UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X|
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
|-|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from
to
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Commission file number: 0-25976
UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2802415
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Graham Building, 30 South 15th Street, Suite 1200, 19102
Philadelphia, Pennsylvania
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(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:
Name of each exchange on
Title of each class which registered
NONE NONE
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
Yes [ ] No [ ]
Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes [ ] No [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether 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 |X|
Indicate by checkmark whether the Registrant is a shell company (as defined by
Rule 126-2 of the Exchange Act):
Yes |_| No |X|
The aggregate market value of shares of common stock held by non-affiliates of
Registrant (including fiduciary accounts administered by affiliates) was
[_______________] on June 30, 2005. 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 a Series Preferred Stock (Series A
Preferred Stock).
The Board of Directors designated a subclass of the common stock, Class B Common
Stock, by filing of Articles of Amendment to its Articles of Incorporation on
September 30, 1998. This Class B Common Stock has all of the rights and
privileges of Common Stock with the exception of voting rights. Of the 2,000,000
shares of authorized Common Stock, 250,000 have been designated Class B Common
Stock. There is no market for the Common Stock. None of the shares of the
Registrant's stock was sold within 60 days of the filing of this Form 10-K.
As of March 10, 2006 the aggregate number of the shares of the Registrant's
Common Stock outstanding was 1,068,588 (including 191,667 Class B non-voting).
There are 33,500 shares of Common Stock held in treasury stock at March 10,
2006.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Parts Into Which Incorporated
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None
The exhibit index is on pages 47 through 48. There are 76 pages in this report.
FORM 10-K
United Bancshares, Inc.
Index
Item No. Page
PART I
1. Business....................................................................................... 4
1A. Risk Factors................................................................................... 12
1B. Unresolved Staff Comments...................................................................... 14
2. Properties..................................................................................... 14
3. Legal Proceedings.............................................................................. 14
4. Submission of Matters to a Vote of Security Holders............................................ 15
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters............................. 15
6. Selected Financial Data........................................................................ 17
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17
7A. Quantitative and Qualitative Disclosures about Market Risk..................................... 37
8. Financial Statements and Supplementary Data.................................................... 37
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 37
9A. Controls and Procedures........................................................................ 37
9B. Other Information ............................................................................. 37
PART III
10. Directors and Executive Officers of Registrant................................................. 37
11. Executive Compensation......................................................................... 43
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 44
13. Certain Relationships and Related Transactions................................................. 45
14. Principal Accountant Fees and Services......................................................... 46
PART IV
15. Exhibits and Financial Statements Schedules.................................................... 47
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 10, 2006.
1
PART I
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT
Certain of the matters discussed in this document and the documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward looking statements for the purposes of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended, and may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
United Bancshares, Inc ("UBS") to be materially different from future results,
performance or achievements expressed or implied by such forward looking
statements. The words "expect," "anticipate," "intended," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. UBS' actual results may differ materially from the
results anticipated by the forward-looking statements due to a variety of
factors, including without limitation: (a) the effects of future economic
conditions on UBS and its customers, including economic factors which affect
consumer confidence in the securities markets, wealth creation, investment and
consumer saving patterns; (b) UBS interest rate risk exposure and credit risk;
(c) changes in the securities markets with respect to the market values of
financial assets and the stability of particular securities markets; (d)
governmental monetary and fiscal policies, as well as legislation and regulatory
changes; (e) changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral and securities, as well as
interest-rate risks; (f) changes in accounting requirements or interpretations;
(g) the effects of competition from other commercial banks, thrifts, mortgage
companies, consumer finance companies, credit unions securities brokerage firms,
insurance company's, money-market and mutual funds and other financial
institutions operating in the UBS' trade market area and elsewhere including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet; (h) any extraordinary events (such as the
September 11, 2001 events) ,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) the failure of assumptions
underlying the establishment of reserves for loan losses and estimates in the
value of collateral, and various financial assets and liabilities and
technological changes being more difficult or expensive than anticipated; (j)
UBS' success in generating new business in its existing markets, as well as its
success in identifying and penetrating targeted markets and generating a profit
in those markets in a reasonable time; (k) UBS' timely development of
competitive new products and services in a changing environment and the
acceptance of such products and services by its customers; and (l) UBS' success
in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to UBS are
expressly qualified in their entirety by use of the foregoing cautionary
statements. All forward-looking statements included in this Report are based
upon information presently available, and UBS assumes no obligation to update
any forward-looking statement.
ITEM 1 -- BUSINESS
United Bancshares, Inc.
United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for
United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of
the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the
bank holding company of the Bank, pursuant to the Bank Holding Company Act of
1956, as amended, on October 14, 1994.
The Bank commenced operations on March 23, 1992. UBS provides banking
services through the Bank. The principal executive offices of UBS and the Bank
are located at The Graham Building, 30 S 15th Street, Suite 1200, Philadelphia,
Pennsylvania 19102. The Registrant's telephone number is (215) 351-4600.
As of March 10, 2006, UBS and the Bank had a total of 34 employees.
2
United Bank of Philadelphia
United Bancshares, Inc. is an African American controlled and managed bank
holding company for United Bank of Philadelphia (the "Bank"), a commercial bank
chartered in 1992 by the Commonwealth of Pennsylvania, Department of Banking and
a member of the Federal Reserve System. The deposits held by the Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides
full service community banking in Philadelphia neighborhoods that are rich in
diversity providing a market opportunity that includes men, women, families,
small business owners, skilled laborers, professionals and many more who value
home ownership and need banking services to help make their dreams come true.
The Bank conducts all its banking activities through its 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 August 2005, the Bank leased, and
simultaneously subleased to a mortgage brokerage alliance, retail space on the
bottom floor of its Center City Graham Building corporate office. The Bank
placed one business development officer in this space with joint signage and an
automated teller machine. This relationship allows the Bank to have 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, 2005, the Bank had total deposits aggregating
approximately $63.3 million and had total net loans outstanding of approximately
$46.0 million. Although the Bank's primary service area for Community
Reinvestment Act purposes is Philadelphia County, it also services, generally,
the Delaware Valley, which consists of portions of Montgomery, Bucks, Chester,
and Delaware Counties in Pennsylvania; New Castle County in Delaware; and
Camden, Burlington, and Gloucester Counties in New Jersey.
The city of Philadelphia is comprised of 353 census tracts and, based on
2000 census data, 204 or 58% of these are designated as low to moderate-income
tracts while 105 or 30% are characterized both as low to moderate-income and
minority tracts. The Bank's primary service area consists of a population of
1,517,550, which includes a minority population of 752,309.
United Bank of Philadelphia, while state chartered as a commercial bank,
is uniquely structured to be a player in providing retail services to its urban
communities, while maintaining and establishing a solid portfolio of commercial
relationships that include small businesses, churches and corporations. The Bank
will leverage its CDFI (community development financial institution) designation
as established by the United States Department of Treasury to attract deposits
from entities seeking Community Reinvestment Act (the "CRA Act") credit as well
as grants and/or equity from the US Treasury CDFI Fund and other agencies of the
U.S. Government.
Among the greatest challenges facing inner city communities is their
lack of stability and transience. The Bank represents consistency to these
communities. It takes its commitment to community development quite seriously
and recognizes that effective corporate and institutional partnerships must be
forged to truly make a difference. Bank management recognizes the potential in
these communities and knows that with the right mix of financial services,
growth will occur. The Bank will continue to leverage its community "know-how"
with the appropriate corporate and institutional partners to help ensure that it
creates economic profit by making comprehensive products and services available
and accessible through service focused delivery channels.
The Bank engages in the commercial banking business, serving the banking
needs of its customers with a particular focus on, and sensitivity to, groups
that have been traditionally under-served, including Blacks, Hispanics and
women. The Bank offers a wide range of deposit products, including checking
accounts, interest-bearing NOW accounts, money market accounts, certificates of
deposit, savings accounts and Individual Retirement Accounts.
The focus of the Bank's lending activities is on the origination of
commercial, consumer and residential loans. A broad range of credit products is
offered to the businesses and consumers in the Bank's service area, including
commercial loans, mortgage loans, student loans, home improvement loans, auto
loans, personal loans, and home equity loans. At March 10, 2006, the Bank's
maximum legal lending limit was approximately $1,122,000 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
3
limit upon consideration of a loan. The Board of Directors has exercised this
power with respect to loans and participations on a number of occasions.
In the area of commercial loans, the Bank has flexibility to develop loan
arrangements targeted at a customer's objectives. Typically, these loans are
term loans or revolving credit arrangements with interest rate, collateral and
repayments terms, varying based upon the type of credit, and various factors
used to evaluate risk. The Bank participates in the government-sponsored Small
Business Administration ("SBA") lending program and when the Bank deems it
appropriate, obtains SBA guarantees for up to 90% of the loan amount. 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.
The Bank's consumer loan program includes installment loans for home
improvement and the purchase of consumer goods and automobiles, student loans,
home equity and VISA secured and unsecured revolving lines of credit, and
checking overdraft protection. The Bank participates in an automobile refinance
program that allows customers to reduce high interest rates paid on their
automobile loans down to more reasonable market rates. The Bank also offers
residential mortgage loans to its customers through its strategic alliance with
a regional mortgage brokerage company. Other services the Bank offers include
safe deposit boxes, travelers' checks, money orders, direct deposit of payroll
and Social Security checks, wire transfers and access to regional and national
automated teller networks.
In 2006, the Bank will introduce new products/strategies aimed at
attracting a significant level of core deposits. These strategies include the
introduction of a new "signature" savings account with a premium interest rate
and remote deposit capture services. Coupled with internet banking, these
products are designed to attract customers throughout the Philadelphia region
without the additional cost of new brick and mortar. The Bank will work together
with its Clergy Advisory Council, formed in May 2005, to roll these products out
to churches and congregations in the Philadelphia region.
The Bank will continue to develop relationships with corporate entities
in the region that have a commitment to community and economic development in
the urban sector to ensure that the communities it serves have full access to
financial products and services. Strategic alliances and partnerships are key to
the economic strength of inner city neighborhoods.
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 web site at www.unitedbankofphiladelphia.com
under the "shareholders corner" section. These files are also accessible on the
Commission's web site@www.sec.gov "
4
Competition
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with local, regional and national commercial
banks, as well as savings banks and savings and loan associations. Many of these
banks and financial institutions have an amount of capital that allows them to
do more advertising and promotion and to provide a greater range of services to
customers including trust services and many "free" products and services with
bundled account relationships. To date, the Bank has attracted, and believes it
will continue to attract its customers from the deposit base of such existing
banks and financial institutions largely due to the Bank's mission to service
groups of people who have traditionally been under served and by its devotion to
personalized customer service. The Bank's strategy has been, and will continue
to be, to emphasize personalized services with special sensitivity to the needs
of Blacks, Hispanics and women and to offer competitive rates to borrowers and
depositors.
To compete, the Bank relies upon personal contacts by the officers,
directors and employees of the Bank to establish and maintain relationships with
Bank customers. The Bank focuses its efforts on the needs of individuals and
small and medium-sized businesses. In the event there are customers whose loan
demands exceed the Bank's lending limit, the Bank will seek to arrange for such
loans on a participation basis with other financial institutions and
intermediaries. The Bank will also assist those customers requiring other
services not offered by the Bank to obtain such services from its correspondent
banks.
UBS believes that a portion of the Bank's customer base is derived from
customers who were dissatisfied with the level of service provided at larger
financial institutions. Many of the national financial institutions that provide
financial services in Philadelphia are no longer headquartered in the region
resulting in a loss of connectivity with the community. The Bank plans to
further capitalize on this situation by implementing calling programs to offer
potential customers a personalized community-based approach to banking. The Bank
has sought, in the past, and intends to continue in the future, to hire business
development officers who have good relationships with desirable customers. These
personal relationships, provision of a high level of customer services, and
referrals from satisfied customers, form the basis of the Bank's competitive
approach, as opposed to advertising, rate competition or the development of
proprietary banking products, services or programs.
In the past, the principal competition for deposits and loans has been
other depository institutions. However, now the Bank also competes with other
financial intermediaries such as brokerage houses offering investment vehicles
to the general public. Other entities, both public and private, seeking to raise
capital through the issuance and sale of debt or equity securities are also
competitors with banks and savings and loan associations in the acquisition of
deposits.
To help remain competitive and attract a significant level of new core
customers, the Bank will introduce a premium rate signature savings account and
new "Check 21" technology--remote deposit capture. This service will allow
customers who are not located in close proximity to the Bank's branches to scan
and transmit deposit information remotely versus physically depositing paper
checks. Remote deposit capture will put the Bank on the cutting edge of
technology in the financial services arena.
UBS will continue to be cognizant of the diversity in its market and will
continue to develop partnerships to leverage the Bank's capacity in its niche
market by skillfully targeting customers and building stakeholder relationships.
Supervision and Regulation
Regulation of United Bancshares, Inc.
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UBS, as a Pennsylvania business corporation, is subject to the
jurisdiction of the Securities and Exchange Commission (the "SEC") and certain
state securities commissions concerning matters relating to the offering and
sale of its securities. Accordingly, if UBS wishes to issue additional shares of
its Common Stock, for example, to raise capital or to grant stock options, UBS
must comply with the registration requirements of the Securities Act of 1933, as
amended, and any applicable states securities laws, or find an applicable
exemptions from such registration.
5
The Bank Holding Company Act
UBS, as a bank holding company, is subject to the Bank Holding Company Act
of 1956, as amended (the "BHC Act"), and supervision by the Federal Reserve
Board. The BCH Act limits the business of bank holding companies to banking,
managing or controlling banks, performing certain servicing activities for
subsidiaries and engaging in such other activities as the Federal Reserve Board
may determine to be closely related to banking. UBS is subject to the
supervision of and inspection by the Federal Reserve Board and required to file
with the Board an annual report and such additional information as the Board may
require pursuant to the BHC Act and its implementing regulations.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities, unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks, as to be a proper incident thereto. In making
this determination, the Board considers whether the performance of these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects.
The BHC Act requires UBS to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or indirectly, more than 5%
of the voting shares of any corporation, including another bank. In addition,
the BHC Act prohibits UBS from acquiring more than 5% of the voting shares of,
or an interest in, or all or substantially all of the assets of, any bank
located outside Pennsylvania, unless such an acquisition is specifically
authorized by the laws of the state in which such bank is located.
Subject to compliance with Pennsylvania law, and, as noted above,
compliance with the BHC Act, UBS is permitted to control a number of banks.
However, UBS is required under the BHC Act to obtain the prior approval of the
Federal Reserve Board before acquiring all or substantially all of the assets of
any bank, or acquiring ownership or control of any voting shares of any other
bank if, after such acquisition, UBS would control more than 5% of the voting
shares of such bank.
The BHC Act and the Federal Reserve Board's regulations prohibit a bank
holding company and its subsidiaries from engaging in certain tying arrangements
in connection with any extension of credit or services. The "anti-tying"
provisions prohibit a bank from extending credit, leasing, selling property or
furnishing any service to a customer on the condition that the customer obtain
additional credit or service from the bank, its bank holding company or any
other subsidiary of its bank holding company, or on the condition that the
customer not obtain other credit or services from a competitor of the bank, its
bank holding company or any subsidiary of its bank holding company.
The Bank, as a subsidiary of UBS, is subject to certain restrictions
imposed by the Federal Reserve Act, as amended, on any extensions of credit to
UBS or its subsidiaries, on investments in the stock or other securities UBS or
its subsidiaries, and on taking such stock or securities as collateral for
loans.
The Federal Reserve Act and Federal Reserve Board regulations also place
certain limitations and reporting requirements on extensions of credit by a bank
to principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, that Act and
those regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control by UBS of a bank
holding company, without prior notice to certain federal bank regulators.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of the bank or bank holding company or to vote
25% or more of any class of voting securities of the bank holding company.
6
The Financial Services Act
The Financial Services Act (the "FSA Act"), sometimes referred to as the
Gramm-Leach-Bliley Act, repealed the provisions of the Glass-Steagall Act, which
prohibited commercial banks and securities firms from affiliating with each
other and engaging in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and securities firms have been
eliminated.
The FSA Act authorizes the establishment of "financial holding companies"
("FHC") to engage in new financial activities offering and banking, insurance,
securities and other financial products to consumers. Bank holding companies may
elect to become a FHC, if all of its subsidiary depository institutions are well
capitalized and well managed. See "Regulatory Action" and "Regulatory Matters"
below. If those requirements are met, a bank holding company may file a
certification to that effect with the Federal Reserve Board and declare that it
elects to become a FHC. After the certification and declaration are filed, the
FHC may engage either de novo or through an acquisition in any activity that has
been determined by the Federal Reserve Board to be financial in nature or
incidental to such financial activity.
Under the FSA Act the Bank, subject to various requirements, is permitted
to engage through "financial subsidiaries" in certain financial activities
permissible for affiliates of an FHC. However, to be able to engage in such
activities the Bank must be well capitalized and well managed and receive at
least a "satisfactory" rating in its most recent CRA examination. See "The
Community Reinvestment Act" below.
UBS cannot be certain of the future effect of the legislation and
regulations, described above, on its business, although there may be
consolidation among financial service institutions and increased competition for
UBS as well as an increase in the expense of regulatory compliance.
Regulation of the Bank
----------------------
The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and the Federal Reserve Board because the
Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank's
deposits and thus the Bank is subject to certain FDIC regulations. In addition,
the Bank is subject to a variety of local, state and federal laws that affect
its operation. Below are summarized those laws and regulations which a have
material impact on the operations and expenses of the Bank and thus UBS.
Branch Banking
The Pennsylvania Banking Code of 1965, as amended, the ("Banking Code"),
has been amended to harmonize Pennsylvania law with federal law to enable
Pennsylvania banking institutions, such as the Bank, to participate fully in
interstate banking and to remove obstacles to out of state banks engaging in
banking in Pennsylvania.
Federal Reserve Membership Regulations
Since the Bank is a member bank of the Federal Reserve System, the Federal
Reserve Board possesses the power to prohibit institutions regulated by it, such
as the Bank, from engaging in any activity that would be an unsafe and unsound
banking practice or violate the law. Moreover, the Board has: (i) empowered the
Federal Deposit Insurance Corporation (the "FDIC") to issue cease-and-desist or
civil money penalty orders against the Bank or its executive officers, directors
and/or principal shareholders based on violations of law or unsafe and unsound
banking practices; (ii) authorized the FDIC to remove executive officers who
have participated in such violations or unsound practices; (iii) restricted
lending by the Bank to its executive officers, directors, principal shareholders
or related interests thereof; (iv) restricted management personnel of the Bank
from serving as directors or in other management positions with certain
depository institutions whose assets exceed a specified amount or which have an
office within a specified geographic area. Additionally, the Bank Control Act
provides that no person may acquire control of the Bank unless the Federal
Reserve Board has been given 60-days prior written notice and within that time
has not disapproved of the acquisition or extended the period for disapproval.
7
The Federal Deposit Insurance Corporation Act
The Federal Deposit Insurance Corporation Act (the "FDIC Act") includes
several provisions that have a direct material impact on the Bank. The most
significant of these provisions are discussed below.
To minimize losses to the deposit insurance funds, the FDIC Act has
established a format to monitor FDIC-insured institutions and to enable prompt
corrective action to be taken by the appropriate federal supervisory agency if
an institution begins to experience difficulty. The FDIC Act establishes five
"capital" categories. They are: (1) well capitalized, (2) adequately
capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5)
critically undercapitalized. The overall goal of these new capital measures is
to impose more scrutiny and operational restrictions on banks as they descend
the capital categories from well capitalized to critically undercapitalized.
Under current regulations, a "well-capitalized" institution would be one
that has at least a 10% total risk-based capital ratio, a 6% Tier I risk-based
capital ratio, a 5% Tier I leverage ratio, and is not subject to any written
order or final directive by its regulatory agency to meet and maintain a
specific capital level.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement is to be in
the form of Tier I capital, this also will mean that a bank would need to
maintain at least 4% Tier I risk-based capital ratio. An institution must meet
each of the required minimum capital levels in order to be deemed "adequately
capitalized." The most recent notification from the Federal Reserve authorities
categorized the Bank as "adequately capitalized" under the regulatory framework
for prompt and corrective action. See "Regulatory Action" and "Regulatory
Matters" below.
An "undercapitalized" institution is one that fails to meet one or more of
the required minimum capital levels for an "adequately capitalized" institution.
Under the FDIC Act, an "undercapitalized" institution must file a capital
restoration plan and is automatically subject to restrictions on dividends,
management fees and asset growth. In addition, the institution is prohibited
from making acquisitions, opening new branches or engaging in new lines of
business without the prior approval of its primary federal regulator. A number
of other restrictions may be imposed.
The Bank is insured by the FDIC, which currently insures the Bank's
deposits to a maximum of $100,000 per depositor. For this protection, each
insured bank pays a semiannual 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. A
significant increase in the assessment rate or a special additional assessment
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 February 2006, Congress passed the Federal Deposit Insurance Reform Act
of 2005. This legislation will merge the Bank Insurance Fund and the Savings
Association Insurance Fund into one fund, increase insurance coverage for
retirement accounts to $250,000, adjust the maximum deposit insurance for
inflation after March 31, 2010 and give the FDIC greater flexibility in setting
insurance assessments.
The Community Reinvestment Act
The Bank is required, by the CRA Act and its implementing regulations, to:
(i) meet the credit needs of the community, including the low and
moderate-income neighborhoods, which it serves. The Bank's CRA Act record is
taken into account by the regulatory authorities in their evaluation of any
application made by the Bank for, among other
8
things, approval of a branch or other deposit facility, branch office
relocation, a merger or an acquisition. The CRA Act also requires the federal
banking agencies to make public disclosure of their evaluation of a bank's
record of meeting the credit needs of its entire community, including low and
moderate-income neighborhoods. After its most recent CRA Act examination the
Bank was given an "outstanding" CRA Act rating."
The Bank Secrecy Act
Under the Bank Secrecy Act ("BSA"), the Bank and other financial
institutions are required to report to the Internal Revenue Service currency
transactions, of more than $10,000 or multiple transactions of which the Bank
has knowledge exceed $10,000 in the aggregate. Civil and criminal penalties are
provided under the BSA for failure to file a required report, for failure to
supply information required by the BSA or for filing a false or fraudulent
report.
Privacy of Consumer Financial Information
The FSA Act also contains provisions designed to protect the privacy of
each consumer's financial information held in a financial institution. The
regulations (the "Regulations") issued pursuant to the FSA Act are designed to
prevent financial institutions, such as the Bank, from disclosing a consumer's
nonpublic personal information to third parties. However, financial institutions
can share a consumer customer's personal information or information about
business with affiliated companies.
The FSA Act Regulations permit financial institutions to disclose nonpublic
personal information to nonaffiliated third parties for marketing purposes but
financial institutions must provide a description of their privacy policies to
the consumers and give consumers an opportunity to opt-out of such disclosure
and prevent disclosure by the financial institution of the consumer's nonpublic
personal information to nonaffiliated third parties. These privacy Regulations
will affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
Consumer Protection Rules - Sale of Insurance Products
In addition, as mandated by FSA Act, the bank regulators have published
consumer protection rules (the "Rules") which apply to the retail sales
practices, solicitation, advertising or offers of insurance products, including
annuities, by depository institutions such as the Bank.
The Rules provide that before the sale of insurance or annuity products can
be completed, disclosures must be made that such insurance products are not
deposits or other obligations of or guaranteed by the FDIC or any other agency
of the United States, the Bank or any affiliate and that insurance products,
including an annuities, may involve an investment risk, including a possible
loss of value.
The Rules also provide that the Bank may not condition an extension of
credit on the consumer's purchase of an insurance product or annuity from the
Bank or any affiliate or on the consumer's agreement not obtain or prohibit the
consumer from obtaining an insurance product or annuity from an unaffiliated
entity.
Finally the Rules also require formal acknowledgment by the consumer that
such disclosures have been received. In addition, to the extent practical, the
Bank must keep insurance and annuity sales activities physically separate from
the areas where retail sales are routinely accepted from the general public. The
Bank currently does not market insurance products.
The Patriot Act
The Patriot Act of 2001 which was enacted in the wake of the September
11, 2001 attacks, include provisions designed to combat international money
laundering and advance the U.S. government's war against terrorism. The Patriot
Act, and the regulations, which implement it, contains many obligations, which
must be satisfied by financial institutions, including the Bank, which involve
additional expenses for the Bank. In March of 2006 the Patriot Act, which was
about to expire, was extended. The provisions in the Patriot Act concerning
anti-terrorism were extended and provisions were added to the Patriot Act to
curb certain of the criminal investigation powers that were in the original
Patriot Act.
9
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") stated goals are
to increase corporate responsibility, provide enhanced penalties for accounting
and auditing improprieties by publicly traded companies and protect investors by
improving the accuracy and reliability of corporate disclosures made pursuant to
the securities law. The Sarbanes-Oxley Act and its implementing regulations
allow shareholders to monitor the performance of companies and their directors
more easily and effectively.
The Sarbanes-Oxley Act generally applies to all domestic companies, such
as UBS, that file periodic reports with the SEC under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Sarbanes-Oxley Act includes
very significant disclosure requirements and new corporate governance rules,
requires the SEC, the securities exchanges and the NASDAQ stock market to adapt
extensive additional disclosures, corporate governance provisions and other
related rules, as well as mandating that studies of certain significant issues
be made by the SEC and the US Comptroller General. Given the extensive number of
Sarbanes-Oxley Act rules and regulations to be finalized and implemented, the
final scope and impact of its requirements on UBS and the financial services
industry have yet to be determined.
The SOX Act addresses, among other matters, directors' audit committees;
certification of financial statements by the chief executive officer and chief
financial officer; forfeiture of bonuses and profits made by directors and
senior officers in the twelve (12) month period covered by restated financial
statements; a prohibition on insider trading during pension blackout periods;
disclosure of off-balance sheet transactions; a prohibition by companies, other
than federally insured financial institutions, on personal loans to their
directors and officers; expedited filing of reports concerning stock
transactions by directors and executive officers; formation of a public
accounting oversight board; auditor independence; and increased criminal
penalties for violation of certain the securities laws.
To implement the requirements of SOX Act and regulations, UBS' management
has instituted a series of actions to strengthen and improve UBS', corporate
governance practices. Included in those actions was the development of a system
designed to evaluate and monitor the continued effectiveness of the design and
operation of UBS' internal controls and procedures for financial reporting.
These series of actions by UBS' management improves UBS' and the Bank's
Audit Committees and Risk Management Committees of the Boards, and UBS' and
Bank's structures and processes which are intended to provide tools to
strengthen internal controls, communications and disclosure of necessary
information to those who must know and use it. UBS' system of internal controls
and procedures, which are in place, are designed to capture information from all
segments of its business. At UBS and the Bank, each key material element of
their operation is subject to oversight to help insure proper internal controls
and procedures, administration, risk management and delivery of critical
information disclosures to appropriate audit and financial officers, executive
management, Board committees and the Boards of directors. UBS' management
believes that the addition of these new controls and processes has brought with
it a broader and more in depth analysis to UBS' systems of controls and
procedures and corporate governance.
Compliance with Section 404 of the Sarbanes-Oxley Act
Section 404 ("SOX-404") of the Sarbanes-Oxley Act requires that UBS put
internal controls for public financial reporting in place to gain assurance that
UBS properly presents its financial statements and related footnotes, under
generally accepted accounting principles of the United States ("GAAP"). The
Commission has postponed the effective date of SOX-404 for companies, such as
UBS, with less than $75,000,000 in market capitalization until July 15, 2007.
As required by, SOX-404 UBS has undertaken a project to determine (1)
what internal controls for public financial reporting are in place and (2) what
additional internal controls needed to be implemented in order to gain assurance
that UBS properly presents its financial statements and related footnotes, under
GAAP. To accomplish this task UBS has devoted such staff to assist for UBS'
management in completing the project and thereby enabling the UBS' chief
executive officer and chief financial officer to certify, in a timely fashion,
whether or not there will be any significant deficiencies or material weaknesses
in the internal controls, established to assure that the UBS' financial
statements will be prepared under GAAP.
Upon completion of management's assessments of the adequacy of its
internal controls, its Independent Registered
10
Public Accounting Firm, McGladrey & Pullen, LLP ("McGladrey & Pullen"), will be
required to audit management's assessment of internal controls and issue an
opinion stating whether (1) management's assessment of the internal controls was
fairly stated and (2) whether UBS maintains effective internal control over
financial reporting. Based on UBS' management's assessment, the chief executive
officer and chief financial officer will then attest whether the UBS' internal
control over financial reporting is effective. McGladrey & Pullen will then
issue a report stating whether in their opinion management's assessment of the
UBS' internal control over financial reporting is fairly stated and that UBS
maintains effective internal control over financial reporting as of December 31,
2007.
The rules and regulations, discussed above, which implement the
Sarbanes-Oxley Act could have a significant economic impact on the compliance
costs of the UBS and all publicly held companies.
New Legislation and Regulations
The Fair and Accurate Credit Reporting Transactions Act
The Fair and Accurate Credit Reporting Transactions Act of 2003 (the "Fact
Act") became law on December 4, 2003. Among other things, the Fact Act
permanently extended the provisions of the Fair Credit Reporting Act (the FCR
Act") that would have expired on January 1, 2004 and had prevented the states
from enforcing credit reporting laws that were more restrictive than the FCR Act
provisions.
Specifically, the Fact Act now permanently prohibits the states from
enforcing laws stricter than the Fact Act regulate that regulate: (1) the
prescreening of consumer reports, (2) the time within which credit bureaus must
respond to consumer disputes, (3) the duties of users of credit bureau
information, (4) the information contained in the credit reports, (5) the duties
of the information providers, and (6) the exchange of credit information between
affiliates.
In addition the Fact Act contains provisions concerning (i) how often
consumers may obtain free copies of their credit reports, (ii) the disclosure of
credit scores used for credit decisions, (iii) a consumers opt-out procedure for
exchange of credit information, that would otherwise be treated as a credit
report, among affiliates, (iv) the duty of lenders to notify consumers that
information contained in their credit reports resulted in their receiving credit
on less than the most favorable terms.
The Fact Act also contains provisions designed to reduce identity theft and
protect the confidentiality of a consumer's private medical information.
Future Legislation and Governmental Policies
From time to time various Federal and state legislation have been proposed
that could result in additional regulation of, and restrictions on, the business
of the Bank. As the enactment of the FSA Act and the Sarbanes-Oxley Act confirm,
from time to time, various proposals are enacted in the United States Congress
as well as Pennsylvania legislature and issued by various bank regulatory
authorities which alter the powers of, and place restrictions on, different
types of bank organizations.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal and state legislation and regulations that may
increase the costs of doing business. Bank management cannot anticipate the
changes in laws and regulations and their impact on the Bank's business,
financial position and reported results of operation.
Regulatory Action
-----------------
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement ("the Agreement") with
its primary regulators with regard to, among other things, achievement of
agreed-upon capital levels, implementation of a viable earnings/strategic plan,
adequate funding of the allowance for loan losses, the completion of a
management review and succession plan, and improvement in internal controls. The
Agreement required the Bank to increase its capital ratio to 6.5% by June 30,
2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had
met the required ratios by implementing strategies that included: reducing
expenses,
11
consolidating branches, and soliciting new and additional sources of capital.
Management continues to address all matters outlined in the Agreement.
At December 31, 2003, the Bank's tier one leverage capital ratio had
fallen to 6.81%, below the 7% minimum capital ratio required by the Agreement.
However, by February 2004, the tier one leverage ratio had improved to 7.29%.
Subsequently, as a result of a re-capitalization plan including the sale of
bank-owned real estate for a gain of $1.9 million, the Bank's tier one leverage
ratio improved to 9.49% at December 31, 2004. At December 31, 2005, the Bank's
tier one leverage ratio increased to 9.47%.
With the stabilization of the Bank's capital position, management has
turned its attention to increasing core profitability. A strategic plan has been
adopted for 2006 that focuses on growth strategies for loans and deposits. These
strategies include the introduction of "signature" deposit products with premium
interest rates coupled with alternative service delivery channels including
internet banking and remote deposit capture. In addition, the Bank has
designated regional business development officers in the areas surrounding each
of its three branches to solicit loan and deposit business. These strategies
will allow the Bank to penetrate the marketplace without adding additional
branches to its network. While expense reductions will continue to be sought,
management believes that a greater impact will be realized with increased
deposit levels and loan originations that result increased net interest income.
As a result of the actions referred to above, Management believes that
the Bank is substantially in compliance with the Agreement's terms and
conditions. Failure to comply could result in additional regulatory supervision
and/or actions.
ITEM 1A--RISK FACTORS
Below is a list of the significant risks that concern UBS, the Bank and the
banking industry. The list may not be a complete listing and has not been
prepared in a certain order.
Changes in the economy could have an adverse affect on the Bank and UBS
- -----------------------------------------------------------------------
The strength of the U.S. economy and the local economy in which the Bank
operates may be different than expected. The business and earnings of the Bank
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, all of which are beyond the Bank's control. A
downturn in the economy could result in a decrease in products and service
demand, an increase in loan delinquencies 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. These factors could result in an increase in the provision for loan
losses.
Future loan losses may exceed the Bank's allowance for loan losses
- ------------------------------------------------------------------
The Bank is 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. A downturn in the economy or the real estate market in Bank's market area
or a rapid change in interest rates could have a negative effect on collateral
values and borrowers' ability to repay. This deterioration 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, 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.
Changing interest rates could reduce the Bank's net interest margin, net
- ------------------------------------------------------------------------
interest income, fee income and net income
- ------------------------------------------
Interest and fees on loans and securities, net of interest paid on
deposits and borrowings, are a large part of the Bank's net income. Interest
rates are key drivers of the Bank's net interest margin and subject to many
factors beyond the control of the Bank's management. As interest rates change,
net interest income is affected. Rapidly changing interest rates in the future
could result in interest expense increasing faster than interest income because
of mismatches in financial instrument maturities and/or competitive pressures.
Further, substantially higher interest rates generally reduce loan demand and
may result in slower loan growth. Decreases or increases in interest rates could
have a negative effect
12
on the spreads between the interest rates earned on assets and the rates of
interest paid on liabilities, and therefore decrease net interest income.
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, establish permissible activities for the Bank to engage in,
maintenance of adequate capital levels, and other aspects of operations. The
laws and regulations applicable to the banking industry could change at any
time, and cannot predict the effect of these changes on the Bank's business and
profitability. Increased regulation could increase the cost of compliance and
adversely affect profitability. In addition, the Bank is currently operating
under a regulatory agreement that requires the maintenance of minimum capital
levels. Losses from operations may result in deterioration of the Bank's capital
levels below required levels and could result in more severe regulatory action.
(See "Regulatory Action" above)
The financial services industry is very competitive
- ---------------------------------------------------
The Bank faces competition in attracting and retaining deposits, making
loans, and providing other financial services such as trust and investment
management 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 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.
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.
Ability to attract and retain management and key personnel may affect future
- ----------------------------------------------------------------------------
growth and earnings
- -------------------
The Company's success 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.
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 net
- ----------------------------------------------------------------------------
income
- ------
>> New developments in the banking industry
>> Variations in quarterly or annual operating results
>> 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.
13
ITEM 1B--UNRESOLVED STAFF COMMENTS
None.
ITEM 2 -- PROPERTIES
Corporate Headquarters
In February 2005, United Bank of Philadelphia's corporate offices
re-located to The Graham Building, 30 S. 15th Street, Suite 1200, Center City
Philadelphia. On February 1, 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, including executive
offices, operations, finance, human resource, 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. The Bank formed an alliance with a regional mortgage brokerage company
and simultaneously subleased all except the lobby in which the automated teller
machine (ATM) is located. The Bank occupies one desk in the space for the
purpose of business development/cross-referrals. The lease expires in September
2009. The Bank's average aggregate gross monthly rental is $4,858 of which the
tenant pays an average monthly rent of $3,358. In addition, the Bank pays $1,500
per month for the ATM lobby plus one third of common area maintenance.
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. Management believes this branch has not reached its capacity and looks
forward to increased opportunities in all aspects of the Bank's niche
businesses. This facility, comprising a retail banking lobby, teller area,
offices, vault and storage space is currently leased at a monthly rental of
$3,843.
West Philadelphia Branch
In August 2003, the Bank purchased the branch location at 3750 Lancaster
Avenue for $287,500. From July 1996 to the time of purchase, this facility had
been leased. 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 a teller and customer service area, lobby and vault.
The aggregate monthly rental for this facility is $3,875 per month. This lease
expired in October 2003. The Bank has been notified by the landlord that
extensive improvements to the shopping plaza in which this branch is located are
planned for 2006. The Bank will be relocated within the shopping plaza in a
space to be constructed by the Fall of 2006. It is currently leasing this
facility on a month-to-month basis. However, a proposed new lease is currently
under negotiation for the new location.
ITEM 3 -- LEGAL PROCEEDINGS
No material claims have been instituted or threatened by or against UBS or
the Bank other than in the ordinary course of business.
14
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A shareholders annual meeting of UBS was held on November 14, 2005. Proxies
for the annual meeting were solicited pursuant to Regulation 14A of the Exchange
Act and there were no solicitation in opposition to the management's nominees as
listed in the proxy statement and all such nominees were elected.
The matters voted upon at shareholders annual meeting of UBS were the
reelection of one (1) Class B director to serve a four year term and the
ratification of the appointment of McGladrey and Pullen LLP as UBS' independent
registered public accountants for the year 2004.
The votes cast at the meeting for the election of directors, for, against
or withheld, as well as a number of absentee and non-broker votes as to each
matter voted upon at the meeting, including a separate tabulation with respect
to each nominee for office is as follows:
- ------------------------------------------------ -------------------------------
53.679% Shares Voted 468,716.99 of 873,192.32 Shares
- ------------------------------------------------ -------------------------------
14.898% Accounts Voted 469 of 3,148 Accounts
- ------------------------------------------------ -------------------------------
- --------------------------------- ------------ ------- --------------------
Question YES NO WITHHOLD/ABSTAIN
- --------------------------------- ------------ ------- --------------------
Ahsan M. Nasratullah 99.093% 0.00% 0.907%
(CLASS B) 464,466.99 0.00 4,250.00
- --------------------------------- ------------ ------- --------------------
Ratify McGladrey and Pullen, LLP 99.208% 0.00% 0.642%
465,006.99 0.00 3,010.00
- --------------------------------- ------------ ------- --------------------
PART II
-------
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS
Common Stock
The 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 2004 and 2005.
In June 2003, a shareholder of the Bank returned 33,500 shares of common
stock and 6,308 shares of preferred Series A stock. These shares were returned
for no consideration and were recorded as treasury stock by the Bank. No other
transactions with respect to UBS common stock occurred during 2003.
As of March 10, 2006 there were 3,148 shareholders of record of UBS' voting
Common Stock and two shareholders of record of UBS' Class B Non-voting Common
Stock.
Dividend Restrictions
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
15
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 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.
The FDIC generally prohibits all payments of dividends by a bank, which is
in default of any assessment to the FDIC. (See "Regulatory Action" above.)
Securities Authorized for Issuance Under Equity Compensation Plans
The Company adopted a Stock Option Plan in 1998. Under this Plan,
options to acquire shares of common stock were granted to the former chief
executive officer. The Stock Option Plan provides for the granting of options at
the fair market value of the Company's common stock at the time the options are
granted. Each option granted under the Stock Option Plan may be exercised within
a period of ten years from the date of grant. However, no option may be
exercised within one year from the date of grant. In 1998, options to purchase
29,694 shares of the Company's common stock at a price of $8.54 per share were
awarded to the former chief executive officer.
The information below has been derived from UBS' consolidated financial
statements.
16
ITEM 6 -- SELECTED FINANCIAL DATA
Selected Financial Data
Year ended December 31,
(Dollars in thousands, except per share data) 2005 2004 2003 2002 2001
------------------------------------------------------------
Net interest income.............................. $3,570 $ 3,280 $ 3,290 $ 3,726 $ 4,060
Provision for loan losses........................ 558 45 565 175 335
Noninterest income............................... 1,582 3,655 1,891 2,327 2,443
Noninterest expense.............................. 4,864 5,243 5,732 6,095 7,038
Net (loss)income ................................ (269) 1,647 (1,115) (217) (870)
Net (loss) income per share - basic.............. (0.25) 1.54 (1.03) (0.20) (0.79)
Net (loss) income per share - fully diluted (0.25) 1.50 (1.03) (0.20) (0.79)
Balance sheet totals:
Total assets................................. $72,210 $ 72,301 $74,717 $86,044 $88,668
Net loans........................................ 45,950 46,490 46,690 43,459 42,292
Investment securities............................ 13,706 13,560 15,637 21,518 25,806
Deposits......................................... 63,324 63,172 67,117 76,929 79,423
Shareholders' equity............................. 8,492 8,811 7,235 8,500 8,558
Ratios:
Tangible Equity to assets................. 9.87% 9.89% 6.85% 7.45% 7.67%
Return on assets......................... (0.37)% 2.38% (1.38)% (0.25)% (0.95)%
Return on equity................................. (3.78)% 26.96% (13.03)% (2.55)% (9.63)%
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Because UBS is a bank holding company for the Bank, the financial
statements in this report are prepared on a consolidated basis to include the
accounts of the Company and the Bank. The purpose of this discussion is to focus
on information about the Bank's financial condition and results of operations,
which is not otherwise apparent from the consolidated financial statements
included in this annual report. This discussion and analysis should be read in
conjunction with the financial statements presented elsewhere in this report.
Critical Accounting Policies
Allowance for Credit Losses
The Bank considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The balance in the allowance for loan losses is determined
based on management's review and evaluation of the loan portfolio in relation to
past loss experience, the size and composition of the portfolio, current
economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from management's estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets are subject to management's
judgment based upon available evidence that future realization is more likely
than not. For financial reporting purposes, a valuation allowance of 100% of the
net deferred tax asset has been recognized to offset the net deferred tax assets
related to cumulative temporary differences and tax loss carryforwards. If
management determines that the Bank may be able to realize all or part of the
deferred tax asset in the future, a credit to income tax expense may be required
to increase the recorded value of the net deferred tax asset to the expected
realizable amount.
17
Background Summary
History
The Bank entered a Written Agreement ("the Agreement") with the Federal
Reserve Bank in 2000 that had many ambitious timelines for the board and
management to meet. This Agreement became a motivator for the new management
team to dismantle a lack luster business model in order to keep the franchise
alive and relevant. This was a model that originally held great promise for it
was established to bring the "unbanked" into the mainstream of financial
services through affordable pricing and sensitive customer service. The
customers came and the numbers grew quickly and the franchise grew through the
acquisition of failed savings and loan branches. However, with this growth came
increased expenses through the assimilation of acquired branch locations,
people, products and the overall conversion expense.
The Bank had quickly strayed from its model of building a customer-friendly
and affordable franchise into a franchise of transforming several branches of
savings and loan customers into the Bank's commercial platform. In 2000, the
Bank was still faced with an enormous array of accounts that had not yet been
streamlined, thus curtailing the sales capacity of the staff. In 2002,
management consolidated the Bank's product offerings to make them more
customer/sales friendly.
A major factor that needed to be addressed by the Bank was its capital
(tier one leverage ratio). When the Bank entered into the Agreement, the Bank's
tier one leverage ratio was slightly under 5%. Aggressive strategies were
developed and implemented by moving more expensive deposit relationships
(certificates of deposit and IRA's) off the Bank's balance sheet. These deposits
were sold for a gain and thus the Bank's total assets were reduced getting the
Bank closer to the 7% capital requirement. In 2004, management continued to
implement capitalization strategies including the sale of bank-owned real estate
for a $1.9 million gain. With its current capital position (9.47% tier one
leverage at December 31, 2005), the Bank is positioned for growth.
Another fundamental problem for the Bank's business model was its expense
profile. Major cuts were made including staff reductions and the consolidation
the branch network (from 8 offices to 3). While there was a conscientious effort
to dismantle the original business model, management recognized the positive
aspects of the model - low cost of funds, loyal customer base, and strong net
interest margins. These strengths can be built upon as a new, productive model
is formulated and implemented.
The Bank's Goals
With the stabilization of the Bank's capital position and operating
structure, the primary focus of management is to increase core profitability and
build franchise/shareholder value. As a result of an internal assessment, the
Bank will focus on the following goals to build value:
o Growing and diversifying the deposit mix
o Growing and diversifying the loan mix
o Growing and diversifying noninterest income
o Controlling expenses
o Enhancing the branch network and alternative delivery options
To accomplish these goals management will focus on the implementation of
three (3) critical strategies as follows:
o Implementation of a Signature Savings Product--A new statement savings
-----------------------------------------------
product will be introduced in 2006 that will have a constant premium
interest rate (initial rate of 3.25%). The product will be rolled out
via a targeted direct mail campaign, newspaper advertisements, and
distribution in church bulletins. The Bank will work together with its
Clergy Advisory Council to generate interest in the product and
encourage congregants as well as churches to establish "Rainy Day
Savings Funds" at the Bank. While the introduction of this product
will result in an increased cost of funds, it allows for the creation
of new core customers and the generation of significant deposits to
fund loans and/or investments. This strategy is projected to generate
increased net interest income that will result in increased core
profitability for the Bank.
18
o Implementation of Remote Deposit Capture--New technology evolved from
------------------------------------------
the introduction of "Check 21" in October 2004. This new banking
legislation allows for expedited clearing of check deposits through
the use of images. The Bank is currently working with its core service
provider to implement a remote deposit capture service delivery option
in 2006. This new technology will allow customers near and far from
the Bank's branch network to conveniently make deposits using a
scanner. The initial target market for this product will be religious
organizations to allow for expedited deposit processing and
availability of tithes and offerings. Again, the Bank will utilize its
Clergy Advisory Council to introduce this product. Remote deposit
capture is projected to increase the level of core noninterest-bearing
checking accounts.
o Hire Business Development Officers/Lenders--The Bank will seek to hire
an experienced business development officer/lender to drive business
to its branch network and build its loan portfolio. This person will
"get the Bank's name out" as a critical player in Philadelphia's
financial services arena. Substantial loan volume is projected to be
generated by this individual. In addition, the Bank reallocated three
(3) staff positions to become regional business development officers.
These individuals will work to cultivate relationships in and around
the areas surrounding the Bank's branches.
In addition, the Bank will continue to develop relationships with corporate
entities in the region that have a commitment to community and economic
development in the urban sector. Strategic alliances and partnerships are key to
the economic strength of inner city neighborhoods. The Bank has begun to develop
these strategic alliances/partnerships to help ensure that the communities it
serves have full access to financial products and services.
While the Bank will continue to provide a full array of commercial products
and services, enhanced emphasis will be placed on the production of consumer
products through the Bank's financial service centers (branches). Some products
will be marketed solely by the Bank while others will be offered through
strategic alliances. Some of the products and services that will be emphasized
include the following:
o Auto Loans--A relationship with a direct marketing company will
continue with mailings taking place at agreed upon times
throughout the year. The goal is to attract consumers who may not
bank with the Bank through this marketing effort and to cross sell
other products including the opening of a deposit account.
o Residential Mortgages--Through its marketing alliance with it
mortgage brokerage company, the Bank's customers will have access
to a full array of affordable mortgage products with special
incentives. This marketing alliance will give the Bank name
recognition in the mortgage.
o Home Equity Loans--This product will receive heightened attention
with the co-branded advertising in conjunction with a the Bank's
mortgage brokerage alliance. All home equity inquiries, as a
result of the add campaign, will be referred to the Bank.
The Bank will continue to underwrite commercial transactions as well as
participate with other banks in the region. The commercial portfolio will be
built through traditional loans as outlined:
o Working capital lines of credit
o Term loans
o Demand loans
o Commercial real estate (construction and permanent)
Church loans and small business loans continue to be the "bread and butter"
of loans for the Bank. The Bank is working in collaborative relationships to
enhance volume. Some of these relationships include Small Business Development
Centers, religious adjudicators, the newly formed Clergy Advisory Council and
various local banks.
Management's focus will continue to be on relationship banking. The goal is
to engage in a more aggressive marketing and advertising campaign to get the
Bank back into the marketplace and in the minds of the customers. Full advantage
will be taken of the co-branding opportunities with the Bank's strategic
alliances to increase the Bank's consumer loan business including brochures,
joint seminars, and other business development opportunities.
19
Results of Operations
In 2005, the Company recorded a net loss of approximately $269,000
($0.25 per share) compared to net income of approximately $1,647,000 ($1.54 per
share) in 2004 and a net loss of approximately $1,115,000 in 2003 ($1.03 per
share). The financial results for 2005 were adversely impacted by increased
provisions to allowance for loan losses totaling $558,000 compared to $45,000 in
2004. In addition, the financial results for the year ended December 31, 2004
included non-recurring income of $1.9 million from the gain on the sale of the
Bank's corporate headquarters and an adjacent parking lot. Without this gain,
the Bank would have experienced a net loss of approximately $250,000 from its
core operations.
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
December 31,
2005 2004 2003
-------------------------- -------------------------- ------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate
------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Loans .................................... $ 47,861 3,429 7.16% $ 46,037 $ 3,009 6.54% $ 45,168 2,913 6.45%
Investment securities held-to-maturity ... 8,636 357 4.13 7,273 308 4.23 6,479 273 4.21
Investment securities available-for-sale 3,852 180 4.67 5,488 252 4.59 9,393 532 5.66
Interest bearing balances with other banks 584 10 1.71 880 30 3.41 869 21 2.99
Federal funds sold ........................... 5,482 180 3.29 6,244 87 1.39 8,498 98 1.15
-------- -------- ------- -------- -------- ----- -------- ------ ------
Total interest-earning assets....... 66,415 4,156 6.26 65,922 3,685 5.59 70,407 3,837 5.45
Noninterest-earning assets:
Cash and due from banks .................. 3,772 3,708 4,433
Premises and equipment, net .............. 1,073 2,006 2,679
Other assets ............................. 2,648 2,726 3,922
Less allowance for loan losses ........... (683) (542) (713)
---- ---- ----
Total............................... $ 73,225 $73,820 $ 80,728
======== ======= ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits .......................... $ 9,204 64 0.71% $ 9,315 $ 49 0.53% 11,924 83 0.70%
Savings deposits.......................... 17,069 58 0.34 18,693 62 0.33 20,241 89 0.44
Time deposits............................. 23,344 463 1.98 21,559 295 1.37 21,565 375 1.74
------ --- ---- ------ --- ---- ------ --- ----
Total interest-bearing liabilities.. 49,617 585 1.18 49,567 406 0.82 53,730 547 1.02
Noninterest-bearing liabilities:
Demand deposits .......................... 14,668 16,306 18,439
Other .................................... 444 193 --
Shareholders' equity ......................... 8,496 7,754 8,559
----- ----- -----
Total 73,225 $ 73,820 $ 80,728
====== ======== ========
Net interest earnings ........................ $ 3,571 $ 3,280 3,290
Net yield on interest-earning assets ......... 5.38% 4.98% 4.67%
For purposes of computing the average balance, loans are not reduced for nonperforming loans.
Net Interest Income
Net interest income is an effective measure of how well management has
balanced the Bank's interest rate-sensitive assets and liabilities. Net interest
income, the difference between (a) interest and fees on interest-earning assets
and (b) interest paid on interest-bearing liabilities, is a significant
component of the Bank's earnings. Changes in net interest
20
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 $3,571,000 in 2005, an increase of $291,000, or
8.87%, compared to 2004. Net interest income was $3,280,000 in 2004, a decrease
of $11,000, or .31%, compared to 2003.
Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2005 compared to 2004 2004 compared to 2003
--------------------- ---------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
------ ----- ----- ------ ----- -----
Interest earned on:
Loans ........................................ $ 133 $ 287 $ 420 $ 57 $ 39 $ 96
Investment securities held-to-maturity ....... 56 (7) 49 33 2 35
Investment securities available-for-sale ..... (77) 5 (72) (219) (61) (280)
Interest-bearing deposits with other banks ... (5) (15) (20) 5 4 9
Federal funds sold ........................... (25) 118 93 8 (19) (11)
--- --- -- - --- ---
Total interest-earning assets ............. 82 388 470 (116) (35) (151)
-- --- --- ---- --- ----
Interest paid on:
Demand deposits .............................. $ (2) 17 15 (13) (21) (34)
Savings deposits ............................. (6) 2 (4) (5) (22) (27)
Time deposits ................................ 36 132 168 (1) (78) (79)
-- --- --- -- --- ---
Total interest-bearing liabilities ........ 28 151 179 (19) (121) (140)
-- --- --- --- ---- ----
Net interest income ....................... $ 54 $ 237 $ 291 $ (97) $ 86 $ (11)
===== ===== ===== ===== ===== =====
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to
rate variances due to the interest sensitivity of consolidated assets and liabilities.
In 2005, there was an increase in net interest income of $54,000 due to
changes in volume and an increase of $237,000 due to changes in rate. In 2004,
there was a decrease in net interest income of $97,000 due to changes in volume
and an increase of $86,000 due to changes in rate.
Average earning assets increased slightly to $66.4 million in 2005 from
$65.9 million in 2004 and decreased from $71 million in 2003 to $66 million in
2004. With the sale of its corporate headquarters in July 2004, the Bank
converted approximately $1.2 million in nonearning assets to liquid earning
assets. Current capital levels allow for approximately $25 million in deposit
growth while remaining compliant with mandatory capital requirements outlined in
its Written Agreement with its regulators (See Regulatory Action above).
The net interest margin of the Bank was 5.38% in 2005, 4.98% in 2004, and
4.67% in 2003. Management actively manages its exposure to interest rate
changes. The Bank's deposit base includes many low cost core checking and
savings deposits that are not sensitive to rate changes. Thus, although there
were a series of short-term rate increases (in aggregate 175 basis points) by
the Federal Reserve in 2005, the Bank's cost of funds did not increase at the
same pace while floating rate assets including loans, investments and Federal
Funds Sold did increase.
During 2005, the average federal funds yield was 3.29%, compared to 1.39%
in 2004 and 1.15% in 2003. During 2005, the average investment in federal funds
decreased by $762,000. The reduction was a result of a $1.8 million increase in
average loan fundings.
The yield on the investment portfolio decreased 9 basis points to 4.30% in
2005 compared to 4.39% in 2004 and 4.81% in 2003. The reduction in yield is
primarily a result of the purchase of short-term (average 2 year duration)
agency securities in late September 2004 that were used as collateral for
quasi-governmental deposit customers. These securities had an average yield of
4.00%. In addition, some of the Bank's floating rate mortgage-backed securities
that had Treasury and LIBOR indices repriced in 2004 in a lower interest rate
environment. The yield is projected to increase in 2006 as many of the floating
rate securities repriced in late 2005 in a higher interest rate environment.
The cost of interest-bearing liabilities increased to 1.18% in 2005
compared to 0.82% in 2004 and 1.02% in 2003.
21
Consistent with market conditions through mid-year 2004, the Bank reduced the
rates it paid on many of its interest-bearing products. Although short-term
interest rates increased in 2005 by 175 basis points, increases in rates on the
Bank's core deposits did not change at the same pace. When setting the pricing
for its deposits, the Bank generally uses the median rate paid by its
competitors in the region. Because most of the Bank's deposits are considered
core, they were not sensitive to rising interest rates and generally lag market
changes. With the introduction of its new signature savings account in 2006
(minimum initial rate of 3.25%), the Bank is projecting an increase in its cost
of funds to 1.98%. While increasing, this cost of funds remains below the Bank's
peer group average cost of funds of 2.50%.
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 credit 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 2005 was
$558,000 compared to $45,000 in 2004 and $565,000 in 2003. The increase in the
provision in 2005 was due to a review and analysis of the Bank's loan portfolio
and an increase in the level of classified loans and charge-offs during the
year. The Bank charged-off the un-guaranteed portion of three (3) Small Business
Administration ("SBA") loans totaling $107,000. The un-guaranteed portion of the
loans ranged between 10 and 25 percent of the outstanding loan balances. The
Bank also charged-off the guaranteed portion of two (2) of these loans totaling
$187,000 because of the unlikely collection from the SBA. In addition, the Bank
charged-off forty-seven (47) loans totaling $368,000 related to an improperly
administered mirco-loan fund in which it was a participant.
The Bank made net provisions to the allowance totaling $45,000 for the year
ended December 31, 2004. The level of required provision was reduced by the
recovery of $265,000 related to one previously charged-off commercial loan.
In 2003, the Bank made provisions for loan losses totaling $565,000. This
level of provision was required because of the charge off of $710,000 that
represented the non-SBA guaranteed portion of a loan to one borrower in the
telecommunications industry. Severe financial difficulties experienced by the
borrower made the full collection of this loan uncertain. In 2003, loans to this
borrower totaled $1.3 million. In 2005, the Bank collected the guaranteed
portion of the loans that totaled $569,000.
The Bank continues to monitor its credit quality very closely by working
with borrowers in an effort to identify and control credit risk. Systematic
provisions are made to the allowance for loan losses to cover potential losses
related to the Bank's classified loans. Management believes the level of the
allowance for loan losses is adequate as of December 31, 2005.
Noninterest Income
Noninterest income decreased $2,072,000 in 2005 compared to 2004 and
increased $1,764,000 in 2004 compared to 2003. In connection with its 2004
re-capitalization plan, the Bank sold bank-owned real estate including a remote
bank-owned parking lot and its corporate headquarters building located at 300 N.
Third Street. The sale of these assets resulted in a non-recurring gain of
approximately $1,874,000 million in 2004.
The amount of the Bank's noninterest income also 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 2005, customer service fees declined by $171,000,
or 20.03%, compared to 2004. In 2005, there was a $1.6 million decline in the
Bank's average noninterest bearing demand deposits that resulted in less
overdraft fees, activity service charges and low balance fees. Also, in December
2003, to avoid the necessity to escheat the balances of inactive customer
accounts, the Bank made an extensive effort to contact customers to re-activate
their accounts. The Commonwealth of Pennsylvania requires that accounts that are
inactive for five years or more be closed and escheated to the state. This
resulted in a reduction in ongoing activity/dormant account service charges
beginning in 2004.
During 2005, surcharge income on the Bank's ATM network declined by
$28,000, or 4.63%, compared to 2004.
22
Some of the Bank's ATMs have experienced a drop in volume as competitors placed
machines in close proximity to existing high volume ATMs of the Bank and several
of the Bank's high volume ATM's were replaced with those of competitors that
paid significantly higher transactional fees to site owners. Management
continues to seek potentially high volume locations to place machines.
In 2002, the Bank began developing a new core line of business--serving as
arranger/agent for loan syndications for four major corporations throughout the
country. In this capacity, the Bank syndicates back-up lines/letters of credit
with other minority banks throughout the country for the corporations for which
it receives agent fees. In 2005 these fees totaled $202,000 compared to $178,000
and $85,000 in 2004 and 2003, respectively. These fees will be received annually
for the administration of the credit facilities. Management plans to continue to
develop this core line of business to generate fee income to support the Bank's
profitability goals.
Noninterest Expense
Noninterest expense decreased $379,000, or 7.23%, in 2005 compared to 2004
and decreased $488,000, or 8.52% in 2004 compared to 2003.
Salaries and benefits decreased $105,000, or 5.42% in 2005 compared to
2004 and decreased $269,000, or 12.21%, in 2004 compared to 2003. As part of the
Bank's continued effort to reduce/control expenses, there have been strategic
reductions in staff and job consolidations. Also, in conjunction with the
closure of its Two Penn Center branch office in July 2004, there was attrition
and layoffs that resulted in staff reductions. Management continues its review
of its staffing model to ensure the Bank is operating with the most efficient
organizational structure.
Occupancy and equipment expense decreased approximately $108,000, or 9.79%,
compared to 2004 and decreased $122,000, or 9.97%, in 2004 compared to 2003.
Management continued the implementation of strategies to reduce its occupancy
expense including the closure/consolidation of its Two Penn Center Center City
branch office in 2004. The cost of the lease was scheduled to double at
expiration. As part of the Bank's profit restoration plan, upon expiration of
the lease in July 2004, this branch was closed and consolidated with other
branches in the network to further reduce operating costs. In addition, there
was a reduction in depreciation expense related to the Two Penn Center branch
office for which leasehold-related improvements and furniture became fully
depreciated. The Bank realized a full year expense benefit in 2005 related to
the closure of this branch.
Also contributing to the reduction in occupancy expense was the sale of the
Bank's corporate headquarters in July 2004. This building was sold to generate
gains as part of the Bank's re-capitalization plan. The sale of the building
resulted in a reduction in property taxes, insurance, repairs and maintenance,
and depreciation expense on leasehold improvements associated with the building.
In February 2005, the Bank began the lease of its new corporate headquarters on
a 10,000 square foot floor of a full service high rise office building located
in center city Philadelphia.
Office operations and supplies expense decreased by $67,000, or 16.18%, in
2005 compared to 2004 and decreased $41,000, or 9.11%, in 2004 compared to 2003.
In conjunction with the closure/consolidation of the Bank's Two Penn Center
financial service center in July 2004, reductions were experienced in this
category of expense including security guards, supplies and other costs
associated with branch operations.
Marketing and public relations expense increased by $18,000, or 21.5%, in
2005 compared to 2004 and decreased by $31,000, or 27.21% in 2004 compared to
2003. In April 2005, the Bank engaged a public relations firm to assist with
re-acquainting the leaders in the Philadelphia region with the services of the
Bank in effort to stimulate business development activity. Activities of this
firm yielded in excess of $1 million in new deposit balances in 2005. Management
will continue to seek cost-effective methods to sell its brand and products
including the use of co-branded marketing materials with its strategic alliances
and advertising in community-based newspapers and church bulletins.
Professional services increased by $26,000, or 11.06%, in 2005 compared to
2004 and increased $18,000, or 8.28%, in 2004 compared to 2003. The increase in
2005 is primarily related to the use of consultants to assist the Bank with the
preparation of a five-year strategic plan. In addition, the Bank used external
consultants to assist with disaster recovery testing and penetration testing
associated with its computer systems. In 2004, the Bank used consultants for
human resource-related matters including the development of a new employee
performance management system and
23
compensation/contract review for the Bank's two executive officers. Also, in
October 2004, the Bank engaged two business development consultants to assist
with developing loans and deposits for the Bank.
Data processing expenses are a result of the management decision to
outsource a majority of its data processing operations to third party
processors. Such expenses are reflective of the high level of accounts being
serviced for which the Bank is charged a per account charge by processors. 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.
Data processing expenses decreased by $155,000, or 27.61%, in 2005 compared
to 2004 and decreased $99,000, or 15.00%, in 2004 compared to 2003. The
reduction in 2005 is primarily a result of a decline in processing costs
associated with the Bank's automated teller machine network because of fewer
machines in service as well as a contract re-negotiation with its service
provider. In addition, the Bank experienced a reduction the in monthly
processing cost of its core processor, FISERV, as a result of the removal of
closed deposit accounts from the account database as well as a line-by-line
review of the invoice to identify other areas of savings.
The decline in 2004 is primarily the result of the conversion/consolidation
of the consumer loan account processing (previously outsourced to EDS) with its
core vendor, FISERV. This conversion resulted in a monthly savings of
approximately $6,000. The Bank continues to study methods by which it may
further reduce its data processing cost including the consolidation of its
mortgage loan service providers in 2006.
Federal deposit insurance premiums were $113,000 in 2005, $72,000 in 2004,
and $34,000 in 2003. FDIC insurance premiums are applied to all financial
institutions based on a risk based premium assessment system. Under this system,
bank strength is based on three factors: 1) asset quality, 2) capital strength,
and 3) management. Premium assessments are then assigned based on the
institution's overall rating, with the stronger institutions paying lower rates.
The Bank's assessment was based on 1.96 basis points for BIF (Bank Insurance
Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable deposits.
By typical regulatory guidelines the Bank is considered "well" capitalized,
however, because it is operating with a Written Agreement (Refer to "Regulatory
Action" above), it is only considered to be "adequately" capitalized. The
increase during 2005, is a result of the perceived risk associated with the
Bank's operating losses.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
24
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 3 below
indicates how the Bank has managed these elements. Average funding uses
increased $493,000, or 0.75% in 2005 compared to 2004 and decreased
approximately $4.5 million, or 6.37%, in 2004 compared to 2003.
Table 3--Sources and Use of Funds Trends
2005 2004 2003
---------------------------- --------------------------- ----
Increase Increase
Average (decrease) Average (decrease) Average
(Dollars in thousands) balance amount Percent balance amount Percent balance
-------- ------- ------- --------- ------- ------ -------
Funding uses:
Loans ............................. $ 47,861 $ 1,824 3.96% $46,037 $ 869 1.92% $ 45,168
Investment securities..............
Held-to-maturity................. 8,636 1,363 18.74 7,273 794 12.25 6,479
Available-for-sale............... 3,852 (1,636) (29.81) 5,488 (3,905) (41.57) 9,393
Interest-bearing balances with
other banks...................... 584 (296) (33.64) 880 11 1.27 869
Federal funds sold............... 5,482 (762) (12.20) 6,244 (2,254) (26.52) 8,498
----- ---- ------ ----- ------ ------ -----
Total uses................... 66,415 493 $ 65,922 $(4,485) $ 70,407
------ --- ======== ======== ========
Funding sources:
Demand deposits:
Noninterest-bearing.............. $ 14,668 $(1,638) (10.05)% $ 16,306 $(2,133) (11.57)% $ 18,439
Interest-bearing................. 9,204 (111) (1.19) 9,315 (2,609) (21.88) 11,924
Savings deposits................... 17,069 (1,624) (8.69) 18,693 (1,548) (7.65) 20,241
Time deposits...................... 23,344 1,785 8.28 21,559 (6) (.03) 21,565
------ ----- ---- ------ -- ---- ------
Total sources................ 64,285 (1,588) $65,873 $(6,296) $ 72,169
-------- ------- ======= ======== ========
*Includes held-to-maturity and available-for-sale securities
Investment Securities and Other Short-Term Investments
The Bank's investment portfolio is classified as either held-to-maturity or
available-for-sale. Investments classified as held-to-maturity are carried at
amortized cost and are those securities the Bank has both the intent and ability
to hold to maturity. Investments classified as available-for-sale are those
investments the Bank intends to hold for an indefinite amount of time, but not
necessarily to maturity, and are carried at fair value, with the unrealized
holding gains and losses reported as a component of shareholders' equity on the
balance sheet.
Average investment securities, decreased by $273,000, or 2.14%, in 2005
compared to 2004, and decreased $3.1 million, or 19.60%, in 2004 to 2003. The
decrease in investments was primarily a result of paydowns in the Bank's
mortgage-backed securities portfolio.
The Bank's current investment portfolio primarily consists of
mortgage-backed pass-through agency securities and other government-sponsored
agency securities. The Bank does not invest in high-risk securities or complex
structured notes. As reflected in Table 4 below, the average maturity of the
portfolio is 3.25 years compared to 3.07 years in 2004. In the current rising
interest rate environment, the duration of the investment portfolio is slightly
extended because of the reduction in the prepayment speed on the Bank's
mortgage-backed security portfolio.
At December 31, 2005, approximately 48% of the portfolio consists of
mortgage-backed pass-through securities that have longer-term contractual
maturities but are sometimes paid off/down before maturity or have repricing
characteristics that occur before final maturity. The Bank has attempted to
minimize the repayment risk (risk of very fast or very slow repayment)
associated with these types of securities by investing primarily in a number of
seasoned mortgage pools for
25
which there is a repayment history. This history better enables the Bank to
project the repayment speeds of these pools. In addition, the Bank has minimized
the interest rate risk associated with these mortgage-backed securities by
investing in a variety of pools, many of which have variable rates with indices
that track closely with the current interest rate environment. Because customers
are less likely to refinance in the current rising interest rate environment,
the prepayment speed decreased on this component of the portfolio. The constant
one year prepayment rate (CPR) at December 31, 2005 was 20.60% compared to
24.06% at December 31, 2004. This translates into 20.60% of the mortgage-backed
pools repaying on an annual basis. This results in less monthly cash flow than
was received in 2004.
The Bank will continue to take steps to control the level of
optionality in the portfolio by identifying replacement loans or securities that
diversify risk and provide some level of monthly cashflow to be reinvested in
the projected current rising rate environment.
Table 4--Analysis of Investment Securities
After one but After five but
Within one year within five years within ten years After ten years
(Dollars in thousands) ......... Amount Yield Amount Yield Amount Yield Amount Yield Total
-------- ----- ------- --------- ------- ------- ------- ----- ------
Other government securities .... $ 1,246 3.93% $ 5,498 4.26% $ 500 4.03% $ -- % $ 7,244
Mutual funds and other ......... -- -- -- 340
Mortgage-backed securities ..... -- -- -- -- 6,121
------- ------- ----- ------ -------
Total securities ............... $ 1,246 $ 5,498 $ 500 -- $13,705
======= ======= ====== =======
Average maturity ............... 3.25 years
==========
The above table sets forth the maturities of investment securities at December
31, 2005 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security).
Loans
Average loans increased approximately $1,824,000, or 3.96%, in 2005
compared to 2004 and increased $869,000, or 1.92%, in 2004 compared to 2003.
During 2005, the Bank funded $12 million in new commercial loans. However,
growth in the loan portfolio was offset by payoffs of some large loan
participations the Bank had with other financial institutions. In addition, the
Bank's mortgage loan portfolio declined by $3.1 million as a result of customers
with adjustable rate loans refinancing into fixed rate mortgages to avoid the
negative impact of interest rate increases that occurred during the year.
The Bank has developed relationships with other financial institutions in
the region with which it participates in loans as a strategy to grow its
commercial loan portfolio. This strategy continues to be utilized while the Bank
enhances it own business development capacity. Approximately $1.6 million in
commercial loan participations were booked during 2005. Most of these
participations were secured by commercial real estate.
To increase the level of loan originations management will add a business
development officer/lender and retail sales manager to its staff in 2006. In
addition, three (3) existing staff positions will be re-allocated to business
development. Individuals in these positions will drive loan and deposit growth
for the Bank.
The Bank's loan-to-deposit ratio at December 31, 2005 was 72.8%---slightly
lower than 2004 at 73.6%. The target loan-to-deposit ratio is 75%. This level
would allow the Bank to optimize interest income on earning assets while
maintaining adequate liquidity. The decrease in this ratio is the result of a
slightly larger deposit base.
As reflected in Table 5 below, the Bank's loan portfolio is heavily
concentrated in commercial real estate loans that comprise approximately $25.8
million, or 55.60%, of total loans. Of the $12 million in 2005 of new commercial
loan originations, $8.4 million were commercial real estate transactions,
including $3.8 million in loans made to religious organizations. The Bank also
continued to fund construction financing from prior year's loan originations.
Continued payoffs resulted in a reduction of the residential mortgage loan
component of the portfolio from $10.6 million at December 31, 2004 to $7.5
million at December 31, 2005.
26
In January 2005, the Bank sold $1,412,000 of its student loan portfolio
and recorded a gain of $25,000. At December 31, 2004, these loans were recorded
as held-for-sale. In December 2005, the Bank sold $363,000 of its student loan
portfolio and recorded a gain of $6,000. These loans were sold to provide
liquidity for the funding of higher yielding less costly to service commercial
loans. Student loans are typically held in the consumer loan portfolio.
As reflected in Table 6 below, approximately 54.08% of the Bank's loan
portfolio have scheduled maturities or reprice in five years or more. This
position is largely a result of the Bank's relatively high level of residential
mortgage loans and the typical five to seven year balloon structure of the
commercial real estate portfolio. While scheduled maturities and repricing
exceed five years, the actual duration of the portfolio may be much shorter
because of changes in market conditions and refinancing activity.
Table 5--Loans Outstanding, Net of Unearned Income
December 31,
------------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
------- -------- ------- ------- --------
Commercial and industrial................... $ 7,176 $ 15,217 $11,361 $10,855 $ 11,054
Commercial real estate...................... 25,809 13,070 11,862 11,898 5,504
Residential mortgages....................... 7,546 10,665 15,110 13,560 18,148
Consumer loans.............................. 5,891 6,729 8,695 7,820 8,294
------- ------ ------- ------- -----
- - - -
------ ------- ------- -----
Total loans............................. $46,422 $ 45,681 $47,028 $44,133 $ 43,000
------- ======= ====== ====== =======
Table 6--Loan Maturities and Repricing
Within After one but After
(Dollars in thousands) one year within five years five years Total
------------ ----------------- --------- ---------
Commercial and industrial................... $ 779 $ 3,734 $ 2,663 $ 7,176
Commercial real estate...................... 4,510 5,854 15,445 25,809
Residential mortgages....................... 467 2,008 5,071 7,546
Consumer loans.............................. 2,637 1,330 1,924 5,891
-------- ------ ----- ------
Total loans........................... $ 8,393 $12,926 $25,103 $ 46,422
Loans maturing after one year with:
Fixed interest rates.................... $35,261
Variable interest rates................. 11,161
Nonperforming Loans
Table 7 reflects the Bank's nonperforming and restructured loans for the
last five years. The Bank generally determines a loan to be "nonperforming" when
interest or principal is past due 90 days or more. If it otherwise appears
doubtful that the loan will be repaid, management may consider the loan to be
nonperforming before the lapse of 90 days. The Bank's policy is to charge off
unsecured loans after 90 days past due. Interest on nonperforming loans ceases
to accrue except for loans that are well collateralized and in the process of
collection. When a loan is placed on nonaccrual, previously accrued and unpaid
interest is reversed out of income unless adequate collateral from which to
collect the principal of, and interest on, the loan appears to be available.
27
Table 7--Nonperforming Loans
(Dollars in thousands) 2005 2004 2003 2002 2001
------- -------- ------- ------- --------
Nonaccrual loans............................ $ 683 $ 1,366 $ 1,588 $ 651 $ 412
Interest income included in net income
for the year............................ 37 22 62 25 25
Interest income that would have been
recorded under original terms........... 56 143 120 49 29
Loans past due 90 days and still accruing... - 65 560 797 526
Restructured loans.......................... 554 1,411 569 1,286 182
At December 31, 2005, nonaccrual loans totaled $683,000 compared to
$1,366,000 at December 31, 2004. The decrease in 2005 is primarily related to
the $569,000 collection of the SBA guaranteed portion of one problem loan and
the charge-off of $294,000 related to three (3) other SBA guaranteed loans for
which collection is uncertain. At December 31, 2005, $191,000 of the Bank's
nonaccrual loans carried some level of guarantee from the SBA that provide
credit enhancement to these loans.
The balance of impaired loans was $386,000 and $1,034,000 at of December
31, 2005 and 2004, respectively. The Bank identifies a loan as impaired when it
is probable that interest and principal will not be collected according to the
contractual terms of the loan agreement. The allowance for loan loss associated
with these loans was $113,000 and $259,000 at December 31, 2005 and 2004,
respectively. In February 2006, the Bank reached a compromise agreement with the
borrower on one real estate secured impaired loan totaling $127,000. The
borrower has entered an agreement of sale for $185,000 on the underlying
collateral property for which the Bank has received a deposit of $50,000. Full
collection of principal balance is expected by April 1, 2006.
Interest income recognized on impaired loans in 2005 was $37,000. There
was no interest recognized on impaired loans in 2004. The Bank recognizes income
on impaired loans under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to the
Bank. If these factors do not exist, the Bank will not recognize income on such
loans.
From time to time, management will modify or restructure the terms of
certain loans to provide relief to borrowers. Restructured loans are those loans
whose terms have been modified because of deterioration in the financial
condition of a borrower to provide for a reduction of either interest or
principal, regardless of whether such loans are secured or unsecured and
regardless of whether such credits are guaranteed by the government or by
others. As of December 31, 2005, the Bank had $554,000 in restructured loans.
There is no known information about possible credit problems other than
those classified as nonaccrual or impaired that causes management to be
uncertain as to the ability of any borrower to comply with present loan terms.
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the region's economy.
At December 31, 2005, approximately 25% of the commercial loan portfolio of
the Bank was concentrated in loans
28
made to religious organizations. From inception, the Bank has received support
in the form of investments and deposits and has developed strong relationships
with the Philadelphia region's religious community. Loans made to these
organizations were primarily for expansion and repair of church facilities. At
December 31, 2005, none of these loans were nonperforming.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation of
the loan portfolio, assessment of economic conditions, the diversification and
size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount and quality of nonperforming loans. Table 8 below
presents the allocation of loan losses by major category for the past five
years. The specific allocations in any particular category may prove to be
excessive or inadequate and consequently may be reallocated in the future to
reflect then current conditions.
The allowance for loan losses as a percentage of total loans was 1.02%
at December 31, 2005 compared to 1.28% at December 31, 2004. The decline in this
ratio is a result of charge-offs and a reduction in the level of classified
loans. In 2005, the Bank charged-off the un-guaranteed portion of three (3) SBA
loans totaling $107,000. The Bank also charged-off the guaranteed portion of two
(2) of these loans totaling $187,000 because of the unlikely collection from the
SBA. In addition, the Bank charged-off forty-seven (47) loans totaling $368,000
related to an improperly administered mirco-loan fund in which it was a
participant.
As a result of the charge-offs and the $569,000 collection from the SBA of
the guaranteed portion of a problem loan, the level of classified loans
significantly declined in 2005. At December 31, 2005, the Bank's classified
loans totaled $694,000, or 1.50% of total loans, compared to $1.2 million, or
2.50%, of total loans at December 31, 2004. Approximately $191,000 of the Bank's
classified loans are guaranteed by the SBA.
The Bank continues to proactively monitor its credit quality while
working with borrowers in an effort to identify and control credit risk.
Table 8--Allocation of Allowance for Loan Losses
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
(Dollars in thousands)
Commercial and
industrial ....... $ 267 15.46% $ 424 32.31% $267 24.16% $ 565 24.60% $ 576 37.30%
Commercial real
estate ........... 66 55.59 49 27.75 - 25.22 37 26.96 29 1.21
Residential mortgages 17 16.25 14 17.29 35 32.13 45 17.72 30 19.29
Consumer loans ...... 79 12.69 110 22.65 37 18.49 28 30.72 73 42.20
Unallocated ......... 43 - 6 - - - - - - -
--------- ------ ----- ------ ---- ------ ------ ------ ------ ------
$ 472 100.00% $ 603 100.00% $339 100.00% $ 675 100.00% $ 708 100.00%
========= ====== ===== ====== ==== ====== ====== ====== ====== ======
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
29
Table 9--Analysis of Allowance for Loan Losses
Year ended December 31,
(Dollars in thousands) 2005 2004 2003 2002 2001
Balance at January 1 ................................. $ 603 $ 339 $ 675 $ 708 $ 562
Charge-offs:
Commercial and industrial ........................ (762) -- (799) -- (61)
Commercial real estate ........................... -- -- -- (100) --
Residential mortgages ............................ -- -- -- -- --
Consumer loans ................................... (219) (240) (174) (261) (261)
----- ----- ----- ----- -----
(981) (240) (973) (361) (322)
----- ----- ----- ----- -----
Recoveries--commercial loans ......................... 165 265 -- 27 --
Recoveries--consumer loans ........................... 127 194 72 126 133
----- ----- ----- ----- -----
292 459 72 153 133
Net recoveries(charge-offs) .......................... (689) 219 (901) (208) (189)
Provisions charged to operations ..................... 558 45 565 175 335
----- ----- ----- ----- -----
Balance at December 31 ............................... $ 472 $ 603 $ 339 $ 675 $ 708
===== ===== ===== ===== =====
Ratio of net (recoveries) charge-offs to average loans
outstanding ...................................... 1.50% (0.48)% 1.99% 0.49% 0.41%
The amount charged to operations and the related balance in the allowance
for loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
Deposits
Average deposits declined approximately $1.6 million, or 2.41%, in 2005
compared to 2004 and declined $6.3 million, or 8.72%, in 2004 compared to 2003.
One of the primary areas of decline was in demand deposit accounts that
decreased on average by $1.6 million, or 10.05%, compared to 2004. This decrease
was primarily related to one significant deposit relationship with a
quasi-governmental organization that converted its deposit relationship from a
noninterest bearing checking account to certificates of deposit for which there
was a corresponding increase in the average balance.
The Bank also experienced a decline of $1.6 million, or 8.69%, in its
average savings deposits during 2005. In July 2004, the Bank closed its 2 Penn
Center Office located in Center City Philadelphia. The closure of this branch
resulted in some savings passbook account attrition. Because passbook customers
must physically enter the branch to complete transactions, electronic banking
alternatives including ATMs and e-banking could not be used to help retain the
savings account deposits.
Current capital levels allow for approximately $25 million in deposit
growth and still remain compliant with mandatory capital requirements outlined
in its Written Agreement with its regulators (See Regulatory Action above).
30
The Bank is in the process of implementing business development strategies
including a signature savings account and remote deposit capture to increase the
level of core deposits. In addition, the Bank will leverage the strategic
partnerships/alliances it has developed to cross-sell its products and services.
Table 10--Average Deposits by Class and Rate
2005 2004 2003
---- ---- ----
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
----------------- ---------------- ------------------
Noninterest-bearing demand deposits $14,668 -% $16,306 - % $18,439 -%
Interest-bearing demand deposits 9,204 0.71 9,315 0.53 11,924 0.70
Savings deposits 17,069 0.34 18,695 0.33 20,241 0.44
Time deposits 23,344 1.98 21,559 1.37 21,565 1.74
Other Borrowed Funds
The Bank did not borrow funds during 2005. Generally, the level of other
borrowed funds is dependent on many items such as loan growth, deposit growth,
customer collateral/security requirements and interest rates paid for these
funds. The Bank's liquidity has been enhanced by loan paydowns/payoffs and
called investment securities--thereby, reducing the need to borrow.
Off Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, which are conditional commitments issued by the Bank to guarantee the
performance of an obligation of a customer to a third party. Both arrangements
have credit risk essentially the same as that involved in extending loans and
are subject to the Bank's normal credit policies. Collateral may be obtained
based on management's assessment of the customer. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments is represented by the contractual amount of those instruments.
Summaries of the Bank's financial instrument commitments are as follows:
2005 2004
----------- -----------
Commitments to extend credit.............................................. $12,727,370 $13,749,562
Outstanding letters of credit............................................. 10,000 --
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract and unused
credit card lines. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.
31
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and enhance
consistent growth of net interest income through periods of changing interest
rates.
The Bank is required to maintain minimum levels of liquid assets as defined
by Federal Reserve Board ("FRB") regulations. This requirement is evaluated in
relation to the composition and stability of deposits; the degree and trend of
reliance on short-term, volatile sources of funds, including any undue reliance
on particular segments of the money market or brokered deposits; any difficulty
in obtaining funds; and the liquidity provided by securities and other assets.
In addition, consideration is given to the nature, volume and anticipated use of
commitments; the adequacy of liquidity and funding policies and practices,
including the provision for alternate sources of funds; and the nature and trend
of off-balance-sheet activities. As of December 31, 2005, management believes
the Bank's liquidity is satisfactory and in compliance with FRB regulations.
The Bank's principal sources of asset liquidity include investment
securities consisting primarily of U.S. Government and agency issues,
particularly those of shorter maturities, and mortgage-backed securities with
monthly repayments of principal and interest. There are no securities maturing
in one year or less. However, other types of assets such as federal funds sold,
as well as maturing loans, are sources of liquidity. At December 31, 2005,
approximately $8.2 million in loans are scheduled to mature within one year.
The Bank's overall liquidity has been enhanced by a significant level of
core deposits which management has determined are less sensitive to interest
rate movements. The Bank has avoided reliance on large-denomination time
deposits as well as brokered deposits. Table 11 provides a breakdown of the
maturity of time deposits of $100,000 or more.
Table 11--Maturity of Time Deposits of $100,000 or More
(Dollars in thousands)
3 months or less..................................... $10,485
Over 3 through 6 months.............................. 2,520
Over 6 months through 1 year......................... -
Over 1 through five years............................
Over five years...................................... -
-------
Total................................................ $13,005
=======
The following table sets forth contractual obligation and other commitments
representing required and potential cash outflows as of December 31, 2005:
Table 12--Contractual Obligations and Other Commitments
Less than One to Four to After
(Dollars in thousands) Total one year three years five years five years
Certificates of Deposit........ $ 22,670 $ 21,296 $ 954 $ 343 $ 77
Rental Obligations............. 2,338 310 630 468 930
-------- -------- ------- ------- --------
-- -- --
Total $ 25,008 $ 21,606 $ 1,584 $ 811 $ 1,007
======== ======== ======= ======= ========
32
In February 2005, the Bank entered into a 10-year lease for its new
corporate headquarters located at The Graham Building in Center City
Philadelphia. As reflected in Table 12 above, this transaction is included in
the Bank's long-term rental obligations.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which rates
change daily and loans that are tied to prime or other short-term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest-sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap or excess interest-earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations. Table 13 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 2005, the Bank's interest rate
sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over
interest rate-sensitive liabilities, divided by total assets) and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table,
except for savings deposits, an asset or liability is considered rate-sensitive
within a specified period when it matures or could be repriced within such
period in accordance with its contractual terms. At December 31, 2005, an asset
sensitive position is maintained on a cumulative basis through one year of
5.50%. This level is within the Bank's policy guidelines of +/-15% on a
cumulative one-year basis. Interest rate risk is minimized by the Bank's high
level of core deposits that have been placed in shorter repricing intervals.
Generally, because of the Bank's positive gap position in shorter time frames,
the Bank can anticipate that increases in market rates will have a positive
impact on the net interest income, while decreases will have the opposite
effect.
For purposes of the gap analysis, such deposits (savings, MMA, NOW) which
do not have definitive maturity dates and do not readily react to changes in
interest rates have been placed in longer repricing intervals versus immediate
repricing time frames, making the analysis more reflective of the Bank's
historical experience.
Table 13--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2005
Over
Over 1 year Over
3 months 3 through through 3 through Over
(Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative
Interest-sensitive assets:
Interest-bearing deposits with banks. $ -- $ 290 $ -- $ -- $ -- $ 290
Investment securities................ 2,360 2,632 3,071 3,232 2,410 13,705
Federal funds sold................... 5,292 - - - - 5,292
Loans................................ 17,039 10,389 5,684 3,513 9,797 46,422
Total interest-sensitive assets.... 24,691 13,311 8,755 6,745 12,207 $65,709
Cumulative totals.................. 24,691 38,002 46,757 53,502 65,709
Interest-sensitive liabilities:
Interest checking accounts........... 1,960 - 1,960 - - 3,920
Savings accounts..................... 11,132 - 11,132 - - 22,264
Certificates $100,000 or more....... 10,485 2,520 - - - 13,005
Certificates of less than $100,000 .. 3,404 4,887 954 420 - 9,665
...................................
------- -------- ------- ------- -------- -------
Total interest-sensitive liabilities $26,981 $ 7,407 $14,046 $ 420 $ - $48,854
======= ======== ======= ======= ======== =======
Cumulative totals.................. $26,981 $ 34,388 $48,434 $48,854 $ 48,854
======= ======== ======= ======= ========
Interest sensitivity gap................. $(2,290) $ 5904 $(5,292) $ 6,325 $ 12,207
======= ======== ======= ======= ========
Cumulative gap........................... (2,290) 3,614 (1,677) 4,648 16,855
Cumulative gap/total earning assets...... 3.49% 5.50% 2.55% 7.07% 25.65%
Interest-sensitive assets to interest-sensitive
liabilities.......................... 0.92 1.80 0.62 16.06 -- --
33
Core deposits such as checking and savings deposits have been placed in
repricing intervals based on historical trends and management's estimates.
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
positive gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
net income of the Bank. The calculated estimates of net income or "earnings" at
risk at December 31, 2005 are as follows:
Net interest Percent of
Changes in rate income risk
(Dollars in thousands)
+200 basis points $ 3,471 0.73%
+100 basis points 3,463 0.49
Flat rate 3,446 --
-100 basis points 3,410 1.04
-200 basis points 3,345 2.93
A simulation model is also used to estimate the impact of various changes,
both upward and downward, in market interest rates and volumes of assets and
liabilities on the economic value of the Bank. This model produces an interest
rate exposure report that measures the long-term rate risks in the balance sheet
by valuing the Bank's assets and liabilities at market. It simulates what amount
would be left over if the Bank liquidated its assets and liabilities. This is
otherwise known as "economic value" of the capital of the Bank. The calculated
estimates of economic value at risk at December 31, 2005 are as follows:
MV of equity
Changes in rate MV equity Risk change
(Dollars in thousands)
+200 basis points $ 6,479 (14.7)%
+100 basis points 7,377 (7.9)
Flat rate 8,205 -
-100 basis points 8,853 4.8
-200 basis points 9,413 21.0
The market value of equity may be impacted by the composition of the
Bank's assets and liabilities. A shift in the level of variable versus fixed
rate assets will create swings in the market value of equity. The Bank's market
value of equity declines in a rising rate environment because of the high level
of fixed rate loans and investments it has in its portfolio that do not follow
market rate changes.
The assumptions used in evaluating the vulnerability of the Bank's earnings
and equity to changes in interest rates are based on management's consideration
of past experience, current position and anticipated future economic conditions.
The interest sensitivity of the Bank's assets and liabilities, as well as the
estimated effect of changes in interest rates on the earnings and equity, could
vary substantially if different assumptions are used or actual experience
differs from the assumptions on which the calculations were based.
34
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest rate
exposure is within the policy limits of the Bank at December 31, 2005. However,
if significant interest rate risk arises, the Board of Directors and management
may take, but are not limited to, one or all of the following steps to
reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit and movement into money market
deposit accounts and short-term certificates of deposit through pricing
and other marketing strategies.
2. Purchase quality loan participations with appropriate interest rate/gap
match for the Bank's balance sheet.
3. Restructure the Bank's investment portfolio.
The Board of Directors has determined that active supervision of the
interest rate spread between yield on earning assets and cost of funds will
decrease the Bank's vulnerability to interest rate cycles.
Capital Resources
Total shareholders' equity decreased $320,000 in 2005 compared to 2004 and
increased $1.6 million in 2004 compared to 2003. The decline in capital in 2005
is primarily attributable to the net loss of $269,000 for the year as well as a
decline in other comprehensive income related to an increase in the unrealized
loss on securities classified as available-for-sale.
The increase in 2004 was primarily related to gains realized on the sale of
bank-owned real estate totaling $1.9 million. Aggressive steps were taken to
infuse additional capital to ensure the continued viability and growth of the
institution.
While gains on asset sales were used to re-capitalize the Bank and support
growth and profitability strategies, the next phase of capital generation will
focus on retained earnings--attaining continuous profitability from the Bank's
core operations---loan and deposit growth. Management will seek to leverage
capital down to industry levels through growth generated by its strategic
initiatives--signature savings and remote deposit capture.
The FRB standards for measuring capital adequacy for U.S. Banking
organizations require that banks maintain capital based on "risk-adjusted"
assets so that categories of assets with potentially higher risk will require
more capital backing than assets with lower risk. In addition, banks are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier I and Tier II. Tier I
consists of common shareholders' equity (excluding net unrealized holding gains
on available for sale securities), noncumulative and cumulative perpetual
preferred stock, and minority interests less goodwill and/or intangible assets).
Tier II capital consists of allowance for loan losses, hybrid capital
instruments, term subordinated debt, and intermediate-term preferred stock.
Banks are required to meet a minimum ratio of 8% of qualifying capital to
risk-adjusted total assets with at least 4% Tier I capital and a Tier I leverage
ratio of at least 6%. Capital that qualifies as Tier II capital is limited to
100% of Tier I capital.
As indicated in Table 14, the Company's risk-based capital ratios are above
the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
in a private offering as well as increasing the rate of internal capital growth
as a means of maintaining the required capital ratios. However, the Bank's
growth and operating losses may have an adverse effect on its capital ratios.
UBS and the Bank do not anticipate paying dividends in the near future.
35
Table 14--Capital Ratios
(Dollars in thousands) 2005 2004 2003
Total Capital ....................................... $ 8,491 $ 8,812 $ 7,235
Less: Intangible Assets/Net unrealized gains (losses)
on available for sale .............................. (1,382) (1,578) (1,826)
Tier I capital ...................................... 7,109 7,234 5,409
Tier II capital ..................................... 472 544 339
Total qualifying capital ............................ $ 7,581 $ 7,778 $ 5,748
Risk-adjusted total assets (including
off-balance-sheet exposures) ....................... $ 44,503 $ 43,436 $ 44,971
Tier I risk-based capital ratio ..................... 15.97% 16.65% 12.03%
Total (Tier I and II) risk-based capital ratio ...... 17.03 17.91% 12.78%
Tier I leverage ratio ............................... 9.87 9.89% 7.19%
See "Regulatory Action" above for a description of and status of
compliance with the regulatory Agreement under which the Bank is currently
operating.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement No. 154, ("SFAS No. 154") "Accounting Changes and Error Corrections -
A Replacement of APB Opinion No. 20 and FASB Statement No. 3." This new standard
replaces Accounting Principles Board ("APB") Opinion No. 20, "Accounting
Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements." Among other changes, SFAS No. 154 requires that a
voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented on the new accounting principle,
unless it is impracticable to do so. SFAS No. 154 also provides that (1) a
change in method of depreciating or amortizing a long-lived nonfinancial asset
be accounted for as a change in estimate (prospectively) that was effected by a
change in accounting principle, and (2) correction of errors in previously
issued financial statements should be termed a "restatement. " The new standard
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. UBS does not anticipate this revision
will have a material effect on its financial statements.
In December 2004, the FASB issued Statement No. 123 (Revised 2004) ("SFAS
No. 123R") "Share-Based Payment," which requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." Share-based compensation arrangements include share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. SFAS No. 123R requires all share-based payments
to employees be valued using a fair valued method on the date of grant and
expensed based on that fair value over the applicable vesting period. SFAS No.
123R also amends SFAS No. 95 "Statement of Cash Flows," requiring the benefits
of tax deductions in excess of recognized compensation cost be reported as
financing instead of operating cash flows. The Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 107, ("SAB No. 107")
which expresses the SEC's views regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations. Additionally, SAB No. 107 provides
guidance related to share-based payment transactions for public companies. UBS
will be required to apply SFAS No. 123R as January 1, 2006. UBS does not
anticipate this revision will have a material effect on its financial
statements.
In November 2004, the Emerging Issues Task Force ("EITF") published Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." The Task Force discussed the meaning of
other-than-temporary impairment and its application to certain investments
carried at cost. The Task Force requested that the FASB staff consider other
impairment models within U.S. Generally Accepted Accounting Principles ("GAAP")
when developing its views. The Task Force also requested that the scope of the
impairment issue be expanded to include equity investments and investments
subject to FASB Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and that the issue be addressed by the Task Force as a
separate EITF issue. At the EITF meeting, the Task Force reached a consensus on
one issue that certain quantitative and qualitative disclosures should be
required for securities accounted for under Statement 115 that are impaired at
the balance sheet date but for which an other-than-temporary impairment has not
been recognized. The APB ratified the consensus on that one issue at its
November 25, 2004 meeting. In September 2004, the Financial Accounting Standards
Board ("FASB") directed the FASB staff to issue two proposed FASB Staff
Positions ("FSP"): Proposed FSP EITF Issue 03-1-a, which provides guidance for
the application of paragraph 16 of EITF Issue 03-1 to debt securities that are
36
impaired because of interest rate and/or sector spread increases, and Proposed
FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt
securities that are impaired because of interest rate and/or sector spread
increases. In June 2005, the FASB reached a decision whereby they declined to
provide additional guidance on the meaning of other-than-temporary impairment.
The Board directed the FASB staff to issue EITF 03-1a as final and to draft a
new FSP that will replace EITF 03-01. The final FSP (retitled FAS 115-1, "The
Meaning of Other-Than-Temporary Impairment and it Application to Certain
Investments") is effective for reporting periods beginning after December 15,
2005. UBS does not anticipate this revision will have a material effect on its
financial statements.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial information required by this Item 7A is incorporated by
reference to page 33 of this Report, the Liquidity and Interest Rate Sensitivity
Management provisions and pages 33 to 37 of this Report, including Table 13 the
Interest Sensitivity Analysis Table of this Report.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements on pages 52 to 78 hereof.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the year ended December 31, 2005.
ITEM 9A--CONTROLS AND PROCEDURES
UBS carried out an evaluation, under the supervision and with the
participation of the UBS' management, including the UBS' Chief Executive
Officer, Evelyn F. Smalls and Chief Financial Officer, Brenda Hudson-Nelson, of
the effectiveness of the design and operation of the UBS' disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act), as of December 31, 2005 pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that UBS' disclosure controls and procedures as of December
31, 2005, are effective and timely in alerting them to material information
relating to UBS (including its consolidated subsidiaries) required to be
included in UBS' periodic SEC filings.
During the last fiscal quarter, there have not been any significant changes
in UBS' internal control over financial reporting that have materially affected
or are reasonably likely to materially affect the UBS' internal control over
financial reporting.
ITEM 9B--OTHER INFORMATION
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain biographical information. Other than
as indicated below, each of the persons named below has been employed in their
present principal occupation for the past five years.
37
(a) Directors of the Registrant and Bank
Principal occupation and Year first Term
Name Age other directorships became director will expire
Bernard E. Anderson 67 Professor of Management/Economist 2002 2006
At the Wharton School,
Philadelphia, PA
David R. Bright 66 Retired, Executive Vice President
Meridian Bancorp 2002 2006
Philadelphia, PA
Joseph T. Drennan 60 Universal Capital Management, Inc. 2004 2008
Wilmington, DE
L. Armstead Edwards 63 Chairman, 1993 2008
United Bancshares, Inc.
Owner and President,
Edwards Entertainment., Inc.
Philadelphia, Pennsylvania
Marionette Y. Wilson(Frazier) 61 Retired as co-Founder, 1996 2008
John Frazier, Inc.
Philadelphia, Pennsylvania
William B. Moore 63 Secretary,
United Bancshares, Inc.
Pastor, Tenth Memorial 1993 2007
Baptist Church
Philadelphia, Pennsylvania
Ashan M. Nasratullah 48 President,
JNA Capital, Inc.
Philadelphia, PA 2004 2009
Evelyn F. Smalls 60 President and CEO of Registrant 2000 2007
and United Bank of Philadelphia
Ernest L. Wright 77 Founder, President and 1993 2008
CEO of Ernest L. Wright
Construction Company
Philadelphia, Pennsylvania
38
(b) Executive Officers of Registrant and Bank
Name Age Office
Evelyn F. Smalls 60 President and Chief Executive Officer
Brenda M. Hudson-Nelson 44 Executive Vice President/Chief Financial Officer
L. Armstead Edwards 63 Chairman, Board of Directors
William B. Moore 62 Secretary
Marionette Y. Frazier 61 Assistant Secretary
Joseph Drennan 60 Treasurer*
*Please note that Mr. Drennan was elected as Treasurer of the Registrant
and the Bank and serves as Chairman of the Audit Committees of those
Board's of Directors beginning on November 14, 2005.
(c) Family Relationships.
There are no family relationships between any director, executive
officer or person nominated or chosen by the UBS or the Bank to become a
director or executive officer.
(d) Other
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
INFORMATION ABOUT THE AUDIT COMMITTEES
Information about the UBS' Audit/Compliance Committee and Financial Expert
The Audit/Compliance Committee of UBS' Board of Directors(1) comprised of
Angela M. Huggins(3) (Chairman), Joseph T. Drennan(2), L. Armstead Edwards,
Marionette Y. Frazier and William B. Moore, meets when necessary at the call of
the Chairman. The Committee meets with the internal auditor to review audit
programs and the results of audits of specific areas, as well as other
regulatory compliance issues. In addition, the Committee meets with UBS'
independent certified public accountants to review the results of the annual
audit and other related matters. Each member of the Committee is "independent"
as defined in the applicable listing standards of the National Association of
Securities Dealers ("NASDAQ"). The Committee held four (4 ) meetings during
2005.
Each member of the Audit/Compliance Committee is independent and
financially literate as defined by NASDAQ. The Board of Directors of the Company
and the Bank have determined that Joseph T. Drennan is a "Financial Expert," as
defined in the SEC's regulations.
The Compliance Committee is combined with the Audit Committee and is
comprised of the same members. On a quarterly basis compliance matters are
addressed to included the review of regulatory compliance matters, the Bank's
compliance programs and the CRA Act activities.
Information about the Bank's Audit/Compliance Committee
The Audit/Compliance Committee of the Bank Board of Directors(1) comprised
of Angela M. Huggins(3) (Chairman), Joseph T. Drennan(2), L. Armstead Edwards ,
William B. Moore, and Marionette Y. Frazier meets at least quarterly. The
Audit/Compliance Committee meets with the internal auditor to review audit
programs and the results of audits of specific areas, as well as other
regulatory compliance issues. In addition, the Audit/Compliance Committee meets
with the Bank's independent registered public accountants to review the results
of the annual audit and other related matters, with the internal auditor to
review audit programs and the results of audits of specific areas, as well as
other regulatory compliance issues. Each member of the Audit/Compliance
Committee is "independent" as defined in the applicable listing standards of the
NASDAQ. The Committee held four (4 ) meetings during 2005.
39
In 2003, the Compliance Committee was combined with the Audit Committee and
is comprised of the same members. On a quarterly basis, in addition to the audit
matters outlined above, compliance matters are addressed to included the review
of regulatory compliance matters, the Bank's compliance programs and the CRA Act
activities.
(1)The Audit Committees of UBS and the Bank are operating standing
committees established in accordance with Section 3(a)58(A) of the Exchange
Act. (2)Mr. Drennan was elected as Treasurer of the Registrant and the Bank
and serves as Chairman of the Audit Committees of those
Board's of Directors beginning on November 14, 2005
(3)Angela M. Huggins retired from the Registrant's and Bank's Boards of
Directors and their Audit Committee in November 2005 upon the expiration of
her term.
INFORMATION ABOUT THE COMMITTEES OF THE BOARDS
Under UBS' By-Laws, persons elected by the Board of Directors to fill a
vacancy on the Board serve as directors for the balance of the term of the
director who that person succeeds. The Board of Directors of UBS and the Board
of Directors of the Bank meet on a monthly basis (except August). The Executive
Committee of the Bank meets in those months when the Board of Directors does not
meet. The Executive Committees of UBS and the Bank act in the stead of the
Boards of Directors of UBS and the Bank, respectively, and exercise the
authority and powers of the Boards of Directors at intervals between meetings of
the Boards of Directors insofar as may be permitted by law and have
responsibility for the nomination of new directors. The Asset and Liability
Management Committee of the Bank's Board meets for the purpose of managing and
monitoring the Bank's exposure to interest rate risks, market risk and liquidity
risk. UBS' and the Bank's Audit/Compliance Committees interface with UBS' and
the Bank's independent registered public accountants to review the results of
the annual audit as well as regulatory compliance matters. UBS' Board of
Directors does not have a Compensation Committee of the Board since it has no
employees.
General Information About UBS' and Bank's Boards of Directors
UBS' Board of Directors meets when necessary and during 2005 held eleven
(11) meetings, including UBS' organization meeting. The Bank's Board of
Directors was scheduled to meet at least monthly, except in August. The total
number of meetings of the Bank's Board of Directors that were held in 2005 was
eleven (11).
Information About the Committees of UBS' Board of Directors
The Committees of UBS' Board of Directors are the Executive Committee and
the Audit Committee. The Executive Committee comprised of L. Armstead Edwards
(Chairman), Steven L. Sanders(4) (Vice Chairman)(1), Angela M. Huggins(3),
William B. Moore, Evelyn F. Smalls, and Marionette Y. Frazier meets, when
necessary, at the call of the Chairman, and to exercise the authority and powers
of UBS' Board of Directors at intervals between meetings of the Board of
Directors insofar as may be permitted by law. The Executive Committee held
eleven (11) meetings during 2005.
For information about UBS' and the Bank's Audit/Compliance Committees refer to
"INFORMATION ABOUT THE AUDIT COMMITTEES" above.
Information About UBS' Nominating Committee
The Nominating Committee, comprised of Angela M. Huggins(3) (Chairman), L.
Armstead Edwards and Ernest L. Wright, meets at the call of the Chairman. The
Committee is responsible for considering and recommending future director
nominees to the Board of Directors of UBS and the Bank. The Committee will be
independent and meet the requirements for independence of NASDAQ. The Nominating
Committee a charter will be made available, without charge, upon written request
by the shareholders of UBS to the corporate secretary of UBS and the charter
will be attached to the Proxy Statement sent to the UBS shareholders in
connection with UBS' next Annual Meeting. The Committee did not hold any
meetings during 2005.
40
Meetings of UBS' Board and its Committees
The total number of meetings of UBS' Board of Directors that were held in
2005 was eleven (11). All of the incumbent directors, who were directors during
2005 (i) attended at least seventy-five percent (75%) of the total number of
meetings of the Board of Directors and (ii) all directors attended at least
seventy-five percent (75%) of the aggregate of the total number of meetings held
by all committees of the Board on which the director served except William B.
Moore, who attended seventy-three percent (73%) and Steven Sanders(4) who
attended fifty-five percent (55%) of all Board of Director and Executive
Committee meetings.
(3)Angela M. Huggins retired from the Board of Directors in November 2005 upon
the expiration of her term.
(4)Steve Sanders resigned from the Board of directors in January 2006 because of
a change in his work schedule that precluded him from attending board meetings.
Information About Committees of the Bank's Board of Directors
The Committees of the Bank's Board of Directors are the Executive, Asset
and Liability Management, the Audit/Compliance Committees, and the Loan
Committee.
The Executive Committee comprised of L. Armstead Edwards (Chairman), Steven
L. Sanders(4) (Vice Chairman), Angela M. Huggins(3), William B. Moore, Evelyn F.
Smalls and Marionette Y. Frazier meets, when necessary, at the call of the
Chairman, to discuss and approve certain human resource matters including
compensation, to ratify and approve certain of the Bank's loans and to exercise
the authority and powers of the Bank's Board of Directors at intervals between
meetings of the Board of Directors insofar as may be permitted by law. The
Executive Committee held eleven (11) meetings during 2005.
The Compensation Committee, comprised of Steven Sanders (Chairman)(1), L.
Armstead Edwards, Angela M. Huggins(3) , William B. Moore, and Marionette Y.
Wilson, meets to discuss compensation matters. The Compensation Committee of the
Bank annually reviews and approves corporate goals and objectives relevant to
CEO compensation, evaluates the CEO's performance in light of those goals and
objectives and determines and approves the compensation and benefits to be paid
or provided to the Evelyn F. Smalls, the President of UBS and Brenda M.
Hudson-Nelson, Executive Vice President and Chief financial Officer. Each member
of the Compensation Committee is independent as defined by NASDAQ. During 2005,
the Compensation Committee did not hold any meetings as there were no changes in
the contracts of the executive officers or other matters for discussion.
The Asset and Liability Management Committee comprised Bernard E. Anderson
(Chairman), L. Armstead Edwards, Angela M. Huggins(3) , Evelyn F. Smalls and
Ernest L. Wright meets quarterly to review and manage the Bank's exposure to
interest rate risk, market risk and liquidity risk. During 2005, the Asset and
Liability Management Committee held three (3) meetings.
The Loan Committee, comprised of David R. Bright (Chairman) L. Armstead
Edwards, Ernest L. Wright, and Evelyn F. Smalls meets when necessary to review
and approve loans that are $200,000 and over and to discuss other related loan
matters. The Committee held 11 (eleven) meetings during 2005.
For information about UBS' and the Bank's Audit/Compliance Committees refer
to "INFORMATION ABOUT THE AUDIT COMMITTEES" above.
The Board of Directors of the Company and the Bank has determined that all
of its members are independent and meet the independence requirements of NASDAQ
except Evelyn F. Smalls. Because Ms. Smalls is the President and Chief Executive
Officer of the Company and the Bank she is not independent as defined by NASDAQ.
41
Meetings of Bank's Board and its Committees
The total number of meetings of the Bank's Board of Directors that were
held in 2005 was eleven (11). All incumbent directors (i) attended at least
seventy-five percent (75%) of the total number of meetings of the Board of
Directors,and (ii) attended at least seventy-five percent (75%) of the aggregate
of the total number of meetings held by all committees of the Board on which the
director served except William B. Moore, who attended seventy-three percent
(73%), and Steven Sanders(4) who attended fifty-five percent (55%) of all Board
of Directors and Executive Committee meetings.
(3)Angela M. Huggins retired from the Board of Directors in November 2005 upon
the expiration of her term.
(4)Steve Sanders resigned from the Board of directors in January 2006 because of
a change in his work schedule that precluded him from attending board meetings.
BOARDS OF DIRECTORS COMPENSATION
Directors Fees
The normal non-officer director fee paid by the Bank is Three Hundred Fifty
Dollars ($350) for attending each Board meeting and One Hundred Seventy-five
Dollars ($175) per quarter for attending the Board of Directors' Committee
meetings. Directors' fees are not paid to officer directors for attending Bank
Board of Directors or Committee meetings. UBS does not pay any fees to any
directors for attending UBS' Board of Directors or Committee meetings. Effective
April 1, 2002, the Board of Directors elected to waive all fees for an
indefinite period of time.
UBS'S AND BANK'S EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
current executive officers of UBS and Bank as of March 10, 2006:
UBS Stock
Name, Principal Occupation and Age as of Beneficially
Business Experience For Past 5 Years March 10, 2006 Office with the UBS and/or Bank Owned
Evelyn F. Smalls(1)(2) 60 President and Chief Executive Officer and 600
Director of UBS and Bank
Brenda M. Hudson-Nelson (3) 44 Executive Vice President and Chief Financial Officer 50
of UBS and Bank
__________________
Footnote Information Concerning Executive Officers
<FN>
(1) Ms. Smalls was elected as a director and was appointed as President and
Chief Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior
Vice President of Human Resources and Compliance from October 1993 to May
2000.
(2) The President and Chief Executive Officer, currently Evelyn F. Smalls, acts
as Trustee of certain voting trust agreements (the "Voting Trusts")
pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of
UBS.
(3) Ms. Hudson-Nelson was appointed Senior Vice President and Chief Financial
Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President
and Controller from January 1992 to May 2000. In May 2002, Ms.
Hudson-Nelson was promoted to Executive Vice President and Chief Financial
Officer.
</FN>
42
CODE OF CONDUCT AND ETHICS
UBS and the Bank has adopted a Code of Business Conduct and Ethics ( the
"Code") that applies to all its directors, employees and officers and including
its Chief Executive Officer and its Chief Financial Officer. The Code meets the
requirement of a code of ethics for the UBS' and the Bank's principal executive
officer and principal financial officer or persons performing similar functions
under Item 406 of the SEC's Regulation S-K. Any amendments to the Code, or any
waivers of the Code for directors or executive officers will be disclosed
promptly on a Form 8-K filed with the SEC or by any other means approved by the
SEC. The Code complies with requirements of Sarbanes - Oxley Act and the listing
standards of NASDAQ and UBS provides a copy of the Code to each director,
officer and employee."
UBS will provide, without charge, a copy of its Code of Business Conduct and
Ethics to any person who requests a copy of the Code. A copy of the Code may be
requested by writing to the President of UBS at United Bank of Philadelphia at
30 S. 15th Street, Suite 1200, Philadelphia, PA 19102.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that UBS' directors and
executive officers file reports of their holdings of UBS' Common Stock with the
SEC. Based on UBS' records and other information available to UBS believes that
the SEC's Section 16(a) reporting requirements applicable to UBS' directors and
executive officers were complied with for UBS' fiscal year ended December 31,
2005. There were no reportable transactions during this period.
ITEM 11 -- EXECUTIVE COMPENSATION
The Compensation Committee, comprised of Steven Sanders (Chairman), L.
Armstead Edwards, Angela M. Huggins, William B. Moore, and Marionette Y. Wilson,
meets to discuss compensation matters. The Compensation Committee of the Bank
annually reviews and approves corporate goals and objectives relevant to CEO
compensation, evaluates the CEO's performance in light of those goals and
objectives and determines and approves the compensation and benefits to be paid
or provided to the Evelyn F. Smalls the President of UBS and Brenda M.
Hudson-Nelson Executive Vice President and Chief financial Officer. Each member
of the Compensation Committee is independent as defined by NASDAQ. During 2005,
the Compensation Committee did not hold any meetings.
The following information relates to all plan and non-plan compensation
awarded to, earned by, or paid to (i) Evelyn F. Smalls, the President and Chief
Executive Officer of the Bank , and (ii) Brenda M. Hudson-Nelson, Executive Vice
President and Chief Financial Officer of the Bank, the only persons who were
serving as executive officers of the Bank at December 31, 2005 (Ms. Smalls and
Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the
"Named Executive Officers").
Summary Compensation Table
The disclosure regarding the compensation of the Bank's executives includes
the following table that sets forth the compensation paid to the Named Executive
Officers during the last three fiscal years.
Annual Compensation(1) (3)
Stock All Other
Name and Principal Position During 2005 Year Salary Bonus Options Compensation(2)
($) (#) ($)
Evelyn F. Smalls 2005 $169,077 -- -- --
President and Chief Executive Officer 2004 $149,588 -- -- --
of UBS and the Bank 2003 $139,050 -- -- --
-- -- --
Brenda M. Hudson-Nelson 2005 $124,096 -- -- --
Executive Vice President and Chief Financial 2004 $106,044 -- -- --
Officer of UBS and the Bank 2003 $97,850 -- -- --
__________________
<FN>
(1) Amounts are not included in the Bonus, Stock Option and All Other
Compensation columns of the table because no compensation of this nature
was paid by UBS or the Bank and the restricted stock awards and long term
incentive payouts columns are not included in the Compensation Table since
these benefits are not made available by UBS or the Bank.
(2) The SEC's compensation disclosure rules require the use, where applicable,
of a series of tables to describe various types of compensation paid to the
specified executive officers. The use of a specific table or column in a
table is not required by the SEC's rules if no compensation was paid or
awarded to the named executives. Only the tables or columns required to be
used by the SEC's rules, because of the compensation paid to the specified
executive officers, have been used in this report.
(3) UBS' executives are not compensated for their services to UBS rather,
because the Bank is the principal subsidiary of UBS, they are compensated
as officers of the Bank.
</FN>
43
Executive Employment Agreements
The Bank entered into a new Employment Agreement with Evelyn F. Smalls in
November 2004 to continue to serve as the Bank's President and Chief Executive
Officer. The term of the Employment Agreement is three (3) years, unless
extended or terminated. The Employment Agreement provides for an annual base
salary of $160,000 that may be increased, but not decreased. Under her
Employment Agreement, Ms. Smalls has an opportunity to receive an annual cash
bonus based on performance targets specified in the Employment Agreement which
are based on the annual earnings of the Bank.
The Bank entered into a new Employment Agreement with Brenda M.
Hudson-Nelson in November 2004 to continue to serve as the Bank's Executive Vice
President and Chief Financial Officer. The term of the Employment Agreement is
three (3) years, unless extended or terminated. The Employment Agreement
provides for an annual base salary of $115,000 that may be increased, but not
decreased. Under her Employment Agreement, Ms. Hudson-Nelson has an opportunity
to receive an annual cash bonus based on performance targets specified in the
Employment Agreement which are based on the annual earnings of the Bank.
Equity Compensation Plan Information
The Company adopted a Stock Option Plan in 1998. Under this Plan,
options to acquire shares of common stock were granted to the former chief
executive officer. The Stock Option Plan provides for the granting of options at
the fair market value of the Company's common stock at the time the options are
granted. Each option granted under the Stock Option Plan may be exercised within
a period of ten years from the date of grant. However, no option may be
exercised within one year from the date of grant. In 1998, options to purchase
29,694 shares of the Company's common stock at a price of $8.54 per share were
awarded to the former chief executive officer.
Equity Compensation Plan Table
- ----------------------------------------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ----------------------------------------------------------- ---------------------------- ----------------------------
Plan Category Number of Securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants, and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
- ----------------------------------------------------------- ---------------------------- ----------------------------
Equity compensation plans 29,694 $8.54 70,306
approved by security holders
- ----------------------------------------------------------- ---------------------------- ----------------------------
Equity compensation plans not - - -
approved by security holders
- ----------------------------------------------------------- ---------------------------- ----------------------------
Total 29,694 $8.54 70,306
- ----------------------------------------------------------- ---------------------------- ----------------------------
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to UBS, as of
March 10, 2006 (1), with respect to the only persons to UBS' knowledge, who may
be beneficial owners of more than 5% of UBS' Common Stock.
Percentage of
Amount and Nature of Outstanding
Beneficial Ownership Corporation
Name and Address of Corporation Common Stock
of Beneficial Owner Common Stock Owned
Philadelphia Municipal 71,667 8.17%
Retirement System
2000 Two Penn Center
Philadelphia, Pennsylvania 19102
Wachovia Corporation(2) 50,000 5.70%
1 Wachovia Center
Charlotte, NC 28288
__________________
(1) As of March 10, 2006, there were 876,921 shares of UBS' voting Common Stock
outstanding. (2) Wachovia Corporation owns 241,666 shares of UBS Common Stock of
which 50,000 are voting shares.
44
The following table lists the beneficial ownership of shares of the UBS'
Common Stock as of March 10, 2006 for each of the UBS' director, nominees and
executive officers. The table also shows the total number of shares of Common
Stock ownership by the director, nominees and executive officers of UBS as a
group.
Common Percent of
Stock(9,10,11) Outstanding Stock
Name
Current Directors
L. Armstead Edwards.................................................... 10,833 1.23%
Marionette Y. Wilson (Frazier)......................................... 17,900 2.04%
Ernest L. Wright....................................................... 7,084 *
Bernard E. Anderson.................................................... 850 *
David R. Bright........................................................ 850 *
Joseph T. Drennan...................................................... 783 *
Ahsan M. Nasratullah................................................... 833 *
William B. Moore....................................................... 1,834 *
Evelyn F. Smalls....................................................... 600 *
Certain Executive Officers
Evelyn F. Smalls....................................................... 600** *
Brenda M. Hudson-Nelson................................................ 50 *
All Current Directors and Executive Officers as a Group ............... 41,617 4.7400% ***
__________________
Footnotes Concerning Beneficial Ownership of Stock
* Less than one percent.
** Ms. Smalls is also a Director; see listing above.
*** Calculated by adding the Common Stock owned plus exercisable options and
dividing by the actual number of shares outstanding on March 10, 2006, plus
the shares subject to the exercisable option.
(9) Stock ownership information is given as of March 10, 2006, and includes
shares that the individual has the right to acquire (other than by exercise
of stock options) within sixty (60) days of March 10. 2006. Unless
otherwise indicated, each director and each such named executive officer
holds sole voting and investment power over the shares listed.
(10) The number of shares "beneficially owned" in each case includes, when
applicable, shares owned beneficially, directly or indirectly, by the
spouse or minor children of the director, and shares owned by any other
relatives of the director residing with the director. None of the directors
holds title to any shares of UBS of record that such director does not own
beneficially.
(11) UBS does not know of any person having or sharing voting power and/or
investment power with respect to more than 5% of the UBS' Common Stock
other than Wachovia Corporation (formerly First Union Corporation) and
Philadelphia Municipal Retirement System.
45
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the UBS and Bank and the
entities with which they are associated were customers of and had banking
transactions with the Bank in the ordinary course of its business during the
year 2005. All loans and commitments to lend were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. In the opinion of Bank
management, the transactions and loan commitments did not involve more than
normal risk of collectively or present other unfavorable features.
ITEM 14--PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents the fees for each of the last two fiscal years
for the UBS' principal accountants by category:
2005 2004
Audit Fees..................................$ 86,703 $ 62,000
Audit-related fees.......................... - -
Tax fees.................................... 8,304 -
All other fees.............................. - -
Total fees...............................$ 95,007 $ 62,000
The Audit Committee pre-approves all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for
UBS by its independent auditor, subject to the minimus exceptions for non-audit
services described in Section 10A (i) (1) (B) of the Exchange Act which are
approved by the Committee prior to the completion of the audit. The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting.
46
PART IV
ITEM 15 -- EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
The following documents are filed as part of this report of United Bancshares, Inc.: Page
(a) 1. Financial Reports of United Bancshares, Inc.
Report of Independent Registered Public Accounting Firm. 52
Consolidated Balance Sheets at December 31, 2005 and 2004. 54
Consolidated Statements of Operations for the three years ended December 31, 2005. 55
Consolidated Statements of Changes in Shareholders' Equity for the three years ended
December 31, 2005. 56
Consolidated Statements of Cash Flows for the three years ended December 31, 2005. 57
Notes to Consolidated Financial Statements 58
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in
the respective financial statements or in the notes thereto.
3. The following Exhibits are filed herewith or incorporated by
reference as a part of this Annual Report:
Exhibit Number Item
(3(i)) Articles of Incorporation (Incorporated by reference to
Registrant's 1998 Form 10-K).
(3(ii)) Bylaws (Incorporated by reference to Registrant's 1997
Form 10-K).
(9.1) Voting Trust Agreement with NationsBank (Incorporated by
reference to Registrant's 1997 Form 10-K).
(9.2) Voting Trust Agreement with Fahnstock (Incorporated by
reference to Registrant's 1997 Form 10-K).
47
(10) Material Contracts
a) Lease for corporate headquarters office located at The
Graham Building, 30 S. 15th Street, Suite 1200,
Philadelphia, PA (Incorporated by reference to Registrant's
2004 Form 10-K)
b) Lease for branch office located at 1620 Wadsworth
Avenue(Incorporated by reference to Registrant's 2002 Form
10-K)
c) Lease for branch office located at 3750 Lancaster
Avenue(Incorporated by reference to Registrant's 2002 Form
10-K)
d) Lease for branch office located at 1015 North Broad
Street(Incorporated by reference to Registrant's 2002 Form
10-K)
e) Evelyn F. Smalls' Employment Agreement, dated November 1,
2004, is attached hereto as Exhibit 10e.
f) Brenda Hudson-Nelson's Employment Agreement, dated November
1, 2004, is attached hereto as Exhibit 10f.
g) Long Term Incentive Compensation Plan (Incorporated by
reference to Registrant's 1992 Form 10)
h) Lease for Retail office located at The Graham Building, 30
S. 15th Street, Philadelphia, PA, is attached hereto as
Exhibit 10h.
i) Sublease for Retail office located at The Graham Building,
30 S. 15th Street, Philadelphia, PA, is attached hereto as
Exhibit 10i.
(11) Statement of Computation of Earnings Per Share. Included at Note 16
of the Financial Statements hereof.
(12) Statement of Computation of Ratios. Included at Note 15 of the
Financial Statements hereof. (14) Code of Conduct and Ethics (Incorporated by
reference to Registrant's 2004 10-K)
(21) Subsidiaries of Registrant
Name State of Incorporation
United Bank of Philadelphia Pennsylvania
(31) Certification of the Annual Report
(31.1) Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sabanes-Oxley Act of 2002.
(31.2) Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32) Certification Pursuant to issue of Section 1350
(A) Exhibit 32.1 Certification Pursuant to 18U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of
2002 of the Chief Executive Officer attached hereto as Exhibit
99.1.
(B) Exhibit 32.2 Certification Pursuant to 18U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of
2002 of the Chief Financial Officer attached hereto as Exhibit
99.2.
(99)Additional Exhibits
(A) Exhibit 99 Registrants Proxy Statement for its Annual
Shareholders Meeting held on November 14, 2005 is attached hereto
as Exhibit 99(A).
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized
UNITED BANCSHARES, INC. DATE
/s/ Evelyn F. Smalls
_________________________________________ March 31, 2006
Evelyn F. Smalls, President & CEO, Director
/s/ Brenda M. Hudson-Nelson
_________________________________________ March 31, 2006
Brenda M. Hudson-Nelson, EVP, CFO
/s/ L. Armstead Edwards
___________________________________ March 31, 2006
L. Armstead Edwards, Chairman, Director
/s/ Marionette Y. Wilson(Frazier)
_________________________________________ March 31, 2006
Marionette Y. Wilson(Frazier), Assistant Secretary, Director
/s/ William B. Moore
_________________________________________ March 31, 2006
William B. Moore, Secretary, Director
/s/ Bernard E. Anderson
________________________________________ March 31, 2006
Bernard E. Anderson, Director
/s/ David R. Bright
________________________________________ March 31, 2006
David R. Bright, Director
/s/ Joseph T. Drennan
________________________________________ March 31, 2006
Joseph T. Drennan, Treasurer, Director
/s/ Ashan M. Nasratullah
_________________________________________ March 31, 2006
Ashan M. Nasratullah, Director
/s/ Ernest L. Wright
_________________________________________ March 31, 2006
Ernest L. Wright, Director
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors
United Bancshares, Inc.
Philadelphia, Pennsylvania
We have audited the consolidated balance sheets of United Bancshares, Inc. and
Subsidiary (the "Company") as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Bancshares,
Inc. and Subsidiary as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 10, 2006
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
United Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated statement of operations, changes
in shareholders' equity, and cash flows of United Bancshares, Inc. and its
Subsidiary, United Bank of Philadelphia ("Bank"), for the year ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
United Bancshares, Inc. and Subsidiary as of December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the December 31,
2003 financial statements the Bank entered into a written agreement (Agreement)
with its primary regulators dated February 23, 2000. As of December 31, 2003 the
Bank was not in compliance with certain requirements of the Agreement. Not
meeting these requirements, losses incurred in the current year and the results
of a recent regulatory examination, could expose the Bank to possible further
regulatory actions. As more fully discussed in Note 2, these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on many
factors, including achieving the required capital levels, earnings and fully
complying with the Agreement. Management's plans with respect to these matters
are also described in Note 2. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 27, 2004
51
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 2005 2004
------------- ------------
Cash and due from banks ....................................................... $ 3,657,763 $ 4,317,645
Interest-bearing deposits with banks .......................................... 290,030 888,924
Federal funds sold ............................................................ 5,292,000 3,727,000
------------ ------------
Cash and cash equivalents ........................................... 9,239,793 8,933,569
Investment securities:
Available-for-sale, at fair market value .................................. 3,627,425 4,797,549
Held-to-maturity, at amortized cost (fair market value of $9,906,420
and $8,784,495 in 2005 and 2004, respectively) ......................... 10,078,441 8,762,796
Loans held-for-sale (market value of $1,437,274) ............................. -- 1,412,554
Loans, net of unearned discount of $21,781 and $43,181 in 2005
and 2004, respectively .................................................... 46,422,378 45,680,014
Less allowance for loan losses ................................................ (472,198) (602,939)
------------ ------------
Net loans ................................................................. 45,950,180 45,077,075
Bank premises and equipment, net .............................................. 1,038,081 1,074,855
Accrued interest receivable ................................................... 336,466 328,354
Other real estate owned ....................................................... 164,500 --
Intangible assets ............................................................. 1,382,279 1,560,358
Prepaid expenses and other assets ............................................. 392,564 353,789
------------ ------------
Total assets .............................................................. $ 72,209,729 $ 72,300,899
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Demand deposits, noninterest-bearing ...................................... $ 14,469,063 $ 13,439,567
Demand deposits, interest-bearing ......................................... 9,788,131 8,333,631
Savings deposits .............................................................. 16,396,073 17,591,982
Time deposits,
under $100,000 ................................................................ 9,665,743 10,165,837
Time deposits, $100,000 and over .............................................. 13,004,506 13,641,202
------------ ------------
Total deposits ................................................................ 63,323,516 63,172,219
Accrued interest payable ...................................................... 150,777 78,196
Accrued expenses and other liabilities ........................................ 243,657 239,156
------------ ------------
Total liabilities ................................................... 63,717,950 63,489,571
------------ ------------
Commitments and Contingencies (Notes 6, 11, and 15)
Shareholders' equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value,
500,000 shares authorized; 136,842 issued; 6,308 shares held in treasury 1,368 1,368
Common stock, $0.01 par value; 1,750,000 shares authorized;
876,921 issued ......................................................... 8,769 8,769
Class B Non-voting Common Stock; 250,000 shares authorized; $0.01 par value;
191,667 issued and outstanding ........................................ 1,917 1,917
Treasury Stock, 33,500 shares, at cost ........................................ -- --
Additional paid-in-capital .................................................... 14,749,852 14,749,852
Accumulated deficit ........................................................... (6,237,557) (5,968,140)
Accumulated other comprehensive income(loss) .................................. (32,570) 17,562
------------ ------------
Total shareholders' equity ............................................. 8,491,779 8,811,328
------------ ------------
Total liabilities and shareholders' equity ............................. $ 72,209,729 $ 72,300,899
============ ============
The accompanying notes are an integral part of these statements ...............
52
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2005 2004 2003
----------- ----------- -----------
Interest income:
Interest and fees on loans ................ $ 3,428,778 $ 3,008,532 $ 2,912,547
Interest on investment securities ......... 537,077 560,255 805,655
Interest on federal funds sold ................ 180,258 86,935 97,599
Interest on time deposits with other banks .... 9,717 30,087 21,002
----------- ----------- -----------
Total interest income .................. 4,155,830 3,685,809 3,836,803
Interest ...................................... -- -- --
expense:
Interest on time deposits ................. 462,910 294,863 374,297
Interest on demand deposits .................. 64,224 48,602 83,267
Interest on savings deposits .................. 57,940 62,464 89,020
----------- ----------- -----------
Total interest expense ................. 585,074 405,929 546,584
----------- ----------- -----------
Net interest income ........................... 3,570,756 3,279,880 3,290,219
Provision for loan losses ................... 45,000 565,000 558,000
Net ........................................... -- -- --
interest income after provision for loan losses 3,012,756 3,234,880 2,725,219
----------- ----------- -----------
Noninterest income:
Gain on sale of loans ..................... 33,679 6,299 57,061
Customer service fees ......................... 681,919 852,806 955,284
ATM Fee Income ............................... 570,274 597,965 697,724
Loan Syndication Fee Income ................... 202,171 178,802 86,000
Gain on sale of investments .................. -- 31,115 --
Gain on sale of fixed assets .................. -- 1,874,203 --
Other income .................................. 94,011 113,837 94,837
----------- ----------- -----------
Total noninterest income ...................... 1,582,054 3,655,027 1,890,906
----------- ----------- -----------
Noninterest expense:
Salaries, wages and employee benefits ..... 1,830,572 1,935,421 2,204,583
Occupancy and equipment ....................... 994,690 1,102,627 1,224,719
Office operations and supplies ................ 345,265 411,920 453,202
Marketing and public relations ............... 100,421 82,652 113,552
Professional services ......................... 265,487 239,050 220,765
Data processing .............................. 407,324 562,655 661,939
Deposit insurance assessments ................ 113,144 72,238 33,501
Other operating ............................... 807,324 836,822 819,329
----------- ----------- -----------
Total noninterest expense .............. 4,864,227 5,243,385 5,731,590
----------- ----------- -----------
Net (loss) income before income taxes .. $ (269,417) $ 1,646,522 $(1,115,465)
Provision for income taxes ................ -- -- --
----------- ----------- -----------
Net (loss) income ...................... $ (269,417) $ 1,646,522 $(1,115,465)
=========== =========== ===========
Net (loss) income per common share--basic ..... $ (0.25) $ 1.54 $ (1.03)
=========== =========== ===========
Net (loss) income per common share--diluted ... $ (0.25) $ 1.50 $ (1.03)
=========== =========== ===========
Weighted average number of common shares ...... 1,068,588 1,068,588 1,084,694
=========== =========== ===========
The accompanying notes are an integral part of these statements.
53
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2005, 2004 and 2003
Series A Accumulated Compre-
preferred stock Common stock Additional other Total hensive
----------------- --------------------- paid-in Accumulated comprehensive shareholders' income
Shares Amount Shares Amount capital deficit income (loss) equity (loss)
------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 143,150 $1,432 1,102,088 $ 11,021 $14,749,453 $(6,499,197) $237,432 $ 8,500,141
Treasury Stock (6,308) (64) (33,500) (335) 399
Unrealized losses
on investment securities (149,783) (149,783) $ (149,783)
Net loss ................. (1,115,465) (1,115,465) (1,115,465)
------------------------------------------------------------------------------------------------------
Total comprehensive
income (loss) $(1,265,248)
=============
Balance at December 31, 2003 136,842 $1,368 1,068,588 $ 10,686 $14,749,852 $(7,614,662) 87,649 $ 7,234,893
========================================================================================
Unrealized losses
on investment securities (70,087) (70,087) $(70,087)
Net income ............... 1,646,522 1,646,522 1,646,522
------------------------------------------------------------------------------------------------------
Total comprehensive
income (loss) $1,576,435
==============
Balance at December 31, 2004 136,842 $1,368 1,068,588 $ 10,686 $14,749,852 $(5,968,140) $ 17,562 $ 8,811,328
========================================================================================
Unrealized loses
on investment securities (50,132) (50,132) $ (50,132)
Net loss (269,417) (269,417) (269,417)
------------------------------------------------------------------------------------------------------
Total comprehensive loss $(319,549)
==============
Balance at December 31, 2005 136,842 $1,368 1,068,588 $ 10,686 $14,749,852 $(6,237,557) $(32,570) $ 8,491,779
========================================================================================
The accompanying notes are an integral part of these statements.
54
UNITED BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income......................................... $ (269,417) $ 1,646,522 $ (1,115,465)
Adjustments to reconcile net (loss) income to net cash
(used in)provided by operating activities:
Provision for loan losses............................... 558,000 45,000 565,000
Gain on sale of loans................................... (33,679) (6,299) (57,061)
Gain on sale of fixed assets............................ - (1,874,203) -
Gain on sale of investment securities................... - (31,115) -
Depreciation and amortization........................... 480,976 610,440 688,247
(Increase) decrease in accrued interest receivable and
other assets......................................... (211,387) 505,173 (198,518)
Increase (decrease) in accrued interest payable and
other liabilities.................................... 77,082 (48,299) (249,024)
----------- ------------ -------------
Net cash provided by (used in) operating activities.. 601,575 847,219 (366,821)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of available-for-sale investments................. - (496,421) (3,200,237)
Purchase of held-to-maturity investments................... (4,762,327) (3,986,354) (3,510,938)
Proceeds from maturity and principal reductions of
available-for-sale investments.......................... 1,084,929 3,774,398 8,414,626
Proceeds from maturity and principal reductions of
held-to-maturity investments............................ 3,440,765 1,917,765 3,967,709
Proceeds from sale of investments available-for-sale....... - 786,526 -
Proceeds from the sale of fixed assets..................... - 3,283,536 -
Proceeds from sale of student loans........................ 1,806,173 - 3,054,429
Purchase of loans from other financial institutions........ - - (9,325,656)
Net (increase)decrease in loans............................ (1,771,882) 161,493 2,532,105
Purchase of premises and equipment......................... (244,306) (102,935) (588,878)
----------- ------------ ------------
Net cash (used in) provided by investing activities.. (446,648) 5,338,008 1,343,161
------------ ----------- ------------
Cash flows from financing activities:
Net increase (decrease) in deposits........................ 151,297 (3,944,604) (9,812,482)
------------ ------------- ------------
Net cash provided by (used in) financing activities.. 151,297 (3,944,604) (9,812,482)
---------- ------------- ------------
Net increase (decrease) in cash and cash equivalents. 306,224 2,240,623 (8,836,142)
---------- ------------ ------------
Cash and cash equivalents at beginning of year................. 8,933,569 6,692,946 15,529,088
---------- ------------- ------------
Cash and cash equivalents at end of year....................... $ 9,239,793 $ 8,933,569 $ 6,692,946
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................... $ 512,493 $ 405,508 $ 468,141
============= =========== ===========
The accompanying notes are an integral part of these statements.
55
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of United
Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank
of Philadelphia (the Bank). All significant intercompany transactions and
balances have been eliminated.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold on an overnight
basis. Changes in loans made to and deposits received from customers are
reported on a net basis.
Securities Held-to-Maturity
Bonds, notes, and debentures for which the Bank has both the positive intent
and ability to hold to maturity are classified as held-to-maturity and
carried at cost, adjusted for premiums and discounts that are recognized in
interest income using the interest method over the period to maturity.
Securities Available-for-Sale
Available-for-sale securities consist of bonds, notes and debentures, and
certain equity securities for which the Bank does not have positive intent
to hold to maturity. These securities are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders'
equity net of related income tax effects.
Gains and losses on the sale of available-for-sale securities are determined
by the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Securities classified as available for sale or held to maturity are
considered to be impaired when a decline in the fair value is judged to be
other-than temporary. The Bank evaluates the securities for the
other-than-temporary impairment at least on a quarterly basis and more
frequently when economic or market conditions warrant such evaluation. The
Bank employs a systematic methodology that considers available evidence in
evaluating potential impairment of its investments. In the event that the
cost of an investment exceeds its fair value, the Bank evaluates, among
other factors, the magnitude and duration of the decline in fair value; for
equity and debt securities the financial health of and business outlook of
the issuer; the performance of the underlying assets in interests in
securitized assets; and the Bank's intent and ability to hold the
investment. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded in investment income
and a new cost basis in the investment is established.
(Continued)
56
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loans
The Bank has both the positive intent and ability to hold the majority of
its loans to maturity. These loans are stated at the amount of unpaid
principal, reduced by net unearned discount and an allowance for loan
losses. Interest income on loans is recognized as earned based on
contractual interest rates applied to daily principal amounts outstanding
and accretion of discount. It is the Bank's policy to discontinue the
accrual of interest income when a default of principal or interest exists
for a period of 90 days except when, in management's judgment, the
collection of principal and interest is reasonably anticipated or adequate
collateral exists. Interest received on nonaccrual loans is either applied
against principal or reported as interest income according to management's
judgment as to collectibility of principal. When interest accruals are
discontinued, interest credited to income is reversed and the loan is
classified as nonperforming.
Unearned discount is amortized over the weighted average maturity of the
mortgage loan portfolio. Loan origination and commitment fees and certain
direct loan origination costs are deferred, and the net amount is amortized
as an adjustment of the related loan's yield. The Bank is amortizing these
amounts over the contractual life of the loan.
For purchased loans, the discount remaining after the loan loss allocation
is being amortized over the remaining life of the purchased loans using the
interest method.
Loans Held-for-Sale
Transfers of financial assets, for which the Bank has surrendered control,
are accounted for as sales to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange.
Retained interests in a sale of financial assets are measured at the date of
transfer by allocating the previous carrying amount between the assets
transferred and based on their relative estimated fair values. The fair
values of retained servicing rights and any other retained interests are
determined based on the present value of expected future cash flows
associated with those interests and by reference to market prices for
similar assets.
Loans held-for-sale are carried at the aggregate of lower of cost or market
value. The Bank had student loans held for sale totaling $1,412,554 as of
December 31, 2004.
Allowance for Loan Losses
The allowance for loan losses related to "impaired loans" is based on the
discounted cash flows using the impaired loans' initial effective interest
rate as the discount rate, or the fair value of the collateral for
collateral-dependent loans. A loan is impaired when it meets the criteria to
be placed on nonaccrual status. Loans that are evaluated for impairment are
assessed on a loan-by-loan basis and include only commercial nonaccrual
loans. Large groups of smaller, homogeneous loans, such as credit cards,
student loans, residential mortgages, and other student loans, are evaluated
collectively for impairment.
(Continued)
57
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The allowance for loan losses is maintained at a level considered adequate
to provide for potential losses in the portfolio. The allowance is increased
by provisions charged to operating expenses and reduced by charge-offs net
of recoveries. Management's determination of the adequacy of the allowance
is based on continuous credit reviews of the loan portfolio, consideration
of the current economic conditions, review of specific problem loans, and
other relevant factors. This evaluation is subjective as it requires
material estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change. However, actual losses on specific loans, which are
encompassed in the analysis, may vary from estimated losses. The allowance
is an accounting estimate subject to short-term changes based on the outcome
of periodic analysis.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements
is computed over the shorter of the related lease term or the useful life of
the assets.
Income Taxes
The liability method is used in accounting for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Earnings (Loss) Per Share
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average common shares outstanding during
the period. Diluted EPS takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
and converted into common stock.
Stock-based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
No. 148, contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue accounting for
employee stock options and similar equity instruments under Accounting
Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees.
Entities that continue to account for stock options using APB Opinion 25 are
required to make pro forma disclosures of net income and earnings per share,
as if the fair value-based method of accounting defined in SFAS No. 123 had
been applied.
At December 31, 2005, the Company had one stock-based employee compensation
plan, which is more fully described in note 13. The Bank accounts for this
plan under the recognition and measurement principles of APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based employee compensation
(Continued)
58
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
costs are not reflected in net income, as all options granted under the
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net income (loss) per share if
the Bank had applied the fair value recognition provisions of SFAS No. 123,
to stock-based employee compensation (in thousands, except per share
amounts).
Year ended December 31,
(In thousands) 2005 2004 2003
---- ----- ----
Net (loss) income
As reported................................................. $ (269) $ 1,647 $ (1,115)
Less: Stock-based compensation costs determined under... -- -- --
fair value-based method for all awards
Pro forma................................................... $ (269) $ 1,647 $ (1,115)
Basic (loss) income per share
As reported................................................. $(0.25) $ 1.54 $ (1.03)
Pro forma................................................... $(0.25) $ 1.54 $ (1.03)
Fully Diluted (loss) income per share
As reported................................................. $(0.25) $ 1.50 $ (1.03)
Pro forma................................................... $(0.25) $ 1.50 $ (1.03)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: no dividends declared; expected
volatility of 20%; a risk-free interest rate of 4.7%, and expected life of
10 years.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable approximates
fair market value.
(Continued)
59
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loans held-for-sale: Fair values are estimated using quoted rates based upon
secondary market sources for similar loans.
Loans: The fair value of loans was estimated using a discounted cash flow
analysis, which considered estimated prepayments and amortizations.
Prepayments and discount rates were based on current marketplace estimates
and pricing. Residential mortgage loans were discounted at the current
effective yield, including fees, of conventional loans, adjusted for their
maturities with a spread to the Treasury yield curve. The carrying amount of
accrued interest receivable approximates fair market value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are equal to the amounts payable on demand at the
reporting date (e.g., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate the fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation. The Treasury Yield Curve was utilized for discounting cash
flows as it approximates the average marketplace certificate of deposit
rates across the relevant maturity spectrum. Commitments to extend credit:
The carrying amounts for commitments to extend credit approximate fair value
as such commitments are not substantially different from the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparts. The carrying amount of accrued interest payable approximates
fair market value.
Intangible Assets
On September 24, 1999, the Bank acquired four branches from First Union
Corporation with deposits totaling $31.5 million. As a result of the
acquisition, the Bank recorded a core deposit intangible of 2,449,488. The
core deposit intangible is being amortized over 14 years. Amortization
totaled $178,078 for each of the years ended December 31, 2005, 2004, and
2003, respectively. The amortization of the intangible will be $178,078 for
each of the next five years.
Intangible assets are reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the net asset. Such
reviews include an analysis of current results and take into consideration
the discounted value of projected operating cash flows. The core deposit
intangible was tested for impairment. No impairment has been recognized.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management, and the real estate is carried at
the lower of carrying amount or fair value less the cost to sell. Revenue
and expenses from operations and changes in valuation allowance are charged
to operations. The historical average holding period for such properties is
24 months.
(Continued)
60
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Management's Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Material estimates which are particularly
susceptible to significant change in the near term relate to the market
value of investment securities, the determination of the allowance for loan
losses, valuation of other real estate, and consideration of impairment of
other intangible assets.
Segments
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and assess performance. The statement
also requires that public enterprises report a measure of segment profit or
loss, certain specific revenue and expense items and segment assets. It also
requires that information be reported about revenues derived from the
enterprises' products or services, or about the countries in which the
enterprises earn revenues and hold assets, and about major customers,
regardless of whether that information is used in making operating
decisions.
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
other. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer
and residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment or
unit.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2005 presentation.
Comprehensive Income
Comprehensive income includes net income as well as certain other items that
result in a change to equity during the period. The components of other
comprehensive income (loss) are as follows:
(Continued)
61
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2005
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
----- ---------------- ------
Unrealized losses on securities
Unrealized holding losses arising during period $ (75,958) $ 25,826 $ (50,132)
Less: reclassification adjustment for gains
realized in net income - - -
---------- ---------- ----------
Other comprehensive income(loss), net $ (75,958) $ 25,826 $ (50,132)
============ =========== ============
December 31, 2004
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
----- --------------- ------
Unrealized losses on securities
Unrealized holding losses arising during period $ (74,015) $ 24,776 $ (49,240)
Less: reclassification adjustment for gains
realized in net income 31,115 (10,267) 20,847
---------- ----------- ----------
Other comprehensive income(loss), net $ (105,130) $ 35,043 $ (70,087)
============ =========== ============
December 31, 2003
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
----------- ---------------- ------
Unrealized losses on securities
Unrealized holding losses arising during period $ (223,555) $ 73,772 $ (149,783)
Less: reclassification adjustment for gains
realized in net income - - -
------------ ---------- ----------
Other comprehensive income(loss), net $ (223,555) $ 73,772 $ (149,783)
============ =========== ============
62
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
2. REGULATORY AGREEMENT
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (Agreement) with
its primary regulators with regard to, among other things, achievement of
agreed-upon capital levels, implementation of a viable earnings/strategic
plan, adequate funding of the allowance for loan losses, the completion of
a management review and succession plan, and improvement in internal
controls. The current Agreement requires the Bank to increase its capital
ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of
December 31, 2000, the Bank had met the required ratios by implementing
strategies that included: increasing profitability, consolidating branches,
and soliciting new and additional sources of capital. At December 31, 2003,
the Bank's tier one leverage capital ratio had fallen to 6.81%, below the
7% minimum capital ratio required by the Agreement. However, by February
2004, the tier one leverage ratio had improved to 7.29%. Subsequently, as a
result of a re-capitalization plan including the sale of bank-owned real
estate for a gain of $1.9 million, the Bank's tier one leverage ratio
improved to 9.49% at December 31, 2004. At December 31, 2005, the Bank's
tier one leverage ratio was 9.47%.
With the stabilization of the Bank's capital position, management has turned
its attention to increasing profitability. A strategic plan has been adopted
for 2006 that focuses on core growth strategies for loans and deposits.
These strategies include the introduction of "signature" deposit products
with attractive interest rates coupled with alternative delivery channels
including internet banking and remote deposit capture. In addition, the Bank
has designated regional business development officers in the regions
surrounding each of its three branches to solicit loan and deposit business,
These strategies allow the Bank to penetrate the market place without adding
additional branches to the network. While expense reductions will continue
to be sought, management believes that a greater impact will be realized
with increased deposit levels and loan originations that result increased
net interest income. As a result of all of the actions referred to above,
Management believes that the Bank is substantially in compliance with the
Agreement's terms and conditions. Management continues to address all
matters outlined in the Agreement. Failure to comply could result in
additional regulatory supervision and/or actions.
3. CASH AND DUE FROM BANK BALANCES
The Bank maintains various deposit accounts with other banks to meet normal
fund transaction requirements and to compensate other banks for certain
correspondent services. The withdrawal or usage restrictions of these
balances did not have a significant impact on the operations of the Bank as
of December 31, 2005.
63
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
4. INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and estimated
market value of the available-for-sale and held-to-maturity investment
securities by major security type at December 31, 2005 and 2004 are as
follows:
2005
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------- ------------- ------------- -------------
Available-for-sale:
U.S.Government agency securities....... $ 250,000 $ $ (3,515) $ 246,485
Mortgage-backed securities............. 3,085,436 18,348 (63,445) 3,040,339
--------- -------------- ----------- ------------
Total debt securities.................. 3,335,436 18,348 (66,960) 3,286,824
Investments in mutual funds............ 112,151 112,151
Other investments...................... 228,450 228,450
------- ----------- ----------- ----------
$ 3,676,037 $ 18,348 $ (66,960) $ 3,627,425
========= ======== ============ =========
Held-to-maturity:
U.S.Government agency securities....... $ 6,997,720 $ 235 $ (133,292) $ 6,864,663
Mortgage-backed securities............. 3,080,721 23,875 (62,839) 3,041,757
--------- -------------- ----------- ------------
$10,078,441 $ 24,110 $ (196,131) $ 9,906,420
========= ======== ============ =========
2004
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------- ------------- ------------- -------------
Available-for-sale:
U.S.Government agency securities....... $ 250,00 $ - $ (702) $ 249,298
Mortgage-backed securities............. 4,183,980 54,149 (27,233) 4,210,896
----------- ----------- ------------ ---------
Total debt securities.................. 4,433,980 54,149 (27,935) 4,460,194
Investments in mutual funds............ 108,905 108,905
Other investments...................... 228,450 228,450
----------- ----------- ----------- -------
$ 4,771,335 $ 54,149 $ (27,935) $ 4,797,549
============ ============ ============= =========
Held-to-maturity:
U.S.Government agency securities....... $ 4,499,892 $ 1,355 $ (30,030) $ 4,471,217
Mortgage-backed securities............. 4,262,904 63,702 (13,328) 4,313,278
----------- ----------- ------------ ---------
$ 8,762,796 $ 65,057 $ (43,358) $ 8,784,495
=========== ========== =========== =========
64
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
4. INVESTMENTS- Continued
The table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been in a continuous
unrealized loss position at December 31, 2005 (in thousands):
Less than 12 months 12 months or longer Total
Number ---------------------- ---------------------- ----------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
Securities securities value losses value losses value losses
------------------- ------------ -------- ----------- -------- ----------- -------- ------------
U.S. Government
agency securities 17 $1,723 $(25) $2,569 $ (172) $ 4,555 $ (197)
Mortgage backed
securities 20 970 (12) 7,441 (54) 8,411 (66)
---- ---- ---- ------- ----- ------ -----
Total temporarily
impaired investment
securities 37 $2,693 $(37) $10,010 $ (226) $ 12,966 $ (263)
=== ====== ==== ====== ===== ====== ======
The table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been in a continuous
unrealized loss position at December 31, 2004 (in thousands):
Less than 12 months 12 months or longer Total
Number ---------------------- ---------------------- ----------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
Securities securities value losses value losses value losses
------------------- ------------ -------- ----------- -------- ----------- -------- ------------
U.S. Government
agency securities 10 $3,481 $ (19) 488 (12) $ 3,969 $(31)
Mortgage backed
securities 11 3,833 (35) 222 (5) 4,055 (40)
---- ------ ---- ------ ------- ------ ----
Total temporarily
impaired investment
securities 21 $7,314 $ (54) $ 710 $ (17) $ 8,024 $(71)
=== ====== ==== ====== ======== ======= ====
Management does not believe any individual unrealized loss as of December
31, 2005 and 2004 represents other-than-temporary impairment. The unrealized
losses on these securities are caused by the changes in general market
interest rates. All securities with unrealized losses are reviewed by
management at least quarterly to determine whether the unrealized losses are
other-than-temporary. The Company believes it will collect all amounts
contractually due on these securities as they are backed by the full faith
and credit of the U.S. Government or are guaranteed by an agency of the U.S.
Government. The Company has the ability and the intent to hold these
securities until market price recovery or maturity.
(Continued)
65
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
4. INVESTMENTS - Continued
Maturities of investment securities classified as available-for-sale and
held-to-maturity at December 31, 2005 were as follows. Expected maturities
may differ from contractual maturities.
Amortized Market
cost value
------------- -------------
Available-for-sale:
Due after one month through three years................................ $ 250,000 $ 246,485
Due after three year through five years................................ - -
Due after five years through fifteen years............................. - -
Mortgage-backed securities............................................. 3,085,436 3,040,339
----------- ------------
Total debt securities.................................................. 3,335,436 3,286,824
Investments in mutual funds............................................ 112,151 112,151
Other investments...................................................... 228,450 228,450
----------- ------------
$ 3,676,037 $ 3,627,425
============ ============
Held-to-maturity:
Due in one month through three years................................... $ 3,749,438 $ 3,696,815
Due after three years through five years............................... 2,748,282 2,692,848
Due after five years through fifteen years............................. 500,000 475,000
Mortgage-backed securities............................................. 3,080,721 3,041,757
----------- -----------
$ 10,078,441 $ 9,906,420
============ ============
No securities were sold during 2005. The Bank recorded a gross gain of
$31,115 on the sale of investments during the year ended December 31, 2004.
No securities were sold during 2003.
As of December 31, 2005 and 2004, investment securities with a book value of
$11,780,583 and $11,459,636, were pledged as collateral to secure public
deposits and for other purposes required or permitted by law.
66
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the net loans is as follows:
2005 2004
------------- -------------
Commercial loans.......................................................... $ 32,985,265 $ 28,287,290
Residential mortgages..................................................... 7,545,858 10,664,750
Consumer loans............................................................ 5,891,256 6,727,974
----------- -----------
Total loans............................................................ 46,422,378 45,680,014
Less allowance for loan losses............................................ (472,198) ( 602,939)
------------ ------------
Net loans.............................................................. $ 45,950,180 $ 45,077,075
============ ============
As of December 31, 2004, the Bank had student loans with a book value of
$1,412,554 that were held-for-sale.
At December 31, 2005 and 2004, unamortized deferred fees and costs totaled
$127,714 and $139,296, respectively.
As of December 31, 2005 and 2004, the Bank had loans to certain officers and
directors and their affiliated interests in aggregate dollar amounts of
$856,473 and $1,074,000, respectively. During 2005, there were $125,000 in
new loans to related parties and repayments amounted to $258,000. During
2004, there were $236,000 in new loans to related parties and repayments
amounted to $81,000.
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 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.
Details on the Bank's non-performing loans are as follows:
2005 2004 2003
------------ ------------ ------------
Total non-accrual loans................................. $ 683,000 $ 1,366,000 $ 1,588,000
Total impaired loans.................................... 386,000 1,034,000 1,124,000
Average impaired loans.................................. 903,000 1,079,000 1,124,000
Specific allowance allocated to impaired loans.......... 113,000 259,000 75,000
Non-accrual/impaired loans with SBA Guarantees.......... 190,000 888,000 888,000
Interest recognized on impaired loans................... 37,000 - 67,000
Loans past due 90 days and still accruing............... - 65,000 560,000
(Continued)
67
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
5. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued
Changes in the allowance for possible loan losses are as follows:
2005 2004 2003
------------ ------------ ------------
Balance, beginning of year.............................. $ 602,939 $ 338,574 $ 674,550
Provision............................................... 558,000 45,000 565,000
Charge-offs............................................. (981,355) ( 239,757) (972,938)
Recoveries.............................................. 292,614 459,122 71,962
---------- ---------- ----------
Balance, end of year.................................... $ 472,198 $ 602,939 $ 338,574
=========== =========== ===========
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding
counties in the Delaware Valley. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by
the region's economy. At December 31, 2005, approximately 25% of the Bank's
commercial loan portfolio was concentrated in loans made to religious
organizations.
6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
Estimated
useful life 2005 2004
------------- ------------ ------------
Buildings and leasehold improvements.................... 10-15 years $ 853,066 1,355,086
Furniture and equipment................................. 3-7 years 1,068,223 1,753,307
--------- ----------
1,921,289 3,108,393
Less accumulated depreciation........................... (833,208) (2,033,538)
----------- -------------
$ 1,038,081 $ 1,074,855
=========== ===========
The Bank leases other facilities and other equipment under non-cancelable
operating lease agreements. The amount of expense for operating leases for
the years ended December 31, 2005, 2004, and 2003 was $340,638, $277,850,
and $329,878.
Future minimum lease payments under operating leases are as follows:
Operating
Year ending December 31, leases
2006................................................. $ 310,227
2007................................................. 316,808
2008................................................. 312,599
2009................................................. 266,389
2010................................................. 202,530
Thereafter........................................ 929,916
----------
Total minimum lease payments......................... $ 2,338,469
===========
68
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
6. BANK PREMISES AND EQUIPMENT-Continued
In August 2005, the Bank assumed the remaining term from another financial
institution of a lease for retail space on the ground level of its corporate
headquarters. The Bank formed an alliance with a regional mortgage brokerage
company and simultaneously subleased all except the lobby in which the
automated teller machine (ATM) is located. The lease expires in September
2009. The Bank's average aggregate gross monthly rental is $4,858 of which a
tenant pays an average monthly rent of $3,358.
7. DEPOSITS
At December 31, 2005, the scheduled maturities of time deposits
(certificates of deposit) are as follows (dollars in thousands):
2006............................... $ 21,296
2007............................... 647
2008............................... 307
2009............................... 90
2010............................... 253
Thereafter......................... 77
----------
$ 22,670
8. BORROWINGS
As of December 31, 2005, the Bank has two borrowing arrangements available
with financial institutions, collateralized by investment securities. One
arrangement is a fully secured Federal Funds line of credit with a
correspondent bank totaling $2 million, the second is a Master Repurchase
Agreement with another financial institution. Borrowings under these
agreements have interest rates that fluctuate based on market conditions. As
of December 31, 2005 and 2004, the Bank had no borrowings outstanding.
9. CAPITAL STOCK
There were no capital stock transactions in 2005 and 2004.
In June 2003, a shareholder of the Bank returned 33,500 shares of common
stock and 6,308 shares of preferred Series A stock. These shares were
returned for no consideration and were recorded as treasury stock by the
Bank.
10. INCOME TAXES
At December 31, 2005, the Bank has net operating loss carryforwards of
approximately $4,610,000 for income tax purposes that expire in 2008 through
2025.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. For
financial reporting purposes, a valuation allowance of $2,088,508 and
$1,930,062 as of December 31, 2005 and 2004, respectively, has been
recognized to offset the deferred tax assets related to the cumulative
temporary differences and the tax loss carryforwards. Significant components
of the Bank's deferred tax assets are as follows:
(Continued)
69
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
10. INCOME TAXES - Continued
2005 2004
-------- ------------
Deferred tax assets(liabilities):
Provision for loan losses.............................................. $ (13,058) $ 72,243
Unrealized (gains) losses on investment securities..................... 16,528 (8,909)
Depreciation........................................................... 435,472 436,223
Net operating loss carryforwards....................................... 1,634,822 1,405,875
Other.................................................................. 154,623 24,630
Valuation allowance for deferred tax assets............................... (2,228,388) ( 1,930,062)
------------ -------------
Net deferred tax assets............................................ $ - $ -
=========== ===========
2005 2004 2003
------------ ------------ ------------
Effective rate reconciliation:
Tax at statutory rate(34%)........................... $ (91,601) $ 559,817 $ (379,258)
Nondeductible expenses............................... 4,513 5,401 4,325
(Decrease)Increase in valuation allowance............ 298,326 (422,447) 494,737
Other................................................ (211,238) (142,771) (119,804)
-------- --------- ---------
Total tax expense $ - $ - $ -
=========== =========== ===========
11. FINANCIAL INSTRUMENT COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters
of credit, which are conditional commitments issued by the Bank to guarantee
the performance of an obligation of a customer to a third party. Both
arrangements have credit risk essentially the same as that involved in
extending loans and are subject to the Bank's normal credit policies.
Collateral may be obtained based on management's assessment of the customer.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments is represented by the contractual
amount of those instruments.
Summaries of the Bank's financial instrument commitments are as follows:
2005 2004
------------ ------------
Commitments to extend credit............ $ 12,727,370 $ 13,749,562
Outstanding letters of credit........... 10,000 -
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract and
unused credit card lines. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee.
70
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments is required to be
disclosed, whether or not recognized in the balance sheet, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash
flows or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are exempt from
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
2005 2004
------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ----------- ----------
(Dollars in thousands)
Assets:
Cash and cash equivalents..................... $ 9,240 $ 9,240 $ 8,934 $ 8,934
Investment securities......................... 13,705 13,533 13,560 13,582
Loans held-for-sale........................... - - 1,412 1,437
Loans, net of allowance for loan losses....... 45,950 45,998 45,077 45,366
Interest receivable........................... 336 336 328 328
Liabilities:
Demand deposits............................... 24,257 24,257 21,773 21,773
Savings deposits.............................. 16,396 16,396 17,591 17,591
Time deposits................................. 22,670 22,670 23,807 23,807
Interest Payable.............................. 150 150 78 78
13. EMPLOYEE COMPENSATION
In November 2004, the Bank renewed the employment agreements of its chief
executive officer and its chief financial officer covering such items as
salaries, bonuses and benefits for three years. These agreements provide for
guaranteed minimum annual compensation over the term of the contracts.
In 1998, the Company adopted a Stock Option Plan with the approval of its
shareholders. In accordance with the contractual terms with its former chief
executive officer, the Bank granted the right to acquire up to 4% of the
Bank's stock as of December 31, 1993 at $8.54 per share, which was the book
value at the date of grant. Under this Plan, options to acquire shares of
common stock were granted to the former chief executive officer. The Stock
Option Plan provides for the granting of options at the fair market value of
the Company's common stock at the time the options are granted. Each option
granted under the Stock Option Plan may be exercised within a period of ten
years from the date of grant. However, no option may be exercised within one
year from the date of grant. In 1998, options to purchase 29,694 shares of
the Company's common stock at a price of $8.54 per share were awarded, to
the former chief executive officer. Those options remain outstanding at
December 31, 2005. These options expire in 2008.
The Company made no stock-based compensation awards to any employee during
2005, 2004, and 2003.
71
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets
December 31,
------------
(Dollars in thousands) 2005 2004
--------- ---------
Assets:
Due from banks (subsidiary).................................................. $ 289 $ 289
Investment in United Bank of Philadelphia.................................... 8,202 8,522
------- -------
Total assets............................................................. $ 8,491 $ 8,811
======== ========
Shareholders' equity:
Series A preferred stock..................................................... $ 1 $ 1
Common stock................................................................. 11 11
Additional paid-in capital................................................... 14,750 14,750
Accumulated deficit.......................................................... (6,238) (5,968)
Net unrealized holding gains on securities available-for-sale................ (33) 17
-------- -------
Total shareholders' equity............................................... $ 8,491 $ 8,811
======== ========
Condensed Statements of Operations
..... Years ended December 31,
--------------------------------------
(Dollars in thousands) 2005 2004 2003
--------- --------- ---------
Equity in net (loss) income of subsidiary........................ $ (269) $ 1,646 $ (1,115)
--------- -------- ---------
Net (loss) income ............................................... $ (269) $ 1,646 $ (1,115)
========= ======== ========
Condensed Statements of Cash Flows
..... Years ended December 31,
--------------------------------------
(Dollars in thousands) 2005 2004 2003
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income............................................. $ (269) $ 1,646 $ (1,115)
Equity in net loss (income) of subsidiary..................... 269 (1,646) 1,115
------- -------- -------
Net cash provided by operating activities................. - - -
------- ------- -------
Cash flows from investing activities:
Investment in subsidiary......................................... - -
------- ------- -------
Net cash used in investing activities............................ - -
------- ------- -------
Cash flows from financing activities:
Issuance of common stock.................................. - -
------- ------- -------
Net cash provided by financing activities................. - -
------- ------- -------
Net increase in cash and cash equivalents................. - - -
Cash and cash equivalents at beginning of year................... 289 289 289
------- ------- -------
Cash and cash equivalents at end of year......................... $ 289 $ 289 $ 289
======== ======== ========
72
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. REGULATORY MATTERS
The Bank engages in the commercial banking business, with a particular focus
on serving Blacks, Hispanics and women, and is subject to substantial
competition from financial institutions in the Bank's service area. As a
bank holding company and a banking subsidiary, the Company and the Bank,
respectively, are subject to regulation by the Federal Reserve Board and the
Pennsylvania Department of Banking and are required to maintain capital
requirements established by those regulators. Prompt corrective actions may
be taken by those regulators against banks that do not meet minimum capital
requirements. Prompt corrective actions range from restriction or
prohibition of certain activities to the appointment of a receiver or
conservator of an institution's net assets. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices, the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier I capital (as defined in the regulations) for
capital adequacy purposes to risk-weighted assets (as defined).
The most recent notification from the Federal Reserve Bank categorized the
Bank as "adequately capitalized" under the regulatory framework for prompt
and corrective action. To be categorized as "well capitalized," the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. By typical regulatory
guidelines the Bank is considered "well" capitalized, however, because it is
operating with a Written Agreement, it is only considered to be "adequately"
capitalized. The Bank's growth and other operating factors may have an
adverse effect on its capital ratios.(Also see Note 2.
REGULATORY AGREEMENT)
(Continued)
73
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. REGULATORY MATTERS - Continued
The Bank's actual capital amounts and ratios are as follows:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ---------
As of December 31, 2005:
Total capital to risk-weighted assets:
Consolidated...................... $ 7,581 17.03% $ 3,583 8.00% N/A
Bank.............................. 7,292 16.39 3,560 8.00 $ 4,450 10.00%
Tier I capital to risk-weighted assets:
Consolidated...................... 7,109 15.97 1,792 4.00 N/A
Bank.............................. 6,820 15.32 1,780 4.00 $ 2,670 6.00
Tier I capital to average assets:
Consolidated...................... 7,109 9.87 2,891 4.00 N/A
Bank.............................. 6,820 9.47 2,880 4.00 $ 3,600 5.00
As of December 31, 2004:
Total capital to risk-weighted assets:
Consolidated...................... $ 7,778 17.91% $ 3,498 8.00% N/A
Bank.............................. 7,489 17.24 3,475 8.00 $ 4,344 10.00%
Tier I capital to risk-weighted assets:
Consolidated...................... 7,234 16.65 1,749 4.00 N/A
Bank.............................. 6,945 15.99 1,737 4.00 $ 2,606 6.00%
Tier I capital to average assets:
Consolidated...................... 7,234 9.89 2,938 4.00 N/A
Bank.............................. 6,945 9.49 2,926 4.00 $ 3,658 5.00%
Under the framework, the Bank's capital levels do not allow the Bank to
accept brokered deposits without prior approval from regulators. Historically,
the Bank has not accepted brokered deposits and management believes this
restriction does not significantly limit the Bank's ability to attract deposits
and maintain adequate liquidity.
74
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. COMMITMENTS AND CONTINGENCIES
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial condition of the Company.
16. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
Year ended December 31, 2005
-----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss.............................................. $ (269,417)
============
Basic and fully diluted EPS
Income available to stockholders................. $ (269,417) 1,068,588 $ (0.25)
============ ============ =========
Year ended December 31, 2004
-----------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net income.............................................. $ 1,646,522
===========
Basic EPS
Income available to stockholders................. $ 1,646,522 1,068,588 $ 1.54
=========== ============ =========
Fully Diluted EPS
Income available to stockholders................. $ 1,646,522 1,098,282 $ 1.50
========== ============ =========
Year ended December 31, 2003
-----------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
Net loss................................................ $ (1,115,465)
============
Basic and fully diluted EPS
Income available to stockholders................. $ (1,115,465) 1,084,694 $ (1,.03)
============ ============ =========
Options to purchase 29,694 shares of common stock are included in the
computation of diluted EPS for the years ended December 31, 2004.
The preferred stock is non cumulative and the Company is restricted
from paying dividends. Therefore, no effect of the preferred stock is
included in the earnings per share calculations.
75
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2005
and 2004, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
(Dollars in thousands)
2005
---------------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
----------- ----------- ----------- -----------
Interest income $ 1,063 $ 1,075 $ 1,031 $ 986
Interest expense 183 157 130 115
--------- --------- --------- ---------
Net interest income 880 918 901 871
Provisions for loan losses 398 50 70 40
--------- --------- ---------- ---------
Net interest after provisions for loan losses 482 868 831 831
Non-interest income 390 362 416 414
Non-interest expense 1,239 1,193 1,197 1,234
--------- --------- --------- ---------
Net (loss) income $ (367) $ 37 $ 50 $ 11
=========== ========== ========== ==========
2004
---------------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
----------- ----------- ----------- -----------
Interest income $ 933 $ 947 $ 882 $ 924
Interest expense 110 94 96 105
--------- --------- --------- ---------
Net interest income 823 853 786 818
Provisions for loan losses 39 36 111 (141)
--------- --------- --------- ----------
Net interest after provisions for loan losses 784 817 675 959
Non-interest income 403 1,908 888 456
Non-interest expense 1,288 1,237 1,322 1,397
--------- --------- --------- ---------
Net (loss) income $ (102) $ 1,489 $ 241 $ 18
=========== ========== ========== ==========
76
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
10. INCOME TAXES - Continued
2005 2004
------------ ------------
Deferred tax assets(liabilities):
Provision for loan losses.............................................. $ (4,749) $ 72,243
Unrealized (gains) losses on investment securities........................... 16,528 (8,909)
Depreciation................................................................. 435,472 436,223
Net operating loss carryforwards............................................. 1,568,931 1,405,875
Other.................................................................. 72,325 24,630
Valuation allowance for deferred tax assets.................................. (2,088,508) ( 1,930,062)
------------ ------------
Net deferred tax assets............................................ $ - $ -
============ ============
2005 2004 2003
------------ ------------ ------------
Effective rate reconciliation:
Tax at statutory rate(34%)........................... $ (91,601) $ 559,817 $ (379,258)
Nondeductible expenses............................... 4,513 5,401 4,325
(Decrease)Increase in valuation allowance............ 158,446 (422,447) 494,737
Other................................................ (71,358) (142,771) (119,804)
------------ ------------ ------------
Total tax expense $ - $ - $ -
============ ============ ============
11. FINANCIAL INSTRUMENT COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters
of credit, which are conditional commitments issued by the Bank to guarantee
the performance of an obligation of a customer to a third party. Both
arrangements have credit risk essentially the same as that involved in
extending loans and are subject to the Bank's normal credit policies.
Collateral may be obtained based on management's assessment of the customer.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments is represented by the contractual
amount of those instruments.
Summaries of the Bank's financial instrument commitments are as follows:
2005 2004
Commitments to extend credit.............................................. $ 12,727,370 $ 13,749,562
Outstanding letters of credit............................................. 10,000 -
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract and
unused credit card lines. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee.
77
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments is required to be
disclosed, whether or not recognized in the balance sheet, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash
flows or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are exempt from
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
2005 2004
------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ----------- ----------- ----------
(Dollars in thousands)
Assets:
Cash and cash equivalents..................... $ 9,240 $ 9,240 $ 8,934 $ 8,934
Investment securities......................... 13,705 13,533 13,560 13,582
Loans held-for-sale................................. - - 1,412 1,437
Loans, net of allowance for loan losses....... 45,950 45,998 45,077 45,366
Interest receivable........................... 336 336 328 328
Liabilities:
Demand deposits............................... 24,257 24,257 21,773 21,773
Savings deposits.............................. 16,396 16,396 17,591 17,591
Time deposits................................. 22,670 22,670 23,807 23,807
Interest Payable.............................. 150 150 78 78
13. EMPLOYEE COMPENSATION
In November 2004, the Bank renewed the employment agreements of its chief
executive officer and its chief financial officer covering such items as
salaries, bonuses and benefits for three years. These agreements provide for
guaranteed minimum annual compensation over the term of the contracts.
In 1998, the Company adopted a Stock Option Plan with the approval of its
shareholders. In accordance with the contractual terms with its former chief
executive officer, the Bank granted the right to acquire up to 4% of the
Bank's stock as of December 31, 1993 at $8.54 per share, which was the book
value at the date of grant. Under this Plan, options to acquire shares of
common stock were granted to the former chief executive officer. The Stock
Option Plan provides for the granting of options at the fair market value of
the Company's common stock at the time the options are granted. Each option
granted under the Stock Option Plan may be exercised within a period of ten
years from the date of grant. However, no option may be exercised within one
year from the date of grant. In 1998, options to purchase 29,694 shares of
the Company's common stock at a price of $8.54 per share were awarded, to
the former chief executive officer. Those options remain outstanding at
December 31, 2005. These options expire in 2008.
The Company made no stock-based compensation awards to any employee during
2005, 2004, and 2003.
78
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets
December 31,
(Dollars in thousands) 2005 2004
--------- ---------
Assets:
Due from banks (subsidiary).................................................. $ 289 $ 289
Investment in United Bank of Philadelphia.................................... 8,202 8,522
--------- ---------
Total assets............................................................. $ 8,491 $ 8,811
========= =========
Shareholders' equity:
Series A preferred stock..................................................... $ 1 $ 1
Common stock................................................................. 11 11
Additional paid-in capital................................................... 14,750 14,750
Accumulated deficit.......................................................... (6,238) (5,968)
Net unrealized holding gains on securities available-for-sale................ (33) 17
--------- ---------
Total shareholders' equity............................................... $ 8,491 $ 8,811
========= =========
Condensed Statements of Operations
Years ended December 31,
(Dollars in thousands) 2005 2004 2003
--------- --------- ---------
Equity in net (loss) income of subsidiary........................ $ (269) $ 1,646 $ (1,115)
--------- --------- ---------
Net (loss) income ............................................... $ (269) $ 1,646 $ (1,115)
========= ========= =========
Condensed Statements of Cash Flows
Years ended December 31,
(Dollars in thousands) 2005 2004 2003
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income............................................. $ (269) $ 1,646 $ (1,115)
Equity in net loss (income) of subsidiary..................... 269 (1,646) 1,115
--------- --------- ---------
Net cash provided by operating activities................. - - -
--------- --------- ---------
Cash flows from investing activities:
Investment in subsidiary......................................... - -
--------- --------- ---------
Net cash used in investing activities............................ - -
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock.................................. - -
--------- --------- ---------
Net cash provided by financing activities................. - -
--------- --------- ---------
Net increase in cash and cash equivalents................. - - -
Cash and cash equivalents at beginning of year................... 289 289 289
--------- --------- ---------
Cash and cash equivalents at end of year......................... $ 289 $ 289 $ 289
========= ========= =========
79
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. REGULATORY MATTERS
The Bank engages in the commercial banking business, with a particular focus
on serving Blacks, Hispanics and women, and is subject to substantial
competition from financial institutions in the Bank's service area. As a
bank holding company and a banking subsidiary, the Company and the Bank,
respectively, are subject to regulation by the Federal Reserve Board and the
Pennsylvania Department of Banking and are required to maintain capital
requirements established by those regulators. Prompt corrective actions may
be taken by those regulators against banks that do not meet minimum capital
requirements. Prompt corrective actions range from restriction or
prohibition of certain activities to the appointment of a receiver or
conservator of an institution's net assets. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices, the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier I capital (as defined in the regulations) for
capital adequacy purposes to risk-weighted assets (as defined).
The most recent notification from the Federal Reserve Bank categorized the
Bank as "adequately capitalized" under the regulatory framework for prompt
and corrective action. To be categorized as "well capitalized," the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. By typical regulatory
guidelines the Bank is considered "well" capitalized, however, because it is
operating with a Written Agreement, it is only considered to be "adequately"
capitalized. The Bank's growth and other operating factors may have an
adverse effect on its capital ratios.(Also see Note 2.
REGULATORY AGREEMENT)
(Continued)
80
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. REGULATORY MATTERS - Continued
The Bank's actual capital amounts and ratios are as follows:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2005:
Total capital to risk-
weighted assets:
Consolidated...................... $ 7,581 17.03% $ 3,583 8.00% N/A
Bank.............................. 7,292 16.39 3,560 8.00 $ 4,450 10.00%
Tier I capital to risk-
weighted assets:
Consolidated...................... 7,109 15.97 1,792 4.00 N/A
Bank.............................. 6,820 15.32 1,780 4.00 $ 2,670 6.00
Tier I capital to average assets:
Consolidated...................... 7,109 9.87 2,891 4.00 N/A
Bank.............................. 6,820 9.47 2,880 4.00 $ 3,600 5.00
As of December 31, 2004:
Total capital to risk-
weighted assets:
Consolidated...................... $ 7,778 17.91% $ 3,498 8.00% N/A
Bank.............................. 7,489 17.24 3,475 8.00 $ 4,344 10.00%
Tier I capital to risk-
weighted assets:
Consolidated...................... 7,234 16.65 1,749 4.00 N/A
Bank.............................. 6,945 15.99 1,737 4.00 $ 2,606 6.00%
Tier I capital to average assets:
Consolidated...................... 7,234 9.89 2,938 4.00 N/A
Bank.............................. 6,945 9.49 2,926 4.00 $ 3,658 5.00%
Under the framework, the Bank's capital levels do not allow the Bank to
accept brokered deposits without prior approval from regulators. Historically,
the Bank has not accepted brokered deposits and management believes this
restriction does not significantly limit the Bank's ability to attract deposits
and maintain adequate liquidity.
81
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
15. COMMITMENTS AND CONTINGENCIES
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial condition of the Company.
16. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
Year ended December 31, 2005
-----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss.............................................. $ (269,417)
============
Basic and fully diluted EPS
Income available to stockholders................. $ (269,417) 1,068,588 $ (0.25)
============ ========= =========
Year ended December 31, 2004
-----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net income.............................................. $ 1,646,522
Basic EPS
Income available to stockholders................. $ 1,646,522 1,068,588 $ 1.54
============ ========= =========
Fully Diluted EPS
Income available to stockholders................. $ 1,646,522 1,098,282 $ 1.50
============ ========= =========
Year ended December 31, 2003
-----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Net loss................................................ $ (1,115,465)
============
Basic and fully diluted EPS
Income available to stockholders................. $ (1,115,465) 1,084,694 $ (1.03)
============ ========= =========
Options to purchase 29,694 shares of common stock are included in the
computation of diluted EPS for the years ended December 31, 2004.
The preferred stock is non cumulative and the Company is restricted
from paying dividends. Therefore, no effect of the preferred stock is
included in the earnings per share calculations.
82
UNITED BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005, 2004, and 2003
17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2005
and 2004, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
(Dollars in thousands)
2005
-----------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $ 1,063 $ 1,075 $ 1,031 $ 986
Interest expense 183 157 130 115
----------- ----------- ----------- -----------
Net interest income 880 918 901 871
Provisions for loan losses 398 50 70 40
----------- ----------- ----------- -----------
Net interest after provisions for loan losses 482 868 831 831
Non-interest income 390 362 416 414
Non-interest expense 1,239 1,193 1,197 1,234
----------- ----------- ----------- -----------
Net (loss) income $ (367) $ 37 $ 50 $ 11
=========== =========== =========== ===========
2004
-----------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $ 933 $ 947 $ 882 $ 924
Interest expense 110 94 96 105
----------- ----------- ----------- -----------
Net interest income 823 853 786 818
Provisions for loan losses 39 36 111 (141)
----------- ----------- ----------- -----------
Net interest after provisions for loan losses 784 817 675 959
Non-interest income 403 1,908 888 456
Non-interest expense 1,288 1,237 1,322 1,397
----------- ----------- ----------- -----------
Net (loss) income $ (102) $ 1,489 $ 241 $ 18
=========== =========== =========== ===========
83