orders, the Company’s independent registered public accounting firm, McGladrey and Pullen, LLP, issued a “going concern” opinion on the Company’s 2011 audited financial statements because failure to meet the capital requirements outlined in the Orders exposes the Company to regulatory sanctions that may include restrictions on operations and growth, mandatory asset disposition and seizure of the Bank.


As of December 31, 2011, the Bank’s tier one leverage capital ratio was 6.27% and its total risk based capital ratio was 12.41%. These ratios are below the levels required by the Orders.  Management is in the process of addressing all matters outlined in the Consent Orders.  The Bank has increased the participation of the Bank’s Board of Directors in the Bank’s affairs and has established an oversight committee of the Board of Directors of the Bank with the responsibility to insure the Bank’s compliance with the Consent Orders.  The Bank has eliminated all assets classified as “loss” in its current regulatory examination.  The Management is in the process of developing the written plans and policies required by the Consent Orders.  Management believes that the Bank will comply with the terms and conditions of the Orders and will continue to operate as a going concern and an independent financial institution for the foreseeable future.

Federal Deposit Insurance Assessments

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.

The Bank is insured by the FDIC, which insures the Bank’s deposits up to applicable limits per insured depositor. For this protection, each insured bank pays a quarterly statutory insurance assessment and is subject to certain rules and regulations of the FDIC. The amount of FDIC assessments paid by individual insured depository institutions, such as the Bank, is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this system, in establishing the insurance premium assessment for each bank, the FDIC will take into consideration the probability that the deposit insurance fund will incur a loss with respect to an institution, and will charge an institution with perceived higher inherent risks a higher insurance premium.  The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the revenue needs of the deposit insurance fund, and any other factors the FDIC deems relevant.  Increases in the assessment rate and additional special assessments with respect to insured deposits could have an adverse impact on the results of operations and capital levels of the Bank and/or UBS.

In accordance with the Economic Stabilization Act, the deposit insurance per account owner was increased from $100,000 to $250,000 through December 31, 2013. The newly enacted Dodd Frank Act made this change in deposit insurance permanent and, as a result, each account owner’s deposits will be insured up to $250,000 by the FDIC.   In addition, the Dodd Frank Act provides for unlimited deposit insurance coverage on non-interest bearing transaction accounts, including Interest on Lawyer Trust Accounts but excluding interest-bearing NOW accounts, without an additional fee at insured institutions through December 31, 2012.
                Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses. An institution’s risk is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned.  Pursuant to the Dodd Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e. Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

 Prior to the passage of the Dodd Frank Act, assessments for FDIC deposit insurance ranged from 7 to 77 basis points per $100 of assessable deposits. On May 22, 2009, the FDIC imposed a special assessment of five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, which was payable to the FDIC on September 30, 2009.  In 2009, the Bank paid $30,386 related to the special assessment. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Also during 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $502,011.  The Bank amortized and expensed $32,923 for the quarter ending December 31, 2009, $135,784 for the year ending December 31, 2010 and $167,695 for the year ending December 31, 2011.  The prepaid assessment remaining at December 31, 2010 is $170,716 for 2012.


                In connection with the Dodd Frank Act’s requirement that insurance assessments be based on assets, the FDIC issued the final rule that provides that assessments be based on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level. The new assessment schedule, effective as of April 1, 2011, results in the collection of assessment revenue that is approximately revenue neutral compared to the prior method of calculating assessments. Pursuant to this new rule, the assessment base is larger than the prior assessment base, but the new rates are lower than prior rates, ranging from approximately 2.5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio equals or exceeds 1.15%, the applicable assessment rates may range from 1.5 basis points to 40 basis points.  There was no significant impact on the Company’s assessment as a result of this change in assessment base.
 The FDIC insurance premiums are “risk based.”  Accordingly, higher premiums would be charged to banks that have lower capital ratios or higher risk profiles.  As a result, a decrease in the bank’s capital ratios, or a negative evaluation by the FDIC, the Bank’s primary federal banking regulator, may increase the Bank’s net funding cost and reduce its net income.  The impact of the recent Consent Orders on the insurance premiums is not yet known.

                The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, rule, regulation, order, or condition imposed by the FDIC. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC. There are no pending proceedings to terminate the FDIC deposit insurance of the Bank, and the management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance.

The Community Reinvestment Act

The Bank is required, by the Community Reinvestment Act (“CRA”) and its implementing regulations, to meet the credit needs of the community, including the low and moderate-income neighborhoods, which it serves. The Bank’s CRA 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 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 examination the Bank was given an “outstanding” CRA 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.  The BSA also requires the Bank to file suspicious activity reports for transactions that involve more than $5,000 and which the Bank knows, suspects or has reason to suspect, involves illegal fund is designed to evade the requirements of the BSA or has no lawful purpose.

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 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 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 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.

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, such as the Bank, which include appropriate policies and procedures and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers all of which involve additional expenses for the Bank.  Failure to comply with the Patriot Act could have serious legal and reputational consequences for a financial institution.

Below is a list of the significant risks that concern UBS, the Bank and the banking industry.  The list should not be considered an all inclusive list and has not been prepared in any certain order.

Failure to Comply with the FDIC and Pennsylvania Department of Banking Consent Orders

The Bank has entered into Consent Orders with the FDIC and the Department which, among other provisions, require the Bank to increase its tier one leverage capital ratio to 8.5% and its total risk based capital ratio to 12.5%.  As of December 31, 2011, the Bank’s tier one leverage capital ratio was 6.27% and its total risk based capital ratio was 12.41%.  See the Regulatory Orders section.  The Bank’s failure to comply with the terms of the Consent Orders could result in additional regulatory supervision and/or actions.  The ability of the Bank to continue as a going concern is dependent on many factors, including achieving required capital levels, earnings and fully complying with the Consent Orders.  The Consent Orders raise substantial doubt about the Bank’s ability to continue as a going concern.

Changes in the economy, especially in the Philadelphia region, could have an adverse affect on the Company

The economic turmoil has led to elevated levels of commercial and consumer loan delinquencies.  The business and earnings of the Bank and UBS are directly affected by general conditions in the U.S. and in particular, economic conditions in the Philadelphia region.  These conditions include legislative and regulatory changes, inflation, and changes in government and monetary and fiscal policies, increases in unemployment rates, and declines in real estate values, all of which are beyond the Bank’s control.  Continued weakness in the economy could result in a decrease in products and service demand, decrease in deposits and deterioration of customer credit quality, an increase in loan delinquencies, non-accrual loans and increases in problem assets.  Real estate pledged as collateral for loans made by the Bank may decline in value, reducing the value of assets and collateral associated with the Bank’s existing loans.  Because of the Bank’s concentration in the Philadelphia region, it is less able to respond or diversify credit risk among multiple markets.  These factors could result in an increase in the provision for loan losses, thus reducing net income.

Future loan losses may exceed the Bank’s allowance for loan losses
The Bank and UBS are subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms.  The downturn in the economy and the real estate market in the Bank’s market area could have a negative effect on collateral values and borrowers’ ability to repay. This downturn in economic conditions could result in losses to UBS in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. To the extent loan charge-offs exceed the Bank’s projections, increased amounts allocated to the provision for loan losses would reduce income.

Exposure to Credit Risk on Commercial Lending can Adversely Affect Earnings and Financial Condition

The Bank’s loan portfolio contains a significant number of commercial real estate and commercial and industrial loans.  These loans may be viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of a default during an economic down turn.  A deterioration of these loans may cause a significant increase in non-performing loans.  An increase in non-performing loans could cause an increase in loan charge offs and a corresponding increase in the provision for loan losses which could adversely impact the Bank’s earning and financial condition.

Our operations are subject to interest rate risk and variations in interest rates may negatively affect financial performance
                In addition to other factors, our earnings and cash flows are dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Changes in the general level of interest rates may have an adverse effect on our business, financial condition, and results of operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence the amount of interest income that we receive on loans and investment securities and the amount of interest that we pay on deposits and borrowed funds. Changes in monetary policy and interest rates also can adversely affect:
our ability to originate loans and obtain deposits;
the fair value of our financial assets and liabilities; and
the average duration of our investment securities portfolio.
                If the interest rates paid on deposits and other borrowed funds increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowed funds.

The Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely impact our business
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which provides for a broad range of financial reform and will result in a number of new regulations which could significantly impact regulatory compliance costs and the operations of community banks and bank holding companies.  The Dodd-Frank Act, among other things, broadens the base for FDIC insurance assessments which may increase our FDIC insurance premiums; repeals the prohibition on a bank’s payment of interest on demand deposit accounts of commercial clients beginning one year after the date of enactment; and contains provisions affecting corporate governance and executive compensation for publicly traded companies.  The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection with broad authority to develop and implement rules regarding most consumer financial products.  Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional costs, including increased compliance costs.  These changes may also require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply.  These changes may adversely affect our business, financial condition and results of operations.
Government regulation can result in limitations on operations
The Bank operates in a highly regulated environment and is subject to supervision and regulation by a number of governmental regulatory agencies.  Regulations adopted by these agencies are generally intended to provide protection for depositors and customers rather than for the benefit of the shareholders. These regulations establish permissible activities for the Bank to engage in, require maintenance of adequate capital levels, and regulate other aspects of operations.  The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effect of these changes on the Bank’s business and profitability.  The current economic crisis creates the potential for increased regulation, new federal or state laws and regulations regarding lending and funding practices and liquidity standards that could negatively impact the Bank’s operations by restricting the Bank’s business operations, increase the cost of compliance and adversely affect profitability.  Losses from operations may result in deterioration of the Bank’s capital levels below required levels and could result in severe regulatory action.

The financial services industry is very competitive
The Bank faces competition in attracting and retaining deposits, making loans, and providing other financial services throughout the Bank’s market area. The Bank’s competitors include other community banks, larger banking institutions, trust companies and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses.  Many of these competitors have substantially greater resources, including access to capital markets, than the Bank and are able to expend greater funds for advertising and marketing.  If the Bank is unable to compete effectively, the Bank will lose market share and income from deposits, loans, and other products may be reduced.
Higher FDIC assessments could negatively impact profitability

The FDIC insurance premiums are “risk based.”  Accordingly, higher premiums would be charged to banks that have lower capital ratios or higher risk profiles.  As a result, a decrease in the Bank’s capital ratios, or a negative evaluation by the FDIC, the Bank’s primary federal banking regulator, may increase the Bank’s net funding cost and reduce its earnings.
Inadequate liquidity
The Bank may not be able to meet the cash flow requirements of its 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.  While the Bank actively manages its liquidity position and is required to maintain minimum levels of liquid assets, rapid loan growth or unexpected deposit attrition may negatively impact the Bank’s ability to meet its liquidity requirements. The inability to increase deposits to fund asset growth represents a potential liquidity risk. The Bank may need to reduce earning asset growth through the reduction of current production, sale of assets and/or the participating out of future and current loans.  This might reduce future earnings of the Bank.

Lack of Deposit Growth Could Increase the Bank’s Cost of Funds

A decline in the aggregate balance of deposits or the failure of deposits to grow at a rate comparable to loan growth could require the Bank to obtain other sources of loan funds at higher costs, thus reducing the Bank’s net interest income.
Ability to attract and retain management and key personnel may affect future growth and earnings
The success of UBS and the Bank will be influenced by its ability to attract and retain management experienced in banking and financial services and familiar with the communities in the Bank’s market areas.  The Bank’s ability to retain executive officers, management team, and support staff is important to the successful implementation of the Bank’s strategic plan.  It is critical, as the Bank grows, to be able to attract and retain qualified staff with the appropriate level of experience and knowledge in community banking.  The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future could have an adverse effect on the Bank’s business, financial condition, and results of operations.
The ability to maintain adequate levels of capital to meet regulatory minimums and support growth

The Bank and UBS may not be able to maintain the requisite minimum regulatory capital levels to support asset growth.  While management may seek additional capital through available government programs, unforeseen economic events may negatively impact the Bank’s and UBS’ profitability and result in erosion of capital. This might restrict growth and reduce future earnings of the Company.

The soundness of other financial services institutions may adversely affect USB and the Bank.

Routine funding transactions may be adversely affected by the actions and soundness of other financial institutions.  Financial service institutions are interrelated as a result of trading, clearing, lending, borrowing or other relationships.  As a result, a rumor, default or failures within the financial services industry could lead to market wide liquidity problems which, in turn, could materially impact the financial condition of USB and the Bank.


Our information systems may experience an interruption or breach in security that could impact our operational capabilities.
                We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrences of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

USB’s Controls and Procedures may Fail or be Circumvented.

USB diligently reviews and updates its internal controls and financial reporting, disclosure controls and procedures and corporate governance policies and procedures.  Any failure or undetected circumvention of these controls could have material adverse impact on USB and the Bank’s financial condition and results of operations.

Additional, risk factors also include the following all of which may reduce revenues and/or increase expenses and/or pull the Bank’s management attention away from core banking operations which may ultimately reduce the Bank’s earnings
New developments in the banking industry
Variations in quarterly or annual operating results
o    Revision of or the issuance of additional regulatory actions affecting UBS or the Bank
Litigation involving UBS or the Bank
Changes in accounting policies or procedures

Investments in UBS common shares involve risk.  There is no trading market for UBS’ common shares.

There were no unresolved staff comments.

All of the Bank’s properties are in good operating condition and are adequate for the Bank’s present needs.

Corporate Headquarters

United Bank of Philadelphia’s corporate office is located in The Graham Building, 30 S. 15th Street, Suite 1200, Center City Philadelphia.   In February 2005, the Bank began a 10-year lease for its new Center City headquarters location.  The Graham building is located in the heart of the Philadelphia business district, directly across from City Hall. The Bank occupies approximately 10,000 square feet on the 12th Floor that provides adequate and suitable space for executive offices, operations, finance, human resource, and security and loss prevention functions.  The average monthly lease rate over the term of the lease is $15,170.

 In August 2005, the Bank assumed the remaining term from another financial institution of a lease for retail space on the ground level of the Graham Building that expired in 2009.  At expiration of the sublease, the Bank amended its corporate office lease to include this retail space for which the term is co-terminous.  The Bank’s average aggregate gross monthly rental is $8,000.


Mt. Airy Branch

The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is located in a densely populated residential neighborhood and in close proximity to small businesses/retail stores.   This facility includes a retail banking lobby, teller area, offices, and vault and storage space.  In December 2008, the Bank began a new 10-year lease term for which the average monthly rent is $5,285.

West Philadelphia Branch

The Bank owns and operates the branch location at 3750 Lancaster Avenue.  This branch is located in close proximity to two major universities and hospitals.   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.

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 area of North Philadelphia is an important area for the Bank and its mission. The facility is comprised of teller and customer service areas, lobby and vault.  Extensive improvements to the shopping plaza were completed in 2010.   In April 2008, the Bank’s branch was relocated within the shopping plaza to a newly constructed space at which time it began a 10-year lease for which the average aggregate gross monthly rent is $5,996.

No material litigation or claims have been instituted or threatened by or against UBS or the Bank.

Not applicable.




Common Stock

UBS’ Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. There is no established public trading market for UBS’ common stock.  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 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.

There were no capital stock transactions during 2011 and 2010.

As of March 5, 2012 there were 3,143 shareholders of record of UBS’ voting Common Stock and two shareholders of record of UBS’ Class B Non-voting Common Stock.

Dividend Restrictions

The Consent Orders with the FDIC and the Pennsylvania Department of Banking prohibit the payment of dividends without the approval of both regulatory agencies.  UBS 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 the 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 Federal Reserve 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 UBS, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists.  UBS does not anticipate that dividends will be paid for the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

There were no equity compensation instruments outstanding at December 31, 2011.


The information below has been derived from UBS’ consolidated financial statements.

Selected Financial Data

Year ended
(Dollars in thousands, except per share data)
Net interest income
  $ 3,068     $ 3,094     $ 3,124     $ 3,291     $ 3,600  
Provision for loan losses
    170       747       235       368       120  
Noninterest income
    1,071       1,465       1,313       1,209       1,320  
Noninterest expense
    5,000       5,040       4,747       4,785       4,753  
Net income (loss)
    (1,031 )     (1,228 )     (545 )     (653 )     47  
Net income (loss) per share – basic
    (0.97 )     (1.15 )     (0.51 )     (0.61 )     0.04  
Net income (loss) per share – fully diluted
    (0.97 )     (1.15 )     (0.51 )     (0.61 )     0.04  
Balance sheet totals:
Total assets
  $ 77,017     $ 73,966     $ 68,318     $ 69,435     $ 75,232  
Net loans
    40,635       44,686       46,860       48,077       44,594  
Investment securities
    18,490       16,477       11,834       12,562       13,921  
    71,300       67,211       60,307       60,904       66,084  
Shareholders’ equity
    5,261       6,297       7,531       8,050       8,685  
Tangible Equity to average assets
    6.29 %     7.63 %     10.08 %     10.32 %     10.17 %
Equity to assets ratio
    6.83 %     8.51 %     11.02 %     11.59 %     11.54 %
Return on assets
    (1.32 )%     (1.68 )%     (0.79 )%     (0.87 )%     0.06 %
Return on equity
    (18.92 )%     (17.49 )%     (7.66 )%     (8.21 )%     0.62 %


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 UBS 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 Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses.  Loans that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.  When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers’ ability to repay, and other factors which may warrant current recognition.  Such periodic assessments may, in management’s judgment, require the Bank to recognize additions or reductions to the allowance.

Various regulatory agencies periodically review the adequacy of the Bank’s allowance for loan losses as an integral part of their examination process.  Such agencies may require the Bank to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination.  It is reasonably possible that the above factors may change significantly and, therefore, affect management’s determination of the allowance for loan losses in the near term.


A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

  Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. (Refer to Note 1 and Note 4 of the notes to financial statements.)

Executive Brief

United Bank of Philadelphia is the only African American-owned and controlled community development financial institution headquartered in Philadelphia. Management continues to seek to maximize the Bank’s “community bank” competitive advantage by leveraging its strategic partnerships and relationships to increase market penetration and to help ensure that the communities it serves have full access to financial products and services.

Although the economy is slowly recovering, the lagging effect of the recession resulted in lower than projected loan origination volume and continued asset quality challenges that have negatively impacted the Company’s financial condition.   Management is committed to improving the operating performance by implementing more effective strategies to achieve and sustain profitability, augment capital, and manage loan and other real estate portfolios. The following actions are crucial to enhancing the Company’s future financial performance:
Increase Capital.  The Company’s capital continues to be eroded by operating losses.  Net losses as well as growth in the average assets of the Bank have resulted in a reduction in its capital ratios.  The importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood.  Therefore, a concentrated effort will be made to raise additional capital from potential corporate and institutional partners in the region to support its community development activities including increased lending within economically distressed low to moderate income communities. In conjunction with this effort, management initiated a “Partners for Growth” capital campaign for which meetings and/or conference calls have been held with a number of corporate leaders in the region to request participation in the initiative.  Proposals are under consideration; however, no commitments have been received.
In addition, because the Bank is a CDFI, it has the ability to utilize programs of the U.S. Treasury’s CDFI Fund to supplement capital.  The Bank Enterprise Award (BEA) Program was created in 1994 to support FDIC-insured financial institutions, like the Bank, around the country that are dedicated to financing and supporting community and economic development activities. The BEA Program complements the community development activities of insured depository institutions (i.e., banks and thrifts) by providing financial incentives to expand investments in CDFIs and to increase lending, investment, and service activities within economically distressed communities. In 2011, the Bank applied for a BEA grant based on lending activity but did not qualify.  Management will continue to seek funding from available CDFI programs in the future to supplement capital and support growth.


Manage asset quality to minimize credit losses. Progress has been made in the Bank’s collection, underwriting, and customer relationship management practices. Evidence of these improvements can be seen in the reduction of the level of impaired/nonperforming loans during 2011. The percentage of nonperforming loans to total loans increased during 2011 as a result of a decline in total loans.  Management is proactively identifying and managing emerging problem credits to minimize additions to its classified assets through its Asset Quality Committee discussions.  During 2012, further progress is expected to be made in reducing the level of non-performing loans and non-performing assets by utilizing forbearance, foreclosure and/or other appropriate collection methods.   These activities will likely result in increased credit quality costs, including loan collection and other real estate related costs that will continue to affect reported earnings as the Bank diligently works to reduce the outstanding investment in these assets.
(In 000's)
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010
         Total nonperforming loans
  $ 2,132     $ 2,220     $ 2,160     $ 1,962     $ 2,781  
    1,284       1,284       1,286       2,015       1,417  
         Total nonperforming assets
  $ 3,416     $ 3,504     $ 3,446     $ 3,977     $ 4,198  
Nonperforming loans to total loans
    5.14 %     4.87 %     5.20 %     4.68 %     6.10 %
Nonperforming assests to total loans and OREO
    7.98 %     7.47 %     8.04 %     9.05 %     8.93 %
Nonperforming assests to total assets
    4.44 %     4.49 %     4.41 %     5.37 %     5.66 %
Allowance for loan losses as a percentage of:
     Total Loans
    2.09 %     1.92 %     1.84 %     1.77 %     2.03 %
     Total nonperforming loans
    40.67 %     35.99 %     35.51 %     37.92 %     33.30 %
Develop an earnings enhancement plan. Management recognizes the challenges it has faced in achieving profitability much of which was triggered by economic conditions that resulted in less than projected lending activity and increased credit quality costs.  Management is in the process of developing a strategic plan with a business banking focus to include strategies to increase the Bank’s commercial lending activity in alliance with a third party SBA loan origination group.  This program will be designed to generate fee income as well as build loan volume.  Focused and aggressive business development efforts targeting small businesses will be employed in effort to increase commercial and industrial lending activity (i.e. working capital, receivables, etc.) for which credit enhancements through the SBA or other loan guaranty programs may be available to mitigate credit risk.

The Bank’s noninterest expense continues to be elevated as a result of core deposit amortization expense and occupancy expense related to its three branch structure. Also, unlike other similar-sized community banks, the Bank incurs a higher level of professional service fees (audit and legal) because of its SEC filing requirements as a result of having in excess of 500 shareholders. While there has been some improvement in noninterest expense during 2011, management will seek further savings and efficiencies, where possible, including the review of the existing branch structure and personnel utilization.

Another challenge to increased earnings is margin compression. Margin compression has been created by the reduction in loans outstanding as well as the continued low interest rate environment that has resulted in lower yields on loans, federal funds sold and investment securities. While management actively manages the rates paid on deposit products to “average” market rates in attempt to mitigate the effect of the reduction in yield on earning assets, deposit rates have generally “bottomed out”. Management will continue to focus on growing the Bank’s loan portfolio and reducing the level of nonaccrual loans to increase net interest income.


Results of Operations

In 2011, the Company recorded a net loss of approximately $1,031,000 ($0.97 per share) compared to a net loss of approximately $1,228,000 ($1.15 per share) in 2010.  A detailed explanation for each component of earnings is included in the sections below.

Table 1—Average Balances, Rates, and Interest Income and Expense Summary
(Dollars in thousands)
Interest-earning assets:
  $ 42,238     $ 2,666       6.31 %   $ 46,775     $ 2,806       6.00 %   $ 48,568     $ 3,039       6.26 %
Investment securities held-to-maturity
    17,219       571       3.32       13,711       508       3.71       9,888       439       4.44  
Investment securities available-for-sale
    1,110       45       4.05       1,348       62       4.60       2,211       107       4.84  
     Total investment securities
    18,329       616       3.36       15,059       570       3.79       12,099       546       4.51  
Interest bearing balances with other banks
    305       1       0.33       305       1       0.33       299       7       2.34  
Federal funds sold
    10,958       20       0.18       5,557       12       0.22       3,396       8       0.24  
Total interest-earning assets
    71,830       3,303       4.60       67,696       3,389       5.01       64,362       3,600       5.59  
Noninterest-earning assets:
Cash and due from banks
    1,687                       1,814                       2,294                  
Premises and equipment, net
    1,079                       1,263                       1,492                  
Other assets
    3,082                       2,975                       1,863                  
Less allowance for loan losses
    (814 )                     (740 )                     (626 )                
    76,864                     $ 73,008                     $ 69,385                  
Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Demand deposits
  $ 15,948       73       0.46 %   $ 12,455       75       0.60 %   $ 11,161       89       0.80 %
Savings deposits
    14,236       11       0.08       14,441       15       0.10       15,988       34       0.21  
Time deposits
    26,019       151       0.58       24,450       205       0.84       20,803       353       1.70  
Total interest-bearing liabilities
    56,203       235       0.42       51,346       295       0.57       47,952       476       0.99  
Noninterest-bearing liabilities:
Demand deposits
    14,458                       14,232                       13,248                  
    -                       408                       268                  
Shareholders’ equity
    6,203                       7,022                       7,917                  
  $ 76,864                     $ 73,008                     $ 69,385                  
Net interest income
          $ 3,068                     $ 3,094                     $ 3,124          
                    4.18 %                     4.44 %                     4.60 %
Net yield on interest-earning assets
                    4.27 %                     4.57 %                     4.85 %

For purposes of computing the average balance, loans are not reduced for nonperforming loans.  Loan fee income is included in interest income on loans but is not considered material.

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 totaled approximately $3,068,000 in 2011 and approximately $3,094,000 in 2010, a decrease of approximately $26,000, or 0.84%


Table 2—Rate-Volume Analysis of Changes in Net Interest Income
2011 compared to 2010
2010 compared to 2009
Increase (decrease) due to
Increase (decrease) due to
(Dollars in thousands)
Interest earned on:
  $ (276 )   $ 136     $ (140 )   $ (107 )   $ (126 )   $ (233 )
Investment securities held-to-maturity
    116       (53 )     63       142       (73 )     69  
Investment securities available-for-sale
    (10 )     (7 )     (17 )     (40 )     (5 )     (45 )
Interest-bearing deposits with other banks
    -       -       -       -       (6 )     (6 )
    Federal funds sold
    10       (2 )     8       5       (1 )     4  
Total Interest-earning assets
    (160 )     74       (86 )     -       (211 )     (211 )
Interest paid on:
Demand deposits
    15       (17 )     (2 )     8       (22 )     (14 )
Savings deposits
    (1 )     (3 )     (4 )     (2 )     (17 )     (19 )
Time deposits
    9       (64 )     (54 )     31       (179 )     (148 )
Total interest-bearing liabilities
    23       (84 )     (60 )     37       (218 )     (181 )
Net interest income
  $ (184 )   $ 158     $ (26 )   $ (37 )   $ 7     $ (30 )
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to volume variances due to the interest sensitivity of consolidated assets and liabilities.

In 2011, there was a decrease in net interest income of approximately $184,000 due to changes in volume and an increase of approximately $158,000 due to changes in rate. In 2010, there was a decrease in net interest income of approximately $37,000 due to changes in volume and an increase of approximately $7,000 due to changes in rate.

Average earning assets increased to approximately $71.8 million compared to approximately $67.7 million in 2010, however, the net interest margin of the Bank declined to 4.27% in 2011 from 4.57% in 2010.  The Bank is operating in a historically low interest rate environment that is expected to remain low until 2014.  Although the yield on loans increased as a result of the transfer of more than $2 million in nonaccrual loans to OREO and the imposition of default interest rates for several borrowers for noncompliance with note requirements to provide annual financial statements, the overall yield on interest-bearing assets declined.  This decline was the result of a reduction in average outstanding loans because of slow origination activity and payoffs that resulted in a shift in earning assets from loans to lower yielding federal funds sold and other investments. The reduction in yield on federal funds sold and other investments was also a contributing factor in the decline.
The average yield on the investment portfolio declined to 3.36% in 2011 compared to 3.79% in 2010.  The decline in yield was the result of the call of approximately $8.9 million in higher yielding agency securities for which replacements were purchased in 2011 in the low rate environment.  In addition, some of the Bank’s floating rate mortgage-backed securities that have Treasury and LIBOR indices repriced in 2011.  The average yield is projected to decline further in 2012 as a result of anticipated call activity and projected low interest rate environment.

The cost of interest-bearing liabilities fell 15 basis points compared to 2010 as a result of rate reductions made on the Bank’s deposit products to follow market conditions. However, deposit rates have relatively “bottomed-out”, leaving little room to make further downward adjustments.

Provision for Loan Losses

The provision for loan losses 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 loan losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate.

The net provision for loan losses charged against earnings in 2011 was $170,000 compared to $747,000 in 2010.  The Bank’s provision is based on a review and analysis of the loan portfolio, and is therefore subject to fluctuation based on qualitative factors like delinquency trends, charge-offs, economic conditions, concentrations, etc. Management monitors its credit quality closely by working with borrowers in an effort to identify and control credit risk. Systematic provisions are made to the allowance for loan losses to cover probable loan losses in the portfolio.  Increased provisions during 2010 were primarily driven by declining real estate collateral values on loans deemed impaired and/or transferred to other real estate owned in the foreclosure process. During 2011, the level of impaired loans and foreclosures declined, reducing specific reserves and minimizing charge-off activity.  Based on its analysis, management believes the level of the allowance for loan losses is adequate as of December 31, 2011. Refer to the Allowance for Loan Loss section below for further discussion/analysis of the Bank’s credit quality.


Noninterest Income

Noninterest income decreased approximately $394,000, or 26.89% in 2011 compared to 2010.  The decrease compared to 2010 is primarily the result of the receipt of a grant in 2010 from the CDFI Fund of the U.S. Department of Treasury which was not received in 2011.  In 2010, the Bank received a $394,400 Bank Enterprise Award (“BEA”) grant from the Community Development Financial Institutions Fund (“CDFI”) of the US Treasury for its small business lending activity.  This grant was fully recognized as all conditions required by the grant have been fulfilled, and is included as grant income.  In 2011, although a grant application was submitted, the Bank did not have qualifying loan activity.

The customer service fee component of noninterest income reflects the volume of 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.  During 2011, customer service fees declined approximately $53,000, or 12.19% compared to 2010.  The decline was primarily a result of a reduction in overdraft and other activity fees on deposit accounts.

During 2011, surcharge income on the Bank’s ATM network declined approximately $18,000, or 4.91%, compared to 2010.  The Bank’s ATM network continues to experience a reduction in volume because of ATM saturation in the marketplace by both financial and non-financial competitors.  Also, consistent with trends in the industry, ATM usage has declined as consumers continue to move to electronic payment methods utilizing debit and credit cards versus cash.  In March 2011, the Bank increased its surcharge fee for non-customer use of ATMs to be consistent with the marketplace and enhance profitability of the network; however, improvement has been negated by declining volume.  Methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated including a more cost effective network communication system that will be implemented as ATM hardware upgrades are made to meet American Disabilities Act requirements during 2012.

Since 2002, the Bank has served as arranger/agent for loan syndications for several major corporations throughout the country.  In this capacity, the Bank arranges back-up lines/letters of credit with other minority banks for which it receives agent/administrative fees.  In 2011 and 2010, these fees totaled $145,000 and $140,000, respectively.  The Bank serves as agent/arranger for two (2) facilities.  Fees on these facilities are received annually for the administration of the credit facilities.  Growth in this business line was temporarily curtailed as a result of the turmoil in the financial markets over the last several years.  Management may seek to expand these credit services as the economy moves out of recession.

Noninterest Expense

Noninterest expense decreased approximately $39,000, or 0.78% in 2011 compared to 2010.
Salaries and benefits decreased approximately $74,000, or 4.30%, in 2011 compared to 2010.  The decline  is the result of the severance of unproductive personnel in the lending/credit administration area of the Bank in April 2011. Management continues to review the organizational structure to maximize efficiencies, increase utilization/productivity and increase business development activity in conjunction with the Regulatory Order and development of its 2012 strategic plan.

Occupancy and equipment expense increased approximately $79,000, or 7.72%, in 2011 compared to 2010. The increase in 2011 is attributable to the September 2010 expiration of a sublease the Company had for a retail space it leases at its corporate headquarters for which a replacement tenant has not been secured.  Also, there was an increase in common area maintenance expense in 2011 related to general repairs and maintenance charges for leased facilities.

Office operations and supplies expense increased approximately $13,000, or 4.43%, in 2011 compared to 2010.  The increase is related to the cost of branch capture-compatible forms and checks required in conjunction with the implementation of Check 21 technology in October 2010. Management continues to review all office operations expenses including the selection of a less costly supplier to fulfill general supplies requirements of branch and backroom operations in effort to reduce expenses.


Marketing and public relations expense increased approximately $70,000, or 162.61%, in 2011 compared to 2010.  In 2011, the Company began to push out its new branding message, “So Much More Than Banking” utilizing newspaper and magazine ads, bus depots, and other relevant marketing strategies.  Beginning in 2012, direct marketing was curtailed.  More direct outreach through office receptions and direct calling by business development staff will be utilized to reduce expenses.

Professional services expense decreased approximately $54,000, or 17.19%, in 2011 compared to 2010.  The decrease is primarily related to lower consulting fees.  In 2010, the Bank utilized a consultant to assist with the preparation of its strategic and marketing plans.

Data processing expenses are a result of management’s 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.  The Bank experiences a higher level of data processing expenses relative to its peer group because of the nature of its deposit base--low average balance and high transaction volume.  In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, and student loan portfolios.  To better serve its customers, the Bank also has an extensive ATM network of twenty-five (25) machines for which it pays processing fees.  This network is larger than most banks in its peer group.

Data processing expenses increased approximately $15,000, or 3.19%, in 2011 compared to 2010 as a result of the implementation of an enhanced e-banking platform (including e-statements), 3% annual escalation in core processing fees and increased credit card processing charges.

Loan and collection expenses decreased approximately $135,000, or 39.18%, in 2011 compared to 2010. The decrease is directly related to a reduction in the level foreclosure activity in 2011.  In 2010, the Bank incurred a significant level of legal and other collection cost associated with the acquisition of OREO properties.

Federal deposit insurance premiums increased approximately $24,000, or 16.31% in 2011 compared to 2010. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings.  The increase is primarily related to growth in deposits compared to the prior year. The impact of the recent Consent Order on the insurance premiums is not yet known.  (Refer to “Federal Deposit Insurance Assessments” above).

All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintain adequate insurance coverage.



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 increased approximately $4,134,000, or 5.76%, in 2011 compared to 2010.

Table 3—Sources and Use of Funds Trends

(Dollars in thousands)
Funding uses:
  $ 42,238     $ (4,537 )     (9.70 )%   $ 46,775     $ (1,793 )     (3.69 )%
Investment securities
    17,219       3,508       25.59       13,711       3,823       38.66  
    1,110       (238 )     (17.66 )     1,348       (863 )     (39.03 )
Interest-bearing balances with other banks
    305       -       -       305       6       2.01  
Federal funds sold
    10,958       5,401       97.19       5,557       2,161       63.63  
Total uses
  $ 71,830     $ 4,134             $ 67,696     $ 3,334          
Funding sources:
Demand deposits:
  $ 14,458     $ 226       1.59     $ 14,232     $ 984       7.43  
    15,948       3,493       28.04       12,455       1,294       11.59  
Savings deposits
    14,236       (205 )     (1.42 )     14,441       (1,547 )     (9.68 )
Time deposits
    26,019       1,569       6.42       24,450       3,647       17.53  
Total sources
  $ 70,661     $ 5,083             $ 65,578     $ 4,378          

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 increased approximately $3,270,000, or 17.84%, in 2011 compared to 2010 The increase was primarily related to an increase in investable funds because of loan payoffs and increased deposit levels during the year. The Bank's current investment portfolio primarily consists of mortgage-backed pass-through agency securities and other government-sponsored agency debt securities.  The Bank does not invest in high-risk securities or complex structured notes.  The most significant risk associated with the Bank’s investments is “optionality” whereby callable debt securities are called or the speeds at which mortgage-backed securities pay quicken creating additional liquidity in a declining rate environment.  The result is generally a reduction in yield on the portfolio.

           As reflected in Table 4 below, the duration of the portfolio has extended to 2.42 years at December 31, 2011 compared to 2.0 years at December 31, 2010 as a result of the purchase of callable agency securities with longer terms as well as amortizing 15 and 20 year government sponsored agency (GSA) mortgage-backed pass-through securities that serve to generate monthly cash flow.    At December 31, 2011, 41% of the investment portfolio consisted of callable agency securities for which a high level of call activity is projected in the current low interest rate environment that may result in a shortened duration.  Approximately 59% of the portfolio consists of GSA mortgage-backed pass-through securities.  The payments of principal and interest on these pools of GSA loans are guaranteed by these entities that bear the risk of default.  The Bank’s risk is prepayment risk when defaults accelerate the repayment activity.  These loans have longer-term con­tractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. Home foreclosures in the current economy and lower interest rates continue to result in increased prepayment speeds and a shortened duration.  Management’s goal is to maintain a portfolio with a short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk.  The Bank will continue to take steps to control the level of optionality in the portfolio by identifying replacement securities that diversify risk and provide some level of monthly cash flow.


Table 4—Analysis of Investment Securities

Within one year
After one but
within five years
After five but
within ten years
After ten years
(Dollars in thousands)
Other government securities
  $ -       - %   $ 250       2.54 %   $ 6,504       3.22 %   $ 777       2.74 %   $ 7,531  
Money market funds
                    -               -               -               129  
Mortgage-backed securities
    -               -               -               -               10,830  
Total securities
  $ -             $ -             $ 9,369             $ 1,033             $ 18,490  
Average maturity
2.42 years

The above table sets forth the maturities of investment securities at December 31, 2011 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).


           Average loans decreased approximately $4,537,000, or 9.70%, in 2011 compared to 2010.  Market demand for loans remains “soft” as some borrowers have shied away from obtaining financing as a result of the slow economic recovery. While the Bank funded more than $2.3 million in commercial loans during 2011, they were offset by payoffs/paydowns, charge-offs and transfers to OREO. Focused and aggressive business development efforts targeting small businesses will be employed in effort to increase commercial and industrial lending activity (i.e. working capital, receivables, etc.) for which credit enhancements through SBA or other loan guaranty programs may be available to mitigate credit risk.  With over 93,000 small businesses in the region that may fall below minimum business loan levels of many of the money center banks in the region, the Bank will seek establish and grow this niche business.  Management is in the process of developing a strategic plan with a business banking focus to include strategies to increase its commercial lending activity in alliance with a third party SBA loan origination group.
           As reflected in Table 5 below, the Bank’s loan portfolio is concentrated in commercial loans that comprise approximately $33.9 million, or 82%, of total loans at December 31, 2011. Approximately $16.2 million of these loans are secured by owner occupied commercial real estate that may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations, including construction loans, for which total loans at December 31, 2010 were $13.7 million, or 40%, of the commercial portfolio. Management continues to closely monitor this concentration to proactively identify and manage credit risk in light of the current high level of unemployment that may impact the level of tithes and offerings that provide cash flow for repayment.

           As reflected in Table 6 below, approximately $12.7 million, or 30.6%, of the Bank’s loan portfolio has scheduled maturities or repricing in five years or more.  This position is largely a result of the relatively high level of loans in the commercial real estate portfolio that typically have five to seven year balloon structures.  While scheduled maturities and repricing exceed five years, the actual duration of the portfolio may be much shorter because of changes in market conditions and refinancing activity.

Table 5—Loans Outstanding, Net of Unearned Income

December 31,
(Dollars in thousands)
Commercial and industrial
  $ 3,730     $ 5,729     $ 4,353     $ 4,286     $ 4,463  
Commercial real estate
    30,197       30,738       32,294       32,199       28,640  
Residential mortgages
    3,356       4,432       5,313       6,110       6,549  
Consumer loans
    4,219       4,713       5,626       6,068       5,532  
           Total loans
  $ 41,502     $ 45,612     $ 47,587     $ 48,663     $ 45,184  


Table 6—Loan Maturities and Repricing
(Dollars in thousands)
one year
After one but
within five years
five years
Commercial and industrial
  $ 2,828     $ 1,441     $ 250     $ 4,519  
Commercial real estate
    4,831       16,979       7,598       29,408  
Consumer loans
    1,951       195       2,072       4,218  
Residential mortgage loans
    547       31       2,779       3,357  
Total loans
  $ 10,157     $ 18,646     $ 12,699     $ 41,502  
Loans maturing after one year with:
Fixed interest rates
                          $ 26,057  
Variable interest rates

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.  The loan is also placed on nonaccrual status at that time.  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 generally reversed out of income.

Table 7—Nonperforming Loans

(Dollars in thousands)
Nonaccrual loans
  $ 2,133     $ 2,781     $ 3,783     $ 1,701     $ 745  
Impaired loans
    1,687       2,516       3,553     $ 2,531       1,745  
Interest income on nonaccrual loans included in net income for the year
    144       110       219       9       35  
Interest income that would have been recorded under original terms
    165       186       195       121       65  
Interest income recognized on impaired loans
    6       63       34       64       112  
Loans past due 90 days and still accruing
    471       205       776       578       1,067  
Troubled Debt Restructured loans
    -       -       -       -       -  

                At December 31, 2011, nonaccrual loans totaled approximately $2,133,000 compared to approximately $2,781,000 at December 31, 2010.  The decline is primarily related to foreclosure activity totaling approximately $602,000.  The remaining nonaccrual loans primarily include commercial loans with real estate collateral that may help to mitigate potential losses. Management continues to actively work with these borrowers to develop suitable repayment plans.

The level of classified loans (including impaired loans) decreased to approximately $3,061,000 at December 31, 2011 from approximately $3,251,000 at December 31, 2010. These loans possess potential weaknesses/deficiencies deserving management’s closer attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects at some future date.  Some of these borrowers may be experiencing adverse operating trends, which potentially could impair debt, services capacity but secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure.  A portion of one commercial and industrial loan totaling $226,000 migrated to a “Doubtful” classification in 2011 as a result of uncertainty surrounding contract receivables.  Accordingly, a specific reserve has been allocated to cover potential exposure. Management is working proactively with these borrowers to prevent any further deterioration in credit quality.

      Impaired loans totaled approximately $1,687,000 at December 31, 2011 compared to $2,516,000 at December 31, 2010.  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 decline in impaired loans is primarily related to foreclosure activity totaling approximately $602,000.  The valuation allowance associated with impaired loans was approximately $307,000 and $238,000, at December 31, 2011 and 2010, respectively.  The allowance was determined based on careful review and analysis including collateral liquidation values and/or guarantees and is deemed adequate to cover shortfalls in loan repayment    Management is working aggressively to resolve the potential credit risk associated with its impaired loans by detailing specific payment requirements including the sale of underlying collateral or obtaining take-out financing.


The commercial loan portfolio of the Bank is 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 are primarily for expansion and repair of church facilities.  At December 31, 2011 and December 31, 2010, loans to religious organizations represented approximately $418,000 and $441,000, respectively, of total impaired loans. Management continues to work closely with its attorneys and the leadership of these organizations in an attempt to develop suitable repayment plans to avoid foreclosure.  In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.

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.

                Interest income recognized on impaired loans during the year ended December 31, 2011 and 2010 was $6,000 and $63,000, 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.
The Bank may modify or restructure the terms of certain loans to provide relief to borrowers. Troubled debt restructurings (“TDRs”).  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal.  The terms of these loans do not include any financial concessions and are consistent with the current market.  Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties).  Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring.  Therefore, the Company had no troubled debt restructurings at December 31, 2011 and December 31, 2010.

Allowance for Loan Losses

 The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates.  The three components are as follows:

Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.  
Historical Charge-Off Component – Applies a rolling, twelve-quarter historical charge-off rate to all pools of non-classified loans.
Qualitative Factors Component – The loan portfolio is broken down into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.

All of these factors may be susceptible to significant change.   There has been no change in qualitative factors during the year ended December 31, 2011.  However, the average 3-year net loss factors have declined during the period in each portfolio segment as a result of a lower level of net charge-offs in 2011.  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.   Management believes that the allowance for loan losses is adequate at December 31, 2011.  While available information is used 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.  (Refer to Note 4 of the financial statements for further details on the allowance for loan losses.)

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. The allowance for loan losses as a percentage of total loans was 2.09% at December 31, 2011 and 2.03% at December 31, 2010. The increase in the allowance in 2011 as a percentage of total loans is related to an increase in specific reserves for impaired loans.


Table 8—Allocation of Allowance for Loan Losses

      2011     2010     2009     2008     2007
of loans
in each
of loans
in each
category to
of loans
in each
category to
of loans
in each
category to
of loans
in each
category to
Total loans
total loans
total loans
total loans
total loans
(Dollars in thousands)
Commercial and industrial
  $ 387       8.99 %   $ 301       12.56 %   $ 324       8.54 %   $ 282       8.81 %   $ 517       9.88 %
Commercial real estate
    412       72.76       553       67.39       298       68.47       210       66.17       28       63.38  
Residential mortgages
    40       10.17       36       10.33       38       11.17       33       12.56       8       14.49  
Consumer loans
    28       8.09       36       9.72       65       11.82       62       12.47       37       12.25  
    -       -       -       -       2       -       -       -       -          
    $ 867       100.00 %   $ 926       100.00 %   $ 727       100.00 %   $ 587       100.00 %   $ 590       100.00 %


Table 9—Analysis of Allowance for Loan Losses

Year ended December 31,
(Dollars in thousands)
Balance at January 1
  $ 926     $ 727     $ 587     $ 590     $ 561  
Commercial and industrial
    (65 )     (189 )     (22 )     (464 )     (91 )
Commercial real estate
    (150 )     (227 )     (62 )     (4 )     -  
Residential mortgages
    -       (8 )     -       -       -  
Consumer loans
    (50 )     (177 )     (57 )     (51 )     (139 )
      (265 )     (601 )     (141 )     (519 )     (230 )
Commercial loans
    10       7       2       107       92  
Commercial real estate
    -       1       -       -       -  
Consumer loans
    27       45       44       41       46  
      37       53       46       148       138  
Net recoveries (charge-offs)
    (228 )     (548 )     (95 )     (371 )     (91 )
Provisions charged to operations
    170       747       235       368       120  
Balance at December 31
  $ 867     $ 926     $ 727     $ 587     $ 590  
Ratio of net (recoveries) charge-offs to average loans outstanding
    0.54 %     1.17 %     0.20 %     0.77 %     0.21 %